2016-0646891R3 Pipeline and subsequent Split-up butterfly

Principal Issues: Whether the proposed pipeline and split-up butterfly transactions described in the ruling meet legislative and administrative requirements.

Position: Yes.

Reasons: Consistent with law and administrative requirements and corresponds with previous positions.

Author: XXXXXXXXXX
Section: 55(2), 55(3)(b) and 55(3.1)

XXXXXXXXXX                                                                             2016-064689

XXXXXXXXXX, 2017

Dear XXXXXXXXXX:

Re:    XXXXXXXXXX, XXXXXXXXXX Tax Centre and XXXXXXXXXX Tax Service Office);
Advance Income Tax Ruling

This is in reply to your letter in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in correspondences and telephone conversations concerning your request. You have advised that to the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein are:

(a)    in previously filed return of the taxpayer or a related person;

(b)    being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(c)    under objection by the taxpayer or a related person;

(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.

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act as defined below.

DEFINITIONS

The following terms or expressions used in this letter have the meaning specified:

“A” means the late XXXXXXXXXX, the grandparent of Grandchild1, Grandchild2 and Grandchild3.

“ACB” has the meaning assigned to the term “adjusted cost base” by section 54.

“Act” means the Income Tax Act, R.S.C.  1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and the Income Tax Regulations thereunder are referred to as the “Regulations”.

“agreed amount” means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1).

“arm’s length” has the meaning assigned by subsection 251(1).

“BCA” means the XXXXXXXXXX.

“Canadian-controlled private corporation” or “CCPC” has the meaning assigned to the term “Canadian-controlled private corporation” by subsection 125(7).

“capital gain” has the meaning assigned by paragraph 39(1)(a).

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

“capital dividend account” or “CDA” has the meaning assigned to the term “capital dividend account” by subsection 89(1).

“Codicil” means A’s Codicil executed on and dated XXXXXXXXXX.

“connected” has the meaning assigned by subsection 186(4).

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

“CRA” mans the Canada Revenue Agency.

“DC” means XXXXXXXXXX.

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

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

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

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

“eligible property” has the meaning assigned to that term in subsection 85(1.1).

“Estate” means the estate of A, created on XXXXXXXXXX upon the death of A.

“Executors” means XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX, the executors of the Estate, who were appointed as executors of the Estate pursuant to the terms of the Will.

“FMV” means the highest price expressed in terms of money or money’s worth available in an open and unrestricted market between informed, prudent parties, acting at arm’s length and under no compulsion to act, expressed in terms of cash.

“Grandchild1” means XXXXXXXXXX, the grandchild of XXXXXXXXXX and a sibling of Grandchild2 and Grandchild3 and a resident of Canada for purposes of the Act.

“Grandchild1 Trust” refers to the testamentary trust created for the benefit of Grandchild1 pursuant to XXXXXXXXXX of the Will and XXXXXXXXXX of the Codicil.

“Grandchild2” means XXXXXXXXXX, the grandchild of XXXXXXXXXX and a sibling of Grandchild1 and Grandchild3 and a resident of Canada for purposes of the Act. 

“Grandchild2 Trust” refers to the testamentary trust created for the benefit of Grandchild2 pursuant to XXXXXXXXXX of the Will and XXXXXXXXXX of the Codicil.

“Grandchild3” means XXXXXXXXXX, the grandchild of XXXXXXXXXX and a sibling of Grandchild1 and Grandchild2 and a resident of Canada for purposes of the Act. 

“Grandchild3 Trust” refers to the testamentary trust created for the benefit of Grandchild3 pursuant to XXXXXXXXXX of the Will and XXXXXXXXXX of the Codicil.

“GRIP” has the meaning assigned to the term “general rate income pool” by subsection 89(1).

“Marketable Securities” means the diversified portfolio of DC that includes cash and cash equivalents, shares of public corporations and units of mutual fund trusts. 

“Paragraph” refers to a numbered paragraph in this letter.

“Predecessor1” means XXXXXXXXXX, a TCC and CCPC formed on XXXXXXXXXX, under the BCA. Predecessor1 was a holding corporation with investments in marketable securities and held XXXXXXXXXX Class A common shares in the capital stock of Predecessor2, being all of the issued and outstanding shares of Predecessor2.

