2017-0728381R3 Butterfly Transaction

Principal Issues: Whether subsection 55(3)(b) applies.

Position: Yes.

Reasons: See statement of principal issues.

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

XXXXXXXXXX
                                                                                      2017-072838

XXXXXXXXXX, 2019

Dear XXXXXXXXXX,

Re : Advanced Income Tax Ruling
        XXXXXXXXXX(Collectively referred to as the “Taxpayers”)

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; and

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

All of the above-mentioned Taxpayers, except for XXXXXXXXXX, have filed their XXXXXXXXXX tax returns at the XXXXXXXXXX and are within the jurisdiction of the XXXXXXXXXX Tax Services Office.

XXXXXXXXXX have filed their XXXXXXXXXX tax returns at the XXXXXXXXXX and are within the jurisdiction of the XXXXXXXXXX Tax Services Office.

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:

“ACB” means “adjusted cost base” and has the meaning assigned by section 54;

“BCA” means the Business Corporations Act XXXXXXXXXX;

“Canco 1” refers to XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX under the CBCA;

“Canco 2” refers to XXXXXXXXXX, corporation incorporated on XXXXXXXXXX under the CBCA;

“CBCA” refers to the Canada Corporation Business Act;

“CCPC” means “Canadian-controlled private corporation” and has the meaning assigned by subsection 125(7);

“CDA” means “capital dividend account” and has the meaning assigned by subsection 89(1);

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

“CRA” refers to the Canada Revenue Agency;

“CSV” refers to cash surrender value of life insurance policies;

“DC1” refers to XXXXXXXXXX, a corporation formed under the BCA on XXXXXXXXXX as a result of the amalgamation of XXXXXXXXXX. The authorized share capital of DC1 consist of an unlimited number of common shares. DC1 is a subsidiary of Holding 1. Its head office is located at XXXXXXXXXX;

“DC1 Class A Common Shares” has the meaning assigned in Paragraph 61;

“DC1 Class A Special Shares” means the authorized XXXXXXXXXX Class A non-voting Special shares of the capital of DC1 as described in Paragraph 61;

“DC1 Redemption Note” means a demand promissory note having a principal amount and FMV equal to the redemption amount of the DC1 Class A Special Shares for which it is issued on their redemption;

“DC2” means a corporation resulting from the amalgamation of Holding 2, Holding 3 and Holding 1 in Paragraph 56;

“DC2 Proportion” means the proportion of the aggregate FMV of the property transferred to Newco 2 by DC2 under Paragraph 87 over the aggregate FMV of the property of DC2 (net of the amount of its liabilities);

“DC2 Redemption Note” means a demand promissory note having a principal amount and FMV equal to the redemption amount of the DC2 Class B, C, E, G, I Special Shares held by Newco 2 for which it is issued on their redemption;

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

“designated person” has the meaning assigned by subsection 74.4(5);

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

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

“Family Trust # 1” refers to a new inter-vivos and personal trust which will be created. The characteristics of the Family Trust # 1 are described in Paragraph 108;

“FMV” means “fair market value” - the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm’s length and under no compulsion to act, expressed in cash;

“GRIP” means “General Rate Income Pool” and has the meaning assigned by subsection 89(1);

“Holding 1” refers to XXXXXXXXXX, a corporation formed under the BCA on XXXXXXXXXX as a result of the amalgamation of XXXXXXXXXX. were all controlled by Sibling 1. The authorized share capital of Holding 1 consists of an unlimited number of Class I Shares, an unlimited number of Class A Shares, XXXXXXXXXX Class B Shares, XXXXXXXXXX Class C Shares and an unlimited number of Class D Shares. Its head office is located at XXXXXXXXXX. Holding 1 is primarily an investment holding company;

“Holding 2” means XXXXXXXXXX a corporation incorporated on XXXXXXXXXX under the BCA. The authorized share capital of XXXXXXXXXX consists of an unlimited number of voting, non-participating Class A shares and an unlimited number of non-voting, participating Class B shares. Its head office is located at XXXXXXXXXX;

“Holding 3” means XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX under the BCA. The authorized share capital of Holding 3 consist of an unlimited number of voting, non-participating Class A shares and an unlimited number of non-voting, participating, Class B shares. Its head office is located at XXXXXXXXXX;

“inter-vivos trust” has the meaning assigned by subsection 108(1);

“Newco 1” means a corporation that will be incorporated under the BCA. Newco 1 will be a CCPC and a taxable Canadian corporation. The authorized share capital of Newco 1 will consist of (i) XXXXXXXXXX Class A shares; ii) an unlimited number of Class B Common Shares; and (iii) XXXXXXXXXX Newco 1 Class A Special Shares;

“Newco 1 Class A shares” has the meaning assigned in Paragraph 60;

“Newco 1 Class B Common Shares” has the meaning assigned in Paragraph 60;

“Newco 1 Class A Special Shares” has the meaning assigned in Paragraph 60;

“Newco 1 Redemption Note” means a demand promissory note having a principal amount and FMV equal to the redemption amount of the Newco 1 Class A Special Shares for which it is issued on their redemption;

“Newco 2” means a corporation that will be incorporated under the BCA. Newco 2 will be a CCPC and a taxable Canadian corporation. The authorized share capital of Newco 2 is described in Paragraph 75;

“Newco 2 Redemption Note” means a demand promissory note having a principal amount and FMV equal to the redemption amount of the Newco 2 Class F Special Shares for which it is issued on their redemption;

“Newco 3” means a corporation that will be incorporated under the BCA. Newco 3 will be a CCPC and a taxable Canadian corporation. The authorized share capital of Newco 3 is described in Paragraph 76;

“Newco 4” means a corporation that will be incorporated under the BCA. Newco 4 will be a CCPC and a taxable Canadian corporation. The authorized share capital of Newco 4 is described in Paragraph 77;

“Opco 1” means XXXXXXXXXX, a corporation in which each of DC1 and Holding 1 have a XXXXXXXXXX% interest in the shares;

“Opco 2” means XXXXXXXXXX, a corporation in which DC1 has a XXXXXXXXXX% interest; DC1 has a significant influence over Opco 2. Opco 2 XXXXXXXXXX carries on a farming business;

“Opco 3” means XXXXXXXXXX, a corporation in which Sub 3 has a XXXXXXXXXX% interest; Sub 3 has a significant influence over Opco 3. Opco 3 XXXXXXXXXX carries on a farming business;

“Opco 4” means XXXXXXXXXX, a holding company with XXXXXXXXXX wholly owned subsidiaries, XXXXXXXXXX which XXXXXXXXXX carry on a farming business. Sub 3 owns XXXXXXXXXX class G Preference shares and XXXXXXXXXX Class A common shares of Opco 4, being XXXXXXXXXX of each of these classes of shares. Sub 3 has a significant influence over each of Opco 4, XXXXXXXXXX;

“Opco 7” means XXXXXXXXXX a corporation in which Holding 1 has a XXXXXXXXXX% beneficial interest. Sibling 2’s son is the registered owner of Holding 1’s interest in Opco 7. Opco 7 XXXXXXXXXX carries on a farming business;

“Paragraph” means a numbered paragraph of this letter;

“Parent” refers to XXXXXXXXXX;

“Parentco” means XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX under the BCA. The authorized share capital of Parentco consists of an unlimited number of non-voting common shares, an unlimited number of Class A voting, non-participating shares and XXXXXXXXXX Class B non-voting, redeemable and retractable preferred shares. Its head office is located at XXXXXXXXXX. Parentco is a holding company which owns XXXXXXXXXX Class E preferred shares of Sub 2 having a redemption value of $XXXXXXXXXX. Parent owns XXXXXXXXXX% of the common shares of Parentco and Sibling 1 owns XXXXXXXXXX% of the Class A preference shares of Parentco;

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

“Predecessor Corporation(s)” means the corporations that will amalgamate in Paragraph 56 to form DC2;

“private corporation” has the meaning assigned by subsection 89(1);

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

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

“PUC” means “paid-up capital” and has the meaning assigned by subsection 89(1);

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

“Sibling 1” refers to XXXXXXXXXX;

“Sibling 2” refers to XXXXXXXXXX;

“Sibling 3” refers to XXXXXXXXXX;

“Sibling 4” refers to XXXXXXXXXX;

“Sibling 5” refers to XXXXXXXXXX;

“Siblings” refers collectively to Sibling 1, Sibling 2, Sibling 3, Sibling 4 and Sibling 5;

“Sibling Trusts” refers collectively to five new inter-vivos trusts that will be created in Paragraph 103;

“significant influence” has the meaning assigned by section 3051.05 of the Accounting Standards for Private Enterprises or by IAS 28 of the International Financial Reporting Standards;

“SIN” means Social Insurance Number;

“Spouse 2” refers to XXXXXXXXXX, spouse of Sibling 2;

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

“Sub 1” refers to XXXXXXXXXX, a corporation incorporated under XXXXXXXXXX. Sub 1’s principal business activities XXXXXXXXXX. The authorized share capital of Sub 1 consists of an unlimited number of common shares, XXXXXXXXXX Class A preferred shares and XXXXXXXXXX Class B preferred shares. Sub 1 is a subsidiary of Holding 1. Its head office is located at XXXXXXXXXX;

“Sub 2” refers to XXXXXXXXXX, a corporation formed under XXXXXXXXXX as a result of the amalgamation of XXXXXXXXXX. Sub 2’s principal business activities is XXXXXXXXXX carries on a farming business. The authorized share capital consists of an unlimited number of Class A common shares, non-voting Class B common shares and non-voting preferred shares redeemable and retractable at $XXXXXXXXXX a share. Its head office is located at XXXXXXXXXX;

“Sub 3” refers to XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX under the CBCA. Sub 3’s registered owner is the son of Sibling 2. The beneficial owner of Sub 3 is Holding 1. Sub 3 owns an interest in Opco 3 and Opco 4;

“Sub 4” refers to XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX under the XXXXXXXXXX carries on a farming business. The XXXXXXXXXX Class A Common shares of Sub 4 are owned XXXXXXXXXX% by Holding 1. Its head office is located at XXXXXXXXXX;

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

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

FACTS

1. Parent, the Siblings and Spouse 2 are all Canadian residents for purposes of the Act.

2. The Siblings are all adults and are the children of Parent. Parent is XXXXXXXXXX years old and XXXXXXXXXX.

3. Sibling 1 is the current CEO, and is the controlling shareholder of the XXXXXXXXXX. Sibling 1 holds voting control through a separate class of voting shares of each of Holding 1, Parentco, Holding 2 and Holding 3.

