2017-0683941R3 Split-up transactions

Principal Issues: Whether the proposed split-up transactions meet legislative and administrative requirements?

Position: Transactions meet requirements.

Reasons: Consistent with law and administrative requirements.

Author: XXXXXXXXXX
Section: Subsection 55(2), paragraph 55(3)(a)

XXXXXXXXXX                            2017-068394

XXXXXXXXXX, 2018

Dear XXXXXXXXXX:

Re:    XXXXXXXXXX (B/N XXXXXXXXXX) (Amalco) 
    XXXXXXXXXX (B/N XXXXXXXXXX) (Opco)
    XXXXXXXXXX (B/N XXXXXXXXXX) (Holdco 1)
    XXXXXXXXXX - SIN XXXXXXXXXX
    XXXXXXXXXX- SIN XXXXXXXXXX 
    Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers.  We also acknowledge the additional information provided to us in subsequent letters and emails, and during our various telephone conversations.

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

(i)    in a previously filed tax return of the taxpayers or persons related to 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 persons related to the taxpayers;

(iii)    under objection by the taxpayers or persons related to the taxpayers; 

(iv)    the subject of a current or completed court process involving the taxpayers or persons related to the taxpayers; or 

(v)    the subject of an advance income ruling previously issued by the Income Tax Rulings Directorate.

I.    ENTITIES INVOLVED

1.    Throughout this letter, the entities below will be referred to as follows:

“Amalco” means XXXXXXXXXX (B/N XXXXXXXXXX), as more particularly described in Paragraphs 3 to 7;

“Bank” means the XXXXXXXXXX;

“Daughter” means XXXXXXXXXX, an adult child of Mother and a resident of Canada;

“Grandchildren” means the two minor children of Daughter, who are the grandchildren of Mother and residents of Canada; 

“Holdco 1” means XXXXXXXXXX (B/N XXXXXXXXXX), a predecessor corporation of Amalco, as more particularly described in Paragraphs 19, 20 and 23;

“Holdco 2” means XXXXXXXXXX (B/N XXXXXXXXXX), as more particularly described in Paragraphs 8 and 9; 

“Investor” means XXXXXXXXXX, a resident of Canada, as more particularly described in Paragraph 12;

“Mother” means XXXXXXXXXX, a resident of Canada;

“Newco” means a new corporation to be incorporated by Daughter under Act 1, as more particularly described in Paragraph 35; 

“Opco” means XXXXXXXXXX (B/N XXXXXXXXXX), a predecessor corporation of Amalco, as more particularly described in Paragraphs 16, 17, 18 and 22;

“Trust” means XXXXXXXXXX, an inter-vivos discretionary trust, as more particularly described in Paragraphs 13 and 14; and 

“XCo” means XXXXXXXXXX (B/N XXXXXXXXXX), as more particularly described in Paragraphs 10 and 11.

II.    DEFINITIONS

Unless otherwise expressly stated, every reference herein to the “Act” or to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and the Income Tax Regulations thereunder are referred to as the “Regulations.”

Unless otherwise noted, all references herein to a currency are a reference to Canadian dollars.

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

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

“Acquisitions” has the meaning set out in Paragraph 33;

“Act 1” means the XXXXXXXXXX, as amended to the date hereof; 

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

“Amalco Class A Voting Common Shares” has the meaning set out in Paragraph 4(a);

“Amalco Class A Voting Special Shares” has the meaning set out in Paragraph 4(b);

“Amalco Class B Non-Voting Special Shares” has the meaning set out in Paragraph 4(d);

“Amalco Class B Voting Common Shares” has the meaning set out in Paragraph 4(c);

“Amalco Class C Voting Common Shares” has the meaning set out in Paragraph 4(e);

“Amalco Dividend 1” means the dividend, deemed by subsection 84(3), to have been paid by Amalco and received by Newco, arising on the purchase for cancellation of the XXXXXXXXXX Amalco Class B Voting Common shares owned by Newco, as described in Ruling B;

“Amalco Dividend 2” means the dividend, deemed by subsection 84(3), to have been paid by Amalco and received by Newco, arising on the redemption of the XXXXXXXXXX Amalco Class B Non-Voting Special Shares owned by Newco, as described in Ruling B; 

“Amalco Dividends” means collectively the Amalco Dividend 1 and the Amalco Dividend 2; 

“Amalco Redemption” has the meaning set out in Paragraph 44;  

“Amalco Redemption Amount” has the meaning set out in Paragraph 44;

“Amalco Redemption Note” has the meaning set out in Paragraph 44;  

“Amalco Transfer” has the meaning set out in Paragraph 39;

“Amalgamation” means the amalgamation of Holdco 1 and Opco to form Amalco on XXXXXXXXXX, as more particularly described in Paragraph 21;

“Arm’s Length” has the meaning assigned by subsection 251(1);

“Bank Loan” means the loan owed by Opco to the Bank, as described in Paragraph 30(a), which became a liability of Amalco on the Amalgamation, as described in Paragraph 21(b);

“Business 1” has the meaning set out in Paragraph 5(a);

“Business 2” has the meaning set out in Paragraph 5(b);

“Capital Property” has the meaning assigned by section 54;

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

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

“CRA” means the Canada Revenue Agency;

“Daughter Amalco Shares” has the meaning set out in Paragraph 37;

“Daughter Transfer” has the meaning set out in Paragraph 37;

“Depreciable Property” has the meaning assigned by subsection 13(21);

“Development Plan” has the meaning set out in Paragraph 28;

“Distribution Property” has the meaning set out in Paragraph 39;

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

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

“Facility 1” means XXXXXXXXXX, as more particularly described in Paragraph 6; 

“Facility 2” means XXXXXXXXXX, as more particularly described in Paragraph 6; 

“FMV” means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at Arm’s Length and without compulsion to act, expressed in terms of cash;

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

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

“Investor XCo Receivable” has the meaning set out in Paragraph 30(b);

“Land” has the meaning set out in Paragraph 31; 

“Lease” has the meaning set out in Paragraph 47;

“Newco Class A Redemption Amount” has the meaning set out in Paragraph 35(b)(i);

“Newco Class A Special Shares” means the Class A special shares in the capital of Newco, as described in Paragraph 35(b); 

“Newco Class B Redemption Amount” has the meaning set out in Paragraph 35(c)(i);

“Newco Class B Special Shares” means the Class B special shares in the capital of Newco, as described in Paragraph 35(c);

“Newco Common Shares” means common shares in the capital of Newco, as described in Paragraph 35(a); 