“Predecessor2” means XXXXXXXXXX, a TCC and CCPC formed on XXXXXXXXXX on the amalgamation of XXXXXXXXXX under the BCA. 

Predecessor2 was a corporation that owned and operated a portfolio of XXXXXXXXXX.

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

“proceeds of disposition” has the meaning assigned at section 54.

“Proposed Transactions” means the proposed transactions which are described herein under the heading Proposed Transactions.

“PUC” has the meaning assigned to the term “paid-up capital” by subsection 89(1).

“qualified small business corporation share” has the meaning assigned to that term in subsection 110.6(1).

“refundable dividend tax on hand” or “RDTOH” has the meaning assigned to the term “refundable dividend tax on hand” by subsection 129(3).

XXXXXXXXXX

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

XXXXXXXXXX

“taxable Canadian corporation” or “TCC” has the meaning assigned to the term “taxable-Canadian corporation” by subsection 89(1).

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

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

“TC” means TC1, TC2 or TC3.

“TCs” means TC1, TC2 and TC3.

“TC1” refers to a new corporation to be incorporated pursuant to the BCA and will be at all relevant times and for all purposes of the Act a TCC and CCPC. 

“TC1 Butterfly Share” means a Class B preferred share of the capital stock of TC1, which will be non-voting, will entitle the holder to non-cumulative dividends, will be redeemable and retractable at any time (subject to applicable law) for an amount equal to the FMV of the consideration received by TC1 on the issuance thereof less the amount of any liabilities assumed by TC1 on its issuance (plus any declared but unpaid dividends), and will have priority over all other classes of shares of the capital stock of TC1 on a liquidation or other dissolution of TC1. No dividends or other distribution will be paid on shares ranking junior to a TC1 Butterfly Share if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets of TC1 to an amount less than the aggregate redemption amount of the issued and outstanding TC1 Butterfly Share.

“TC1 Redemption Note” means the non-interest bearing demand promissory note issued by TC1 to DC as consideration for the redemption by TC1 of the TC1 Butterfly Share held by DC. The TC1 Redemption Note has a principal amount and FMV equal to the aggregate redemption amount of the TC1 Butterfly Share so redeemed.

“TC2” refers to a new corporation to be incorporated pursuant to the BCA and will be at all relevant times and for all purposes of the Act a TCC and CCPC.

“TC2 Butterfly Share” means a Class B preferred share of the capital stock of TC2, which will be non-voting, will entitle the holder to non-cumulative dividends, will be redeemable and retractable at any time (subject to applicable law) for an amount equal to the FMV of the consideration received by TC2 on the issuance thereof less the amount of any liabilities assumed by TC2 on its issuance (plus any declared but unpaid dividends), and will have priority over all other classes of shares of the capital stock of TC2 on a liquidation or other dissolution of TC2. No dividends or other distribution will be paid on shares ranking junior to a TC2 Butterfly Share if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets of TC2 to an amount less than the aggregate redemption amount of the issued and outstanding TC2 Butterfly Share.

“TC2 Redemption Note” means the non-interest bearing demand promissory note issued by TC2 to DC as consideration for the redemption by TC2 of the TC2 Butterfly Share held by DC. The TC2 Redemption Note has a principal amount and FMV equal to the aggregate redemption amount of the TC2 Butterfly Share so redeemed.

“TC3” refers to a new corporation to be incorporated pursuant to the BCA and will be at all relevant times and for all purposes of the Act a TCC and CCPC.

“TC3 Butterfly Share” means a Class B preferred share of the capital stock of TC3, which will be non-voting, will entitle the holder to non-cumulative dividends, will be redeemable and retractable at any time (subject to applicable law) for an amount equal to the FMV of the consideration received by TC3 on the issuance thereof less the amount of any liabilities assumed by TC3 on its issuance (plus any declared but unpaid dividends), and will have priority over all other classes of shares of the capital stock of TC3 on a liquidation or other dissolution of TC3. No dividends or other distribution will be paid on shares ranking junior to a TC1 Butterfly Share if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets of TC3 to an amount less than the aggregate redemption amount of the issued and outstanding TC3 Butterfly Share.