4. The XXXXXXXXXX is engaged primarily in XXXXXXXXXX

5. There have been no changes in shareholdings in the XXXXXXXXXX.

Holding 1

6. Holding 1 is a CCPC and taxable Canadian corporation. All shareholders of Holding 1 are residents of Canada. Holding 1 has a floating taxation year ending on the last XXXXXXXXXX of the month of XXXXXXXXXX.

7. The shares of Holding 1 are held as follows:

Shareholder	Number and Class	ACB $	PUC $
Sibling 1	XXXXX Class A voting, non-participating	XXXXX	XXXXX
	XXXXX Class D non- voting, participating	XXXXX	XXXXX
Sibling 2	XXXXX Class D non- voting, participating	XXXXX	XXXXX
Sibling 3	XXXXX Class D non- voting, participating	XXXXX	XXXXX
Sibling 4	XXXXX Class D, non- voting, participating	XXXXX	XXXXX
Sibling 5	XXXXX Class D, non- voting, participating	XXXXX	XXXXX
Spouse 2	XXXXX Class D, non- voting, participating	XXXXX	XXXXX
Holding 2	XXXXX Class D, non- voting, participating	XXXXX	XXXXX
Parent	XXXXX Class I, non- participating, redeemable and retractable, having an aggregate redemption value of $XXXXX	XXXXX	XXXXX
Holding 3	XXXXX Class B, non- participating, redeemable and retractable, having an aggregate redemption value of $XXXXX	XXXXX	XXXXX

8. All of the shares of the capital stock of Holding 1 represent capital property to the shareholders.

9. Holding 1 is an investment holding company and generates nominal income from leasing tangible assets to its subsidiaries. Holding 1 owns XXXXXXXXXX% of the common shares of the following subsidiaries (collectively referred as the “Holding 1 Subsidiaries”) with the following attributes:

Subsidiary	Number and Class	ACB $	PUC $
DC1	XXXXX Common	XXXXX	XXXXX
Sub 1	XXXXX Common XXXXX Class B Preferred Shares	XXXXX	XXXXX
Sub 2	XXXXX Class A Common	XXXXX	XXXXX
Sub 3	XXXXX Common	XXXXX	XXXXX
Sub 4	XXXXX Common	XXXXX	XXXXX

10. Holding 1 has an interest in Opco 7, Opco 1 (as described in Paragraph 12) and in Canco 1 (as described in Paragraph 11). It also owns XXXXXXXXXX Class B shares of Parentco having a redemption value of $XXXXXXXXXX and an ACB and PUC of $XXXXXXXXXX.

11. Holding 1 owns the following shares in Canco 1:

Number (% Total)	Class	Description	PUC $	ACB $
XXXXX	A	Voting, $XXXXX annual cumulative dividend; redeemable, retractable for $XXXXX per share	XXXXX	XXXXX
XXXXX	B	Voting, non-participating	XXXXX	XXXXX
XXXXX	C	Non-voting, participating	XXXXX	XXXXX

The remaining Class C shares of Canco 1 are held by Parent's daughter-in-law, XXXXXXXXXX and by her mother XXXXXXXXXX.

Canco 1 owns undeveloped land that is zoned for commercial use. Some of the land is adjacent to developed property and can be severed and sold, but most of the land will require an investment in servicing. Certain parcels of land were sold in the XXXXXXXXXX periods, however, there are no expectations for sales in the near term. In the past, the income on sales of lots has been reported as business income for income tax purposes.

12. Holding 1 also owns XXXXXXXXXX Class C convertible common shares or XXXXXXXXXX% of the outstanding common shares of Opco 1. The remaining common shares are held as follows: XXXXXXXXXX% by DC1 (further details are provided below) and XXXXXXXXXX% by unrelated persons.

DC1 and Holding 1 have a significant influence over Opco 1. Opco 1 XXXXXXXXXX carries on a farming business.

The XXXXXXXXXX.

13. In addition to the share investments described above, Holding 1’s assets consist of:

a) Current assets including receivables from subsidiary companies, other receivables, prepaids and income tax recoverable;

b) Loans receivable from shareholders and from companies subject to significant influence;

c) Operating loans and advances to subsidiary companies;

d) XXXXXXXXXX Class B preferred shares of Parentco;

e) Investments in a number of life insurance investment policies;

f) Land and buildings include XXXXXXXXXX. All rental income is reported as active business income;

g) XXXXXXXXXX; and

h) XXXXXXXXXX.

14. Holding 1’s liabilities consist of:

a) Operating credit facility;

b) Accounts payable and accrued liabilities;

c) Payable to Parentco;

d) Loans payables to shareholders and loan payable to spouse of a shareholder; and

e) Bank capital loan.

15. The tax attributes of Holding 1 as at XXXXXXXXXX include:

a) RDTOH balance of $XXXXXXXXXX;

b) CDA balance of $XXXXXXXXXX; and

c) GRIP balance of $XXXXXXXXXX.

Holding 3

16. Holding 3 is a CCPC and taxable Canadian corporation. All shareholders of Holding 3 are residents of Canada. It has a floating taxation year ending on the XXXXXXXXXX of the month of XXXXXXXXXX.

17. Holding 3 is referred to as Familyco in Advance Income Tax Ruling 1999-0010923. The purpose of the transactions described in that ruling was to segregate the farming operations from the processing operations to allow Parent to transfer an interest in a farming business to his Canadian resident children on a tax deferred basis. As contemplated in the previous ruling, the processing and farming businesses were subsequently combined by way of an amalgamation.

18. The shares of Holding 3 are held as follows:

Shareholder	Number and Class	ACB $	PUC $
Sibling 1	XXXXX Class A voting, non-participating	XXXXX	XXXXX
	XXXXX Class B non- voting, participating	XXXXX	XXXXX
Sibling 2	XXXXX Class B non- voting, participating	XXXXX	XXXXX
Sibling 3	XXXXX Class B non- voting, participating	XXXXX	XXXXX
Sibling 5	XXXXX Class B, non- voting participating	XXXXX	XXXXX
Parent	XXXXX Class B, non-     voting,participating	XXXXX	XXXXX

19. All shares of the capital stock of Holding 3 represent capital property to the shareholders.

20. Holding 3 is a holding company whose assets consist of an investment in XXXXXXXXXX Class B non-voting, participating shares of Holding 1 having a redemption value of $XXXXXXXXXX and an investment in life insurance policies having a CSV of approximately $XXXXXXXXXX. Its liabilities consist of payables to Holding 1.

21. The tax attributes of Holding 3 as at XXXXXXXXXX include:

a) RDTOH balance of $XXXXXXXXXX;

b) CDA balance of $XXXXXXXXXX

c) Non-capital losses carried forward of $XXXXXXXXXX; and

d) GRIP balance of $XXXXXXXXXX.

Holding 2

22. Holding 2 is a CCPC and taxable Canadian corporation. All shareholders of Holding 2 are residents of Canada. It has a floating taxation year end on the XXXXXXXXXX of the month of XXXXXXXXXX of each year.

23. The shares of Holding 2 are held as follows:

Shareholder	Number and Class	ACB $	PUC $
Sibling 1	XXXXX Class A voting, non-participating	XXXXX	XXXXX
	XXXXX Class B non- voting, participating	XXXXX	XXXXX
Sibling 2	XXXXX Class B non- voting, participating	XXXXX	XXXXX
Sibling 3	XXXXX Class B non- voting, participating	XXXXX	XXXXX
Sibling 4	XXXXX Class B, non- voting, participating	XXXXX	XXXXX
Sibling 5	XXXXX Class B, non- voting participating	XXXXX	XXXXX
Spouse 2	XXXXX Class B, non- voting participating	XXXXX	XXXXX

24. All shares of the capital stock of Holding 2 represent capital property to the shareholders.

25. The Siblings formed Holding 2 in XXXXXXXXXX to purchase the shares owned by XXXXXXXXXX, an employee of Holding 1. This transaction is not a part of the series of proposed transactions that is the subject of this ruling application, nor was it undertaken in contemplation of the Proposed Transactions described herein.

26. Holding 2 is a holding company whose assets consists of an investment in XXXXXXXXXX non-voting, participating Class D shares of Holding 1 and a note receivable from Holding 1 in the amount of $XXXXXXXXXX. Its liabilities are loans payable to related parties.

27. As at XXXXXXXXXX, Holding 2 had a non-capital losses carried forward balance of $XXXXXXXXXX.

DC1

28. DC1 is a CCPC and a taxable Canadian corporation.

29. DC1 has a floating taxation year ending on the XXXXXXXXXX of the month of XXXXXXXXXX. DC1 carries on farming activities XXXXXXXXXX DC1’s principal business activities are XXXXXXXXXX (the “Farming Division”), XXXXXXXXXX (the “Processing Division”). There are rental houses XXXXXXXXXX.

30. DC1 uses the cash method, as described under subsection 28(1), in computing its income from farming.

31. DC1 is wholly owned by Holding 1. The ACB and PUC of the XXXXXXXXXX issued and outstanding common shares of the capital stock of DC1, is $XXXXXXXXXX and $XXXXXXXXXX, respectively.