“Newco Dividend” means the dividend, deemed by subsection 84(3), to have been paid by Newco and received by Amalco, arising on the Newco Redemption, as described in Ruling B; 

“Newco Redemption” has the meaning described in Paragraph 41;

“Newco Redemption Note” has the meaning set out in Paragraph 41;

“Opco XCo Receivable” has the meaning set out in Paragraph 30(a);

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

“Past Transactions” means the transactions described in Paragraphs 22 to 34;

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

“Proceeds of Disposition” has the meaning assigned by section 54;

“Province” means the Province of XXXXXXXXXX;

“Proposed Transactions” means the transactions described in Paragraphs 35 to 47;

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

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

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

“Renewal Strategy” has the meaning set out in Paragraph 27; 

“Restricted Financial Institution” has the meaning assigned by subsection 248(1);

“Rulings” means the advance income tax rulings labelled “A” to “F” in this letter;

“Safe-income Determination Time” has the meaning assigned to that phrase by subsection 55(1);

“Safe Income On Hand” means income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation after 1971 and before the Safe-income Determination Time for a transaction, event or Series of Transactions or Events;

“Series of Transactions or Events” has the meaning assigned by subsection 248(10);

“Short-Term Preferred Share” has the meaning assigned by subsection 248(1);

“Specified Financial Institution” has the meaning assigned by subsection 248(1);

“Stated Capital” in respect of the share capital of a corporation has the meaning assigned by the statute by which the corporation is governed at the relevant time;

“Subject Transactions” means the transactions described in Paragraphs 16 to 21;

“Substantial Interest” has the meaning assigned by paragraph 191(2)(a);

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

“Taxable Dividend” has the meaning assigned by subsection 89(1);

“Taxable Preferred Share” has the meaning assigned by subsection 248(1);

“Taxable RFI Share” has the meaning assigned by subsection 248(1); and

“Taxation Year” has the meaning assigned by subsection 249(1). 

Our understanding of the Facts, Subject Transactions, Past Transactions, Proposed Transactions and purposes of the Subject Transactions, the Past Transactions and the Proposed Transactions are as follows:

III.    FACTS

Amalco

3.    Amalco is a CCPC and a TCC, which is governed by Act 1.  Amalco was formed on an amalgamation (Amalgamation) of Opco and Holdco 1 under Act 1 on XXXXXXXXXX. 

Prior to the Amalgamation, each of Opco and Holdco 1 was a CCPC and a TCC, which was governed by Act 1, as more particularly described in Paragraphs 16 to 20.  Opco’s and Holdco 1’s Taxation Years both ended XXXXXXXXXX of each year.

Amalco will deal with the XXXXXXXXXX Tax Services Office and will file its T2 Corporation Income Tax Returns at the XXXXXXXXXX Tax Centre.  

Amalco’s first Taxation Year will end on XXXXXXXXXX. 

4.    The issued and outstanding share capital of Amalco consists of: 

(a)    XXXXXXXXXX Amalco Class A Voting Common Shares (one vote per share) having an aggregate PUC and ACB of $XXXXXXXXXX, of which: 

(i)    XXXXXXXXXX shares are owned by Mother, and 

(ii)    the remaining XXXXXXXXXX shares are owned by Holdco 2;

(b)    XXXXXXXXXX Amalco Class A Voting Special Shares (one vote per share), having an aggregate PUC, ACB and redemption amount of $XXXXXXXXXX, all of which are owned by Mother;

(c)    XXXXXXXXXX Amalco Class B Voting Common Shares (one vote per share) having an aggregate PUC and ACB of $XXXXXXXXXX, all of which are owned by Daughter;

(d)    XXXXXXXXXX Amalco Class B Non-Voting Special shares, having an aggregate PUC of $XXXXXXXXXX and an aggregate redemption amount of $XXXXXXXXXX, of which: 

(i)    XXXXXXXXXX shares, having an aggregate PUC of $XXXXXXXXXX, an aggregate ACB of $XXXXXXXXXX, and an aggregate redemption amount of $XXXXXXXXXX, are owned by Mother, and

(ii)    the remaining XXXXXXXXXX shares, having an aggregate PUC and ACB of $XXXXXXXXXX, and an aggregate redemption amount of $XXXXXXXXXX, are owned by Daughter; and

(e)    XXXXXXXXXX Amalco Class C Voting Common Shares (one vote per share) having an aggregate PUC and ACB of $XXXXXXXXXX, all of which are owned by the Trust. 

The Amalco shares described in Paragraphs 4(a) to (e) were shares issued by Amalco in exchange for the shares of Holdco 1 and Opco on the Amalgamation, as described in Paragraph 21.

No shares have been issued by Amalco since the date of the Amalgamation.

Mother controls Amalco through her XXXXXXXXXX Amalco Class A Voting Special Shares.

5.    Amalco carries on: 

(a)    XXXXXXXXXX (Business 1) that Opco (a predecessor corporation of Amalco) carried on immediately before the Amalgamation, in Facility 1 and Facility 2.  

Facility 1 has XXXXXXXXXX, and Facility 2 has XXXXXXXXXX; and

(b)    XXXXXXXXXX (Business 2) that Opco carried on immediately before the Amalgamation, in Facility 2. 

Facility 2 has XXXXXXXXXX.

6.    Amalco’s assets include cash, accounts receivable, and Facility 1 and 2.  Each of Facility 1 and 2 consists of land, a building, equipment and furniture.  XXXXXXXXXX.

Amalco’s liabilities include loan payables to Holdco 2 (as of XXXXXXXXXX, the amount was $XXXXXXXXXX) and to the Bank, with respect to the Bank Loan (as of XXXXXXXXXX, the amount was $XXXXXXXXXX), that Amalco inherited from Holdco 1 (with respect to Holdco 1’s loan payable to Holdco 2) and Opco (with respect to Opco’s Bank Loan), respectively, on the Amalgamation, as described in Paragraph 21(b).

7.    The aggregate FMV of all of the issued and outstanding shares of Amalco is approximately $XXXXXXXXXX.  Daughter’s shareholding interest in Amalco is approximately XXXXXXXXXX%, which has a FMV of approximately $XXXXXXXXXX. 