“TC3 Redemption Note” means the non-interest bearing demand promissory note issued by TC3 to DC as consideration for the redemption by TC3 of the TC3 Butterfly Share held by DC. The TC3 Redemption Note has a principal amount and FMV equal to the aggregate redemption amount of the TC3 Butterfly Share so redeemed.

“Trustees” means the Executors who are also the trustees of each of the Grandchild Trusts.

“Will” means A’s last will and testament executed on XXXXXXXXXX.

FACTS

1.    Immediately before A’s death on XXXXXXXXXX, A held XXXXXXXXXX Class A common shares of the capital stock of Predecessor1, being all of the issued and outstanding capital stock of Predecessor1. The PUC of those shares was $XXXXXXXXXX.

2.    At the time of A’s death, A had an outstanding loan receivable from Predecessor1 in the amount of $XXXXXXXXXX, this amount resulted from declared but unpaid dividends.

3.    A’s terminal return declared a disposition of the XXXXXXXXXX Class A common shares of the capital stock of Predecessor1 at FMV, being $XXXXXXXXXX, which resulted in the realization of a capital gain that was reported on A’s final T1 General Income Tax and Benefit Return. None of A or any person not dealing at arm's length with A, has claimed a deduction under section 110.6 in respect of those shares or shares for which those shares were substituted within the meaning of subsection 248(5).

4.    Each Executor is a resident of Canada and declares that all decisions pertaining to the Estate are made in Canada and that the Estate’s central management and control is located in Canada.

5.    The Estate's taxation year ended on XXXXXXXXXX but that year end was changed as a result of the amendment to subsection 249(1) to a XXXXXXXXXX year end, starting XXXXXXXXXX.

6.    On XXXXXXXXXX, the Estate exchanged its XXXXXXXXXX Class A common shares of the capital stock of Predecessor1 for XXXXXXXXXX Class B common shares and XXXXXXXXXX Class D preferred shares of the capital stock of Predecessor1. The aggregate redemption value of the XXXXXXXXXX Class D preferred shares of the capital stock of Predecessor1 was $XXXXXXXXXX. The ACB to the Estate of the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class D preferred shares of the capital stock of Predecessor1 was $XXXXXXXXXX and $XXXXXXXXXX, respectively. 

7.    On XXXXXXXXXX, Predecessor1 declared a stock dividend of XXXXXXXXXX Class E preferred shares, $XXXXXXXXXX in total was added to the stated capital of the Class E preferred shares and they had a redemption value of $XXXXXXXXXX per share or $XXXXXXXXXX in aggregate.

8.    On XXXXXXXXXX, Predecessor1 redeemed the XXXXXXXXXX Class D preferred shares for their redemption value of $XXXXXXXXXX. The redemption was reported by the Estate as resulting in a taxable dividend of $XXXXXXXXXX and a capital loss. The capital loss was reported as being carried back pursuant to subsection 164(6) to offset some of the capital gain declared on A’s final T1 General Income Tax and Benefit Return. 

9.    On XXXXXXXXXX, Predecessor1 and Predecessor2 were amalgamated under the BCA to form DC. Upon the amalgamation, the Estate received XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares in the capital stock of DC with an ACB to the Estate of $XXXXXXXXXX and $XXXXXXXXXX, respectively. The PUC of the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of DC was $XXXXXXXXXX and $XXXXXXXXXX, respectively. 

10.    DC represents that it will be at all relevant times and for purposes of the Act a TCC and CCPC. The main assets of DC are comprised of the Marketable Securities. DC buys and sells the Marketable Securities in the normal course of its investment activities, pursuant to advice from an independent investment advisor.  DC does not exercise “significant influence” over any corporation, partnership or other entity in which it invests. The main liabilities of DC consisted of accounts payable and accruals, income tax payable, and amounts due to shareholder. There will not be a material change in the composition of DC’s assets or liabilities from the date of this letter until the date the Proposed Transactions described herein are completed.

11.    As at XXXXXXXXXX, the Estate had an outstanding loan receivable from DC in the amount of $XXXXXXXXXX.

12.    As of XXXXXXXXXX, DC had a RDTOH balance of $XXXXXXXXXX, a GRIP balance of $XXXXXXXXXX and a CDA balance of $XXXXXXXXXX. 