32. The shares of the capital stock of DC1 represent capital property to Holding 1.

33. DC1’s assets include the following:

a) Current assets including trade account receivable, accounts receivable from companies under common control, miscellaneous receivables, prepaid expenses and note receivable from a supplier;

b) XXXXXXXXXX;

c) Deposits;

d) Non-interest bearing note receivable;

e) Investments in Opco 1 (XXXXXXXXXX% interest) and Opco 2 (XXXXXXXXXX% interest), corporations over which it exercises significant influence;

f) Investment in XXXXXXXXXX Class B non-voting redeemable and retractable preferred shares of Sub 1, a company under common control, having an aggregate redemption value of $XXXXXXXXXX

g) Land and buildings used in its operations;

h) Rental properties (as described above);

i) Equipment;

j) Equipment under construction;

k) Automotive equipment;

l) Leasehold improvements;

m) Intangible assets which includes, XXXXXXXXXX;

n) DC1 also owns the following shares in Canco 2:

Number	Class	Description	PUC	ACB
(% Total)			$	XXXXX
(XXXXX%)	Class A	Common		XXXXX

The remaining XXXXXXXXXX% of the common shares are held by an arm’s length party. The arm’s length party leases a building owned by Canco 2 to carry on other business activities. The arm’s length party, through a management contract, provides the staff to operate Canco 2.

Canco 2 owns land and a building which were previously owned by DC1 and used by it in its farming business. The land and buildings were sold to Canco 2 in late XXXXXXXXXX for a promissory note. XXXXXXXXXX.

34. DC1’s liabilities consist of:

a) Current liabilities which includes bank advances, accounts payable and accrued liabilities, government remittances payable, income taxes payable, amounts payable to a related individual and a current portion of long term debt; and

b) Long term debt which includes a non-interest bearing note payable secured by a motor vehicle, an interest bearing loan payable to Holding 1 and a non-interest bearing loan from the from XXXXXXXXXX;

35. The tax attributes of DC1 as at XXXXXXXXXX include:

a) RDTOH balance of $XXXXXXXXXX;

b) CDA balance of $XXXXXXXXXX;

c) GRIP balance of $XXXXXXXXXX.

Sub 1

36. Sub 1 is a CCPC and a taxable Canadian corporation.

37. Sub 1 has a floating taxation year ending on the XXXXXXXXXX of the month of XXXXXXXXXX. Sub 1’s principal business activities are XXXXXXXXXX for Sub 2, a company under common control;

Shareholder	Number and Class	ACB $	PUC $
Holding 1	XXXXX Class B preferred	XXXXX	XXXXX
	XXXXX common	XXXXX	XXXXX
DC1	XXXXX Class B preferred	XXXXX	XXXXX

39. The shares of the capital stock of Sub1 represent capital property to Holding 1 and DC1.

Sub 2

40. Sub 2 is a CCPC and a taxable Canadian corporation.

41. Sub 2 has a floating taxation year ending on the XXXXXXXXXX of the month of XXXXXXXXXX. Sub 2’s principal business activities is XXXXXXXXXX.

42. Sub 2 uses the cash method, as described under subsection 28(1), in computing its income from farming.

43. The shareholdings of Sub 2 is as follows:

Shareholder	Number and Class	ACB $	PUC $
Holding 1	XXXXX common	XXXXX	XXXXX
Parentco	XXXXX Class E preferred	XXXXX	XXXXX

44. The shares of the capital stock of Sub 2 represent capital property to Holding 1 and Parentco.

Sub 3

45. Sub 3 is a CCPC and a taxable Canadian corporation.

46. Sub 3 has a floating taxation year ending on the XXXXXXXXXX of the month of XXXXXXXXXX. Sub 3 is an investment holding company. Sub 3 owns an interest in Opco 3, and Opco 4 as described above.

47. Holding 1 has beneficial ownership of Sub 3.

48. The shares of Sub 3 represent capital property to Holding 1.

Sub 4

49. Sub 4 is a CCPC and a taxable Canadian corporation.

50. Sub 4 has a floating taxation year ending on the XXXXXXXXXX of the month of XXXXXXXXXX. Sub 4 carries on XXXXXXXXXX. Production rights were acquired from Sub 2 in between XXXXXXXXXX. The acquisition of the XXXXXXXXXX were structured on a tax deferred basis;

51. Holding 1 owns XXXXXXXXXX Common shares of Sub 4, the shares of Sub 4 represent capital property to Holding 1. Sub 2 owns XXXXXXXXXX Class C Preferred shares of Sub 4, the Class C Preferred shares were issued as consideration for XXXXXXXXXX acquired as described in the preceding paragraph.

52. Reserved

RECENTLY COMPLETED TRANSACTIONS

The following transactions took place in XXXXXXXXXX:

53. XXXXXXXXXX were amalgamated effective XXXXXXXXXX to form Holding 1. Immediately after the amalgamation, the shares of Holding 1 were held as follows:

Shareholder	Number & Class of Shares	Redemption Value
Sibling 1	XXXXX Class A preference	XXXXX
	XXXXX Class D non-voting, participating
Sibling 2	XXXXX Class D non-voting, participating
Sibling 3	XXXXX Class D non-voting, participating
Sibling 4	XXXXX Class D non-voting, participating
Sibling 5	XXXXX Class D non-voting, participating
Spouse 2	XXXXX Class D non-voting, participating
Holding 2	XXXXX Class D non-voting, participating
Holding 3	XXXXX Class B preference	XXXXX
Parent	XXXXX Class C preference	XXXXX
	XXXXX Class I preference	XXXXX

54. As part of estate planning for Parent carried out in XXXXXXXXXX, Parent transferred XXXXXXXXXX Class C preference shares of Holding 1 to Parentco in exchange for XXXXXXXXXX% of the common shares of Parentco. Holding 1 transferred shares of Sub 2 to Parentco on a tax deferred basis in exchange for shares of Parentco. The shares of Holding 1, held by Parentco were redeemed and substantially all the shares held by Holding 1 in Parentco were redeemed.   Parent’s remaining Class C preference shares of Holding 1 were redeemed and XXXXXXXXXX Class B common shares of Holding 3 were purchased for cancellation. These transactions are not part of the series of Proposed Transactions that are subject of this ruling application, nor were they undertaken in contemplation of the Proposed Transactions described herein.

55. The XXXXXXXXXX were audited in XXXXXXXXXX and no adjustments were made.

PROPOSED TRANSACTIONS

The Proposed Transactions will be completed in the sequence described below.

Amalgamation of Holding 1, Holding 2 and Holding 3

56. Each of Holding 1, Holding 2 and Holding 3 will be amalgamated pursuant to the applicable provision of the BCA and section 87, to form DC2 in such manner that:

a) all of the property (except any amounts receivable from any predecessor corporation(s) or shares of the capital of any Predecessor Corporation) of Holding 1, Holding 2 and Holding 3 immediately before the amalgamation will become property of DC2 by virtue of the amalgamation;

b) all of the liabilities (except amounts payable to any Predecessor Corporation(s)) of Holding 1, Holding 2 and Holding 3 will become liabilities of DC2 by virtue of the amalgamation;

c) all of the shareholders (except for any Predecessor Corporation(s)), who own shares of the capital stock of any predecessor corporation immediately before the amalgamation, will receive shares of the capital stock of DC2 by virtue of the amalgamation. The shares of Holding 1 owned by Holding 2 and Holding 3 immediately prior to the amalgamation will be cancelled on the amalgamation.

57. DC2 will be a taxable Canadian corporation and a CCPC.

58. The articles of amalgamation of DC2 will provide for the following classes of shares:

* An unlimited number of non-voting, participating shares (“DC2 Common Shares”);

* XXXXXXXXXX Class A voting, non-participating shares (“DC2 Class A Shares”);

* XXXXXXXXXX Class B voting, non-participating shares (“DC2 Class B Shares”);

* XXXXXXXXXX Class C Special Shares (“DC2 Class C Special Shares”);

* XXXXXXXXXX Class D Special Shares (“DC2 Class D Special Shares”);

* XXXXXXXXXX Class E Special Shares (“DC2 Class E Special Shares”);

* XXXXXXXXXX Class F Special Shares (“DC2 Class F Special Shares”);

* XXXXXXXXXX Class G Special Shares (“DC2 Class G Special Shares”);

* XXXXXXXXXX Class H Special Shares (“DC2 Class H Special Shares”);

* XXXXXXXXXX Class I Special Shares (“DC2 Class I Special Shares”);

The Special shares will be non-voting, redeemable and retractable, entitled to receive dividends at the discretion of the board of directors at a rate not to exceed XXXXXXXXXX% of the redemption amount.

The redemption amount of the DC2 Class A Shares will equal $XXXXXXXXXX less the redemption amount of the DC2 Class B Shares.

The redemption amount of the DC2 Class B Share will be equal to $XXXXXXXXXX multiplied by the DC2 Proportion.

The redemption amount of the DC2 Class C Special Shares will be equal to the FMV of the participating shares of Holding 1 (excluding the participating shares held by Holding 2) multiplied by the DC2 Proportion.

The redemption amount of the DC2 Class D Special Shares will be equal to the FMV of the participating shares of Holding 2 less the redemption amount of the DC2 Class E Special shares.

The redemption amount of the DC2 Class E Special Shares will be equal to the FMV of the participating shares of Holding 2 multiplied by the DC2 Proportion.

The redemption amount of the DC2 Class F Special Shares will be equal to the FMV of the participating shares of Holding 3 less the redemption amount of the DC2 Class G Special shares.

The redemption amount of the DC2 Class G Special Shares will be equal to the FMV of the participating shares of Holding 3 multiplied by the DC2 Proportion.

The redemption amount of the DC2 Class H Special Shares will be equal to the FMV of the Class I Special Shares of Holding 1 less the redemption amount of the DC2 Class I Special shares.

The redemption amount of the DC2 Class I Special Shares will be equal to the FMV of the Class I Special shares of Holding 1 multiplied by the DC2 Proportion.

59. Upon amalgamation:

The aggregated FMV of the DC2 shares issued and outstanding immediately after the amalgamation will be equal to the aggregate FMV of all shares of Holding 1, Holding 2 and Holding 3 that were issued and outstanding immediately before the amalgamation.

Specifically, as the result of the amalgamation:

59.1 Sibling 1 will receive XXXXXXXXXX Class A voting shares and XXXXXXXXXX Class B voting shares for Sibling 1’s voting shares of Holding 1, Holding 2 and Holding 3.

59.2 Each Class D shareholder of Holding 1, other than Holding 2, will receive one DC2 Common Share and one DC2 Class C Special Share for each Class D share of Holding 1.

