2017-0733011R3 Split-up Butterfly

Principal Issues: Standard butterfly.

Position: Favourable rulings given.

Reasons: Meets requirements of the law.

Author: XXXXXXXXXX
Section: 55(3)(b), 55(2), 40(3.3), 40(3.4)

XXXXXXXXXX                                                                                                             2017-073301

XXXXXXXXXX, 2018

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.

The tax account numbers, Tax Services Offices and the Tax Centres of the taxpayers involved are:

Name      Tax Account      Mailing Address        Tax Service Office/
                Number/SIN                                       Taxation Centre

XXXXX    XXXXX              XXXXX                     XXXXX

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

DEFINITIONS

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

“A” means XXXXXXXXXX, an individual resident in Canada and the mother of B and C;

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

“ACo1” means a new corporation to be incorporated in the province of XXXXXXXXXX as part of the Proposed Transactions which is to be wholly owned by A upon incorporation.  The authorized share capital of ACo1 will consist of an unlimited number of ACo1 Common Shares;

“ACo1 Common Shares” means the common shares of ACo1, which are participating, voting and which are entitled to receive dividends;

“ACo2” means a new corporation to be incorporated in the province of XXXXXXXXXX as part of the Proposed Transactions which is to be wholly owned by ACo1 upon incorporation.  The authorized share capital of ACo2 will consist of an unlimited number of ACo2 Common Shares and an unlimited number of ACo2 Class A Preferred Shares;

“ACo2 Class A Preferred Shares” means the new preferred shares of ACo2, which are non‑participating with respect to growth, non-voting, redeemable and retractable for a fixed amount equal to the FMV of the property transferred as consideration for the first issuance of the ACo2 Class A Preferred Shares and entitled to a non-cumulative dividend to be set at the director’s discretion but not to exceed XXXXXXXXXX% of the redemption value per annum;

“ACo2 Common Shares” means the common shares of ACo2, which are participating, voting and which are entitled to receive dividends;

“Act” means the Income Tax Act R.S.C. 1985 (5th Supp), as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

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

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

“B” means XXXXXXXXXX, an individual resident in Canada and the daughter of A and sister of C;

“BCA” means the Business Corporations Act applicable to each corporation participating in the Proposed Transactions based on the jurisdiction of incorporation for that particular corporation which would include the XXXXXXXXXX;

“BCo1” means a new corporation to be incorporated in the province of XXXXXXXXXX as part of the Proposed Transactions which is to be wholly owned by B upon incorporation.  The authorized share capital of BCo1 will consist of an unlimited number of BCo1 Common Shares and BCo1Class A Preferred Shares;

“BCo1 Class A Preferred Shares” means the new preferred shares of BCo1, which are non‑participating with respect to growth, non-voting, redeemable and retractable for a fixed amount equal to the FMV of the property transferred as consideration for the first issuance of the BCo1 Class A Preferred Shares and entitled to a non-cumulative dividend to be set at the director’s discretion but not to exceed XXXXXXXXXX% of the redemption value per annum;

“BCo1 Common Shares” means the common shares of BCo1, which are participating, voting and which are entitled to receive dividends;

“BCo2” means a new corporation to be incorporated in the province of XXXXXXXXXX as part of the Proposed Transactions which is to be wholly owned by BCo1 upon incorporation.  The authorized share capital of BCo2 will consist of an unlimited number of BCo2 Common Shares and an unlimited number of BCo2 Class A Preferred Shares;

“BCo2 Class A Preferred Shares” means the new preferred shares of BCo2, which are non‑participating with respect to growth, non-voting, redeemable and retractable for a fixed amount equal to the FMV of the property transferred as consideration for the first issuance of the BCo2 Class A Preferred Shares and entitled to a non-cumulative dividend to be set at the director’s discretion but not to exceed XXXXXXXXXX% of the redemption value per annum;

“BCo2 Common Shares” means the common shares of BCo2, which are participating, voting and which are entitled to receive dividends;

“BSub” means a new corporation to be incorporated in the province of XXXXXXXXXX as part of the Proposed Transactions which is to be wholly owned by DC upon incorporation.  The authorized share capital of BSub will consist of an unlimited number of BSub Common Shares;

“BSub Common Shares” means the common shares of BSub, which are participating, voting and which are entitled to receive dividends;

“C” means XXXXXXXXXX, an individual resident in Canada and the son of A and brother of B;