13.    Pursuant to the Will and Codicil, the residue of the Estate is to be transferred to Grandchild1 Trust, Grandchild2 Trust and Grandchild3 Trust. Part of the residue of the Estate consists of the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of the capital stock of DC.

14.    Pursuant to the Will and Codicil the Trustees may make the following interim distributions to beneficiaries:

(a)    up to $XXXXXXXXXX per year of income or capital of the Grandchild Trust when the beneficiary is between the ages of XXXXXXXXXX;

(b)    up to $XXXXXXXXXX per year of income or capital of the Grandchild Trust when the beneficiary is between the ages of XXXXXXXXXX; and

(c)    up to $XXXXXXXXXX per year of income or capital of the Grandchild Trust when the beneficiary is between the ages of XXXXXXXXXX.

The Will and Codicil stipulate that the final distribution of the property of each Grandchild Trust will occur once the beneficiary reaches the age of XXXXXXXXXX.

PROPOSED TRANSACTIONS

15.    The Estate will distribute the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of the capital stock of DC under the terms of the Will and Codicil as follows:

(a)    XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of the capital stock of DC having an ACB to the Estate of $XXXXXXXXXX and $XXXXXXXXXX, respectively, will be transferred to Grandchild1 Trust;

(b)    XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of the capital stock of DC having an ACB to the Estate of $XXXXXXXXXX and $XXXXXXXXXX, respectively, will be transferred to Grandchild2 Trust; and

(c)    XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of the capital stock of DC having an ACB to the Estate of $XXXXXXXXXX and $XXXXXXXXXX, respectively, will be transferred to Grandchild3 Trust.

16.    Each of TC1, TC2 and TC3 will be incorporated pursuant to the BCA and the authorized share capital of each corporation will consist of:

(a)    an unlimited number of Class A voting participating common shares; and

(b)    an unlimited number of Class B preferred shares.

Upon incorporation of each of TC1, TC2 and TC3 no shares will be issued.

17.    Grandchild1 Trust will transfer its XXXXXXXXXX Class B common and XXXXXXXXXX Class E preferred shares of the capital stock of DC to TC1 and will receive as consideration therefore XXXXXXXXXX Class A common share of the capital stock of TC1.

Granchild1 Trust and TC1 will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer described in this Paragraph. The agreed amount in respect of the transfer will be equal to the ACB to the Granchild1 Trust of the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of the capital stock of DC immediately before the transfer. The agreed amount will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1)(i) nor will it be less than the amount described in paragraph 85(1)(b).

TC1 will add to the stated capital of the XXXXXXXXXX Class A common share of its capital stock an amount not exceeding the maximum amount that could be added to the PUC of such share without resulting in an adjustment in computing the PUC having regard to paragraph 84.1(1)(a).

18.    Grandchild2 Trust will transfer its XXXXXXXXXX Class B common and XXXXXXXXXX Class E preferred shares of the capital stock of DC to TC2 and will receive as consideration therefore XXXXXXXXXX Class A common share of the capital stock of TC2. 

Granchild2 Trust and TC2 will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer described in this Paragraph. The agreed amount in respect of the transfer will be equal to the ACB to Grandchild2 Trust of the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of the capital stock of DC immediately before the transfer. The agreed amount will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1)(i) nor will it be less than the amount described in paragraph 85(1)(b).

TC2 will add to the stated capital of the XXXXXXXXXX Class A common share of its capital stock an amount not exceeding the maximum amount that could be added to the PUC of such share without resulting in an adjustment in computing the PUC having regard to paragraph 84.1(1)(a).

19.    Grandchild3 Trust will transfer its XXXXXXXXXX Class B common and XXXXXXXXXX Class E preferred shares of the capital stock of DC to TC3 and will receive as consideration therefore XXXXXXXXXX Class A common share of the capital stock of TC3. 

Granchild3 Trust and TC3 will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer described in this Paragraph. The agreed amount in respect of the transfer will be equal to the ACB to Grandchild3 Trust of the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of the capital stock of DC immediately before the transfer. The agreed amount will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1)(i) nor will it be less than the amount described in paragraph 85(1)(b).

