2017-0693271R3 Split-Up Butterfly

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

Position: Yes.

Reasons: Wording of the Act and previous positions.

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

XXXXXXXXXX                                                                                                           2017-069327

XXXXXXXXXX, 2017

Dear XXXXXXXXXX:

Re:   Advanced Income Tax Ruling
        XXXXXXXXXX

We are writing in response to your request for an advance income tax ruling. We also acknowledge the additional information provided in your letters and in various email correspondence, as well as information provided during our telephone conversations (XXXXXXXXXX).

PRELIMINARY MATTERS

To the best of your knowledge, and that of the responsible officers of the above-mentioned Taxpayers, none of the issues contained herein are:

(a)   dealt with in a previously filed return of one of the Taxpayers or a related person;

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

(c)   under objection by one of the Taxpayers or a related person;

(d)   the subject of a current or completed court process involving one of the Taxpayers or a related person; or

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

Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the “Act”) as amended, or the Income Tax Regulations, C.R.C., c.945, as appropriate and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this letter, the following terms or expressions have the meaning specified:

“A” means XXXXXXXXXX, the father of Shareholder1 and Shareholder2, who died on XXXXXXXXXX;

“ACB” means “adjusted cost base” as that expression is defined in section 54 and subsection 248(1);

“Act1” means XXXXXXXXXX;

“Act2” means XXXXXXXXXX;

“AET” means the alter ego trust settled by A and the taxpayers represent that it qualified as an “alter ego trust” and as a “personal trust” as defined in subsection 248(1). The beneficiaries are Shareholder1 and Shareholder2 and their issue. The trustees of AET are Shareholder1, Shareholder2 and an individual unrelated to both of them, all of whom have represented that they reside in Canada for the purposes of the Act. All decisions pertaining to AET are made in Canada, and AET’s central management and control is located in Canada;

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

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

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

“DC1” means XXXXXXXXXX;

“DC2” means XXXXXXXXXX;

“DC Amalco” means the corporation formed on the amalgamation of DC1 and DC2 pursuant to the relevant provisions of Act2;

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

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

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

“FMV” means the highest price available in an open and unrestricted market, between informed prudent parties, acting at arm's length and with no compulsion to act, expressed in terms of cash;

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

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

“Portfolio Investments” means DC1’s portfolio of long term investments in publicly traded securities as described in this letter;

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

“Proposed Transactions” means the transactions described in Paragraphs 19 to 40;

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

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

“Shareholder1” means XXXXXXXXXX, a resident of Canada for purposes of the Act and the sibling of Shareholder2;

“Shareholder2” means XXXXXXXXXX, a resident of Canada for purposes of the Act and the sibling of Shareholder1;

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

“Subco1” means a corporation to be incorporated under Act2 and will be a wholly-owned subsidiary of TC1;

“Subco1 Butterfly Share” means a share of the capital stock of Subco1, which will be non-voting, will entitle the holder to discretionary non-cumulative dividends, will be redeemable and retractable at any time (subject to applicable law) for an amount equal to the aggregate FMV of the consideration received by Subco1 on the issuance thereof (excluding the amount of any liabilities assumed) plus any declared but unpaid dividends, and will have priority over a share of any other classes of shares of the capital stock of Subco1 on a liquidation or other dissolution of Subco1. No dividends or other distribution will be paid on shares ranking junior to the Subco1 Butterfly Shares if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets of Subco1 to an amount less than the aggregate redemption amount of the issued and outstanding Subco1 Butterfly Shares;

“Subco1 Redemption Note” means a non-interest bearing demand promissory note issued by Subco1 to DC Amalco as consideration for the redemption by Subco1 of the Subco1 Butterfly Shares held by DC Amalco having a principal amount and FMV equal to the aggregate redemption amount of the Subco1 Butterfly Shares so redeemed;

“Subco2” means a corporation to be incorporated under Act2 and will be a wholly-owned subsidiary of TC2;

