2018-0756881R3 Net Asset Butterfly - Farm

Principal Issues: Do the proposed transactions, structured as a net asset butterfly of a farming corporation by two 50% shareholders that are brothers, qualify under s. 55(3)(b) for exemption from s. 55(2)?

Position: Yes.

Reasons: In accordance with legislative and administrative requirements.

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

XXXXXXXXXX                                                                                                                  2018-075688

XXXXXXXXXX, 2018

Dear XXXXXXXXXX:

Re:   XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX seeking an advance income tax ruling on behalf of the “Applicants” (see definition below).  We also acknowledge the additional information provided in our various other communications in respect of this matter.

The Applicants for the advance income tax ruling are:

XXXXXXXXXX (herein defined as “DC”) whose business number is XXXXXXXXXX; its address is XXXXXXXXXX; its Tax Services Office is in XXXXXXXXXX and its Tax Centre is XXXXXXXXXX.

XXXXXXXXXX (herein defined as “Mr. A”) whose SIN is XXXXXXXXXX; his postal address is XXXXXXXXXX; his Tax Services Office is in XXXXXXXXXX and his Tax Centre is XXXXXXXXXX.

XXXXXXXXXX (herein defined as “Mr. B”) whose SIN is XXXXXXXXXX; his postal address is XXXXXXXXXX; his Tax Services Office is in XXXXXXXXXX and his Tax Centre is XXXXXXXXXX.

This letter is based solely on the facts, Proposed Transactions, additional information and purposes of the Proposed Transactions described below. Any documentation submitted in respect of your request does not form part of the Facts, Proposed Transactions or Additional Information unless specifically reproduced therein and any references to documentation are provided solely for the convenience of the reader.

We understand that to the best of your knowledge and that of each of the Applicants none of the issues involved in this advance income tax ruling:

(a)   is in a previously filed tax return of an Applicant or person related to an Applicant;

(b)   is being considered by a tax services office or taxation centre in connection with a previously filed tax return of an Applicant or a person related to an Applicant;

(c)   is under objection by an Applicant or a person related to an Applicant;

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

(e)   is the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate of the CRA in connection with an Applicant or a person related to an Applicant.

To the best of the knowledge of each of the Applicants, the Proposed Transactions will not have any impact on the outstanding tax liabilities, if any, of any of the Applicants.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified (and the singular shall be read as plural and vice versa, and words importing any gender or the neuter include all genders and the neuter, all as the circumstances require):

“ACB” means “adjusted cost base” as that term is defined in section 54;

“Act” means the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended to the date of this letter and unless otherwise indicated all statutory references in this letter are to the Act;

“active business” has the meaning assigned by subsection 248(1);

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

“AgriInvest deposits” means amounts deposited in a government-subsidized savings account held with a financial institution that is designed to help the depositor better manage small farming income declines and reduce on-farm risks;

“Applicants” means DC, Mr. A and Mr. B or any 2 of them and “Applicant” refers to any one of them;

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

“BCA” means the XXXXXXXXXX;

“BN” means “business number” as that term is defined in subsection 248(1);

“CA” means the XXXXXXXXXX;

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

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

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

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

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

“CRA” means the Canada Revenue Agency;

“DC” means XXXXXXXXXX;

“DC Class A Shares” means the Class A voting common shares in the capital of DC referred to in Paragraph 3(s);

“DC Class B Shares” means the Class B voting common shares in the capital of DC referred to in Paragraph 3(s);

“DC Shares” means, collectively, the DC Class A Shares and the DC Class B Shares;

“DC Transfers” refers to the transfers of property by DC to TC1 and TC2 described in Paragraph 22;

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

“Distribution” means “distribution” as that term is defined in subsection 55(1);

“Distribution Property” has the meaning assigned by Paragraph 22;

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

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

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

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

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

“FMV” means “fair market value”, which refers to the amount, expressed in money terms, that is the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm's length and under no compulsion to act and contracting for a taxable purchase and sale, expressed in terms of cash;

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

“forgiven amount” has the meaning assigned by subsections 80(1) and 80.01(1);

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

“Mr. A” means XXXXXXXXXX, an individual referred to in Paragraph 1;

“Mr. B” means XXXXXXXXXX, an individual referred to in Paragraph 1;