59.3 Each Class B shareholder of Holding 2 will receive one DC2 Class D Special Share and one DC2 Class E Special Share for each Class B share of Holding 2.

59.4 Each Class B shareholder of Holding 3 will receive one DC2 Class F Special Share and one DC2 Class G Special share for each Class B share of Holding 3.

59.5 Parent will receive XXXXXXXXXX DC2 Class H Special Shares and XXXXXXXXXX DC2 Class I Special shares for Parent’s XXXXXXXXXX Class I Special shares of Holding 1.

59.6 The taxation year of the predecessor corporations will be deemed to have ended immediately before the amalgamation.

59.7 Any inter-company balances between the predecessor corporations will be eliminated.

First Butterfly – Reorganization of DC1

60. DC2 will incorporate Newco 1 under the BCA. No shares of Newco 1 will be issued on its incorporation. The authorized share capital of Newco 1 consists of:

* XXXXXXXXXX voting, non-participating Class A shares (“Newco 1 Class A shares”), redeemable and retractable for $XXXXXXXXXX a share.

* An unlimited number of voting, participating Class B Common shares (the “Newco 1 Class B Common Shares”). A Newco 1 Class B Common Share entitles its holder to (i) one vote; (ii) to receive dividends if, as and when declared at the discretion of Newco 1’s director(s); and (iii) to receive the remaining property of Newco 1 upon its winding up or dissolution; and

* XXXXXXXXXX Class A Special shares (“Newco 1 Class A Special Shares”), non-voting, having a non-cumulative dividend entitlement up to XXXXXXXXXX% per year, redeemable and retractable for amount equal to the FMV of the assets acquired by Newco 1 on the issuance of the Class A Special shares net of liabilities assumed.

61. The articles of DC1 will be amended to create and add the following classes of shares:

* An unlimited number of voting, participating shares (“DC1 Class A Common Shares”). A DC1 Class A Common Share entitles its holder (i) to XXXXXXXXXX votes; (ii) to receive dividends if, as and when declared at the discretion of the DC1 director(s); and to receive the remaining property of DC1 with the other common shareholders upon winding up or dissolution; and

* XXXXXXXXXX Class A Special Shares (“DC1 Class A Special Shares”). A DC1 Class A Special Share entitles its holder to receive dividends if, as and when declared at the discretion of the DC1 directors at a rate not exceeding XXXXXXXXXX% of its redemption amount per annum. A DC1 Class A Special Share is redeemable and retractable. The redemption amount of a DC1 Class A Special share is equal to XXXXXXXXXX of the proportion of the FMV of all issued and outstanding shares of DC1 represented by the aggregate FMV of the property transferred to Newco 1 by DC1 under Paragraph 68 (net of the amount of liabilities assumed in Paragraph 69) over the aggregate FMV of the property of DC1 (net of the amount of its liabilities).

* XXXXXXXXXX voting, non-participating Class B shares (“DC1 Class B shares”), redeemable and retractable for $XXXXXXXXXX a share.

62. DC2 will exchange its XXXXXXXXXX common shares of DC1 for XXXXXXXXXX DC1 Class A Special shares and XXXXXXXXXX DC1 Class A Common shares pursuant to subsection 86. The amount to be added to the stated capital of the DC1 Class A Special shares and DC1 Class A Common shares will not exceed, in total, the paid-up capital of the XXXXXXXXXX common shares of DC1 immediately before the exchange, and such paid-up capital will be allocated between its two classes of shares in proportion to their relative FMV. All of the exchanged common shares will be cancelled by DC1.

63. DC2 will transfer its XXXXXXXXXX DC1 Class A Special shares to Newco 1 in exchange for XXXXXXXXXX Newco 1 Class A shares, and XXXXXXXXXX Newco 1 Class B Common shares. DC2 and Newco 1 will elect jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) to apply to the transfer for an agreed amount equal to the ACB of the XXXXXXXXXX DC1 Class A Special Shares transferred. The amount to be added to the stated capital of the XXXXXXXXXX Newco 1 Class B Common shares will not exceed the agreed amount.  

64. Immediately before the transfers of property described in Paragraph 68 (the “Butterfly Transfer”), the property owned by DC1 will be determined on a consolidated look-through basis by including the appropriate pro rata share of the assets of Opco 1, Opco 2 and Canco 2, corporations over which DC1 has the ability to exercise significant influence (DC1, Opco 1, Opco 2 and Canco 2 are hereinafter sometimes collectively referred to as the “Consolidated Group 1”) and all such property will be classified into the following three types of property for the purpose of the definition “distribution” in subsection 55(1):

a) Cash or Near-Cash property, comprising all current assets of DC1, including cash, accounts receivable, accounts receivable other than trade receivables, assets held for sale, note receivable from suppliers, deposits, prepaid expenses, inventory, loans and advances to related persons with no terms of repayment, if any, plus the proportion of the FMV of shares or interest in an entity of Consolidated Group 1 held by DC1 that the FMV of the Cash or Near-Cash Property is of the total FMV of all the property owned by the entity.

b) Investment property, comprising all of the assets, other than cash or near-cash, any income from which would, for the purposes of the Act be income from property or from a specified investment business plus the proportion of the FMV of shares or interest in an entity of Consolidated Group 1 held by DC1 that the FMV of the Investment property is of the total FMV of all the property owned by the entity; and

c) Business property, comprising all of the assets, other than cash or near cash property, any income of which would, for the purposes of the Act, be income from a business (other than a specified investment business) plus the proportion of the FMV of shares or interest in an entity of Consolidated Group 1 held by DC1 that the FMV of the Business property is of the total FMV of all the property owned by the entity.

65. For greater certainty, for the purpose of the distribution, the following principles will apply:

a) Any tax accounts of Consolidated Group 1, such as any non-capital loss, net capital loss, the balance of its RDTOH, or CDA will not be considered property of DC1 for the purpose of the Proposed Transactions;

b) Shares of Sub 1 held by DC1 will be considered to be the types of property determined by applying the consolidated look-through approach;

c) The land, the building and other depreciable property held by Canco 2 will be considered to be investment property;

d) Rental properties held by DC1 will be considered to be business properties;

e) No amount will be considered a liability unless it represents a true legal liability capable of quantification;

f) Any loans from related persons, which have no specified terms of repayment, will be considered current liabilities of DC1;

g) For the purpose of determining the net FMV of the types of property of any corporation, any deferred charges and future income taxes will be ignored.

66. In determining the net FMV of each of the three type of property of DC1 on a consolidated basis, immediately before the transfer of property described in Paragraph 68 the liabilities will be allocated to and will be deducted in the calculation of the net FMV of each type of property of DC1 in the following manner:

a) current liabilities of DC1, other than those specifically mentioned in (c) below, will be allocated to each cash or near-cash property of DC1 in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by DC1, such that the amount of current liabilities so allocated will not exceed the aggregate FMV of all cash or near cash property of DC1;

b) following the allocation of current liabilities to cash or near-cash property as described in (a), any remaining net FMV of accounts receivable, prepaid expenses, note receivable from suppliers, deposits and inventory will be reclassified as business property and excluded from the net FMV of DC1’s cash or near-cash property, to the extent that such property will be collected, sold or consumed by DC1 or Newco 1 in the ordinary course of the business to which they relate;

c) liabilities, other than current liabilities, that relate to a particular property will then be allocated to the particular property to the extent of its FMV and any liability that pertains 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

d) if any liabilities (hereinafter referred to as “excess unallocated liabilities”) remain after the allocations described in (a) and (c) are made, such excess unallocated liabilities, will then be allocated to the cash or near-cash property, investment property, and business property of DC1 based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. However, where DC1 is considered to have a negative amount of a type of property because of (a) or (c), for the purposes of allocating those remaining liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property.

67. Liabilities of other entities in Consolidated Group 1 will be allocated as described above.

68. Immediately following the determination of the net FMV of the DC1 property on a consolidated basis, DC1 will transfer to Newco 1 some assets of each type of property that it will own at the moment. The shares of Opco 2 and Opco 1 will be transferred to Newco 1 as part of this transfer. Immediately following the transfers, the FMV of the Cash or Near-Cash property, Investment Property and Business Property transferred to Newco 1 will approximate the proportion of the net FMV of all of the assets of DC1 of a corresponding type of property determined immediately before such transfer that:

a) the aggregate FMV, immediately before the transfers, of all the shares of DC1 owned by Newco 1 at that time

is of

b) the aggregate FMV, immediately before the transfer, of all the issued and outstanding shares of DC1 at that time.

The cash to be transferred to Newco 1 will be determined within XXXXXXXXXX days of transfer of the property and an adjustment will be made as required to the cash transferred.

For the purpose of this Paragraph, the expression “approximate” means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the net FMV of each type of property which Newco 1 has received as compared to what Newco 1 would have received had it received its appropriate pro rata share of net FMV of that type of property.

69. As consideration for the property so transferred, Newco 1 will:

a) Assume a portion of the liabilities of DC1; and

b) Issue to DC1 XXXXXXXXXX Newco 1 Class A Special Shares. Newco 1 will add to the stated capital account of the Newco 1 XXXXXXXXXX Class A Special Shares an amount not exceeding the agreed amount (as determined under section 85, where relevant) of the property transferred to it less any liabilities assumed by it.

70. DC1 and Newco 1 will jointly elect pursuant to subsection 85(1) in prescribed form and within the time referred to in subsection 85(6) in respect to each property so transferred to Newco 1. 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 lesser of the FMV and the cost amount to DC1 of such property. For greater certainty, the aggregate of such elected amounts will be greater than the aggregate amount of DC1’s liabilities so assumed for such properties.

Specifically, the agreed amount under such election in respect of each eligible property so transferred within the limit prescribed is as follows:

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

b) in the case of property described in paragraph 85(1)(c.1), an amount equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii); and

c) in the case of inventory described in paragraph 85(1)(c.2), the amount determined in that paragraph calculated on the basis that the amount determined under “D” is nil.

