2017-0714411R3 Butterfly Reorganization

Principal Issues: Can the proposed butterfly reorganization to divide the assets of the corporate taxpayer be completed tax free?

Position: Yes.

Reasons: Meets the legislative and administrative requirements.

Author: XXXXXXXXXX
Section: Subsection 55(2), Paragraph 55(3)(b), Subsections 84(3), 85(1), 112(1), 148(7), 186(4), 187.1(1), 191(2)

XXXXXXXXXX                                                                                                                                               2017-071441

XXXXXXXXXX, 2018

Dear XXXXXXXXXX:

Re:   XXXXXXXXXX

         Advance Income Tax Ruling

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

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues described herein is:

(i)   dealt with in an earlier return of the taxpayers or a person related to the taxpayers;

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

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

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

(v)   the subject of a ruling previously issued by the Income Tax Rulings Directorate.

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

DEFINITIONS

In this ruling, the following terms and expressions have the following meaning:

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

“adjusted cost basis” in respect of a life insurance policy has the meaning assigned by subsection 148(9);

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

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

“BCA” means XXXXXXXXXX;

“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); 

“Child 1” refers to XXXXXXXXXX, a child of Mother;

“Child 2” refers to XXXXXXXXXX, a child of Mother;

“Child 2 Insurance Policy” means the insurance policy on the life of Child 2 issued by XXXXXXXXXX and owned by DC;

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

“CRA” means the Canada Revenue Agency;

“CSV” means ‘cash surrender value’ as that expression is defined in subsection 148(9);

“DC” refers to XXXXXXXXXX;

“DC Class A Shares” means the Class A shares in the capital stock of DC referred to in Paragraph 2;

“DC Class B Shares” means the Class B shares in the capital stock of DC referred to in Paragraph 2;

“DC Common Shares” means the common shares in the capital stock of DC referred to in Paragraph 2;

“DC Cancellation Note” means the non-interest bearing demand promissory note described in Paragraph 19;

“DC Promissory Notes” means collectively the DC Cancellation Note and the DC Redemption Note;

“DC Redemption Note” means the non-interest bearing demand promissory note described in Paragraph 18;

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

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

“Distribution Property” means the property described in Paragraph 13;

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

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

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

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

“farm houses” means the XXXXXXXXXX farm houses located on separate parcels of land owned by DC and known municipally as XXXXXXXXXX;

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

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

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

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

“Mother” means XXXXXXXXXX;

“Mother Insurance Policy” means the insurance policy on the life of Mother issued by XXXXXXXXXX;

“Paragraph” means a numbered paragraph in this letter;

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

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

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

“proceeds of the disposition” in respect of a life insurance policy has the meaning assigned by subsection 148(9);

“Proposed Transactions” means the transactions described in the ‘Proposed Transactions’ section of this letter;

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

“related persons” has the meaning assigned by section 251 as modified for the purposes of section 55 by paragraph 55(5)(e);

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

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

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

“SIN” means Social Insurance Number;

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

“specified investment business” has the meaning assigned by subsection 125(7) and 248(1);

“stated capital” means the amount included in the stated capital account attributable to a share;

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

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

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

“TC” refers to the corporation to be incorporated described in Paragraph 8;

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

“TC Class A Shares” means the Class A special shares in the capital of TC referred to in Paragraph 8;

“TC Class B Shares” means the Class B special shares in the capital of TC referred to in Paragraph 8;

“TC Redemption Note” means the promissory note described at Paragraph 20;

“TC Common Shares” means the common shares in the capital of TC referred to in Paragraph 8;

“TC Insurance Note 1” means the promissory note referred to in Paragraph 14;

“TC Insurance Note 2” means the promissory note referred to in Paragraph 15;

“TC Promissory Notes” means collectively the TC Redemption Note, the TC Insurance Note 1, and the TC Insurance Note 2;

“Transfer” refers to the transfers of property described in Paragraph 13;

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

“value” in respect of a life insurance policy has the meaning assigned by subsection 148(9).

FACTS

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

2.    DC’s authorized share capital consist of the following:

a)    An unlimited number of voting common shares (the “DC Common Shares”);

b)    An unlimited number of non-cumulative, non-participating, redeemable, retractable, voting Class “A” shares, with no dividend entitlement (the “DC Class A Shares”); and,

c)    An unlimited number of non-cumulative, non-participating, redeemable, retractable, non-voting Class “B” shares, with no dividend entitlement (the “DC Class B Shares”).