“Subco2 Butterfly Share” means a share of the capital stock of Subco2, which will be non-voting, will entitle the holder to discretionary non-cumulative dividends, will be redeemable and retractable at any time (subject to applicable law) for an amount equal to the aggregate FMV of the consideration received by Subco2 on the issuance thereof (excluding the amount of any liabilities assumed) plus any declared by unpaid dividends, and will have priority over a share of any other classes of shares of the capital stock of Subco2 on a liquidation or other dissolution of Subco2. No dividends or other distribution will be paid on shares ranking junior to the Subco2 Butterfly Shares if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets of Subco2 to an amount less than the aggregate redemption amount of the issued and outstanding Subco2 Butterfly Shares;

“Subco2 Redemption Note” means a non-interest bearing demand promissory note issued by Subco2 to DC Amalco as consideration for the redemption by Subco2 of the Subco2 Butterfly Shares held by DC Amalco having a principal amount and fair market value equal to the aggregate redemption amount of the Subco2 Butterfly Shares so redeemed;

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

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

“TC1” means XXXXXXXXXX; and

“TC2” means XXXXXXXXXX.

FACTS

Facts Relating to DC1

1.    DC1 is, and will be at all relevant times and for purposes of the Act, a CCPC and TCC. DC1 was incorporated under Act1 on XXXXXXXXXX. DC1’s fiscal period and taxation year ends on XXXXXXXXXX.

2.    DC1’s authorized share capital consists of the following:

a)    XXXXXXXXXX Class A common Shares, non-voting and without par value;

b)    XXXXXXXXXX Class B common Shares, voting and without par value;

c)    XXXXXXXXXX Class C preference Shares with a par value of $XXXXXXXXXX per share;

d)    XXXXXXXXXX Class D preference Shares with a par value of $XXXXXXXXXX per share;

e)    XXXXXXXXXX Class E preference Shares with a par value of $XXXXXXXXXX per share; and

f)    XXXXXXXXXX Class F preference Shares with a par value of $XXXXXXXXXX per share.

3.    The issued and outstanding share capital of DC1 consists of XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares, all of which are owned by DC2. All of the issued and outstanding shares of DC1 are held by DC2 as capital property and were not acquired in contemplation of the Proposed Transactions.

4.    As at XXXXXXXXXX the balance in DC1’s RDTOH account was approximately $XXXXXXXXXX. The current balance in DC1’s CDA is $XXXXXXXXXX and DC1’s current GRIP balance is $XXXXXXXXXX.

5.    As at XXXXXXXXXX, the assets of DC1 consisted of the following:

a)    cash and near cash amounts of approximately $XXXXXXXXXX;

b)    unlisted securities with a FMV of approximately $XXXXXXXXXX; and

c)    the Portfolio Investments with a FMV of approximately $XXXXXXXXXX.

DC1 holds the Portfolio Investments as capital property. DC1 does not exercise any significant influence over any issuer of the Portfolio Investments. The Portfolio Investments are held in independent investment accounts that are managed solely by third party investment advisors who are responsible for making any investment decisions relating to the Portfolio Investments and who only recently were made aware of the Proposed Transactions. Any acquisition or disposition of Portfolio Investments is made by the third party investment advisors in the ordinary course of managing the Portfolio Investments.

As at XXXXXXXXXX, the liabilities of DC1 consist of approximately $XXXXXXXXXX. Its main liabilities include a revolving bank loan, accounts payable, income taxes payable, and amounts due to the AET and shareholders (mainly comprising of unpaid/reinvested dividends).

Facts Relating to DC2

6.    DC2 is and will be, at all relevant times, a CCPC and a TCC.  DC2 was incorporated under Act1 on XXXXXXXXXX. DC2 has a XXXXXXXXXX year end.

7.    DC2’s authorized share capital is as follows:

a)    XXXXXXXXXX Common A Shares which are voting, entitled to non-cumulative discretionary dividends, exchangeable at the rate of XXXXXXXXXX Class B Preferred Shares for every XXXXXXXXXX Class A Common Share so exchanged with par value of $XXXXXXXXXX per share;

b)    XXXXXXXXXX Common B Shares which are voting, entitled to non-cumulative discretionary dividends, with par value of $XXXXXXXXXX per share;

c)    XXXXXXXXXX Class A Preferred Shares which are non-voting, redeemable retractable, entitled to non-cumulative discretionary dividends at the rate of XXXXXXXXXX per cent, with par value of $XXXXXXXXXX per share; and

d)    XXXXXXXXXX Class B Preferred Shares which are voting, redeemable retractable, non- participating with par value of $XXXXXXXXXX per share.