71. Newco 1 will redeem the XXXXXXXXXX Newco 1 Class A Special shares held by DC1 at their aggregate redemption amount and FMV. Newco 1 will pay the redemption amount by issuing to DC1 the Newco 1 Redemption Note. DC1 will accept the Newco 1 Redemption Note as full payment for the redemption amount of the Newco 1 Class A Special Shares so redeemed.

72. Newco 1 will have a year end at the end of the day on which it redeems its XXXXXXXXXX Class A Special shares.

73. The following day, DC1 will redeem the XXXXXXXXXX DC1 Class A Special Shares held by Newco 1 at their aggregate redemption value and FMV. DC1 will pay the redemption amount by issuing the DC1 Redemption Note to Newco 1. Newco 1 will accept the DC1 Redemption Note as full payment for the redemption amount of the DC1 Class A Shares so redeemed.

74. DC1 and Newco 1 will set-off the DC1 Redemption Note and the Newco 1 Redemption Note, and both will be cancelled by set-off.

Second Butterfly – Reorganization of DC2

75. Parent, the Siblings and Spouse 2 will incorporate Newco 2. No shares of Newco 2 will be issued on its incorporation. The authorized share capital of Newco 2 consists of:

* XXXXXXXXXX voting, non-participating Class A shares (“Newco 2 Class A shares”), redeemable and retractable for the FMV of the consideration for which they were issued.

* An unlimited number of non-voting, participating shares (“Newco 2 Class B Common Shares”). A Newco 2 Class B Common Share entitles its holder to (ii) to receive dividends if, as and when declared at the discretion of Newco 2’s director(s); and (iii) to receive the remaining property of Newco 2 upon its winding up or dissolution; and

* XXXXXXXXXX Class C Special shares (“Newco 2 Class C Special Shares”), non-voting, having a non-cumulative dividend entitlement up to XXXXXXXXXX% per year, redeemable and retractable for amount equal to the consideration received thereof.

* Class D Special shares (“Newco 2 Class D Special Shares”), non-voting, having a non-cumulative dividend entitlement up to XXXXXXXXXX% per year, redeemable and retractable for amount equal to the consideration received thereof.

* XXXXXXXXXX Class E Special shares (“Newco 2 Class E Special Shares”), non-voting, having a non-cumulative dividend entitlement up to XXXXXXXXXX% per year, redeemable and retractable for amount equal to the consideration received thereof.

* XXXXXXXXXX Class F Special shares (“Newco 2 Class F Special Shares”), non-voting, having a non-cumulative dividend entitlement up to XXXXXXXXXX% per year, redeemable and retractable for amount equal to the FMV of the assets acquired by Newco on the issuance of the Class F Special shares net of liabilities assumed.

76. DC2 will incorporate Newco 3. No shares of Newco 3 will be issued on incorporation. The authorized share capital of Newco 3 will consist of:

* XXXXXXXXXX voting, non-participating Class A shares (“Newco 3 Class A shares”), redeemable and retractable for $XXXXXXXXXX a share.

* An unlimited number of non-voting, participating shares (“Newco 3 Class B Common Shares”). A Newco 3 Class B Common Share entitles its holder to (ii) to receive dividends if, as and when declared at the discretion of Newco 3’s director(s);

and (iii) to receive the remaining property of Newco 3 upon its winding up or dissolution. ; and

* XXXXXXXXXX Class C Special shares (“Newco 3 Class C Special Shares”), non-voting, having a non-cumulative dividend entitlement up to XXXXXXXXXX% per year, redeemable and retractable for amount equal to the consideration received thereof. The terms of the Class C Special shares will provide that any stock dividend paid on the Class C Special shares will reduce their redemption amount by the fair market value of the shares issued on the stock dividend.

* An unlimited number of Class D Special shares, (“Newco 3 Class D Special Shares”) non-voting, having a non-cumulative dividend entitlement up to XXXXXXXXXX% per year, redeemable and retractable for $XXXXXXXXXX a share.

77. DC2 will incorporate Newco 4. No shares of Newco 4 will be issued on incorporation. The authorized share capital of Newco 4 will consist of:

* XXXXXXXXXX voting, non-participating Class A shares (“Newco 4 Class A shares”), redeemable and retractable for $XXXXXXXXXX a share.

* An unlimited number of non-voting, participating shares (“Newco 4 Class B Common Shares”). A Newco 4 Class B Common Share entitles its holder to (ii) to receive dividends if, as and when declared at the discretion of Newco 4’s director(s);   and (iii) to receive the remaining property of Newco 4 upon its winding up or dissolution. ; and

* XXXXXXXXXX Class C Special shares (“Newco 4 Class C Special Shares”), non-voting, having a non-cumulative dividend entitlement up to XXXXXXXXXX% per year, redeemable and retractable for amount equal to the consideration received thereof. The terms of the Class C Special shares will provide that any stock dividend paid on the Class C Special shares will reduce their redemption amount by the fair market value of the shares issued on the stock dividend.

* An unlimited number of Class D Special shares (“Newco 4 Class D Special Shares”), non-voting, having a non-cumulative dividend entitlement up to XXXXXXXXXX% per year, redeemable and retractable for $XXXXXXXXXX a share.

78. The following transfers will be made to Newco 2 and each of the transferors and Newco 2 will elect jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer for an agreed amount:

a) Sibling 1 will transfer Sibling 1’s XXXXXXXXXX DC2 Class B voting shares to Newco 2 in exchange for XXXXXXXXXX Newco 2 Class A shares;

b) The Class C Special Shares shareholders of DC2 will transfer their DC2 Class C Special Shares to Newco 2 in exchange for Newco 2 Class B Common Shares on a one for one basis.

c) The Class E Special Shares shareholders of DC2 will transfer their DC2 Class E Special Shares to Newco 2 in exchange for Newco 2 Class C Special Shares on a one for one basis.

d) The Class G Special Shares shareholders of DC2 will transfer their DC2 Class G Special Shares to Newco 2 in exchange for Newco 2 Class D Special Shares on a one for one basis.

e) Parent will transfer Parent’s DC2 Class I Special Shares to Newco 2 in exchange for Newco 2 Class E Special Shares on a one for one basis.

The agreed amount for each of the above-mentioned transfers will be equal to the ACB of the shares transferred by each of the transferor. The amount added to stated capital will not exceed the amount determined under section 84.1 or subsection 85(2.1) as the case may be.

For greater certainty, all of the shareholders of DC2 will be shareholders of Newco 2 in approximately the same proportion of ownership as in DC2 immediately before the exchange.

79. Immediately before the transfers of property described below in Paragraph 81, the property owned by DC2, plus DC2 proportionate shares of the property of all of its subsidiaries companies over which it has significant influence (collectively referred to as the “Consolidation Group 2”) will be classified into three different types of property for the purposes of the definition of “distribution” in subsection 55(1) and for the purposes of paragraph 55(3)(b):

a) Cash and near cash property, comprising assets of cash, accounts receivable, accounts receivable other than trade receivables, assets held for sale, note receivable from suppliers, deposits, insurances policies in an amount up to each such policy’s CSV if any, loans and advances to related persons with no terms of repayment, if any, plus the proportion of the FMV of shares or interest in an entity of Consolidated Group 2 held by DC2 that the FMV of the Cash or Near Cash property is of the total FMV of all the property owned by the entity;

b) Investment property, comprising all of the assets, other than cash or near-cash, any income from which would, for the purposes of the Act be income from property or from a specified investment business including the amount, if any, by which the amount of FMV of each insurance policy exceeds its CVS, if any, plus the proportion of the FMV of shares or interest in an entity of Consolidated Group 2 held by DC2 that the FMV of the Investment property is of the total FMV of all the property owned by the entity. The investment in XXXXXXXXXX Class B shares of Parentco will be considered to be investment property;

c) Business property, comprising all of the assets, other than cash or near cash property, any income of which would, for the purposes of the Act, be income from a business (other than a specified investment business) plus the proportion of the FMV of shares or interest in an entity of Consolidated Group 2 held by DC2 that the FMV of the Business property is of the total FMV of all the property owned by the entity;

d) Tax accounts like the RDTOH balance, the CDA balance or any future income tax debit balance of an entity that is part of the Consolidated Group 2 will not be considered property for the purposes of the classification described herein.

e) No amount will be considered a liability unless it represents a true legal liability capable of quantification;

f) Any loans from related persons, which have no specified terms of repayment, will be considered current liabilities of DC1;

g) For the purpose of determining the net FMV of the types of property of any corporation, any deferred charges and future income taxes will be ignored.

80. In determining the net FMV of each of the three type of property of Consolidated Group 2, immediately before the transfer of property described in Paragraph 81 the liabilities will be allocated to and will be deducted in the calculation of the net FMV of each type of property of DC2 in the following manner:

a) current liabilities of Consolidated Group 2, other than those specifically mentioned in (c) below, will be allocated to each cash or near-cash property of Consolidated Group 2 in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by Consolidated Group 2, such that the amount of current liabilities so allocated will not exceed the aggregate FMV of all cash or near cash property of the Consolidated Group 2;

b) following the allocation of current liabilities to cash or near-cash property as described in (a), any remaining net FMV of accounts receivable, prepaid expenses, note receivable from suppliers, deposits and inventory will be reclassified as business property and excluded from the net FMV of Consolidated Group 2’s cash or near-cash property, to the extent that such property will be collected, sold or consumed by of the Consolidated Group 2 or Newco 2 in the ordinary course of the business to which they relate;

c) liabilities, other than current liabilities, of the Consolidated Group 2 that relate to a particular property will then be allocated to the particular property to the extent of its FMV and any liability that pertains 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

d) if any liabilities (hereinafter referred to as “excess unallocated liabilities”) remain after the allocations described in (a) and (c) are made, such excess unallocated liabilities, will then be allocated to the cash or near-cash property, investment property, and business property of the Consolidated Group 2 based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. However, where the Consolidated Group 2 is considered to have a negative amount of a type of property because of (a) or (c), for the purposes of allocating those remaining liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property.