“Mr. C” means XXXXXXXXXX, an individual who is resident in Canada;

“Mr. D” means XXXXXXXXXX, an individual who was resident in Canada at the time of his death on XXXXXXXXXX and was the spouse of Mrs. D and the father of Mr. A, Mr. B, Mr. C, Mrs. E, Mrs. F and Mrs. G;

“Mrs. D” means XXXXXXXXXX, an individual who was resident in Canada at the time of her death on XXXXXXXXXX and was the spouse of Mr. D and the mother of Mr. A, Mr. B, Mr. C, Mrs. E, Mrs. F and Mrs. G;

“Mrs. E” means XXXXXXXXXX, an individual who is resident in Canada;

“Mrs. F” means XXXXXXXXXX, an individual who is resident in Canada;

“Mrs. G” means XXXXXXXXXX, an individual who is resident in Canada;

“Paragraph” means a numbered or lettered paragraph of this letter;

“PUC” means “paid-up capital” as that term is defined by subsection 89(1);

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

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

“Promissory Note #1” means the non-interest bearing demand promissory note identified in Paragraph 25;

“Promissory Note #2” means the non-interest bearing demand promissory note identified in Paragraph 25;

“Proposed Transactions” means the transactions described in Paragraphs 12 to 32;

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

“Redemption Notes” means, collectively, Promissory Note #1 and Promissory Note #2;

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

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

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

“Shareholder Advances” means the amounts payable, on demand, to Mr. A and/or Mr. B from DC which, at XXXXXXXXXX, were the amounts set forth in Paragraph 8;

“Shareholder Loans” means the amounts due to DC from Mr. A and/or Mr. B which, at XXXXXXXXXX, were the amounts set forth in Paragraph 8;

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

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

“SIN” means social insurance number;

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

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

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

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

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

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

“taxation year” has the meaning assigned by subsection 249(1);

“TC1” refers to the corporation to be incorporated by Mr. A as described in Paragraph 12;

“TC1 Preferred Shares” refers to the TC1 preferred shares identified in Paragraph 23(b);

“TC2” refers to the corporation to be incorporated by Mr. B as described in Paragraph 15;

“TC2 Preferred Shares” refers to the TC2 preferred shares identified in Paragraph 23(b);

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

“UCC” means undepreciated capital cost as that term is defined in subsection 13(21); and

“Winding-up Dividend” means the dividend arising on the winding-up of DC by virtue of subsection 84(2) and paragraph 88(2)(b), as described in Paragraphs 26 and 27, and Ruling C.

FACTS

The relevant facts are as follows:

1.    Mr. A and Mr. B are brothers who are each resident in the Province of XXXXXXXXXX. Mr. C, Mrs. E, Mrs. F and Mrs. G are also siblings of Mr. A and Mr. B.

2.    DC is a TCC and a CCPC incorporated on XXXXXXXXXX under the CA and is governed under the BCA. The taxation year of DC ends on XXXXXXXXXX each year.

3.    Certain transactions relevant to the current DC shareholdings are described below (and all references to shares in this Paragraph 3 are to shares in the capital of DC).

(a)   On incorporation, the authorized share capital of DC consisted of the following:

XXXXXXXXXX Class A voting common shares with $XXXXXXXXXX par value per share;

XXXXXXXXXX Class B non-voting common shares with $XXXXXXXXXX par value per share;

XXXXXXXXXX Class A non-voting cumulative redeemable preferred shares with $XXXXXXXXXX par value per share; and

XXXXXXXXXX Class B non-voting non-cumulative redeemable preferred shares with $XXXXXXXXXX par value per share.

(b)   On or after XXXXXXXXXX, but before XXXXXXXXXX, Mr. D subscribed for XXXXXXXXXX Class A common shares for $XXXXXXXXXX and Mrs. D subscribed for XXXXXXXXXX Class A common share for $XXXXXXXXXX.

(c)   On or after XXXXXXXXXX, but before XXXXXXXXXX, the following Class B common shares were acquired by subscription:

(A)   Mr. B subscribed for XXXXXXXXXX Class B common shares for $XXXXXXXXXX,

(B)   Mr. D subscribed for XXXXXXXXXX Class B common shares for $XXXXXXXXXX,

(C)   Mrs. D subscribed for XXXXXXXXXX Class B common shares for $XXXXXXXXXX, and

(D)   Mr. A, Mr. C, Mrs. E, Mrs. F and Mrs. G each subscribed for XXXXXXXXXX Class B common shares for $XXXXXXXXXX.