TC3 will add to the stated capital of the XXXXXXXXXX Class A common share of its capital stock an amount not exceeding the maximum amount that could be added to the PUC of such share without resulting in an adjustment in computing the PUC having regard to paragraph 84.1(1)(a).

20.    Until DC will be wound up, the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of the capital stock of DC will not be redeemed and the composition of the Marketable Securities as well as the investment activities, business activities and operations carried on by DC in respect of the Marketable Securities will be governed by the same guidelines as before the implementation of the Proposed Transactions (see Additional Information below).

21.    After at least XXXXXXXXXX has elapsed from the transfer described in Paragraphs 17, 18 and 19 and immediately before the transfer of property described below in Paragraph 24, the property owned by DC will be classified into the following three types of property for the purposes of the definition of distribution:

(a)     “cash or near-cash” property, comprising all of the current assets of DC, including any cash, cash equivalent, accounts receivable, pre-paid expenses, deposits, advances to related persons, shareholders of DC or persons related to such shareholders that are due within the next XXXXXXXXXX months or those with no fixed terms of repayment and marketable securities (other than portfolio investments);

(b)    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; and

(c)    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 a business (other than a specified investment business).

For greater certainty:

(d)    tax accounts or other tax related amounts of DC, such as the balance of non-capital losses, net capital losses, capital dividend account, general rate income pool and refundable dividend tax on hand will not be considered property;

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

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

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

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

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

22.    The aggregate net FMV of each type of property of DC will be determined as follows:

(a)    current liabilities of DC, will reduce the aggregate net FMV of its cash or near-cash property in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by DC, to the extent that the amount of current liabilities so allocated will not exceed the aggregate FMV of all cash or near-cash property of DC;

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

(c)    a liability, other than a current liability, that relates to a particular property will reduce the FMV of the particular property (and effectively the aggregate FMV of the types of properties to which the property belongs) to the extent of its FMV;

(d)    liabilities, other than current liabilities, that relate to a particular type of property, but not a particular property, will be allocated to that type of property to the extent of the FMV;

(e)    any remaining liabilities will then be allocated among all types of property in the proportion that the remaining net FMV of each type of property is of the aggregate FMV of all types of property, determined after the allocation of liabilities in (a) to (d) above; and 

(f)    any amount of taxes payable pursuant to an assessment or reassessment (whether a notice of objection has been served under subsection 165(1) in respect of such assessments or reassessments or not) and any amount of taxes that is the subject of a proposed assessment (to the extent that any such amount is accrued as a liability) will be classified as a current liability and will, to the extent that any objection in respect of such unpaid taxes has not been resolved, be deducted from the net FMV of the cash or near cash property.

23.    Based on the methodologies described above, it is anticipated that DC will not own any property that would be classified as business property immediately before the transfer of property described in Paragraph 24.

24.    DC will transfer all of its properties to TC1, TC2 and TC3 such that, immediately following such property transfer, the aggregate net FMV of each type of property of DC transferred to TC1, TC2 and TC3, will be equal to or approximate the proportion determined by the formula:

A x B/C

where:

A is the net FMV (determined as described in the preceding Paragraph), immediately before the transfer, of all property of that type owned at that time by DC;

B is the FMV, immediately before the transfer, of all of the shares of the capital stock of DC owned, at that time, by TC1, TC2 or TC3, as the case may be; and

C is the FMV, immediately before the transfer, of all the issued and outstanding shares of the capital stock of DC.

For the purposes of this Paragraph, the expression “approximate the proportion” above means that the discrepancy of that proportion, if any, will not exceed XXXXXXXXXX%, determined as a percentage of the net FMV of each type of property that TC1, TC2 and TC3 has received on such transfer as compared to what it would have received had it received its appropriate pro rata share of the net FMV of that type of property.

25.    As consideration for the property transferred by DC to TC1, TC2 and TC3, TC1, TC2 and TC3, as the case may be, will:

(a)    assume such liabilities of DC, as appropriate, so that TC1, TC2 and TC3 respectively, will receive a proportionate share of the net FMV of each type of property owned by DC, as determined in accordance with Paragraphs 21 and 22; and

(b)    issue the TC1 Butterfly Share, the TC2 Butterfly Share and the TC3 Butterfly Share, as the case may be, to DC.