Holdco 2

8.    Holdco 2 is a TCC and a CCPC, which is governed by Act 1.  Holdco 2 was incorporated on XXXXXXXXXX, under Act 1.

The issued and outstanding share capital of Holdco 2 consists of:

(a)    XXXXXXXXXX Holdco 2 Class A voting common shares (one vote per share) having an aggregate PUC and ACB of $XXXXXXXXXX, all of which are owned by the Trust;

(b)    XXXXXXXXXX Holdco 2 Class A voting special shares (one vote per share) having an aggregate PUC, ACB and redemption amount of $XXXXXXXXXX, all of which are owned by Mother;

(c)    XXXXXXXXXX Holdco 2 Class B non-voting special shares having an aggregate PUC and ACB of $XXXXXXXXXX and an aggregate redemption amount of $XXXXXXXXXX, all of which are owned by Mother; and

(d)    XXXXXXXXXX Holdco 2 Class C non-voting special shares having an aggregate PUC and ACB of $XXXXXXXXXX, and an aggregate redemption amount of $XXXXXXXXXX, all of which are owned by Mother, as more particularly described in Paragraph 24. 

Mother controls Holdco 2 through her XXXXXXXXXX Holdco 2 Class A Voting Special Shares.

9.    Holdco 2’s assets include:

(a)    XXXXXXXXXX Amalco Class A Voting Common Shares, as more particularly described in Paragraph 21(c)(iv);

(b)    XXXXXXXXXX XCo Class B non-voting special shares, as more particularly described in Paragraph 33(c);

(c)    an investment property (XXXXXXXXXX) in XXXXXXXXXX;

(d)    a loan receivable from Amalco (as of XXXXXXXXXX, the amount was $XXXXXXXXXX); and 

(e)    a loan receivable from XCo (as of XXXXXXXXXX, the amount was $XXXXXXXXXX).  

Holdco 2’s liabilities include a mortgage against the investment property in XXXXXXXXXX.  

XCo

10.    XCo is a CCPC and a TCC, which is governed by Act 1.  XCo was incorporated on XXXXXXXXXX, under Act 1.

All of the issued and outstanding share capital of XCo consists of:

(a)    XXXXXXXXXX XCo voting common shares (one vote per share) having an aggregate PUC and ACB of $XXXXXXXXXX, of which:

(i)    XXXXXXXXXX shares are owned by Mother, and 

(ii)    the remaining XXXXXXXXXX shares are owned by the Investor.

(b)    XXXXXXXXXX XCo Class B non-voting special shares having an aggregate PUC, ACB and redemption amount of $XXXXXXXXXX, of which: 

(i)    XXXXXXXXXX shares are owned by Holdco 2, as more particularly described in Paragraph 33(c), and

(ii)    the remaining XXXXXXXXXX shares are owned by the Investor, as more particularly described in Paragraph 33(d). 

Mother controls XCo through her XXXXXXXXXX XCo voting common shares. 

11.    XCo’s assets includes the Land, as more particularly described in Paragraph 31.

XCo’s liabilities include loan payables to Holdco 2 in the amount of $XXXXXXXXXX, and to the Investor in the amount of $XXXXXXXXXX. 

12.    The Investor is a resident of Canada and has provided consulting services to: 

(a)    Amalco, since it was formed on the Amalgamation; and

(b)    Opco, since XXXXXXXXXX and before the Amalgamation, 

with respect to the operations of Business 1 and Business 2 in Facility 1 and Facility 2.

The Investor is not a Related Person to Mother or Daughter.

Trust

13.    The Trust is an inter vivos discretionary trust.  It was created by a trust indenture, and settled by the Investor on XXXXXXXXXX, with a XXXXXXXXXX.

The capital and income beneficiaries of the Trust are the two minor children of Daughter, who are the grandchildren of Mother (Grandchildren), and their issue.  

The sole trustee of the Trust is Mother, who has the power to distribute income or capital of the Trust to any or to all, of the beneficiaries of the Trust in her sole discretion.

14.    The Trust’s assets include: 

(a)    XXXXXXXXXX Amalco Class C Voting Common Shares; and

(b)    XXXXXXXXXX Holdco 2 Class A voting common shares.

The Trust has no outstanding liabilities.

Mother, Daughter, Grandchildren, the Trust, Amalco, Newco, Holdco 2 and XCo

15.    Mother, Daughter, and Grandchildren are residents of Canada.  They are related to each other pursuant to paragraph 251(2)(a).

For the purposes of section 55, Mother, Daughter, Grandchildren, the Trust, Amalco, Holdco 2, XCo and Newco (which will be incorporated as described in the Proposed Transactions), are or will be related to each other, through Mother’s controlling interests in Amalco, Holdco 2 and XCo, and Daughter’s controlling interest in Newco, as described in Paragraph 36, by virtue of paragraphs 55(5)(e) and 251(2)(a), and subparagraphs 251(2)(b)(i) and (iii), and 251(2)(c)(ii).

IV.    SUBJECT TRANSACTIONS

Amalgamation of Holdco 1 and Opco

Opco

16.    Prior to the Amalgamation, Opco operated Business 1 in Facility 1 and 2, and Business 2 in Facility 2.

17.    On XXXXXXXXXX:

(a)    Opco’s assets included Facility 1 and Facility 2, and two loan receivables: one from Holdco 1 of $XXXXXXXXXX and the other from Holdco 2 of $XXXXXXXXXX;

(b)    Opco’s liabilities included the Bank Loan of $XXXXXXXXXX, as more particularly described in Paragraph 30(a); and

(c)    all of the issued and outstanding share capital of Opco consisted of:

(i)    XXXXXXXXXX Opco Class A voting common shares (one vote per share) having an aggregate PUC and ACB of $XXXXXXXXXX, all of which were owned by Mother; 

(ii)    XXXXXXXXXX Opco Class A voting special shares (one vote per share) having an aggregate PUC and ACB of $XXXXXXXXXX, and an aggregate redemption amount of $XXXXXXXXXX, all of which were owned by Holdco 1; 

(iii)    XXXXXXXXXX Opco Class B voting common shares (one vote per share) having an aggregate PUC and ACB of $XXXXXXXXXX, all of which were owned by Daughter;

(iv)    XXXXXXXXXX Opco Class B non-voting special shares having an aggregate PUC of $XXXXXXXXXX and an aggregate redemption amount of $XXXXXXXXXX, of which:

(I)    XXXXXXXXXX shares (having an aggregate PUC and ACB of $XXXXXXXXXX, and an aggregate redemption amount of $XXXXXXXXXX) were owned by Mother; and 

(II)    the remaining XXXXXXXXXX shares (having an aggregate PUC and ACB of $XXXXXXXXXX, and an aggregate redemption amount of $XXXXXXXXXX) were owned by Daughter; and

(v)    XXXXXXXXXX Opco Class C voting common shares (one vote per share) having an aggregate PUC and ACB of $XXXXXXXXXX, all of which were owned by the Trust. 

Opco had no RDTOH at the end of its XXXXXXXXXX Taxation Year.