81. DC2 will transfer its shares of Newco 1, Sub 2, Sub 3, Sub 4 and Opco 7 and certain other cash and investment assets to Newco 3. Immediately following the transfers, the net FMV of Cash or Near-Cash Property, Business Property and Investment Property transferred to Newco 3 and the insurance policies or an interest therein to be retained by DC2 will approximate the proportion of the net FMV of all assets of Consolidated Group 2 of a corresponding type of property determined immediately before such transfer that:

(a) The aggregate FMV, immediately before the transfers, of the shares of DC2 which are not owned by Newco 2 at that time

is of

(b) The aggregate FMV, immediately before the transfers, of all the issued and outstanding shares of DC2 at that time.

The cash to be transferred to Newco 3 will be determined within XXXXXXXXXX days of the transfer of the property and an adjustment will be made as required to the cash transferred.

For the purpose of this Paragraph, the expression “approximate” means that the discrepancy from that proportion, if any, would not exceeds XXXXXXXXXX%, determined as a percentage of the net FMV of each type of property which Newco 2 has received as compared to what Newco 2 would have received had it received its appropriate pro rata share of the net FMV of that type of property.

82. As consideration for the property so transferred, other than any life insurance policies (or an interest therein) transferred, Newco 3 will:

a) Assume a portion of the liabilities of DC2; and

b) Issue to DC2 XXXXXXXXXX Newco 3 Class A shares and XXXXXXXXXX Newco 3 Class B Common shares. Newco 3 will add to the stated capital account of that class an amount not exceeding the cost to Newco 3 (as determined pursuant to subsection 85, where relevant) of the property transferred to it less any liabilities assumed by it.

Any life insurance policies (or an interest therein) transferred to Newco 3 will be transferred as a contribution to the capital of Newco 3. The proceeds of the disposition of such interest in the policy will be determined in accordance with subsections 148(7) and (9) 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. The life insurance policy (or an interest therein) is not eligible property and no election will be made under subsection 85(1) in respect of this transfer of property.

83. DC2 and Newco 3 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer at an agreed amount of each property transferred by DC2 to Newco 3 as described in Paragraph 81 that is an eligible property the FMV of which, at the time of the transfer, exceeds or may exceeds the cost amount thereof to DC2.

84. DC2 will transfer its remaining property to Newco 4, except it may retain certain life insurance policies or an interest therein.

85. As consideration for the property so transferred, other than any life insurance policies (or an interest therein), Newco 4 will:

a) Assume a portion of the liabilities of DC2; and

b) Issue to DC2 XXXXXXXXXX Newco 4 Class A shares and XXXXXXXXXX Newco 4 Class B Common shares. Newco 4 will add to the stated capital account of that class an amount not exceeding the cost to Newco 4 (as determined pursuant to subsection 85, where relevant) of the property transferred to it less any liabilities assumed by it.

Any life insurance policies (or an interest therein) transferred to Newco 4 will be transferred as a contribution to the capital of Newco 4. The proceeds of the disposition of such interest in the policy will be determined in accordance with subsections 148(7) and (9) 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. The life insurance policy (or an interest therein) is not eligible property and no election will be made under subsection 85(1) in respect of this transfer of property.

86. DC2 and Newco 4 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer at an agreed amount of each property transferred by DC2 to Newco 4 as described in Paragraph 84 that is an eligible property the FMV of which, at the time of the transfer, exceeds or may exceed the cost amount thereof to DC2.

87. DC2 will transfer its XXXXXXXXXX Newco 4 Class A shares and XXXXXXXXXX Newco 4 Class B Common shares to Newco 2.

88. As consideration for the property so transferred, Newco 2 will issue XXXXXXXXXX Newco 2 Class F Special Shares.

89. DC2 and Newco 2 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer at an agreed amount of each property transferred by DC2 to Newco 2 as described in Paragraph 87 that is an eligible property the FMV of which, at the time of the transfer, exceeds or may exceeds the cost amount thereof to DC2.

90. Newco 2 will redeem the XXXXXXXXXX Newco 2 Class F Special Shares held by DC2 at their aggregate redemption amount and FMV. Newco 2 will pay the redemption amount by issuing to DC2 the Newco 2 Redemption Note. DC2 will accept the Newco 2 Redemption Note as full payment of the redemption amount of the XXXXXXXXXX Newco 2 Class F shares so redeemed.

91. Newco 2 will have a year end at the end of the day on which it redeems its Class F Special shares.

92. The following day, DC2 will then redeem simultaneously all of the following shares held by Newco 2 at their aggregate redemption amount and FMV:

* XXXXXXXXXX DC2 Class B Special Shares;

* XXXXXXXXXX DC2 Class C Special Shares;

* XXXXXXXXXX DC2 Class E Special Shares;

* XXXXXXXXXX DC2 Class G Special Shares;

* XXXXXXXXXX DC2 Class I Special Shares;

DC2 will pay the aggregate redemption amount by issuing the DC2 Redemption Note to Newco 2. Newco 2 will accept the DC2 Redemption Note as full payment for the redemption amount of Newco 2 of the above-mentioned shares so redeemed.

93. DC2 and Newco 2 will set-off the DC2 Redemption Note and the Newco 2 Redemption Note, and both will be cancelled by set-off. XXXXXXXXXX

Following the above-mentioned transactions the following transactions will take place and are part of the same series:

94. Newco 3 will sell its XXXXXXXXXX Newco 1 Class A shares to Sibling 1 for cash of $XXXXXXXXXX, this being the FMV.

95. Newco 2 will sell its XXXXXXXXXX Newco 4 Class A shares to Sibling 1 for cash of $XXXXXXXXXX, this being FMV.

96. DC2 will sell its XXXXXXXXXX Newco 3 Class A shares to Sibling 1 for cash of $XXXXXXXXXX, this being FMV.

97. Sibling 1 will subscribe for XXXXXXXXXX DC1 Class B shares for cash consideration of $XXXXXXXXXX.

98. Reserved.

99. Five new corporations (“Holdco 1”, “Holdco 2”, “Holdco 3”, “Holdco 4” and “Holdco 5”, respectively) will be incorporated under the BCA (Collectively referred to as the “Holdcos”).

The share capital of the above-mentioned Holdcos will include a class of voting and participating Class A common shares; a class of non-voting, participating Class B common shares, a class of voting, non-participating Class C shares redeemable and retractable at $XXXXXXXXXX a share and XXXXXXXXXX Class D Preferred shares. The Class D Preferred Shares will be redeemable and retractable for XXXXXXXXXX of the fair market value of the consideration for which the Class D shares were issued (less liabilities assumed if any), non-voting and entitled to discretionary dividends at a rate not to exceed XXXXXXXXXX% of the redemption amount.

100. Each Sibling will subscribe for XXXXXXXXXX Class C shares of their respective Holdco for $XXXXXXXXXX a share:

XXXXXXXXXX Sibling 1 will subscribe for XXXXXXXXXX Class C shares of Holdco 1;

XXXXXXXXXX Sibling 2 will subscribe for XXXXXXXXXX Class C shares of Holdco 2;

XXXXXXXXXX Sibling 3 will subscribe for XXXXXXXXXX Class C shares of Holdco 3;

XXXXXXXXXX Sibling 4 will subscribe for XXXXXXXXXX Class C shares of Holdco 4; and

XXXXXXXXXX Sibling 5 will subscribe for XXXXXXXXXX Class C shares of Holdco 5.

101. A new corporation (“Beneficiary Co”) will be incorporated under the BCA.  

The share capital of Beneficiary Co will consist of at least XXXXXXXXXX classes of non-voting, participating common shares (Beneficiary Co Class A, B, C, D, E Common Shares, respectively) and one class of voting, non-participating Class F shares (“Beneficiary Co Class F shares”), redeemable and retractable for $XXXXXXXXXX a share.

102. Sibling 1 will subscribe for XXXXXXXXXX Beneficiary Co Class F shares of Beneficiary Co for $XXXXXXXXXX a share.

103. At the same time or prior to the establishment of the Family Trust #1 (see Paragraph 108 below), XXXXXXXXXX family trusts will be established (“collectively known as the Sibling Trusts”). The Sibling Trusts will have the following characteristics:

103.1   Sibling Trust # 1:

103.1.1 The Sibling Trust # 1 will be settled by Parent, who will not be a trustee or a beneficiary of the trust. The Sibling Trust #1 will be settled by the settlor making an initial contribution to the trust of $XXXXXXXXXX.

103.1.2 The Sibling Trust # 1 will be a personal trust and an inter-vivos trust and will be resident in Canada for the purpose of the Act.

103.1.3 The trustee of the Sibling Trust # 1 will include Sibling 1 and XXXXXXXXXX other individuals, neither of whom will be the settlor.

103.1.4 The beneficiaries of the Sibling Trust # 1 will be Sibling 1, the issue of Sibling 1, any future spouse of Sibling 1 (but will not include the current estranged spouse of Sibling 1), any trust for the benefit of one or more beneficiaries as well as any corporation controlled by or for the benefit of one or more beneficiaries as long as such trust(s) or corporation(s) are designated by the trustee(s) in writing as a beneficiary of the Sibling Trust # 1. The beneficiaries will also include nieces and nephews of Sibling 1 in the event that Sibling 1, the spouse of Sibling 1 and Sibling 1’s issue are not alive at the relevant time.

103.1.5 The trust agreement will contain a provision whereby no income or capital, may be paid to a beneficiary as long as the beneficiary is a designated person. Further, shares of a company which derives any value directly or indirectly from a corporation in the XXXXXXXXXX may not be distributed to a future spouse or a corporation of which future spouse is a shareholder.

103.2 Sibling Trust # 2:

103.2.1 The Sibling Trust # 2 will be settled by Parent, who will not be a trustee or a beneficiary of the trust. The Sibling Trust #2 will be settled by the settlor making an initial contribution to the trust of $XXXXXXXXXX.

103.2.2 The Sibling Trust # 2 will be a personal trust and an inter-vivos trust and will be resident in Canada for the purpose of the Act.

103.2.3 The trustee of the Sibling Trust # 2 will be Sibling 2, her spouse, and a third party, who is not the settlor.

103.2.4 The beneficiaries of the Sibling Trust # 2 will be Sibling 2, the issue of Sibling 2, Spouse 2, any trust for the benefit of one or more beneficiaries as well as any corporation controlled by or for the benefit of one or more beneficiaries as long as such trust(s) or corporation(s) are designated by the trustee(s) in writing as a beneficiary of the Sibling Trust # 2. The beneficiaries will also include nieces and nephews of Sibling 2 in the event that Sibling 2, the spouse of Sibling 2 and the issue of Sibling 2 are not alive at the relevant time.