26.    DC will jointly elect with TC1, TC2 or TC3, as the case may be, in the prescribed form and within the time limit referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer described in Paragraph 24 of each property that is an eligible property that is transferred by DC to TC1, TC2 and TC3, as the case may be.  The agreed amount in respect of each eligible property so transferred 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);

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

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

The amount of the liabilities assumed by TC1, TC2 and TC3, 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.

27.    The increase to the PUC of the TC1 Butterfly Share, TC2 Butterfly Share and TC3 Butterfly Share issued by TC1, TC2 and TC3, respectively to DC, as consideration for the property transferred by DC to such corporation will not exceed the aggregate cost amount of such property to the corporation as determined pursuant to subsection 85(1) where applicable, less the aggregate amount of DC’s liabilities assumed by the corporation for such property as described in Paragraph 25.  For greater certainty, the increase to the PUC of the TC1 Butterfly Share, TC2 Butterfly Share and TC3 Butterfly Share so issued by TC1, TC2, and TC3, respectively, will not exceed the maximum amount that could be added to the PUC of such share, without resulting in an adjustment under subsection 85(2.1).

28.    Following the transfer of property described in Paragraph 24, TC1, TC2 and TC3 will redeem the TC1 Butterfly Share, TC2 Butterfly Share and TC3 Butterfly Share, respectively. As consideration for the redemption, TC1 will issue the TC1 Redemption Note, TC2 will issue the TC2 Redemption Note and TC3 will issue the TC3 Redemption Note. DC will accept the TC1 Redemption Note, the TC2 Redemption Note and the TC3 Redemption Note as full payment for the aggregate redemption amount of the TC1 Butterfly Share, TC2 Butterfly Share and TC3 Butterfly Share so redeemed.

29.    TC1, TC2 and TC3 will select their first taxation year to end at the end of the day on which the TC1 Butterfly Share, TC2 Butterfly Share and TC3 Butterfly Share are redeemed. This will occur at least one day prior to the transactions described in Paragraph 30.

30.    After at least XXXXXXXXXX has elapsed since the acquisition of the shares of the capital stock of DC by the TCs and after the Proposed Transactions described in Paragraphs 17 to 29, DC will be wound-up pursuant to the BCA. 

31.    In connection with the winding-up of DC, DC will assign and distribute the TC1 Redemption Note to TC1, the TC2 Redemption Note to TC2 and the TC3 Redemption Note to TC3. As a result of the assignment and distribution of the TC1 Redemption Note, the TC2 Redemption Note and the TC3 Redemption Note by DC, the obligation of each of TC1, TC2 and TC3 under the TC1 Redemption Note, TC2 Redemption Note and TC3 Redemption Note, as the case may be, will be extinguished and such notes will be cancelled.

32.    To the extent that there is a CDA balance in DC at the time of the winding-up of DC and immediately prior to the distribution of the TC1 Redemption Note, the TC2 Redemption Note and the TC3 Redemption Note by DC to TC1, TC2 and TC3, DC will elect, equal to the CDA balance at that time, to treat the portion of the winding-up dividend as a separate dividend for all purposes. TC1, TC2 and TC3 will elect in prescribed manner and form required under subsection 83(2) on the proportion of such separate dividend described in subparagraph 88(2)(b)(iv).

33.    To the extent that there is a positive GRIP balance in DC at the time off 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 subsection 88(2)(b)(iii), which is deemed to be a separate dividend, to be an eligible dividend by notifying TC1, TC2 and TC3 in writing, within the time limit prescribed in subsection 89(14), that the portion of such dividend is an eligible dividend.

34.    After the transactions described above, DC will not own or acquire any property or carry on any activity or undertaking. 

35.    Following receipt of the dividend refund to which DC will become entitled as a result of the Proposed Transactions, DC will immediately transfer the cash received on the dividend refund in the form of a dividend to each of TC1, TC2 and TC3 in the same proportions as described in Paragraph 24.

36.    Within a reasonable time following the payment of such dividend, 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.