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

“Capital dividend” has the meaning assigned by subsection 83(2);

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

“CCo1” means a new corporation to be incorporated federally as part of the Proposed Transactions which is to be wholly owned by C upon incorporation.  The authorized share capital of CCo1 will consist of an unlimited number of CCo1 Common Shares and CCo1Class A Preferred Shares;

“CCo1 Class A Preferred Shares” means the new preferred shares of CCo1, which are non‑participating with respect to growth, non-voting, redeemable and retractable for a fixed amount equal to the FMV of the property transferred as consideration for the first issuance of the CCo1 Class A Preferred Shares and entitled to a non-cumulative dividend to be set at the director’s discretion but not to exceed XXXXXXXXXX% of the redemption value per annum;

“CCo1 Common Shares” means the common shares of CCo1, which are participating, voting and which are entitled to receive dividends;

“CCo2” means a new corporation to be incorporated federally as part of the Proposed Transactions which is to be wholly owned by CCo1 upon incorporation.  The authorized share capital of CCo2 will consist of an unlimited number of CCo2 Common Shares and an unlimited number of CCo2 Class A Preferred Shares;

“CCo2 Class A Preferred Shares” means the new preferred shares of CCo2, which are non-participating with respect to growth, non-voting, redeemable and retractable for a fixed amount equal to the FMV of the property transferred as consideration for the first issuance of the CCo2 Class A Preferred Shares and entitled to a non-cumulative dividend to be set at the director’s discretion but not to exceed XXXXXXXXXX% of the redemption value per annum;

“CCo2 Common Shares” means the common shares of CCo2, which are participating, voting and which are entitled to receive dividends;

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

“CRA” means the Canada Revenue Agency;

“CSub” means a new corporation to be incorporated federally as part of the Proposed Transactions which is to be wholly owned by DC upon incorporation.  The authorized share capital of CSub will consist of an unlimited number of CSub Common Shares;

“CSub Common Shares” means the common shares of CSub, which are participating, voting and which are entitled to receive dividends;

“DC” means XXXXXXXXXX which was incorporated in the province of XXXXXXXXXX on XXXXXXXXXX.  DC’s taxation year end is XXXXXXXXXX of each year.  DC is authorized to issue an unlimited number of DC Common Shares and an unlimited number of DC Class A Special Shares.  The issued share capital is made up of XXXXXXXXXX DC Common Shares.

“DC Class A Special Shares” means the special shares of DC, which are non-participating with respect to growth, voting, redeemable and retractable at $XXXXXXXXXX per share and entitled to a non-cumulative dividend to be set at the director’s discretion but not to exceed XXXXXXXXXX% of the redemption value per month;

“DC Common Shares” means the common shares of DC, which are participating, voting and which are entitled to receive dividends;

“Director” means the person appointed by the Minister to carry out the duties and exercise the powers of the director under the BCA;

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

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

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

“FMV” means the fair market value of a property, being the highest price available in an open and unrestricted market, between informed prudent parties, acting at Arm’s length and with no compulsion to act, expressed in terms of cash;

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

“Issue price” means the FMV of the consideration received by a corporation for the issuance of its shares;

“Net Capital loss” has the meaning assigned by subsection 111(8);

“Non-Capital loss” has the meaning assigned by subsection 111(8);

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

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

“Private Corporation” has the meaning assigned by subsection 89(1);

“Proceeds of Disposition” has the meaning assigned by section 54, which is extended pursuant to paragraph 85(1)(a);

“Proposed Transactions” means the transactions described in paragraphs 8 to 60;

“RDTOH” has the meaning assigned by subsection 129(3);

“Related” in respect of a person has the meaning assigned by subsection 251(2);

“Series of Transactions or Events” has the meaning assigned to the term by the common law, and includes and Related transaction or event referred to in subsection 248(10);

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

“Specified Investment Business” has the meaning assigned by subsection 125(7);

“Stated Capital” means the amount reported in the Stated Capital Account attributable to a share;

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

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

“Type of Property” mean the three Types of Property into which DC’s assets may be classified for the purposes of Distribution, namely: (a) cash or near cash property, comprising all of DC’s current assets, cash, marketable securities (other than portfolio investments), accounts receivable, inventory, prepaid expenses; (b) business property, comprising all of DC’s assets other than cash or near cash property, any income from which would be income from a business (other than a Specified Investment Business) carried on by DC; (c) investment property, comprising all of DC’s assets other than cash or near cash property, any income from which would be income from property of a Specified Investment Business;

“Winding-up Dividend” has the meaning assigned by subsection 84(2).