8.    The issued and outstanding share capital of DC2 consists of XXXXXXXXXX Class B Common Shares, XXXXXXXXXX Class A Preferred Shares and XXXXXXXXXX Class B Preferred Shares which are owned equally by TC1 and TC2. All of the issued and outstanding shares of DC2 are held by TC1 and TC2 as capital property and were not acquired in contemplation of the Proposed Transactions.

9.    As at XXXXXXXXXX, the balance in DC2’s RDTOH account XXXXXXXXXX. The current balance in DC2’s CDA is $XXXXXXXXXX and the current balance in DC2’s GRIP account XXXXXXXXXX.

10.   Immediately prior to the Proposed Transactions, the assets of DC2 will consist of the following:

a)    shares in the capital of DC1; and

b)    advances receivable from DC1.

Facts Relating to TC1

11.   TC1 is and will be, at all relevant times, a CCPC and a TCC. TC1 was incorporated under Act1 on XXXXXXXXXX. TC1 has an XXXXXXXXXX year end.

12.   TC1’s authorized share capital is as follows:

a)    XXXXXXXXXX Class A Common shares which are voting, non-participating with a par value of $XXXXXXXXXX per share;

b)    XXXXXXXXXX Class B Common Shares which are non-voting, entitled to non-cumulative discretionary dividends with a par value of $XXXXXXXXXX per share;

c)    XXXXXXXXXX Class A Preferred Shares which are non-voting, fixed preferential non-cumulative dividend XXXXXXXXXX, redeemable and retractable with a par value of $XXXXXXXXXX per share;

d)    XXXXXXXXXX Class B Preferred Shares which are non-voting, not entitled to dividends, redeemable and retractable with a par value of $XXXXXXXXXX per share; and

e)    XXXXXXXXXX Class C Preferred Shares which have a par value of $XXXXXXXXXX per share.

13.   The issued and outstanding share capital of TC1 consists of XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class B Common Shares which are owned by Shareholder1, and XXXXXXXXXX Class C Preferred which are owned by AET. All of the issued and outstanding shares of TC1 are held by Shareholder1 and AET as capital property.

14.   As at XXXXXXXXXX, the balance in TC1’s RDTOH account was $XXXXXXXXXX, the balance in TC1’s CDA was $XXXXXXXXXX and TC1’s GRIP balance was $XXXXXXXXXX.

Facts Relating to TC2

15.   TC2 is and will be, at all relevant times, a CCPC and a TCC. TC1 was incorporated under Act1 on XXXXXXXXXX. TC2 has an XXXXXXXXXX year end.

16.   TC2’s authorized share capital is as follows:

a)    XXXXXXXXXX Class A common shares which are voting, non-participating with a par value of $XXXXXXXXXX per share;

b)    XXXXXXXXXX Class B common Shares which are non-voting, entitled to non-cumulative discretionary dividends with a par value of $XXXXXXXXXX per share;

c)    XXXXXXXXXX Class A Preferred Shares which are non-voting, fixed preferential non-cumulative dividend XXXXXXXXXX per cent, redeemable and retractable with a par value of $XXXXXXXXXX per share;

d)    XXXXXXXXXX Class B Preferred Shares which are non-voting, not entitled to dividends, redeemable and retractable with a par value of $XXXXXXXXXX per share; and

e)    XXXXXXXXXX Class C Preferred Shares which have a par value of $XXXXXXXXXX per Share.

17.   The issued and outstanding share capital of TC2 consists of XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class B Common Shares which are owned by Shareholder2 and XXXXXXXXXX Class C Preferred Shares which are owned by AET. All of the issued and outstanding shares of TC2 are held by Shareholder1 and AET as capital property.

18.   As at XXXXXXXXXX, the balance in TC2’s RDTOH account was $XXXXXXXXXX, the balance in TC2’s CDA was $XXXXXXXXXX and TC2’s GRIP balance was $XXXXXXXXXX.