18.    Holdco 1 controlled Opco through its XXXXXXXXXX Opco Class A voting special shares, as described in Paragraph 17(c)(ii).

Mother controlled Opco indirectly through her controlling interest in Holdco 1 (by virtue of Mother’s XXXXXXXXXX Holdco 1 Class A voting special shares, as described in Paragraph 20).

Holdco 1

19.    Prior to the Amalgamation, Holdco 1 provided XXXXXXXXXX to Opco. 

On XXXXXXXXXX: 

(a)    Holdco 1’s assets included XXXXXXXXXX Opco Class A voting special shares (one vote per share) having an aggregate PUC and ACB of $XXXXXXXXXX and an aggregate redemption amount of $XXXXXXXXXX;

(b)    Holdco 1’s liabilities included two loan payables: one to Opco of $XXXXXXXXXX, and the other to Holdco 2 of $XXXXXXXXXX; and

(c)    all of the issued and outstanding share capital of Holdco 1 consisted of:

(i)    XXXXXXXXXX Holdco 1 Class A voting common shares (one vote per share) having an aggregate PUC and ACB of $XXXXXXXXXX, all of which were owned by Holdco 2, as more particularly described in Paragraph 24;

(ii)    XXXXXXXXXX Holdco 1 Class A voting special shares (one vote per share) having an aggregate PUC, ACB and redemption amount of $XXXXXXXXXX, all of which were owned by Mother;

(iii)    XXXXXXXXXX Holdco 1 Class B voting common shares (one vote per share) having an aggregate PUC and ACB of $XXXXXXXXXX, all of which were owned by Daughter;

(iv)    XXXXXXXXXX Holdco 1 Class B non-voting special shares having an aggregate PUC and ACB of $XXXXXXXXXX, and an aggregate redemption amount of $XXXXXXXXXX, all of which were owned by Mother; and

(v)    XXXXXXXXXX Holdco 1 Class C voting common shares (one vote per share) having an aggregate PUC and ACB of $XXXXXXXXXX, all of which were owned by the Trust.

Holdco 1 had no RDTOH at the end of its XXXXXXXXXX Taxation Year.

20.    Mother controlled Holdco 1 through her XXXXXXXXXX Holdco 1 Class A voting special shares.

Amalgamation of Holdco 1 and Opco

21.    On XXXXXXXXXX, Holdco 1 and Opco amalgamated to form Amalco pursuant to the provisions of Act 1.

On the Amalgamation:

(a)    all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of Opco and Holdco 1, including Facility 1 and Facility 2 and Opco’s loan receivable from Holdco 2, immediately before the Amalgamation, became property of Amalco, by virtue of the Amalgamation,

(b)    all of the liabilities (except amounts payable to any predecessor corporation) of Opco and Holdco 1, including Holdco 1’s loan payable to Holdco 2 and Opco’s Bank Loan, immediately before the Amalgamation, became the liabilities of Amalco, by virtue of the Amalgamation, and 

(c)    all of the shareholders of Opco and Holdco 1 (except any predecessor corporation), who owned shares of the capital stock of Opco or Holdco 1 immediately before the Amalgamation, received shares of Amalco because of the Amalgamation, as follows:

(i)    Mother received: 

(I)    XXXXXXXXXX Amalco Class A Voting Common Shares (in exchange for her XXXXXXXXXX Opco Class A voting common shares), having an aggregate PUC and ACB of $XXXXXXXXXX, and an aggregate FMV equal to the aggregate FMV, immediately before the Amalgamation, of Mother’s XXXXXXXXXX Opco Class A voting common shares;

(II)    XXXXXXXXXX Amalco Class A Voting Special Shares (in exchange for her XXXXXXXXXX Holdco 1 Class A voting special shares), having an aggregate PUC, ACB, FMV and redemption amount of $XXXXXXXXXX equal to the aggregate FMV, immediately before the Amalgamation, of Mother’s XXXXXXXXXX Holdco 1 Class A voting special shares;

(III)    XXXXXXXXXX Amalco Class B Non-Voting Special Shares (in exchange for her XXXXXXXXXX Opco Class B non-voting special shares) having an aggregate PUC and ACB of $XXXXXXXXXX, and an aggregate FMV and redemption amount of $XXXXXXXXXX equal to the aggregate FMV, immediately before the Amalgamation, of Mother’s XXXXXXXXXX Opco Class B non-voting special shares; and

(IV)    XXXXXXXXXX Amalco Class B Non-Voting Special Shares (in exchange for her XXXXXXXXXX Holdco 1 Class B non-voting special shares) having an aggregate PUC of $XXXXXXXXXX, an aggregate ACB of $XXXXXXXXXX, and an aggregate FMV and redemption amount of $XXXXXXXXXX equal to the aggregate FMV, immediately before the Amalgamation, of Mother’s XXXXXXXXXX Holdco 1 Class B non-voting special shares.

(ii)    Daughter received:

(I)    XXXXXXXXXX Amalco Class B Voting Common Shares (in exchange for her XXXXXXXXXX Holdco 1 Class B voting common shares and XXXXXXXXXX Opco Class B voting common shares) having an aggregate PUC and ACB of $XXXXXXXXXX, and an aggregate FMV equal to the aggregate FMV, immediately before the Amalgamation, of Daughter’s XXXXXXXXXX Holdco 1 Class B voting common shares and XXXXXXXXXX Opco Class B voting common shares; and

(II)    XXXXXXXXXX Amalco Class B Non-Voting Special Shares (in exchange for her XXXXXXXXXX Opco Class B non-voting special shares) having an aggregate PUC and ACB of $XXXXXXXXXX, and an aggregate FMV and redemption amount of $XXXXXXXXXX equal to the aggregate FMV, immediately before the Amalgamation, of Daughter’s XXXXXXXXXX Opco Class B non-voting special shares.

(iii)    The Trust received XXXXXXXXXX Amalco Class C Voting Common Shares (in exchanged for its XXXXXXXXXX Opco Class C voting common shares and XXXXXXXXXX Holdco 1 Class C voting common shares) having an aggregate PUC and ACB of $XXXXXXXXXX, and an aggregate FMV equal to the aggregate FMV, immediately before the Amalgamation, of the Trust’s XXXXXXXXXX Opco Class C voting common shares and XXXXXXXXXX Holdco 1 Class C voting common shares.

(iv)    Holdco 2 received XXXXXXXXXX Amalco Class A Voting Common Shares (in exchange for its XXXXXXXXXX Holdco 1 Class A voting common shares, as described in Paragraph 35) having an aggregate PUC and ACB of $XXXXXXXXXX, and an aggregate FMV equal to the aggregate FMV, immediately before the Amalgamation, of Holdco 2’s XXXXXXXXXX Holdco 1 Class A voting common shares. 