(d)   On or after XXXXXXXXXX, but before XXXXXXXXXX, Mr. D acquired XXXXXXXXXX Class B preferred shares with a par value of $XXXXXXXXXX and a face value of $XXXXXXXXXX.

(e)   On XXXXXXXXXX, DC filed articles of Continuance under the BCA.

(f)   On XXXXXXXXXX, Mrs. D passed away and, pursuant to the terms of Mrs. D’s will, the XXXXXXXXXX Class A common share held by Mrs. D was transferred to Mr. B and the XXXXXXXXXX Class B common shares held by Mrs. D were transferred to Mr. D.

(g)   On XXXXXXXXXX, Mr. D transferred XXXXXXXXXX Class A common shares to Mr. A for $XXXXXXXXXX.

(h)   On XXXXXXXXXX, Mr. D transferred XXXXXXXXXX Class A common shares to Mr. B for $XXXXXXXXXX.

(i)   On XXXXXXXXXX, Mr. D transferred XXXXXXXXXX Class B common shares to Mr. A for $XXXXXXXXXX.

(j)   On XXXXXXXXXX, Mrs. F sold XXXXXXXXXX Class B common shares to Mr. D for $XXXXXXXXXX.

(k)   On XXXXXXXXXX, Mrs. G sold XXXXXXXXXX Class B common shares to Mr. D for $XXXXXXXXXX.

(l)   On XXXXXXXXXX, Mr. D transferred XXXXXXXXXX Class B common shares to Mr. A for $XXXXXXXXXX.

(m)   On XXXXXXXXXX, Mr. D transferred XXXXXXXXXX Class B common shares to Mr. B for $XXXXXXXXXX.

(n)   XXXXXXXXXX, Mrs. E sold XXXXXXXXXX Class B common shares to Mr. D for $XXXXXXXXXX.

(o)   On XXXXXXXXXX, Mr. D passed away and pursuant to the terms of Mr. D’s will, XXXXXXXXXX Class B common shares were transferred to Mr. A, XXXXXXXXXX common shares were transferred to Mr. B, and XXXXXXXXXX Class A common shares were transferred to Mr. C.

(p)   On XXXXXXXXXX, DC acquired all of the outstanding shares of XXXXXXXXXX, a corporation that dealt at arm’s length with DC.

(q)   On XXXXXXXXXX, DC and XXXXXXXXXX were amalgamated under the BCA. The amalgamated entity retained the name of DC. On the amalgamation, no change was made to the number and class of shares owned by each of Mr. A, Mr. B and Mr. C.

(r)   On XXXXXXXXXX, Mr. C, who had never been XXXXXXXXXX or otherwise actively involved in DC’s business on a regular and continuous basis and XXXXXXXXXX, sold XXXXXXXXXX Class B common shares to Mr. A for $XXXXXXXXXX. At the same time, DC purchased for cancellation XXXXXXXXXX Class B common shares that were owned by Mr. C for $XXXXXXXXXX.

(s)   The authorized share capital of DC was amended in XXXXXXXXXX and currently consists of an unlimited number of shares of each class as follows:

Class A voting common shares (herein defined as the “DC Class A Shares”);

Class B voting common shares (herein defined as the “DC Class B Shares”);

Class C and D voting common shares;

Class E, F, G, and H non-voting common shares;

Class I, and J voting redeemable retractable preferred shares; and

Class K, L, and M non-voting redeemable retractable preferred shares.

(t)   On XXXXXXXXXX Mr. C, who had become satisfied that neither he nor his children would engage in a farming business or become actively involved in DC’s farming business on a regular and continuous basis, agreed to sell the remaining DC Shares he then owned to his brothers.  As a result, he sold XXXXXXXXXX Class A common share to each of Mr. A and Mr. B for $XXXXXXXXXX per share. At the same time, Mr. C sold XXXXXXXXXX Class B common shares to Mr. A for $XXXXXXXXXX and XXXXXXXXXX Class B common shares to Mr. B for $XXXXXXXXXX. The sale of the DC Shares by Mr. C was not premised on, nor did it contemplate, a subsequent split-up of the assets of DC and the sale would have taken place whether or not the Proposed Transactions were undertaken.