PROPOSED TRANSACTIONS

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

19.   XXXXXXXXXX, TC1 will incorporate Subco1. Subco1 will be, at all relevant times, a CCPC and a TCC. Subco1 will establish a taxation year end that is after the Proposed Transactions and within 53 weeks of the date of incorporation of Subco1. Subco1’s authorized share capital will be as follows:

(a)   an unlimited number of common shares without par value and which are voting and participating; and

(b)   an unlimited number of Subco1 Butterfly Shares.

Upon incorporation, Subco1 will issue XXXXXXXXXX common shares to TC1 at a price of $XXXXXXXXXX per share. Such common shares will be held by TC1 as capital property.

20.   XXXXXXXXXX, TC2 will incorporate Subco2. Subco2 will be, at all relevant times, a CCPC and a TCC. Subco2 will establish a taxation year end that is after the Proposed Transactions and within 53 weeks of the date of the incorporation of Subco2. Subco2’s authorized share capital will be as follows:

(a)   an unlimited number of common shares without par value and which are voting and participating; and

(b)   an unlimited number of Subco2 Butterfly Shares.

Upon incorporation, Subco2 will issue XXXXXXXXXX common shares to TC2 at a price of $XXXXXXXXXX per share. Such common shares will be held by TC2 as capital property.

21.   DC1 and DC2 will amalgamate under the vertical short form amalgamation provisions of Act2 to form DC Amalco. DC Amalco will be a CCPC and a TCC. DC Amalco's authorized share capital will be identical to the share capital of DC2.

22.   Upon the amalgamation, DC Amalco will issue XXXXXXXXXX Class B Common Shares, XXXXXXXXXX Class A Preferred Shares and XXXXXXXXXX Class B Preferred Shares to each of TC1 and TC2. The FMV of the DC Amalco shares issued to each of TC1 and TC2 will equal the FMV of the shares of DC2 of the equivalent class that each owned in DC2.

23.   [Reserved]

24.   [Reserved]

25.   Immediately before the transfer of property described below, the property owned by DC Amalco will be classified into the following three types of property and the aggregate net FMV of each type of property will be determined in the following manner:

a)    cash or near-cash property, comprising all of the current assets of DC Amalco, including cash, term or other deposits, accounts receivable, and pre-paid expenses, including for greater certainty, any marketable securities held by DC Amalco;

b)    investment property, comprising all of the assets of DC Amalco, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or from a specified investment business, including, for greater certainty, the Portfolio Investments; and

c)    business property, comprising all of the assets of DC Amalco, other than cash or near-cash property, any income from which would, for the 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 Amalco, such as the balance of non-capital losses, net capital losses, CDA, GRIP and RDTOH will not be considered property;

e)    advances that are payable on demand or that are due within the next 12 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 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; and

h)    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.

26.   Based on the methodologies described above, it is anticipated that DC Amalco will not own any property that would be classified as business property immediately before the transfer of property described below.

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

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

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

c)    any liabilities that remain after the allocations described in (a) and (b) are made will then be allocated among all types of property on the basis of the relative net FMV of each type of property immediately prior to the allocation of such excess, but after the allocation of liabilities as described in (a) and (b).

28.   DC Amalco will contemporaneously transfer to each of Subco1 and Subco2 a pro rata portion of the net FMV of each type of property owned by DC Amalco, such that immediately following such property transfer, the aggregate net FMV of each type of property of DC Amalco transferred to Subco1 or Subco2, as the case may be, 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 above) immediately before the transfer, of all property of that type owned at that time by DC Amalco;

B is the FMV, immediately before the transfer, of all the shares of the capital stock of DC Amalco owned, at that time, by TC1 or TC2, 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 Amalco.

For the purposes of this Paragraph, the expression “approximate the proportion” above means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of each type of property that Subco1 and Subco2 has received on such transfer as compared to what each would have received had it received its exact pro rata share of the net FMV of that type of property.

29.   As consideration for the property transferred by DC Amalco to Subco1 and Subco2, Subco1 and Subco2, as the case may be, will:

a)    assume an amount of DC Amalco’s existing liabilities; and

b)    issue to DC Amalco the Subco1 Butterfly Shares and Subco2 Butterfly Shares.