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

a)    XXXXXXXXXX DC Class B Shares held by Mother, which have a FMV of and are redeemable and retractable for $XXXXXXXXXX per share and have, in the aggregate, a nominal ACB and PUC.  Mother acquired legal and beneficial ownership of XXXXXXXXXX of her DC Class B Shares from treasury on XXXXXXXXXX as a result of a transfer of property to DC under the provisions of subsection 85(2).  Mother acquired legal and beneficial ownership of the balance of her XXXXXXXXXX DC Class B Shares from her late husband, XXXXXXXXXX, as a result of his death on XXXXXXXXXX.  XXXXXXXXXX acquired his XXXXXXXXXX DC Class B Shares on XXXXXXXXXX as a result of a transfer of property to DC under the provisions of subsection 85(2);

b)    XXXXXXXXXX DC Class B Shares held by Child 1, which have a FMV of and are redeemable and retractable for $XXXXXXXXXX per share and have, in the aggregate, a nominal ACB and PUC. Child 1 acquired legal and beneficial ownership of his XXXXXXXXXX DC Class B Shares from treasury on XXXXXXXXXX as a result of a transfer of property to DC under the provisions of subsection 85(1);

c)    XXXXXXXXXX DC Class B Shares held by Child 2, which have a FMV of and are redeemable and retractable for $XXXXXXXXXX per share and have, in the aggregate, a nominal ACB and PUC. Child 2 acquired legal and beneficial ownership of his XXXXXXXXXX DC Class B Shares of DC from treasury on XXXXXXXXXX as a result of a transfer of property to DC under the provisions of subsection 85(1);

d)    XXXXXXXXXX DC Common Shares held by Child 1, with an ACB and PUC of $XXXXXXXXXX in aggregate.  Child 1 acquired legal and beneficial ownership of his XXXXXXXXXX DC Common Shares from treasury on XXXXXXXXXX; and,

e)    XXXXXXXXXX DC Common Shares held by Child 2, with an ACB and PUC of $XXXXXXXXXX in aggregate.  Child 2 acquired legal and beneficial ownership of his XXXXXXXXXX DC Common Shares from treasury on XXXXXXXXXX.

4.    DC carries on a farming business in XXXXXXXXXX.  DC’s assets include cash, HST receivables, inventory, land and buildings, farm equipment, the Mother Insurance Policy, the Child 2 Insurance Policy and a life insurance policy on the life of Child 1.  XXXXXXXXXX.

5.    Mother, Child 1 and Child 2 are all Canadian residents for purposes of the Act.  Mother, Child 1 and Child 2 are not residents of any other country.

6.    Mother is the mother of Child 1 and Child 2.  Child 1 and Child 2 are siblings and connected by blood within the meaning of subsection 251(6).

7.    [Reserved].

PROPOSED TRANSACTIONS

8.    Child 2 will incorporate an operating company, TC, under the laws of the Province of XXXXXXXXXX.  TC will be a CCPC and a TCC.  The authorized share capital of TC will consist of the following:

a)    An unlimited number of voting common shares (the “TC Common Shares”);

b)    An unlimited number of Class A special shares, non-voting, redeemable and retractable for an amount determined by the Board of Directors at time of issuance, and entitled to non-cumulative dividends at a rate of XXXXXXXXXX% per annum (the TC Class A Shares”);

c)    An unlimited number of Class B special shares, non-voting, redeemable and retractable for an amount determined by the Board of Directors at time of issuance, and entitled to non-cumulative dividends at a rate of XXXXXXXXXX% per annum (the “TC Class B Shares”); and,

d)    An unlimited number of Class C special shares, non-voting, redeemable and retractable for an amount determined by the Board of Directors at time of issuance, and entitled to non-cumulative dividends at a rate of XXXXXXXXXX% per annum.

9.    Immediately following incorporation, Child 2 will subscribe for XXXXXXXXXX TC Common Shares for $XXXXXXXXXX in aggregate.

10.   Child 2 will transfer all XXXXXXXXXX of his DC Class B Shares and all XXXXXXXXXX of his DC Common Shares to TC.  As consideration for the transfer, TC will issue to Child 2 XXXXXXXXXX TC Common Shares.  An amount equal to the aggregate PUC of the DC Class A Shares and DC Common Shares transferred by Child 2 to TC will be added to the stated capital of the TC Common Shares.  The TC Common Shares owned by Child 2 will have an aggregate FMV equal to the aggregate FMV of the DC Class A Shares and DC Common Shares transferred by Child 2 to TC.