For greater certainty, on the Amalgamation:

(A)    Holdco 1’s XXXXXXXXXX Opco Class A voting special shares were cancelled without any consideration.  All other issued and outstanding shares of Opco and of Holdco 1 were cancelled; 

(B)    Holdco 1’s loan payable to Holdco 2 of $XXXXXXXXXX, as described in Paragraph 19(b), became Amalco’s liability to Holdco 2; and Opco’s receivable from Holdco 2 of $XXXXXXXXXX, as described in Paragraph 17(a), became Amalco’s receivable from Holdco 2, which resulted in Amalco owing $XXXXXXXXXX to Holdco 2;

(C)    Holdco 1’s liability to Opco and Opco’s receivable from Holdco 1 were settled and extinguished; and

(D)    the aggregate PUC of the Amalco shares that were issued in exchange for the respective Opco shares and the Holdco 1 shares, did not exceed the aggregate PUC, immediately before the Amalgamation, of those respective Opco shares and Holdco 1 shares that were exchanged for the respective Amalco shares on the Amalgamation, as described in Paragraph 21(c). 

V.    PAST TRANSACTIONS

Opco

22.    Opco was formed on an amalgamation of XXXXXXXXXX and XXXXXXXXXX on XXXXXXXXXX, under Act 1.

Mother was the sole shareholder of Opco owning XXXXXXXXXX Opco old common shares when it was formed. 

Holdco 1

23.    Holdco 1 was incorporated on XXXXXXXXXX under Act 1.  Holdco 1 was a TCC and a CCPC.

On the incorporation of Holdco 1: 

(a)    Mother subscribed for XXXXXXXXXX Holdco 1 Class A voting special shares for a subscription price of $XXXXXXXXXX, and XXXXXXXXXX Holdco 1 voting common shares for a subscription price of $XXXXXXXXXX; and 

(b)    Daughter subscribed for XXXXXXXXXX Holdco 1 voting common shares for a subscription price of $XXXXXXXXXX.

Since its incorporation, Holdco 1 had provided management services to Opco.

Mother’s XXXXXXXXXX Holdco 2 Class C non-voting special shares and Holdco 2’s XXXXXXXXXX Holdco 1 Class A voting common shares

24.    Prior to XXXXXXXXXX, Mother owned XXXXXXXXXX Holdco 1 Class A voting common shares having an aggregate PUC and ACB of $XXXXXXXXXX.

On XXXXXXXXXX, Mother transferred her XXXXXXXXXX Holdco 1 Class A voting common shares to Holdco 2 in exchange for XXXXXXXXXX Holdco 2 Class C non-voting special shares under subsection 85(1), having an aggregate PUC and ACB of $XXXXXXXXXX, and an aggregate FMV and redemption amount of $XXXXXXXXXX equal to the aggregate FMV at that time of Mother’s XXXXXXXXXX Holdco 1 Class A voting common shares so transferred to Holdco 2. 

Dividends paid by Holdco 1 on Holdco 2’s 100 Holdco 1 Class A voting common shares 

25.    On XXXXXXXXXX, after Holdco 2 acquired Mother’s XXXXXXXXXX Holdco 1 Class A voting common shares, as described in Paragraph 24, Holdco 1 paid:

(a)    a dividend of $XXXXXXXXXX on Holdco 2’s XXXXXXXXXX Holdco 1 Class A voting common shares, and 

(b)    a dividend of $XXXXXXXXXX on Daughter’s XXXXXXXXXX Holdco 1 Class B voting common shares.

26.    On XXXXXXXXXX, Holdco 1 paid:

(a)     a dividend of $XXXXXXXXXX on Holdco 2’s XXXXXXXXXX Holdco 1 Class A voting common shares, and 

(b)     a dividend of $XXXXXXXXXX on Daughter’s XXXXXXXXXX Holdco 1 Class B voting common shares. 

XXXXXXXXXX Business and irreconcilable differences between Mother and Daughter

27.    XXXXXXXXXX

28.    XXXXXXXXXX

The investment with respect to developing a XXXXXXXXXX on a new site (Development Plan) was estimated to be somewhere between $XXXXXXXXXX and $XXXXXXXXXX.  

Mother and Opco did not have financial resources enabling them to undertake this kind of investment.  Furthermore, because of Mother’s age (XXXXXXXXXX), the Province or the financial institutions would not approve the development of a XXXXXXXXXX without an expert being involved in the construction and the operation of the new facility, and in dealing with the Province’s complex rules and regulations, including reporting requirements. 

Mother asked the Investor to participate in the Development Plan, as she was a well-known expert in operating XXXXXXXXXX.  The Investor agreed to become an investor in the Development Plan.  

29.    Daughter opposed the Development Plan and she did not want Opco to undertake the Development Plan if it proceeded.  

On XXXXXXXXXX, the Investor and Mother incorporated XCo under Act 1.  On the incorporation of XCo: 

(a)    Mother subscribed for XXXXXXXXXX XCo common shares (one vote per share) for a subscription price of $XXXXXXXXXX; and

(b)    the Investor subscribed for XXXXXXXXXX XCo common shares for a subscription price of $XXXXXXXXXX.  

30.    On XXXXXXXXXX: 

(a)    Opco borrowed the sum of $XXXXXXXXXX (Bank Loan) from the XXXXXXXXXX (Bank) and loaned the same amount of $XXXXXXXXXX to XCo (Opco XCo Receivable), on the same terms and conditions as the Bank Loan; and 

(b)    the Investor loaned money to Xco (Investor XCo Receivable), in proportion to her shareholding interest in XCo.

31.    On XXXXXXXXXX, XCo used the money that it borrowed from Opco and the Investor to purchase a piece of land (Land), which was located in XXXXXXXXXX, at a purchase price of $XXXXXXXXXX.

Since XXXXXXXXXX, Opco and the Investor each have loaned additional money to XCo, in proportion to their shareholding interests in XCo, to finance its operations. 

32.    In the XXXXXXXXXX, Daughter wanted Mother to sell Opco.  Mother refused.  Consequently, Daughter wanted to sell her entire shareholding interest in Opco and Holdco 1 by: (a) taking Facility 2, but without Business 1 and its related business assets including the XXXXXXXXXX, and (b) operating Business 2 solely in Facility 2.