As a result of the preceding shares transactions, Mr. A and Mr. B became the sole shareholders of DC and since XXXXXXXXXX they have each continued to own the same number of shares of each class of shares of DC, as set forth in Paragraph 4.

4.    Details regarding all of the presently issued and outstanding shares of DC are as follows:

                          No. and Class
Shareholder      of DC Shares                    ACB           PUC

Mr. A             XXXX Class A Shares          $XXXX       $XXXX
Mr. A             XXXX Class B Shares          $XXXX       $XXXX
                                                                   $XXXX       $XXXX

Mr. B             XXXX Class A Shares          $XXXX       $XXXX
Mr. B             XXXX Class B Shares          $XXXX       $XXXX
                                                                   $XXXX       $XXXX

Total             XXXX Class A Shares           $XXXX       $XXXX
Total             XXXX Class B Shares           $XXXX       $XXXX

5.    Mr. A and Mr. B hold their respective shares in DC as capital property for the purposes of the Act and all of such shares are Eligible Property.

6.    DC’s principal business is XXXXXXXXXX. The employees of the corporation are Mr. A and Mr. B and one other unrelated individual.  DC owns XXXXXXXXXX, all of which is farmed by the corporation.  None of its property is rented on a cash-rent or crop-share basis or under any other rental arrangement. Mr. B lives in a residence that is located on XXXXXXXXXX. Mr. A’s residence is not on land owned by DC. Each of the properties that will be transferred by DC to either TC1 or TC2 pursuant to the DC Transfers and that will be subject to an election made pursuant to subsection 85(1) is an Eligible Property.

7.    DC’s assets include cash, term deposits, accounts receivable, income taxes receivable, GST receivable, inventory, prepaid expenses, Agri-Invest accounts, equity investments in cooperatives (XXXXXXXXXX), the land described in Paragraph 6, buildings, and equipment.

8.    As at XXXXXXXXXX, the following Shareholder Advances and Shareholder Loans were outstanding – a positive amount represents an amount due from the corporation to the shareholder:

Mr. A             ($XXXXXXXXXX)
Mr. B              $XXXXXXXXXX
Total               $XXXXXXXXXX

9.    As at XXXXXXXXXX, DC had the following tax account balances:

RDTOH             $XXXXXXXXXX
GRIP                 $XXXXXXXXXX
CDA                  $XXXXXXXXXX

10.   On XXXXXXXXXX and XXXXXXXXXX, respectively, DC declared and paid dividends in the amounts of $XXXXXXXXXX and $XXXXXXXXXX, respectively, on its DC Class A Shares. The dividends were paid as part of the normal compensation plan to the owner‑managers, Mr. A and Mr. B.

11.   If DC has any aggregate investment income prior to the effective date of the Proposed Transactions, DC will declare and pay a dividend on its Class A Shares to obtain a full refund on the balance of the RDTOH of DC as at its XXXXXXXXXX taxation year end. The purpose of the dividend would be to avoid a circular RDTOH calculation that could otherwise arise if DC had an RDTOH balance at the time of the implementation of the Proposed Transactions.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates following the completion of the Proposed Transactions.

12.   TC1 will be incorporated under the BCA. TC1 will be a TCC and a CCPC. TC1’s Tax Services Office will be XXXXXXXXXX and its Taxation Centre will be XXXXXXXXXX.

13.   The authorized share capital of TC1 will consist of an unlimited number of common and preferred shares as follows:

(a)   Class A, B, C and D voting common shares without nominal or par value;

(b)   Class E, F, G, H non-voting common shares without nominal or par value;

(c)   Class I, J, K, L voting redeemable retractable preferred shares;

(d)   Class M, N, O, P non-voting redeemable retractable preferred shares.

14.   No shares in the capital of TC1 will be issued on incorporation and, prior to the commencement of the Proposed Transactions, no shares in the capital of TC will have been previously issued.

15.   TC2 will be incorporated under the BCA. TC2 will be a TCC and a CCPC. TC2’s Tax Services Office will be XXXXXXXXXX and its Taxation Centre will be XXXXXXXXXX.