Child 2 and TC will jointly elect pursuant to subsection 85(1) of the Act in prescribed form and within the time limits prescribed by subsection 85(6) of the Act with respect to the transfer and the agreed amount for the purposes of the election will be equal to the aggregate ACB to Child 2 of his shares of DC transferred to TC.

11.   Mother will transfer all XXXXXXXXXX of her DC Class B Shares to TC.  As consideration for the transfer, TC will issue to Mother XXXXXXXXXX TC Class A Shares.  An amount equal to the aggregate PUC of the DC Class B Shares transferred by Mother to TC will be added to the stated capital of the TC Class A Shares.  The XXXXXXXXXX TC Class A Shares will have an aggregate FMV and be redeemable and retractable for an aggregate amount equal to the aggregate FMV of the DC Class B Shares transferred by Mother to TC.

Mother and TC will jointly elect pursuant to subsection 85(1) of the Act in prescribed form and within the time limits prescribed by subsection 85(6) of the Act with respect to the transfer and the agreed amount for the purposes of the election will be equal to the aggregate ACB to Mother of her shares of DC so transferred. 

12.   Immediately before the transfers of shares of DC to TC described in Paragraphs 10 and 11, the property of DC will be classified into the following three types of property for the purposes of the definition of distribution in subsection 55(1) of the Act, as follows:

a)    cash or near-cash property, consisting of all of the current assets of DC, including cash, HST receivable, Agri-invest deposit, inventory, and the Mother Insurance Policy and Child 2 Insurance Policy in an amount up to each such policy’s CSV, if any;

b)    investment property (including the amount, if any, by which the FMV of each of the Mother Life Insurance Policy and the Child 2 Insurance Policy exceeds its CSV, if any);

c)    business property, consisting of all of the assets of DC other than property described in (a) or (b) above, any income from which would be income from a business (other than a specified investment business), including the XXXXXXXXXX farm houses.

For greater certainty, for purposes of the distribution:

a)    tax accounts of DC, such as the balance of non-capital losses, RDTOH or CDA, if any, and deferred finance charges will not be considered property;

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

the amount of any deferred income tax will not be considered a liability for the purposes of the Proposed Transactions.

13.   DC will transfer to TC a proportionate share of DC’s:

a)    cash or near-cash property;

b)    investment property; and

c)    business property,

(collectively referred to as the “Distribution Property”) such that, immediately after the Transfer, the FMV of each such type of property of DC so transferred to TC will approximate that proportion of the FMV of that type of property of DC, determined immediately before the Transfer that:

a)    the aggregate FMV, immediately before the Transfer, of all of the DC Class B Shares and the DC Common Shares owned by TC,

is of

b)    the aggregate FMV, immediately before the Transfer, of all of the issued and outstanding shares of the capital stock of DC.

The farm houses will be retained by DC.

For the purposes of this Paragraph 13, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed XXXXXXXXXX, determined as a percentage of the FMV of each type of property of DC that TC has received (or DC has retained) as compared to what TC would have received (or DC would have retained) had it received (or retained) its appropriate pro rata share of the FMV of that type of property of DC.

14.   As part of the Transfer, DC will transfer approximately a XXXXXXXXXX% interest in the Mother Insurance Policy to TC.  The proceeds of the disposition of such interest in the policy will be determined in accordance with subsection 148(7) as the greater of the value of the interest; the FMV of the consideration given for the interest; and the adjusted cost basis of the interest to the holder of the policy immediately before the disposition of the policy.  As consideration for the transfer of the approximately XXXXXXXXXX% interest in the Mother Insurance Policy, TC will issue a non-interest bearing demand promissory note in the principal amount equal to XXXXXXXXXX of the FMV of such policy (the “TC Insurance Note 1”).  The exact percentage of the interest in the Mother Insurance Policy transferred by DC to TC will be such percentage that will result in TC acquiring its proportionate share of each type of property as described in Paragraph 13.

The policy will be updated to reflect the beneficiaries as being both DC and TC in the same proportion as their respective ownership of the policy.  Child 1 and Child 2 would like to ensure that the ownership and beneficiaries of the policy going forward matches the family’s intentions with respect to the distribution of Mother’s estate.

The Mother Insurance Policy will not be eligible property and no election will be made under subsection 85(1) with respect to the transfer.