103.2.5 The trust agreement will contain a provision whereby no income or capital, may be paid to a beneficiary as long as the beneficiary is a designated person.   Further, shares of a company which derives any value directly or indirectly from a corporation in the XXXXXXXXXX may not be distributed to a spouse or a corporation of which spouse is a shareholder.

103.3 Sibling Trust # 3:

103.3.1 The Sibling Trust # 3 will be settled by Parent, who will not be a trustee or a beneficiary of the trust. The Sibling Trust #3 will be settled by the settlor making an initial contribution to the trust of $XXXXXXXXXX.

103.3.2 The Sibling Trust # 3 will be a personal trust and an inter-vivos trust and will be resident in Canada for the purpose of the Act.

103.3.3 The trustee of the Sibling Trust # 3 will be Sibling 3 and XXXXXXXXXX other individuals, neither of whom will be the settlor.

103.3.4 The beneficiaries of the Sibling Trust # 3 will be Sibling 3, the issue of Sibling 3, the spouse of Sibling 3, any trust for the benefit of one or more beneficiaries as well as any corporation controlled by or for the benefit of one or more beneficiaries as long as such trust(s) or corporation(s) are designated by the trustee(s) in writing as a beneficiary of the Sibling Trust # 3. The beneficiaries will also include nieces and nephews of Sibling 3 in the event that Sibling 3, the spouse of Sibling 3 and Sibling 3’s issue are not alive at the relevant time.

103.3.5 The trust agreement will contain a provision whereby no income or capital, may be paid to a beneficiary as long as the beneficiary is a designated person.   Further, shares of a company which derives any value directly or indirectly from a corporation in the XXXXXXXXXX may not be distributed to a spouse or a corporation of which spouse is a shareholder.

103.4 Sibling Trust # 4:

103.4.1 The Sibling Trust # 4 will be settled by Parent, who will not be a trustee or a beneficiary of the trust. The Sibling Trust #4 will be settled by the settlor making an initial contribution to the trust of $XXXXXXXXXX.

103.4.2 The Sibling Trust # 4 will be a personal trust and an inter-vivos trust and will be resident in Canada for the purpose of the Act.

103.4.3 The trustee of the Sibling Trust # 4 will be Sibling 4 and XXXXXXXXXX other individuals, neither of whom will be the settlor.

103.4.4 The beneficiaries of the Sibling Trust # 4 will be Sibling 4, the issue of Sibling 4, the spouse of Sibling 4, any trust for the benefit of one or more of the beneficiaries as well as any corporation controlled by or for the benefit of one or more beneficiaries as long as such trust(s) or corporation(s) are designated by the trustee(s) in writing as a beneficiary of the Sibling Trust # 4. The beneficiaries will also include nieces and nephews of Sibling 4 in the event that Sibling 4, the spouse of Sibling 4 and Sibling 4’s issue are not alive at the relevant time.

103.4.5 The trust agreement will contain a provision whereby no income or capital, may be paid to a beneficiary as long as the beneficiary is a designated person.   Further, shares of a company which derives any value directly or indirectly from a corporation in the XXXXXXXXXX may not be distributed to a spouse or a corporation of which spouse is a shareholder.

103.5 Sibling Trust # 5:

103.5.1 The Sibling Trust # 5 will be settled by Parent, who will not be a trustee or a beneficiary of the trust. The Sibling Trust #5 will be settled by the settlor making an initial contribution to the trust of $XXXXXXXXXX.

103.5.2 The Sibling Trust # 5 will be a personal trust and an inter-vivos trust and will be resident in Canada for the purpose of the Act.

103.5.3 The trustee of the Sibling Trust # 5 will be Sibling 5, Sibling 1 and Sibling 2.

103.5.4 The beneficiaries of the Sibling Trust # 5 will be Sibling 5, the nieces and nephews of sibling 5 and their children, the spouse of Sibling 5, any trust for the benefit of one or more beneficiaries as well as any corporation controlled by or for the benefit of one or more beneficiaries as long as such trust(s) or corporation(s) are designated by the trustee(s) in writing as a beneficiary of the Sibling Trust # 5.

103.5.5 The trust agreement will contain a provision whereby no income or capital, may be paid to a beneficiary as long as the beneficiary is a designated person.   Further, shares of a company which derives any value directly or indirectly from a corporation in the XXXXXXXXXX may not be distributed to a spouse or a corporation of which spouse is a shareholder.

104. As soon as the Sibling Trusts are created, their respective trustee(s) will open bank accounts with a financial institution in the name of the trusts.

105. Each Sibling Trust will borrow $XXXXXXXXXX from DC2. The loans will be repayable on demand and bear interest at XXXXXXXXXX%. It will not be guaranteed or reimbursed by any of the settlor, the trustees or the beneficiaries. A promissory note will be issued as evidence of each loan.

106. Each of the Sibling Trusts will subscribe for XXXXXXXXXX Class B common shares of their respective Holdcos for $XXXXXXXXXX a share.

107. Each of the Holdcos will use a portion of the funds received from the subscription of shares to subscribe for the following non-voting, participating shares of Beneficiary Co:

107.1 Holdco 1 will subscribe for XXXXXXXXXX Beneficiary Co Class A Common shares for $XXXXXXXXXX a share;

107.2 Holdco 2 will subscribe for XXXXXXXXXX Beneficiary Co Class B Common shares for $XXXXXXXXXX a share;

107.3 Holdco 3 will subscribe for XXXXXXXXXX Beneficiary Co Class C Common shares for $XXXXXXXXXX a share;

107.4 Holdco 4 will subscribe for XXXXXXXXXX Beneficiary Co Class D Common shares for $XXXXXXXXXX a share ; and

107.5 Holdco 5 will subscribe for XXXXXXXXXX Beneficiary Co Class E Common shares for $XXXXXXXXXX a share.

108. A new discretionary family trust (the “Family Trust # 1”) will be established and will be settled by Parent who will not be a trustee or a beneficiary of the Family Trust #1.  

108.1 The Family Trust # 1 will be a personal trust and an inter-vivos trust. The Family Trust # 1 will be a resident of Canada for the purpose of the Act.  

108.2 The trustee of Family Trust # 1 will be Sibling 1.

108.3 The Family Trust # 1 will have the following beneficiaries:

108.3.1 The income beneficiaries will be Beneficiary Co, and the Sibling Trusts.

108.3.2 The capital beneficiaries will be the Sibling Trusts as well as any trusts or corporation(s) for the benefit of one or more of the beneficiaries of each of the Sibling Trusts and designated in writing by the trustee as beneficiaries of the Family Trust # 1.

109. As soon as the Family Trust # 1 is created, the trustee will open a bank account with a financial institution in the name of the trust.

110. The Family Trust # 1 will borrow $XXXXXXXXXX from DC2. The loan will be repayable on demand and bear interest at XXXXXXXXXX%. It will not be guaranteed or reimbursed by any of the settlor, the trustees or the beneficiaries. A promissory note will be issued as evidence of this loan.

111. DC2 will exchange its XXXXXXXXXX Class B Common Shares of Newco 3 for XXXXXXXXXX Class C Preferred Shares. The exchange will occur on a tax deferred basis pursuant to section 51.

112. Newco2 will exchange its XXXXXXXXXX Class B Common Shares of Newco 4 for XXXXXXXXXX Class C Preferred Shares. The exchange will occur on a tax deferred basis pursuant to section 51.

113. The Family Trust # 1 will use the funds borrowed in Paragraph 110 to subscribe for XXXXXXXXXX Newco 3 Class B Common Shares and for XXXXXXXXXX Newco 4 Class B Common for $XXXXXXXXXX a share.

ADDITIONAL INFORMATION

114. No property has or will become property of DC1, DC2 and the entities they have invested in and no liabilities have been or will be incurred or discharged by DC1, DC2 and the entities they have invested in contemplation of and before the Proposed Transactions, except as otherwise described in the Proposed Transactions.

115. Except as described in this letter, DC2 will not dispose of any shares of the capital stock of Newco 3.

116. Except as described in this letter, Newco 2 will not dispose of any shares of the capital stock of Newco 4.

117. Except as described in this letter, Newco 4 will not dispose of any shares of the capital stock of DC1.

118. Except as described in this letter, Newco 3 will not dispose of any shares of the capital stock of Newco 1.

119. Except as described in this letter, Parent, Siblings and Spouse 2 will not dispose of any shares of the capital stock of DC2 or Newco 2 as part of the series of transactions or events that includes the Proposed Transactions.

120. Except as described in the Proposed Transactions, no acquisition of control of one of the corporations described herein is contemplated.

121. None of DC1, DC2, Newco 1 and Newco 2 are or will be, at any time during the series of transactions or events that includes the Proposed Transactions described herein, a specified financial institution, a restricted financial institution or a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1).

122. None of the shares of DC1, DC2, Newco 1 and Newco 2 are or will be, at any time during the series of transactions or events that includes the Proposed Transactions:

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

b) the subject of a dividend rental arrangement;

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

d) issued for consideration that is or includes:

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

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

e) issued or acquired as part of a transaction or event or series of transactions or events of the type describe in subsection 112(2.5).

123. Each of DC1, DC2, Newco 1 and Newco 2 will have the financial capacity to honor, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.

124. None of DC1, DC2, Newco 1 and Newco 2 have any expectation or intention of disposing of any property owned by them, as part of a series of transactions or events that includes the Proposed Transactions, to a person to whom it is not related or to a partnership, subsequent to the Proposed Transactions, other than in the ordinary course of such corporation's business.

125. Commencing in XXXXXXXXXX it is intended that a dividend/distribution policy be implemented.

During the life time of Parent, the policy provides for annual distributions of up to XXXXXXXXXX% of after tax net income of the consolidated group (to a maximum of $XXXXXXXXXX) to be paid proportionately on the common shares of DC2 and Newco 2.