37.    Subsequently, TC1, TC and TC3 may gradually sell their remaining investment, provided that the sale of their remaining investment does not result in an acquisition of property in the circumstances described in paragraph 55(3.l)(c) and transfer the proceeds to TC1, TC2, and TC3 over a period of at least one year. The amount paid in any quarter of that year on a class of shares will not exceed XXXXXXXXXX% of the PUC of such class of shares of TC1, TC2 and TC3. 

38.    Once all the debts and liabilities of the Estate have been ascertained and settled, the executors/trustees of the Estate will complete the administration of the Estate and distribute the residue in accordance with the terms of the Will. 

ADDITIONAL INFORMATION

39.    DC engages investment advisors to manage the Marketable Securities. DC’s business is the investment of its capital to produce income and long-term appreciation in the value of its Marketable Securities. Prior to A’s death, A approved the investment strategy and since A’s death, the Trustees have continued with such investment strategy. 

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

41.    TC1, TC2 and TC3 will not repay any part of the TC1 Note, TC2 Note or TC3 Note, as the case may be, during the XXXXXXXXXX period following the completion of the Proposed Transactions described in Paragraph 30. 

42.    No property has or will become property of DC or any corporation controlled by DC or a predecessor corporation of any such corporation in contemplation of and before the Proposed Transactions.

43.    Except as described in this letter, no liabilities have been or will be incurred or discharged by DC or any corporation controlled by DC in contemplation of and before the Proposed Transactions.

44.    There has not been and will not be, as part of the series of transactions or events that include 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).

45.    Other than the transfers which form part of the Proposed Transactions or transfers in the ordinary course of business, neither DC, TC1, TC2 nor TC3 has any expectation or intention to dispose of any property owned by them as part of the series of transactions or events that includes the Proposed Transactions to a person unrelated to DC or TC, as the case may be, or to a partnership as described in paragraphs 55(3.1)(c) or (d).

46.    On completion of the Proposed Transactions:

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

(b)    TC2 will hold and only dispose of the property it received from DC in the normal course of its investment activities; and

(c)    TC3 will hold and only dispose of the property it received from DC in the normal course of its investment activities.

For greater certainty, each of TC1, TC2 and TC3 will hold and sell the Marketable Securities received from DC in the course of carrying on its normal investment activities in a similar manner to that which DC would have done had the Proposed Transactions not been executed.

47.    During the period of XXXXXXXXXX following the implementation of the Proposed Transactions, TC1, TC2 or TC3 may pay taxable dividends from the current year’s earnings and these dividends will not be funded through a disposition of Marketable Securities. 

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

49.    None of the shares of DC, TC1, TC2 or TC3 will be at any time during a series of transactions or events that includes the Proposed Transactions:

(a)    the subject of a guarantee agreement within the meaning of subsection 112(2.2);

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

(c)    the subject of a dividend rental agreement within the meaning of subsection 112(2.3).

50.    Each of TC1, TC2 and TC3 will have the financial capacity to honour, upon presentation for payment, the principal amount under the TC1 Redemption Note, the TC2 Redemption Note or the TC3 Redemption Note, as the case may be.

51.    None of DC, TC1, TC2 and TC3 are nor will be a XXXXXXXXXX or a XXXXXXXXXX.  

PURPOSES OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to allow for an estate distribution in accordance with the Will and Codicil of the shares and Shareholder loans of DC to the respective beneficiaries and to allow the trustees of the Grandchild1 Trust, Grandchild2 Trust and Grandchild3 Trust to undertake their future investment and planning independent from one another while minimizing the inherent double tax exposure that can result from the application of paragraph 70(5)(a) of the Act which applied in these particular circumstances.

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.    Section 84.1 will not apply to deem Grandchild1 Trust, Grandchild2 Trust and Grandchild3 Trust to have received a dividend from TC1, TC2 and TC3, respectively, on the disposition to TC1, TC2 and TC3 of the shares of DC, described in Paragraphs 17 to 19.

B.    Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem DC to have paid, and Grandchild1 Trust, Grandchild2 Trust and Grandchild3 Trust to have received, a dividend from DC as a result of the Proposed Transactions.