15.   As part of the Transfer, DC will transfer the Child 2 Insurance Policy to TC. The proceeds of the disposition of the policy will be calculated in accordance with subsection 148(7) as the greater of the value of the policy; the FMV of the consideration given for the policy; and the adjusted cost basis to the holder of the policy immediately before the disposition of the policy.  As consideration for the transfer, TC will issue a non-interest bearing demand promissory note in the principal amount equal to the FMV of the policy (the “TC Insurance Note 2).

The policy will be updated to reflect the beneficiary as being TC, in line with its ownership of the policy.

The Child 2 Insurance Policy will not be eligible property and no election will be made under subsection 85(1) with respect to the transfer.

16.   As consideration for the Transfer of the remaining Distribution Property by DC to TC (other than the Mother Insurance Policy and the Child 2 Insurance Policy described in Paragraphs 14 and 15), TC will:

a)    assume a proportionate share of the liabilities of DC such that the amount of the liabilities assumed will equal that proportion of the aggregate amount of the liabilities of DC, determined immediately before the Transfer, that:

i)    the aggregate FMV, immediately before the Transfer, of the DC Class B Shares and the DC Common Shares held by TC;

is of

ii)   the aggregate FMV, immediately before the Transfer, of all of the issued and outstanding DC Class B Shares and DC Common Shares; and

b)    issue to DC XXXXXXXXXX TC Class B Shares which will be redeemable and retractable for an aggregate amount and have an aggregate FMV equal to the aggregate FMV of the property transferred by DC to TC, less the aggregate of the amount of the TC Insurance Note 1, the TC Insurance Note 2 and the total liabilities of DC assumed by TC under Paragraph 16(a).

17.   In respect of the transfers of the Distribution Property described in Paragraph 13, DC and TC will jointly elect pursuant to subsection 85(1) of the Act in prescribed form and within the time limits prescribed by subsection 85(6) of the Act with respect to the transfer of each property that is an eligible property and the agreed amount for the purposes of each election will be equal to:

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

b)    in the case of a depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and

c)    in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

The agreed amount for any particular property included in the subsection 85(1) elections referred to in this Paragraph will not be less than the amount of any liabilities treated as being assumed by TC as consideration for the transfer of the particular property and will not exceed the FMV of the particular property. The amount of liabilities to be allocated to any property that is not the subject of an election under subsection 85(1) will not exceed the fair market value of such property.

18.   DC will redeem the DC Class B Shares held by TC.  The amount due to TC as a result of the redemption will be paid and satisfied by DC issuing to TC a demand, non-interest bearing promissory note with a principal amount and FMV equal to the aggregate FMV of the DC Class B Shares redeemed (the “DC Redemption Note”).

19.   DC will purchase for cancellation the XXXXXXXXXX DC Common Shares held by TC.  The amount due to TC as a result of the cancellation will be paid and satisfied in full by DC issuing to TC a demand, non-interest bearing promissory note with a principal amount and FMV equal to the aggregate FMV of the DC Common Shares purchased (the “DC Cancellation Note”).

20.   TC will redeem the XXXXXXXXXX TC Class B Shares held by DC.  The amount due to DC as a result of the redemption will be paid and satisfied by TC issuing to DC a demand, non-interest bearing promissory note with a principal amount and FMV equal to the aggregate FMV of the TC Class B Shares redeemed (the “TC Redemption Note”).

21.   The DC Promissory Notes will be set-off against the TC Promissory Notes and such notes will be cancelled. 

ADDITIONAL INFORMATION

22.   Except as described herein, no property has been or will be acquired by DC, in contemplation of and before the transfer, by DC, of its properties to TC as described in Paragraph 13, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

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

24.   None of DC or TC is or will be, at any time during a series of transactions or events that includes the Proposed Transactions,

a)    a specified financial institution;

b)    a restricted financial institution; or

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

25.   None of the shares of the capital stock of DC or TC (including the shares to be issued as described in the Proposed Transactions) is or will be, at any time during a series of transactions or events that includes the Proposed Transactions:

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

b)    the subject of a dividend rental arrangement as defined in paragraph 248(1); or

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

26.   None of the DC Common Shares is a taxable preferred share or a short-term preferred share.  The DC Class A Shares and the TC Class B Shares are not short-term preferred shares.