33.    On XXXXXXXXXX: 

(a)    Opco transferred the outstanding balance of the Opco XCo Receivable (in the amount of $XXXXXXXXXX) to Holdco 1 in partial repayment of Opco’s liability to Holdco 1; 

(b)    Holdco 1 then transferred the Opco XCo Receivable to Holdco 2 in partial repayment of Holdco 1’s liability to Holdco 2;

(c)    Holdco 2 converted its Opco XCo Receivable of $XXXXXXXXXX into XXXXXXXXXX XCo Class B non-voting special shares, having an aggregate PUC, ACB and redemption amount of $XXXXXXXXXX; and 

(d)    the Investor converted her Investor XCo Receivable of $XXXXXXXXXX into XXXXXXXXXX XCo Class B non-voting special shares, having an aggregate PUC, ACB and redemption amount of $XXXXXXXXXX.

(The Investor’s acquisitions of the XCo shares, as described in Paragraphs 29(b) and 33(d), are collectively referred to as the Acquisitions)

34.    Prior to XXXXXXXXXX, XCo discussed with lending institutions, architects and engineers regarding the construction of a new XXXXXXXXXX on the Land. 

In XXXXXXXXXX, XCo made a formal application to the Province for permission to construct a new XXXXXXXXXX on the Land and to purchase Opco’s (after the Amalgamation, Amalco’s) XXXXXXXXXX relating to Business 1 in Facility 2. 

It will take several years to complete building the XXXXXXXXXX on the Land.  

VI.    PROPOSED TRANSACTIONS

Incorporation of Newco

35.    Daughter will incorporate a new corporation (Newco) under Act 1.  

The authorized share capital of Newco will consist of the following: 

(a)    an unlimited number of voting common shares (Newco Common Shares), one vote per share;

(b)    an unlimited number of Class A non-voting special shares (Newco Class A Special Shares) having the following attributes:

(i)    each Newco Class A Special Share is redeemable, subject to applicable law, at any time at the option of Newco at a redemption amount (Newco Class A Redemption Amount) equal to the amount by which the aggregate FMV of the property received by Newco for the issuance of such shares, exceeds any debt issued or liabilities assumed by Newco on their issuance, and then dividing such amount by the number of the Newco Class A Special Shares issued as consideration therefor, plus any declared but unpaid dividends thereon;

(ii)    each Newco Class A Special Share is retractable, subject to applicable law, at any time at the option of the holder for an amount equal to the Newco Class A Redemption Amount, plus any declared but unpaid dividends thereon; 

(iii)    the holder of each Newco Class A Special Share is entitled to a non-cumulative dividend rate of XXXXXXXXXX% per annum on the Newco Class A Redemption Amount;

(iv)    the holder of each Newco Class A Special Share is entitled, upon the liquidation, dissolution or winding-up of Newco, to a payment in priority to Newco Common Shares, but will rank equally with  Newco Class B Special Shares of an amount equal to the Newco Class A Redemption Amount therefor (plus any declared but unpaid dividends thereon) to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but is entitled to no more than the amount of that payment; and

(v)    the holder of each Newco Class A Special Share is not entitled to vote at meetings of shareholders of Newco, other than as provided under Act 1; and

(c)    an unlimited number of Class B non-voting special shares (Newco Class B Special Shares) having the following attributes:

(i)    each Newco Class B Special Share is redeemable, subject to applicable law, at any time at the option of Newco at a redemption amount (Newco Class B Redemption Amount) equal to the amount by which the aggregate FMV of the property received by Newco for the issuance of such shares, exceeds any debt issued or liabilities assumed by Newco on their issuance, and then dividing such amount by the number of the Newco Class B Special Shares issued as consideration therefor, plus any declared but unpaid dividends thereon;

(ii)    each Newco Class B Special Share is retractable, subject to applicable law, at any time at the option of the holder for an amount equal to the Newco Class B Redemption Amount, plus any declared but unpaid dividends thereon; 

(iii)    the holder of each Newco Class B Special Share is entitled to a non-cumulative dividend rate of XXXXXXXXXX% per annum on the Newco Class B Redemption Amount;

(iv)    the holder of each Newco Class B Special Share is entitled, upon the liquidation, dissolution or winding-up of Newco, to a payment in priority to Newco Common Shares, but will rank equally with Newco Class B Special Shares of an amount equal to the Newco Class A Redemption Amount therefor (plus any declared but unpaid dividends thereon) to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but is entitled to no more than the amount of that payment; and

(v)    the holder of each Newco Class B Special Share is not entitled to vote at meetings of shareholders of Newco, other than as provided under Act 1.

36.    On the incorporation of Newco, Daughter will subscribe for XXXXXXXXXX Newco Common Shares for a subscription price of $XXXXXXXXXX. 

Daughter will control Newco through her XXXXXXXXXX Newco Common Shares.

Transfer of Daughter Amalco Shares to Newco

37.    Daughter will transfer (Daughter Transfer) all of her XXXXXXXXXX Amalco Class B Voting Common Shares and XXXXXXXXXX Amalco Class B Non-Voting Special Shares (collectively referred to as the Daughter Amalco Shares) to Newco.

As consideration for the Daughter Amalco Shares, Newco will issue XXXXXXXXXX Newco Class A Special Shares having an aggregate FMV and redemption amount equal to the aggregate FMV at that time of the Daughter Amalco Shares so transferred to Newco on the Daughter Transfer.

For the purposes of Act 1, the increase to the Stated Capital of the Newco Class A Special Shares that are issued to Daughter as consideration for the Daughter Amalco Shares, will equal the aggregate PUC of the Daughter Amalco Shares so transferred to Newco.  For greater certainty, such amount will not exceed the amount determined as B for the purposes of paragraph 84.1(1)(a).

Newco will hold the Daughter Amalco Shares as Capital Property.

38.    Daughter and Newco will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply in respect of the transfer of the Daughter Amalco Shares.  The Agreed Amount in respect of the joint election will be equal to the Daughter’s aggregate ACB of the Daughter Amalco Shares immediately before the Daughter Transfer.

For greater certainty, the Agreed Amount will not exceed the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

Transfer of Distribution Property to Newco

39.    Immediately following the Daughter Transfer, Amalco will transfer (Amalco Transfer) a portion of its property (Distribution Property) to Newco and Newco will assume a portion of Amalco’s existing liabilities such that immediately thereafter, Newco will have acquired, a proportion of the net FMV of all property owned by Amalco determined immediately before the Amalco Transfer that:

(a)    the aggregate FMV of the Daughter Amalco Shares owned by Newco immediately before the Amalco Transfer,

      is of

(b)    the aggregate FMV of all of the issued and outstanding shares of Amalco immediately before the Amalco Transfer.