30.   DC Amalco will jointly elect with Subco1 or Subco2, 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 of each eligible property that is transferred by DC Amalco to that corporation. 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 FMV, at the time of disposition, of the consideration therefor other than shares of the capital stock of that corporation or a right to receive such shares. For greater certainty, the agreed amount in respect of each such transferred property will be within the limits prescribed as follows:

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

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

31.   Each of Subco1 and Subco2 will add to the stated capital maintained for the Subco1 Butterfly Shares or Subco2 Butterfly Shares of its capital stock, as the case may be, an amount that will not exceed the amount by which the aggregate of, in the case of eligible properties, the agreed amounts, and in the case of other properties, the amount equal to the amount by which the FMV of the properties transferred to Subco1 or Subco2, as the case may be, exceeds the liabilities assumed by Subco1 or Subco2, as the case may be. For greater certainty, the increase to the PUC of the Subco1 Butterfly Shares or Subco2 Butterfly Shares will not exceed the maximum amount that could be added to the PUC of each such shares, having regard to subsection 85(2.1).

32.   Subco1 and Subco2 will redeem the Subco1 Butterfly Shares and Subco2 Butterfly Shares, respectively. As consideration for the redemption, Subco1 will issue the Subco1 Redemption Note and Subco2 will issue the Subco2 Redemption Note as full payment for the aggregate redemption amount of the shares so redeemed.

33.   Subco1 will be wound up into its parent corporation, TC1, pursuant to the provisions of Act2. As a consequence, Subco1’s assets will be transferred to TC1 and TC1 will assume Subco1’s liabilities, including the Subco1 Redemption Note.

34.   Subco2 will be wound up into its parent corporation, TC2, pursuant to the provisions of Act2. As a consequence, Subco2’s assets will be transferred to TC2 and TC2 will assume Subco2’s liabilities, including the Subco2 Redemption Note.

35.   Immediately thereafter, the shareholders of DC Amalco (being TC1 and TC2) will resolve to wind-up and dissolve DC Amalco.  In the course of its wind-up, DC Amalco will assign and distribute the Subco1 Redemption Note to TC1, and the Subco2 Redemption Note to TC2.  As a result of that assignment and distribution, the obligations of each of TC1 and TC2 under the Subco1 Redemption Note and Subco2 Redemption Note, respectively, will be extinguished and such notes will be cancelled.

36.   To the extent that there is a positive balance in the CDA of DC Amalco immediately prior to the distribution of the Subco1 Redemption Note and Subco2 Redemption Note, DC Amalco will elect, in the prescribed manner and prescribed form required under subsection 83(2), to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend paid.

37.   To the extent that there is a positive GRIP balance in DC Amalco at the time of the winding-up of DC Amalco, DC Amalco 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 and TC2 in writing, within the time limit prescribed in subsection 89(14), that the portion of such dividend is an eligible dividend.

38.   After the transactions described above and subject to Paragraph 39, DC Amalco will not own or acquire any property or carry on any activity or undertaking.

39.   Upon the receipt of any dividend refund to which DC Amalco may become entitled as a result of the Proposed Transactions, DC Amalco will immediately transfer the cash received in the form of a dividend (under the terms of the agreement governing the winding-up of DC Amalco) to each of TC1 and TC2 in the same proportions as described in Paragraph 28.

40.   Within a reasonable time following the transfer of such dividend refund, articles of dissolution will be filed by DC Amalco with the appropriate corporate registry and upon receipt of a certificate of dissolution DC Amalco will be dissolved.

ADDITIONAL INFORMATION

41.   DC Amalco will not exercise significant influence over any corporation or partnership.

42.   The shares of DC Amalco will be capital property to each of TC1 and TC2.

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

44.   [Reserved]

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

46.   None of the property received by Subco1 or Subco2 on the transfer described in Paragraph 28 will be acquired by a person unrelated to TC1 or TC2, as the case may be, or by a partnership, as part of a series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(c).

47.   None of the shares of DC1, DC2, DC Amalco, Subco1, Subco2, TC1 or TC2 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).