27.   DC is currently controlled by a related group made up of Child 1 and Child 2 and TC will be controlled by Child 2.

28.   None of DC, Mother, Child 1 and Child 2 expect that the Mother Insurance Policy or the Child 2 Insurance Policy will be disposed of or that any benefits will be paid thereunder as part of the same series of transactions or events that include the Proposed Transactions.

29.   None of DC, Mother, Child 1 and Child 2 expect the farm houses to be disposed of by DC or TC as part of the same series of transactions or events that include the Proposed Transactions.

PURPOSE OF THE PROPOSED TRANSACTION

30.   Child 1 and Child 2 wish to go their own ways and carry on separate businesses independently.  XXXXXXXXXX.  None of the property distributed by DC to TC will continue to be used by DC, jointly or otherwise.

RULINGS

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

A.    Subject to the application of subsection 69(11), provided that the requisite joint elections are filed by DC and TC in prescribed form and manner within the prescribed time specified in subsection 85(6), and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to the DC’s transfers of property to TC referred to in Paragraphs 17 such that the agreed amount in respect of each such transfer will be deemed pursuant to paragraph 85(1)(a) to be DC’s proceeds of disposition of the particular property and TC’s cost thereof.

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

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

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

a)    the DC Class B Shares held by TC described in Paragraph 18, to deem DC to have paid and TC to have received a dividend on such shares equal to the amount, if any, by which the amount paid by DC on the redemption exceeds the aggregate PUC in respect of such shares immediately before the purchase for redemption;

b)    the DC Common Shares held by TC described in Paragraph 19, to deem DC to have paid and TC to have received a dividend on such shares equal to the amount, if any, by which the amount paid by DC on the purchase for cancellation exceeds the aggregate PUC in respect of such shares immediately before the purchase for cancellation; and

c)    the TC Class B Shares held by DC described in Paragraph 20, to deem TC to have paid and DC to have received a dividend on such shares equal to the amount, if any, by which the amount paid by TC on the redemption exceeds the aggregate PUC in respect of such shares immediately before the redemption.

C.    The taxable dividends as described in Ruling B above:

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

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

c)    will be excluded from the proceeds of disposition of the shares so redeemed or purchased for cancellation, as the case may be, by virtue of the definition of “proceeds of disposition” in section 54;

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

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

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

D.    Provided that, as part of the series of transaction or events that includes the Proposed Transactions, there is not:

a)    an acquisition of property in the circumstances described in paragraph 55(3.1)(a);

b)    a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

c)    an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);

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

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

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

E.    The set-off and cancellation of the DC Promissory Notes against the TC Promissory Notes described in Paragraph 21 above will not, in and of itself, give rise to a “forgiven amount.”  In addition, neither DC nor TC will otherwise realize a gain or incur any loss as a result of such set-off and cancellation.

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

G.    Subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R6 issued on August 29, 2014, and are binding on the CRA, provided that the Proposed Transactions are completed before XXXXXXXXXX.

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

COMMENTS

Unless otherwise expressively confirmed, nothing in this ruling should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

a)    the FMV, ACB, or adjusted cost basis of any property referred to herein or the PUC in respect of any share referred to herein;

b)    the outstanding balance of various tax accounts such as RDTOH, GRIP, non-capital losses, or CDA for any of the corporate entities described herein;

c)    the tax or any other consequences relating to the transfer of the interest in the Mother Insurance Policy described in Paragraph 14 and the Child 2 Insurance Policy described in Paragraph 15; and

d)    any provincial tax consequences of the Proposed Transactions or any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

To the extent that DC has a balance in its RDTOH at its year-end immediately following the redemptions and purchases for cancellation of its shares described in Paragraphs 18 and 19, such redemptions and purchase for cancellation by DC of its shares owned by TC could give rise to what is referred to as a “circular” calculation of RDTOH. Consequently, we must inform you that, in our view, this could result in each of DC and TC being subject to Part IV tax under paragraph 186(1)(b).  It is also our view that the circularity problem causes uncertainty as to which corporation is ultimately entitled to a dividend refund and which corporation is ultimately liable for Part IV tax. Since the problem will affect the assessment of the income tax returns of DC and TC, the district taxation office at which each of the corporations files its T2 income tax return will have to be consulted in order to determine which corporation will receive the dividend refund and which corporation will be subject to the Part IV tax liability under paragraph 186(1)(b) described in these comments.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred and the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect the ruling given in Ruling F above. Furthermore, none of the rulings given in this letter are intended to apply to, or in the event of, the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, dated March 28, 2013.

Yours truly,

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

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