    In addition to the assumption of a portion of Amalco’s liabilities by Newco, Newco will issue a number of Newco Class B Special Shares to Amalco having an aggregate FMV and redemption amount equal to the amount by which the FMV of the Distribution Property that is transferred to Newco exceeds the aggregate FMV of the liabilities of Amalco that Newco assumed in respect of the Amalco Transfer.

The Distribution Property will include: (i) Facility 2, but without Business 1 including its related assets and the XXXXXXXXXX pertaining to Facility 2; and (ii) Amalco’s accounts receivable relating to Business 2.

Amalco will hold the Newco Class B Special Shares as Capital Property.

For the purposes of Act 1, Newco will add to the Stated Capital account maintained for the Newco Class B Special Shares issued to Amalco, an amount equal to the amount by which the aggregate cost of the properties acquired by it from Amalco (determined pursuant to subsection 85(1) where relevant) exceeds the aggregate amount of the liabilities assumed by Newco as consideration therefor.

For greater certainty, the increase to the aggregate PUC of the Newco Class B Special Shares so issued by Newco to Amalco, will not exceed the maximum amount that could be added to the aggregate PUC of such shares, having regard to subsection 85(2.1).

40.    In respect of the Amalco Transfer, Amalco and Newco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each Eligible Property that is transferred by Amalco to Newco.  The Agreed Amount in respect of each Eligible Property so transferred will be as follows:

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

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

In each case, the Agreed Amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

The amount of Amalco’s liabilities to be assumed by Newco, as described in Paragraph 39, and to be allocated to a particular property: 

(i)    that is the subject of an election under subsection 85(1), will not exceed the Agreed Amount elected for that particular property; and

(ii)    that is not the subject of an election under subsection 85(1), will not exceed the FMV of such particular property.

Amalco and Newco will file a joint election in prescribed form and within the prescribed time period in section 22 in respect of any accounts receivable that Amalco transferred to Newco.

Share purchase for cancellation and share redemption

41.    Newco will redeem all of the Newco Class B Special Shares owned by Amalco (Newco Redemption) for an amount equal to the aggregate Newco Class B Redemption Amount.

In satisfaction of the aggregate Newco Class B Redemption Amount for such shares, Newco will issue a promissory note (Newco Redemption Note), payable to Amalco on demand without interest or fixed terms of repayment, having a Principal Amount and FMV equal to the aggregate Newco Class B Redemption Amount of the Newco Class B Special Shares so redeemed.

Amalco will accept the Newco Redemption Note in full payment of the redemption price of the Newco Class B Special Shares owned by Amalco, and will assume the full risk of the note being dishonoured.

42.    Newco will not designate the Newco Dividend to be an Eligible Dividend under subsection 89(14). 

43.    At the end of the day on which the Newco Class B Special Shares are redeemed, Newco will cause its first Taxation Year to end.  

44.    On the day following the redemption of the Newco Class B Special Shares, as described in Paragraph 41, Amalco will: 

(a)    purchase for cancellation Newco’s XXXXXXXXXX Amalco Class B Voting Common Shares, and 

(b)    redeem Newco’s XXXXXXXXXX Amalco Class B Special Shares, 

(collectively referred to as the Amalco Redemption) for an amount (Amalco Redemption Amount) equal to the total of: 

(c)    the aggregate FMV at that time of Newco’s XXXXXXXXXX Amalco Class B Voting Common Shares, and
 
(d)    the aggregate redemption amount of Newco’s XXXXXXXXXX Amalco Class B Special Shares.

In satisfaction of the Amalco Redemption Amount for such shares, Amalco will issue a promissory note (Amalco Redemption Note), payable to Newco on demand without interest or fixed terms of repayment, having a Principal Amount and FMV equal to the Amalco Redemption Amount.

Newco will accept the Amalco Redemption Note in full payment of the purchase price of the XXXXXXXXXX Amalco Class B Voting Common Shares and the redemption price of the XXXXXXXXXX Amalco Class B Special Shares owned by Newco, and will assume the full risk of the note being dishonoured.

45.    Amalco will designate a portion of the Amalco Dividends to be an Eligible Dividend under subsection 89(14) to the extent of Newco’s proportionate share of Amalco’s GRIP, if any, based on Newco’s shareholding interest in Amalco immediately before the Amalco Transfer. 

Promissory Notes Set-Off 

46.    Immediately following the Newco Redemption and the Amalco Redemption, the Principal Amount owing by Amalco to Newco under the Amalco Redemption Note and the Principal Amount owing by Newco to Amalco under the Newco Redemption Note, which will be equal amounts, will be set-off in full against each other and each such note will be marked paid in full and extinguished.

Lease agreement

47.    Amalco will enter into a lease agreement (Lease) with Newco to lease the portion of Facility 2 currently used as a XXXXXXXXXX.  The Lease will continue until the XXXXXXXXXX on the Land is completed and the Province has permitted the transfer by Amalco of the XXXXXXXXXX that related to Business 1 in Facility 2 to XCo.  

Amalco will pay Newco a FMV rent and its share of all related common costs such as XXXXXXXXXX, all related to Business 1 in Facility 2.

VII.    ADDITIONAL INFORMATION

48.    The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of the filing of any applicable election forms in respect of the Proposed Transactions described in Paragraphs 38 and 40, which will be filed on or before the applicable due date. 

49.    The Acquisitions did not rely on the Proposed Transactions in order to produce a given result.  The Proposed Transactions will not rely on the Acquisitions to produce a given result.  

In addition, none of the Acquisitions 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. 

Furthermore, none of the Proposed Transactions will be undertaken in contemplation of any of the Acquisitions and each would have been undertaken irrespective of whether any of the Acquisitions occurred.

50.    None of the shares of the capital stock of Amalco or Newco has been or will be, at any time prior to the completion of the Proposed Transactions:

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

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

(c)    the subject of a “dividend rental arrangement” referred to in subsection 112(2.3), as that term is defined in subsection 248(1).

51.    Neither Amalco nor Newco is or will be a Specified Financial Institution or a Restricted Financial Institution.  

None of Amalco or Newco is or will be a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1).   

52.    The Newco Class B Special Shares and the Amalco Class B Non-Voting Special Shares are not and will not be Taxable RFI Shares.  However, those shares are or will be Taxable Preferred Shares and Short-Term Preferred Shares.  

The Amalco Class B Voting Common Shares are not Taxable Preferred Shares nor Short-Term Preferred Shares.