48.   [Reserved]

49.   [Reserved]

50.   Each of Subco1 and Subco2 will have the financial capacity to honour, upon presentation for payment, the amount payable under the Subco1 Redemption Note or the Subco2 Redemption Note, as the case may be.

51.   Each of DC1, DC2, DC Amalco, Subco1, Subco2, TC1 and TC2 is not and will not be a restricted financial institution or a specified financial institution.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to allow Shareholder1 and Shareholder2 to separate their indirect interests in DC1 and DC2 and to permit them to undertake their future investment and estate planning independent of the other.

RULINGS GIVEN

Provided that the above statements of Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions are accurate and constitute a complete disclosure of all relevant information, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A.    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 DC Amalco’s transfers of property to Subco1 and Subco2 described in Paragraph 28 such that the agreed amount in respect of each such transfer will be deemed pursuant to paragraph 85(1)(a) to be the transferor’s proceeds of disposition of the particular property and the transferee’s cost thereof. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B.    Subject to subsection 69(11), the provisions of subsection 88(1) will apply to the windings up of Subco1 and Subco2, as described in Paragraphs 33 and 34, respectively.

C.    As a result of the redemption by Subco1 and Subco2, as the case may be, of the Subco1 Butterfly Shares and the Subco2 Butterfly Shares described in Paragraph 32, by virtue of subsection 84(3), each of Subco1 and Subco2 will be deemed to have paid, and DC Amalco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by Subco1 and Subco2, as the case may be, in respect of its redemption of the Subco1 Butterfly Shares and the Subco2 Butterfly Shares owned by DC Amalco exceeds the paid-up capital of such class of shares immediately before the redemption.

D.    As a result of the distribution by DC Amalco in the course of its winding-up, as described in Paragraph 35:

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

i.    the aggregate FMV of the property of DC Amalco distributed to TC1 and TC2 in respect of each of the Class B Common Shares, Class A Preferred Shares and Class B Preferred Shares of DC Amalco, as the case may be, on the winding-up

exceeds

ii.   the amount, if any, by which the PUC in respect of the Class B Common Shares, Class A Preferred Shares and Class B Preferred Shares of DC Amalco, as the case may be, is reduced on the distribution, and

each of TC1 and TC2 will be deemed to have received a dividend equal to that proportion of the amount of the excess that the number of the Class B Common Shares, Class A Preferred Shares and Class B Preferred Shares of DC Amalco, as the case may be, held by TC1 and TC2, as the case may be, is of the number of such shares issued and outstanding immediately before the distribution;

b)    pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend paid on the Class B Common Shares, Class A Preferred Shares and Class B Preferred Shares of DC Amalco referred to in (a) herein that does not in aggregate exceed the CDA of DC Amalco 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 36, to be the full amount of a separate dividend and provided that DC Amalco elects pursuant to subsection 83(2) in respect of the full amount of this separate dividend, in prescribed form and manner, such dividend will be deemed to be a capital dividend;

c)    pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend on the Class B Common Shares, Class A Preferred Shares and the Class B Preferred Shares of DC Amalco that in aggregate is equal to DC Amalco’s pre-1972 CSOH, as determined immediately before the payment of the winding-up dividends, shall be deemed not to be a dividend;

d)    pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend on each of the Class B Common Shares, Class A Preferred Shares and Class B Preferred Shares of DC Amalco, 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

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

E.    The taxable dividends received by TC1, TC2 and DC Amalco, as described in Rulings C and D:

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.

F.    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 subparagraph 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).

G.    The extinguishment of the Subco1 Redemption Note or the Subco2 Redemption Note as described in Paragraph 35 will not, in and of itself, result in a forgiven amount within the meaning of subsections 80(1)) or 80.01(1). In addition, DC Amalco will not realize any gain or loss as a result of the extinguishment of the Subco1 Redemption Note and the Subco2 Redemption Note.

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

I.    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.

These rulings are subject to the limitations and qualifications set out in Information Circular IC 70-6R7 dated April 22, 2016 and are binding on the CRA provided that the Proposed Transactions are completed no later than six months after the date of this letter. The above rulings are based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, 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 PUC of any share or the ACB or FMV of any property referred to herein;

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

c.    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 given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1 Price Adjustment Clauses.

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

Yours truly,

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

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