FACTS

1.    A is the mother of two adult children, B and C.  Each of A, B and C are resident in Canada for purposes of the Act.

2.    DC is a Taxable Canadian Corporation and a CCPC.  DC’s only undertaking is the investment of its funds in marketable securities.

3.    DC’s authorized share capital consists of an unlimited number of DC Common Shares and an unlimited number of DC Class A Special Shares.

4.    DC’s issued share capital is held as follows:

Shareholder     Number and Class of Shares   ACB           PUC
A                       XXXXX                                    XXXXX       XXXXX
B                      XXXXX                                     XXXXX       XXXXX
C                      XXXXX                                     XXXXX       XXXXX

5.    Each of the DC shareholders holds its DC Common Shares as Capital Property.

6.    None of the DC Common Shares owned by A, B or C were acquired in contemplation of the Proposed Transactions.

7.    Immediately before undertaking the Proposed Transactions, DC will own marketable securities with a FMV of approximately $XXXXXXXXXX and an ACB of $XXXXXXXXXX as well as cash and short term investments.  Immediately before undertaking the Proposed Transactions, DC’s liabilities will include accounts payable and promissory notes payable to related party individuals.

PROPOSED TRANSACTIONS

Incorporation of ACo1 and ACo2

8.    ACo1 will be incorporated.  ACo1 will file Articles of Incorporation in the province of XXXXXXXXXX to authorize ACo1 Common Shares.  Upon incorporation, A will subscribe for XXXXXXXXXX ACo1 Common Share for a subscription price of $XXXXXXXXXX.

9.    ACo2 will be incorporated.  ACo2 will file Articles of Incorporation in the province of XXXXXXXXXX to authorize ACo2 Common Shares and ACo2 Class A Preferred Shares.  Upon incorporation, ACo1 will subscribe for XXXXXXXXXX ACo2 Common Shares for an aggregate subscription price of $XXXXXXXXXX.

Incorporation of BCo1 and BCo2

10.   BCo1 will be incorporated.  BCo1 will file Articles of Incorporation in the province of XXXXXXXXXX to authorize BCo1 Common Shares and BCo1 Class A Preferred Shares.  Upon incorporation, B will subscribe for XXXXXXXXXX BCo1 Common Share for a subscription price of $XXXXXXXXXX.

11.   BCo2 will be incorporated.  BCo2 will file Articles of Incorporation in the province of XXXXXXXXXX to authorize BCo2 Common Shares and BCo2 Class A Preferred Shares.  Upon incorporation, BCo1 will subscribe for XXXXXXXXXX BCo2 Common Shares for an aggregate subscription price of $XXXXXXXXXX.

Incorporation of CCo1 and CCo2

12.   CCo1 will be incorporated.  CCo1 will file Articles of Incorporation federally with Corporations Canada to authorize CCo1 Common Shares and CCo1 Class A Preferred Shares.  Upon incorporation, C will subscribe for XXXXXXXXXX CCo1 Common Share for a subscription price of $XXXXXXXXXX.

13.   CCo2 will be incorporated.  CCo2 will file Articles of Incorporation federally with Corporations Canada to authorize CCo2 Common Shares and CCo2 Class A Preferred Shares.  Upon incorporation, CCo1 will subscribe for XXXXXXXXXX CCo2 Common Shares for an aggregate subscription price of $XXXXXXXXXX.

Incorporation of BSub and CSub

14.   BSub will be incorporated.  BSub will file Articles of Incorporation in the province of XXXXXXXXXX to authorize BSub Common Shares.  Upon incorporation, DC will subscribe for XXXXXXXXXX BSub Common Share for a subscription price of $XXXXXXXXXX.

15.   CSub will be incorporated.  CSub will file Articles of Incorporation federally with Corporations Canada to authorize CSub Common Shares.  Upon incorporation, DC will subscribe for XXXXXXXXXX CSub Common Share for a subscription price of $XXXXXXXXXX.

16.   For greater certainty, following incorporation, DC will own an equal number of BSub Common Shares and CSub Common Shares.