53.    Newco and Amalco will have a Substantial Interest in each other at all relevant times.

54.    Each of Amalco and Newco will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.

55.    Amalco will not have a RDTOH balance at the end of the Taxation Year in which the Amalco Dividends are deemed to have been paid.

56.    The Proposed Transactions will not result in Amalco or a person who is a Related Person to Amalco described herein, being unable to pay its existing tax liabilities.

57.    Amalco will transfer Business 1 in Facility 2 including the XXXXXXXXXX to XCo at FMV after:

(a)    the Province has approved such transfer of the XXXXXXXXXX; and

(b)    the XXXXXXXXXX has been completed on the Land.  

58.    As part of a series of transactions or events that includes the Amalco Dividends and the Newco Dividend described in Ruling B, there was not and will not be a disposition of property or a significant increase in interest as described in any of subparagraphs 55(3)(a)(i) to (v), other than as described herein.

59.    The amount of each dividend that Holdco 2 received from Holdco 1 on its Holdco 1 Class B voting common shares, one on XXXXXXXXXX, and the other on XXXXXXXXXX, as described in Paragraphs 25(a) and 26(a), respectively, in each case, did not exceed the Safe Income On Hand, immediately before the Safe Income Determination Time for those dividends, that was attributable to Holdco 2’s Holdco 1 Class B voting common shares on which each such dividend was paid.  

VIII.    PURPOSES OF THE PAST TRANSACTIONS, THE SUBJECT TRANSACTIONS AND THE PROPOSED TRANSACTIONS

60.    The purpose of the Amalgamation, as described in Paragraph 21, was to simplify the corporate structure of Opco and Holdco 1 by consolidating them into one corporate entity so as to facilitate the Proposed Transactions.

61.    The purpose for Mother transferring her XXXXXXXXXX Holdco 1 Class A voting common shares to Holdco 2 on XXXXXXXXXX, as described in Paragraph 24, was to have Holdco 2 (as opposed to Mother) to receive a dividend on the XXXXXXXXXX Holdco 1 Class A voting common shares, as Daughter wanted to receive a dividend on her Holdco 1 Class B voting common shares to repay her shareholder loan owing to Holdco 1. 

62.    The reason for Holdco 2 converting its Opco XCo Receivable and for the Investor converting her Investor XCo Receivable into shares of XCo, as described in Paragraphs 33(c) and (d), respectively, was to facilitate XCo obtaining a construction loan from a financial institution.  

63.    Because of the irreconcilable differences between Mother and Daughter, as described in Paragraphs 29 and 32, Daughter wants to separate her shareholding interest in Amalco from Mother’s by: 

(a)    taking Facility 2 without Business 1 that includes its related assets and the XXXXXXXXXX; and 

(b)    operating Business 2 solely in Facility 2. 

64.    The reason for Newco causing its first Taxation Year to end at the end of the day on which the Newco Class B Special Shares are redeemed, as described in Paragraph 43, is to avoid a possible Part IV tax “circularity” issue. 

IX.    RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, transactions, Additional Information and the purposes of the Subject Transactions, the Past Transactions and the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our Rulings are set forth below:

A.    Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to: 

(a)    the transfer, by Daughter, of the Daughter Amalco Shares to Newco on the Daughter Transfer, and

(b)    the transfer, by Amalco, of the Distribution Property to Newco on the Amalco Transfer,

such that the Agreed Amount in respect of each transfer of Eligible Property will be deemed to be the transferor’s Proceeds of Disposition and the transferee’s cost of such property pursuant to paragraph 85(1)(a).

For greater certainty, 

(c)    paragraph 85(1)(e.2) will not apply to the transfers described in Rulings A (a) and (b); and

(d)    in applying subsection 85(1) to the Amalco Transfer, the reference in subparagraph 85(1)(e)(i) to the “undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition” shall be interpreted to mean the portion of the undepreciated capital cost to Amalco of all property of that class immediately before the disposition that the aggregate FMV at that time of the properties of that class transferred to Newco is of the aggregate FMV at that time of all property of that class.

B.    Subsection 84(3) will apply to:

(a)    the Newco Redemption, to deem Newco to have paid, and Amalco to have received; and

(b)    the Amalco Redemption, to deem Amalco to have paid, and Newco to have received,

a dividend that is a Taxable Dividend, on the Newco Class B Special Shares owned by Amalco (Newco Dividend), and the Amalco Class B Non-Voting Special Shares and the Amalco Class B Voting Common Shares owned by Newco (respectively the Amalco Dividend 1 and Amalco Dividend 2, collectively referred to as the Amalco Dividends), in each case, equal to the amount, if any, by which the aggregate amount paid upon such purchase for cancellation or redemption, as the case may be, exceeds the aggregate PUC in respect of such shares immediately before such purchase for cancellation or redemption, and such dividend:

(c)    will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the recipient corporation;

(d)    will be deductible, pursuant to subsection 112(1), by the recipient corporation;

(e)    will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) and (2.4) apply;

(f)    will be excluded, in determining the Proceeds of Disposition to the recipient corporation of the shares which are redeemed;

(g)    will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b); 

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

(i)    will, by virtue of subsection 112(3), reduce any loss that would otherwise be determined for the particular recipient corporation as a result of the Newco Redemption or the Amalco Redemption, as the case may be.

C.    By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to any of the Amalco Dividends or the Newco Dividend referred to in Ruling B, provided that there is no disposition or significant increase in interest described in any of subparagraphs 55(3)(a)(i) to (v), as part of a Series of Transactions or Events that includes any of the Amalco Dividends or the Newco Dividend, that is not described in this letter.

D.    The set-off and cancellation of the Amalco Redemption Note held by Newco and of the Newco Redemption Note held by Amalco, as described in Paragraph 46, will not, in either case, give rise to a Forgiven Amount, and neither Amalco nor Newco will realize any gain or incur any loss therefrom.

E.    The provisions of subsections 15(1), 56(2) and 69(1) will not, in and of themselves, be applied, as a result of any of the Proposed Transactions.

F.    The provisions of subsection 245(2) will not be applied, as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in Rulings A to E.

The Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R7 issued by the CRA on April 22, 2016, and are binding on the CRA, provided that the Proposed Transactions are completed on or before XXXXXXXXXX.

The 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 confirmed, nothing in the Rulings should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

1.    the Stated Capital or PUC of any share, or the ACB or FMV of any property, referred to herein;

2.    any other tax account of any corporation referred to herein; 

3.    the characterization of any property described herein to the holder thereof;

4.    the Safe Income On Hand attributable to any shares of any corporation referred to herein; or 

5.    any other tax consequences relating to the facts, transactions, 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, 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.

Yours truly,

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

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