Subsequent to the death of parent it is intended that the policy will provide for:

a) Annual distributions of up to XXXXXXXXXX% of after tax net income of the consolidated group (to a maximum of $XXXXXXXXXX).

b) Distributions will be used to redeem the freeze shares held by DC2 and Newco 2 in Newco 3 and Newco 4.

c) A portion of the amount received by DC2 and Newco 2 will be used to redeem freeze shares held by certain of the shareholders of DC2 and Newco 2 with the objective of equalizing the proportionate interest in freeze shares and common shares held by each shareholder in DC2 and Newco 2.

d) Any excess distributions will be paid proportionately on the common shares of DC2 and Newco 2.

e) The proposed distribution plan will be implemented whether or not the proposed butterfly is implemented.

126. The amalgamation which resulted in the creation of Holding 1 is not part of the series of Proposed Transactions that are the subject of this ruling application, nor were they undertaken in contemplation of the Proposed Transactions described herein.

PURPOSE OF THE PROPOSED TRANSACTIONS

The primary objective of the proposed transactions is to segregate the farming operations from the processing activities. The Siblings recognize that the farming and XXXXXXXXXX businesses are two separate business and that the ownership should be structured to reflect this. The transactions, which includes an estate freeze, will allow for the issue of each of the Siblings to participate indirectly, as beneficiaries of family trusts, in the future growth of both the farming and processing businesses carried on by the XXXXXXXXXX of companies. Further, it is anticipated that certain Siblings will be able to transfer their freeze shares of the companies carrying on the farming operations to their children on a tax deferred basis.

Another objective of the reorganization is to create a structure where the shares of Newco3 and DC2 qualify as shares of a family farm corporation. It is anticipated that the farming operations will generate cash in excess of what is needed for reinvestment in the farming business. It is contemplated that the excess cash from the farming business would be distributed by Newco3 to fund/partially fund distributions to the shareholders as described in paragraph 125 above. The remaining cash will be distributed to Family Trust #1 which will allocate the income and distribute the funds to Beneficiary Co. A decision could be made to pay dividends from Beneficiary Co. to its corporate shareholders if it is determined that the cash held by Beneficiary Co. is in excess of what is required in the overall XXXXXXXXXX business. The distribution of cash in this manner will ensure that the shares of Newco3 and DC2 qualify as shares of the capital stock of a family farm corporation.

As mentioned above a major objective of the planning for the XXXXXXXXXX is to carry out an estate freeze by the second generation shareholders in favour of the third generation. The freeze is implemented under the distributing corporation and the transferee corporation (DC2 and Newco 2) on the second butterfly so that the second generation shareholders hold common shares rather than holding redeemable and retractable preferred shares. This structure protects the operating companies (and provides financial stability) as it eliminates the ability of a second generation to demand the retraction of the preferred shares, while still retaining the value of the freeze shares in DC2 and Newco 2.

Holdcos 1-5 and Sibling Trusts 1-5 have been established to facilitate planning at the individual sibling level. It is anticipated that over time, Beneficiary Co will increase in value as it will receive funds from the Family Trust #1. In addition, Holdcos 1-5 will likely receive dividends from Beneficiary Co. Each sibling will be able to make their own decisions on how to invest/distribute the funds received from Beneficiary Co.

Family Trust #1 is controlled by Sibling 1 and thus the second level of trusts provides each of the five siblings with direct control relating to the timing and allocation of income and capital from their respective trust and provides for estate planning at the Holdco 1-5 levels.

It is to be noted that the XXXXXXXXXX anniversary of Family Trust#1 and the Sibling Trusts will be at approximately the same time. It is anticipated that the assets of both Family Trust#1 and Siblings Trusts 1-5 will be distributed prior to the XXXXXXXXXX anniversary of the trusts.

RULINGS

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

A. Upon the amalgamation of Holding 1, Holding 2 and Holding 3 described in paragraph 56

i) the provisions of section 87 will apply in respect of Holding 1, Holding 2 and Holding 3;

ii) provided that the Holding 1, Holding 2 and Holding 3 shares, as the case may be, are held by a particular holder thereof as capital property, the provisions of subsection 87(4) will apply to such holder, other than paragraphs 87(4)(c) to (e).

B. On the exchange of the XXXXXXXXXX common shares of DC1 for XXXXXXXXXX0 DC1 Class A Special shares and XXXXXXXXXX DC1 Class A Common shares of DC1, as described in Paragraph 62, the provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the disposition of each XXXXXXXXXX common shares of DC1 by DC2, provided that:

(a) DC2 holds its XXXXXXXXXX common shares of DC1 as capital property; and

(b) DC2 and DC1 do not file an election under subsection 85(1) or (2);

such that the cost of the XXXXXXXXXX DC1 Class A Special shares and the XXXXXXXXXX DC1 Class A Common shares received by DC2 on the exchange will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate ACB to DC2, immediately before the exchange, of the XXXXXXXXXX common shares of DC1 that:

(i) the FMV, immediately after the exchange, of the XXXXXXXXXX DC1 Class A Special shares or the XXXXXXXXXX DC1 Class A Common shares, as the case may be;

    is of

(ii) the FMV, immediately after the exchange, of all of XXXXXXXXXX DC1 Class A Special shares and the XXXXXXXXXX DC1 Class A Common shares received by DC2 on the exchange;

(c) pursuant to paragraph 86(1)(c), DC2 will be deemed to have disposed of the XXXXXXXXXX common shares of DC1 for aggregate proceeds of disposition equal to the aggregate cost to DC2 of the XXXXXXXXXX DC1 Class A Special shares and the XXXXXXXXXX DC1 Class A Common shares determined in item (c) above; and

(d) pursuant to subsection 86(2.1), the aggregate PUC of the XXXXXXXXXX DC1 Class A Special shares and the XXXXXXXXXX DC1 Class A Common shares will be equal to the PUC of the XXXXXXXXXX common shares of DC1 which were exchanged for the XXXXXXXXXX DC1 Class A Special shares and the XXXXXXXXXX DC1 Class A Common shares.

C. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limit specified in subsection 85(6), subsection 85(1) will apply to:

(a) the transfer by DC2 of XXXXXXXXXX DC1 Class A shares of DC1 to Newco 1 as described in Paragraph 63;

(b) the transfer by DC1 of property to Newco 1 as described in Paragraph 68;

(c) the transfer by Parent, Siblings and Spouse 2 of their shares of DC2 as described in Paragraph 78;

(d) the transfer by DC2 of property to Newco 3 as described in Paragraph 81;

(e) the transfer by DC2 of property to Newco 4 as described in Paragraph 84;

(f) the transfer by DC2 of property to Newco 2 as described in Paragraph 87;

such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost of the particular eligible property, pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

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

D. Subsection 85(2.1) will apply to determine the PUC of the shares issued as consideration for the transfers of property described in Paragraphs 63, 68, 81, 84 and 87.

E. Subsection 84.1(1) will apply to determine the PUC of the shares issued as consideration for the transfers of property described in Paragraph 78.

F. As a result of the redemption of the XXXXXXXXXX DC1 Class A Special Shares held by Newco 1 as described in Paragraph 73 and on the redemption of the XXXXXXXXXX Newco 1 Class A Special Shares owned by DC1, as described in Paragraph 71:

(a) DC1 will be deemed to have paid, and Newco 1 will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the XXXXXXXXXX DC1 Class A Special Shares exceeds the aggregate PUC in respect of those shares immediately before the redemption; and

(b) Newco 1 will be deemed to have paid, and DC1 will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the XXXXXXXXXX Newco 1 Class A Special Shares exceeds the aggregate PUC in respect of those shares immediately before the redemption.

G. As a result of the redemption of the XXXXXXXXXX Newco 2 Class F Special Shares held by DC2 as described in Paragraph 90 and on the redemption of the XXXXXXXXXX DC2 Class B Special Shares, the XXXXXXXXXX DC2 Class C Special Shares, the XXXXXXXXXX DC2 Class E Special Shares, the XXXXXXXXXX DC2 Class G Special Shares and the XXXXXXXXXX DC2 Class I Special Shares owned by Newco 2, as described in Paragraph 92:

(a) Newco 2 will be deemed to have paid, and DC2 will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the purchase for cancellation of the XXXXXXXXXX Newco 2 Class F Special Shares exceeds the aggregate PUC in respect of those shares immediately before the redemption; and

(b) DC2 will be deemed to have paid, and Newco 2 will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the XXXXXXXXXX DC2 Class C Special Shares, the XXXXXXXXXX DC2 Class E Special Shares, the XXXXXXXXXX DC2 Class G Special Shares and the XXXXXXXXXX DC2 Class I Special Shares exceeds the aggregate PUC in respect of each class of those shares immediately before the redemption.

H. The taxable dividends described in Rulings F and G above:

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

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

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

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

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

(f) will not be subject to tax under Part IV except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it is deemed to pay dividends, pursuant to paragraph 186(1)(b).

I. The set-off and cancellation of:

a) the DC1 Redemption Note by DC1; and

b) the Newco 1 Redemption Note by Newco 1;

as described in Paragraph 74 will not, in and of itself, result in a forgiven amount within the meaning of either subsection 80(1) or section 80.01. In addition, DC1 and Newco 1 will not otherwise realize any gain or incur any loss as a result of such set-off and cancellation.

J. The set-off and cancellation of:

a) the DC2 Redemption Note by DC2; and

b) the Newco 2 Redemption Note by Newco 2,

as described in Paragraph 93 will not, in and of itself, result in a forgiven amount within the meaning of either subsection 80(1) or section 80.01. In addition, DC2 and Newco 2 will not otherwise realize any gain or incur any loss as a result of such set-off and cancellation.

K. 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(3.1)(a);

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

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

d. An acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the Taxable Dividends described in Rulings F and G. For greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

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

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

These rulings are subject to the limitations and qualifications set out in Information Circular IC 70-6R9 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;

(c) The amount of any non-capital loss or net capital loss of any entities referred to herein; or

Any other tax consequence relating to the Facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter. Nothing in this letter should be construed as confirmation, express or implied, that, for the 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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