Transfer of DC Common Shares to ACo1 by A

17.   A will transfer XXXXXXXXXX DC Common Shares to ACo1.  In consideration, A will receive XXXXXXXXXX ACo1 Common Shares.  For greater certainty, A will not receive any non-share consideration on the transfer of the DC Common Shares.

18.   A and ACo1 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer.  The Agreed Amount specified in the election will be equal to the ACB of the transferred DC Common Shares, which amount will be less than their FMV at the time of the transfer.

19.   ACo1 will add to the stated capital account maintained for the ACo1 Common Shares an amount not to exceed the paid-up capital of the DC Common Shares so transferred.

Transfer of DC Common Shares to BCo1 by B

20.   B will transfer XXXXXXXXXX DC Common Shares to BCo1.  In consideration, B will receive XXXXXXXXXX BCo1 Common Shares.  For greater certainty, B will not receive any non-share consideration on the transfer of the DC Common Shares.

21.   B and BCo1 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer.  The Agreed Amount specified in the election will be equal to the ACB of the transferred DC Common Shares, which amount will be less than their FMV at the time of the transfer.

22.   BCo1 will add to the stated capital account maintained for the BCo1 Common Shares an amount not to exceed the paid-up capital of the DC Common Shares so transferred.

Transfer of DC Common Shares to CCo1 by C

23.   C will transfer XXXXXXXXXX DC Common Shares to CCo1.  In consideration, C will receive XXXXXXXXXX CCo1 Common Shares.  For greater certainty, C will not receive any non-share consideration on the transfer of the DC Common Shares.

24.   C and CCo1 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer.  The Agreed Amount specified in the election will be equal to the ACB of the transferred DC Common Shares, which amount will be less than their FMV at the time of the transfer.

25.   CCo1 will add to the stated capital account maintained for the CCo1 Common Shares an amount not to exceed the paid-up capital of the DC Common Shares so transferred.

Transfer of DC property

The transferred assets

26.   Immediately before the transfer of DC’s assets described in paragraphs 30 and 34 below, the property owned by DC will be classified into the following Types of Property:

a.    Cash or near cash property, comprising all of the current assets of DC including cash, short-term investments and accrued investment income;

b.    Investment property, comprising of marketable securities; and

c.    Business property, which will have a value of nil.

27.   For the purposes of calculating the FMV of each Type of Property, DC will not have a significant influence over any corporation except BSub and CSub.

28.   For greater certainty, DC’s tax accounts such as the balance of its Non-Capital losses, Net Capital losses, GRIP, RDTOH, and CDA, if any, will not be considered as DC’s property for purposes of determining whether a Distribution is made.

29.   The transfer of property described in paragraphs 30 and 34 below, will be made on a gross FMV basis.  In determining the gross FMV of each Type of Property of DC immediately before the transfer, no liabilities of DC will be allocated to, and deducted from the calculation of the gross FMV of each Type of Property.

Transfer of DC’s assets to BSub and CSub

30.   DC will transfer XXXXXXXXXX% of each Type of Property to each of BSub and CSub.  Since BSub and CSub will each receive a proportionate allocation of each Type of Property owned by DC, the BSub Common Shares and CSub Common Shares will be assets of the same Type of Property in the immediately subsequent Distribution described in paragraph 34 below.

31.   As consideration for DC’s property transferred as described in paragraph 30, each of BSub and CSub will

a.    assume DC’s liabilities in the same proportion as described in paragraph 30 above (the amount of DC liabilities assumed will not exceed the aggregate ACB of the property respectively transferred to BSub and CSub) and

b.    issue XXXXXXXXXX BSub or CSub Common Shares to DC having a FMV amount equal to the amount by which the FMV of DC’s assets respectively transferred to each of BSub and CSub as described in paragraph 30 above exceeds the amount of liabilities respectively assumed by each of BSub and CSub.

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

32.   DC and each of BSub and CSub will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each Eligible Property that is respectively transferred by DC to BSub or CSub as described in paragraph 30 above.  The Agreed Amount in respect of each Eligible Property transferred will not be less than the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) nor will it exceed the FMV of the property so transferred to BSub or CSub in accordance with paragraph 85(1)(c).  In addition, the Agreed Amount will not be less than the amount permitted in paragraph 85(1)(b).

33.   Following the transfer of DC’s assets described in paragraph 30 above, the only assets owned by DC will be its XXXXXXXXXX BSub Common Shares and XXXXXXXXXX CSub Common Shares.