C.    Subject to the application of subsection 69(11), provided that the requisite joint elections are filed 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:

(a)    the transfer of the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of the capital stock of DC by Grandchild1 Trust to TC1 described in Paragraph 17;

(b)    the transfer of the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of the capital stock of DC by Grandchild2 Trust to TC2 described in Paragraph 18;

(c)    the transfer of the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of the capital stock of DC by Grandchild3 Trust to TC3 described in Paragraph 19; and

(d)    the transfer of each property owned by DC to TC1, TC2 and TC3 described in Paragraph 24;

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

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

D.    As a result of the redemption by TC1, TC2 and TC3, as the case may be, of the TC1 Butterfly Shares, the TC2 Butterfly Shares and the TC3 Butterfly Shares, as described in Paragraph 28, by virtue of subsection 84(3), each of TC1, TC2 and TC3 will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by TC1, TC2 and TC3, as the case may be, in respect of its redemption of the TC1 Butterfly Shares, the TC2 Butterfly Shares and the TC3 Butterfly Shares, owned by DC exceeds the PUC of such class of shares immediately before the redemption.

E.    As a result of the distribution by DC in the course of its winding-up:

(a)    by virtue of paragraph 88(2)(b) and subsection 84(2), but subject to (b), (c), and (d) below, DC will be deemed to have paid a dividend (the “winding-up dividend”) on its XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares, as the case may be, equal to the amount by which 

i)    the aggregate FMV of the property of DC transferred to TC1, TC2 and TC3 in respect of each of the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of DC, as the case may be, on the winding-up of DC;

exceeds

ii)    the amount, if any, by which the PUC in respect of the XXXXXXXXXX Class A common shares and XXXXXXXXXX Class E preferred shares of DC, as the case may be, is reduced on the transfer; and 

each of TC1, TC2 and TC3 will be deemed to have received a dividend equal to that proportion of the amount of the excess that the number of the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of DC, as the case may be, held by TC1, TC2 and TC3, as the case may be, is of the number of such shares issued and outstanding immediately before the transfer;

(b)    pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend paid on the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of DC referred to in (a) herein that does not in aggregate exceed the capital dividend account of DC determined immediately before the payment of the winding-up dividend will be deemed, for purposes of the subsection 83(2) elections referred to in Paragraph 32, to be the full amount of a separate dividend;

(c)    pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend on each of the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares of DC, to the extent that it exceeds the portion thereof referred to in (b) and (c) herein that is deemed to be a separate dividend, 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, TC2 and TC3 will be deemed to have received its proportional share of the winding-up dividend relating to the XXXXXXXXXX Class B common shares and XXXXXXXXXX Class E preferred shares in (c) herein.

F.    The taxable dividends deemed received by TC1, TC2, TC3 and DC, as described in paragraph (d) of Rulings E and F:

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

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

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

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

(e)    will not give rise 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 or VI.1.

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

(a)    an acquisition of property in circumstances described in paragraph 55(3.l)(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.l)(b)(iii); or

(e)    an acquisition of property in the circumstances described in paragraph 55(3.l)(c) or 55(3.1)(d);

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings D and E above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b). 

H.    The cancellation of any of the TC1 Redemption Note, the TC2 Redemption Note and the TC3 Redemption Note as described in Paragraph 31 will not, in and of itself, result in a forgiven amount within the meaning of subsections 80(1) or 80.01(1). 

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

J.    Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed herein.

The above rulings are subject to the limitations and qualifications set out in Information Circular 706R7, dated April 22, 2016 and are binding on the CRA provided that the Proposed Transactions in Paragraphs 17 to 19 are completed within six months of the date of this letter and the remaining Proposed Transactions are completed within the timeline specified in this ruling request.

The above rulings are based on the Act as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted, could have an effect on the rulings provided herein.

OTHER COMMENTS

Unless otherwise confirmed in the above rulings, 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 FMV or ACB of any asset or the PUC of any share;

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

(c)    that the executors of the Estate are able to complete the Proposed Transactions under the terms of A’s Will and Codicil;

(d)    that any persons or individuals described herein deal, or do not deal, with any other person or individuals at arm’s length; or

(e)    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 purposes of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares.  Furthermore, none of the rulings listed above 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.

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

Yours Truly,

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

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2018

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2018