Distribution of BSub Common Shares and CSub Common Shares to ACo2, BCo2 and CCo2

34.   DC will proceed with the Distribution of its BSub Common Shares and CSub Common Shares by transferring a number of shares to each of ACo2, BCo2 and CCo2 based on ACo1, BCo1 and CCo1’s proportionate ownership of DC such that, immediately after the transfer, the FMV of the each Type of Property received by ACo2, BCo2 and CCo2 will be equal to or approximate the proportion of the amount determined by the formula X x Y/Z where:

*     X is the FMV of all of the property of each Type of Property owned by DC immediately before the transfer;

*     Y is the FMV of all the shares of the capital stock of DC owned by ACo1, BCo1 and CCo1 respectively immediately before the transfer; and

*     Z is the FMV of all the shares of the capital stock of DC immediately before the transfer.

35.   Following this transfer, BCo2 will own XXXXXXXXXX BSub Common Shares, CCo2 will own XXXXXXXXXX CSub Common Shares and ACo2 will own XXXXXXXXXX BSub Common Shares and XXXXXXXXXX CSub Common Shares.

36.   For purposes of calculating the amount described in paragraph 34 above, the expression “approximate the proportion” means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX% determined as a percentage of the FMV of each Type of Property that ACo2, BCo2 and CCo2 would have received had it received its pro rata share of the FMV of that Type of Property.

37.   As consideration for DC’s property so transferred, each of ACo2, BCo2 and CCo2 will issue to DC XXXXXXXXXX Class A Preferred Shares of its capital stock having an aggregate FMV and redemption amount equal to the FMV of the BSub and CSub shares received by each of ACo2, BCo2 and CCo2 respectively.

ACo2 will add to the stated capital account maintained for the ACo2 Class A Preferred Shares an amount not to exceed the total of the paid-up capital of the BSub Common Shares and the paid-up capital of the CSub Common Shares so transferred.

      BCo2 will add to the stated capital account maintained for the BCo2 Class A Preferred Shares an amount not to exceed the paid-up capital of the BSub Common Shares so transferred.

      CCo2 will add to the stated capital account maintained for the CCo2 Class A Preferred Shares an amount not to exceed the paid-up capital of the CSub Common Shares so transferred.

38.   DC and each of ACo2, BCo2 and CCo2 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each Eligible Property that is respectively transferred by DC to ACo2, BCo2 or CCo2 as described in paragraph 34 above.  The Agreed Amount in respect of each Eligible Property transferred will not be less than the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) nor will it exceed the FMV of the property so transferred to ACo2, BCo2 or CCo2 in accordance with paragraph 85(1)(c).  In addition, the Agreed Amount will not be less than the amount permitted in paragraph 85(1)(b).

39.   ACo2, BCo2 and CCo2 will be connected with DC pursuant to 186(4) and 186(2) of the Act.

Redemption of ACo2, BCo2 and CCo2 Class A Preferred Shares owned by DC

40.   ACo2 will redeem all of the ACo2 Class A Preferred Shares of its capital stock owned by DC for an amount equal to their Issue Price and will issue to DC the ACo2 Redemption Note as consideration.

41.   BCo2 will redeem all of the BCo2 Class A Preferred Shares of its capital stock owned by DC for an amount equal to their Issue Price and will issue to DC the BCo2 Redemption Note as consideration.

42.   CCo2 will redeem all of the CCo2 Class A Preferred Shares of its capital stock owned by DC for an amount equal to their Issue Price and will issue to DC the CCo2 Redemption Note as consideration.

43.   The ACo2 Redemption Note, BCo2 Redemption Note and CCo2 Redemption Note will be non-interest bearing promissory notes payable on demand and will have a Principal Amount equal to the Issue Price of all of the Class A Preferred Shares respectively issued by ACo2, BCo2 and CCo2.  DC will accept the ACo2 Redemption Note, BCo2 Redemption Note and CCo2 Redemption Note as full payment for the redemption amount of the ACo2, BCo2 and CCo2 Class A Preferred Shares redeemed.

Winding-up of ACo2, BCo2 and CCo2

44.   On the day following the redemptions in paragraphs 40, 41 and 42 above, ACo2, BCo2 and CCo2’s shareholders will each pass a Special Resolution to wind-up and dissolve their respective companies under the applicable provisions of the BCA.

45.   All properties of ACo2, BCo2 and CCo2 will be distributed and all liabilities of ACo2, BCo2 and CCo2, if any, will be either discharged or assumed by ACo1, BCo1 or CCo1 respectively.  In connection with the winding-up, the ACo2 Redemption Note will be assigned and distributed to ACo1, the BCo2 Redemption Note will be assigned and distributed to BCo1 and the CCo2 Redemption Note will be assigned and distributed to CCo1.

46.   Articles of Dissolution for each of ACo2, BCo2 and CCo2 will be filed with the Director.  Upon receipt of the Articles of Dissolution, the Director will issue a Certificate of Dissolution.  ACo2, BCo2 and CCo2 will cease to exist on the date shown on the Certificate of Dissolution.

47.   Any excess Dividend Refund or refund of overpayment of taxes for ACo2, BCo2 and CCo2 current taxation year to which ACo2, BCo2 and CCo2 becomes entitled in the course of the Proposed Transactions described herein or otherwise will be distributed, as part of the winding-up process, to each of ACo1, BCo1 and CCo1 respectively.  The Dividend Refund, if any, will not arise until after the end of the fiscal period in which the Proposed Transactions described above are completed.

Winding-up of DC

48.   Following the winding-up of ACo2, BCo2 and CCo2, DC’s shareholders will pass a Special Resolution to wind-up and dissolve DC under the applicable provisions of the BCA.

49.   All properties of DC will be distributed and all liabilities of DC, if any, will be either discharged or assumed by ACo1, BCo1 or CCo1.  As part of the wind-up distribution, the obligations under the ACo2 Redemption Note, BCo2 Redemption Note and CCo2 Redemption Note will be cancelled.

50.   Articles of Dissolution will be filed with the Director.  Upon receipt of the Articles of Dissolution, the Director will issue a Certificate of Dissolution.  DC will cease to exist on the date shown on the Certificate of Dissolution.

51.   Any excess Dividend Refund or refund of overpayment of taxes for DC’s current taxation year to which DC becomes entitled in the course of the Proposed Transactions described herein or otherwise will be distributed, as part of the winding-up process, to each of ACo1, BCo1 and CCo1 in the same proportion as described in paragraph 34 above.  The Dividend Refund, if any, will not arise until after the end of the fiscal period in which the Proposed Transactions described above are completed.

Transfer of ACo1’s BSub Common Shares to BCo1 and CSub Common Shares to CCo1

52.   ACo1 will transfer XXXXXXXXXX BSub Common Shares to BCo1.  ACo1 will receive consideration of XXXXXXXXXX BCo1 Class A Preferred Shares.  The FMV of the XXXXXXXXXX BCo1 Class A Preferred Shares received will be equal to the FMV of the XXXXXXXXXX BSub Common Shares transferred.  For greater certainty, ACo1 will not receive any non-share consideration on the transfer of the BSub Common Shares.

53.   ACo1 and BCo1 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer.  The Agreed Amount specified in the election will be equal to the ACB of the transferred BSub Common Shares, which amount will be less than their FMV at the time of the transfer.

54.   BCo1 will add to the stated capital account maintained for the BCo1 Class A Preferred Shares an amount not to exceed the paid-up capital of the BSub Common Shares so transferred.

55.   ACo1 will transfer XXXXXXXXXX CSub Common Shares to CCo1.  ACo1 will receive consideration of XXXXXXXXXX CCo1 Class A Preferred Shares.  The FMV of the XXXXXXXXXX CCo1 Class A Preferred Shares received will be equal to the FMV of the XXXXXXXXXX CSub Common Shares transferred.  For greater certainty, ACo1 will not receive any non-share consideration on the transfer of the CSub Common Shares.

56.   ACo1 and CCo1 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer.  The Agreed Amount specified in the election will be equal to the ACB of the transferred CSub Common Shares, which amount will be less than their FMV at the time of the transfer.

57.   CCo1 will add to the stated capital account maintained for the CCo1 Class A Preferred Shares an amount not to exceed the paid-up capital of the CSub Common Shares so transferred.

Winding-up of BSub and CSub

58.   Following the share transfer in paragraphs 52 and 55 above, BSub and CSub’s shareholders will each pass a Special Resolution to wind-up and dissolve their respective companies under the applicable provisions of the BCA.

59.   All properties of BSub and CSub will be distributed and all liabilities of BSub and CSub, if any, will be either discharged or assumed by BCo1 or CCo1 respectively.

60.   Articles of Dissolution for each of BSub and CSub will be filed with the Director.  Upon receipt of the Articles of Dissolution, the Director will issue a Certificate of Dissolution.  BSub and CSub will cease to exist on the date shown on the Certificate of Dissolution.

PURPOSES OF THE PROPOSED TRANSACTIONS

61.   The purpose of the Proposed Transactions is for each of A, B and C (the current DC shareholders) to receive their proportionate share of each Type of Property owned by DC.

A is also preparing to transfer her estate to her two adult children.  She intends that her interest in DC will transfer in equal portions to her two children, B and C, on her death.  The further purpose of the Proposed Transactions is to transfer to each of B and C their pro rata share of the cash and near cash, business property and investment property currently held by DC and freeze A’s interest in the DC assets for the future benefit of B and C.  This transfer will allow B and C to independently determine their respective investment policies applicable to the property that BCo1 and CCo1 will receive from DC as a result of the proposed butterfly reorganization.

ADDITIONAL INFORMATION

62.   Except as described in this letter, no property has been or will be acquired by or disposed of by DC in contemplation of and before the proposed Distribution described in paragraph 34 above.  In addition, no liabilities have been, or will be incurred or discharged by DC in contemplation of and before the proposed Distribution described in paragraph 34 above.

63.   Except as described in this letter, no shares of DC or of any other corporation referred to herein has been acquired or will be acquired or disposed of as part of a Series of Transactions or Events that includes the Proposed Transactions.

64.   Subsequent to the Proposed Transactions, neither BCo1 nor CCo1 intends to otherwise transfer or sell any of the assets that it will receive in the course of the Proposed Transactions except in the normal course of its investment activities.  BCo1 and CCo1 will receive the marketable securities from DC.  BCo1 and CCo1 will hold and sell the marketable securities received from DC in the course of carrying on its normal investment activities in a similar manner to that which DC would have done had the Proposed Transactions not been executed.

65.   None of the shares issued by DC, ACo1, ACo2, BCo1, BCo2, CCo1, CCo2, BSub or CSub has been or will be at any time during the implementation of the Proposed Transactions:

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

b.    the subject of a dividend rental arrangement within the meaning referred to in subsection 112(2.3); or

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

66.   None of DC, ACo1, ACo2, BCo1, BCo2, CCo1, Cco2, BSub, CSub is, or will be at the time of the Proposed Transactions a Specified Financial Institution.

RULINGS GIVEN

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

A.    Subject to the application of 69(11), provided that the appropriate joint elections are filed in the prescribed form and manner within the time limit specified in subsection 85(6) and provided that each particular property so transferred is an Eligible Property in respect of which share have been issued as full or partial consideration therefore, the provisions of subsection 85(1) will apply to:

a.    A’s transfer of XXXXXXXXXX DC Common Shares to ACo1 as described in paragraph 17 above.

b.    B’s transfer of XXXXXXXXXX DC Common Shares to BCo1 as described in paragraph 20 above.

c.    C’s transfer of XXXXXXXXXX DC Common Shares to CCo1 as described in paragraph 23 above.

d.    DC’s transfer of property to BSub and CSub as described in paragraph 30 above.

e.    DC’s Distribution of BSub and CSub Common Shares to ACo2, BCo2 and CCo2 as described in paragraph 34 above.

f.    ACo1’s transfer of BSub Common Shares to BCo1 as described in paragraph 52 above.

g.    ACo1’s transfer of CSub Common Shares to CCo1 as described in paragraph 55 above.

B.    Paragraph 40(3.4)(a) will deem DC’s Net Capital Losses, if any, arising from the disposition of its property described in paragraph 30 above to be nil at the time of such disposition. However, subparagraph 40(3.4)(b)(v) will deem such Net Capital losses to occur immediately before DC’s winding-up begins as described in paragraph 48.

C.    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);

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

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the Taxable Dividends resulting from either the redemption by ACo2, BCo2 or Cco2 of the ACo2 Class A Preferred Shares, BCo2 Class A Preferred Shares, CCo2 Class A Preferred Shares owned by DC described in paragraphs 40, 41 and 42 above or the cancellation of DC Common Shares on wind-up as described in paragraphs 48 to 50. For greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

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

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

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

OTHER COMMENTS

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(a)   The PUC of any share or the ACB or FMV of any property referred to herein;

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

(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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