16.   The authorized capital of TC2 will consist of an unlimited number of common and preferred shares as follows:

(a)   Class A, B, C and D voting common shares without nominal or par value;

(b)   Class E, F, G, H non-voting common shares without nominal or par value;

(c)   Class I, J, K, L voting redeemable retractable preferred shares;

(d)   Class M, N, O, P non-voting redeemable retractable preferred shares.

17.   No shares in the capital of TC2 will be issued on incorporation and, prior to the commencement of the Proposed Transactions, no shares in the capital of TC2 will have been previously issued.

18.   Mr. A will transfer all of his shares in DC to TC1.  As consideration for the transfer, Mr. A will receive Class A common shares in the capital of TC1 with an aggregate FMV equal to the aggregate FMV, at the time of the transfer, of the DC shares transferred to TC1.  Mr. A and TC1 will elect, jointly, 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 of the DC shares by Mr. A to TC1.  The agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The amount added to the stated capital account of the Class A common shares of TC1 issued to Mr. A will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the DC shares transferred to TC1; and (ii) the aggregate ACB to Mr. A, immediately before the disposition, of the DC Shares transferred to TC1, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1). Immediately after the transfer, the DC Shares will be the only asset of TC1. TC1 will hold its DC Shares as capital property.

19.   Mr. B will transfer all of his shares in DC to TC2.  As consideration for the transfer, Mr. B will receive Class A common shares in the capital of TC2 with an aggregate FMV equal to the aggregate FMV, at the time of the transfer, of the DC shares transferred to TC2.  Mr. B and TC2 will elect, jointly, 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 of the DC shares by Mr. B to TC2.  The agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The amount added to the stated capital account of the Class A common shares of TC2 issued to Mr. B will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the DC shares transferred to TC2; and (ii) the aggregate ACB to Mr. B, immediately before the disposition, of the DC Shares transferred to TC2, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1). Immediately after the transfer, the DC Shares will be the only asset of TC2. TC2 will hold its DC Shares as capital property.

20.   Immediately prior to the DC Transfers, the property of DC will be classified into the following three types of property for the purposes of the definition of “Distribution”:

      (a)   cash or near-cash property, comprising all current assets of DC, including cash, short-term deposits and other amounts receivable within one year or with no specific terms of repayment (including Shareholder Loans and other amounts repayable on demand), AgriInvest deposits, accounts receivable, income tax receivable, any dividend refund receivable, GST receivable and prepaid expenses;

      (b)   business property, comprising all of the assets of DC, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from an active business of DC (other than a specified investment business), including inventory, land (including the land on which the residence occupied by Mr. B is located), buildings, equipment, and equity in cooperatives; and

      (c)   investment property, comprising all of the assets of DC, other than property described in Paragraphs 20(a) and (b), any income from which would, for the purposes of the Act, be income from property or from a specified investment business.

      For greater certainty, for the purposes of the DC Transfers:

      (d)   any tax accounts, such as the balance of any non-capital losses of DC, net capital losses of DC, or the balance of any RDTOH, GRIP or CDA of DC, if any, will not be considered property of DC;

      (e)   deferred expenses, if any, which are expenditures deferred and amortized for accounting purposes but fully deducted for tax purposes, and any deferred income tax or future income tax assets recorded in the financial statements of DC, will not be considered property; and

      (f)   no amount will be considered a liability unless it represents a true legal liability capable of quantification. For greater certainty, the amount of any deferred income taxes or future income taxes recorded in the financial statements of DC will not be considered a liability because such amount does not represent a legal obligation of DC at the time of the Proposed Transactions.

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

(a)   Current liabilities of DC, which include amounts owing by DC that have a term of less than 12 months, that are due on demand or that are otherwise normally classified as current liabilities (including accounts payable, Shareholder Advances, bonuses payable, and the current portion of any long-term debt), will be allocated to the cash or near-cash property of DC in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property of DC. The total amount of DC’s current liabilities to be allocated to DC’s cash or near cash property will not exceed the aggregate FMV of all of DC’s cash or near-cash property;

(b)   Liabilities, other than current liabilities, of DC that relate to a particular property will be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property will be allocated to that type of property, but not in excess of the net FMV of such type after the allocation to a particular property as described in this Paragraph 21(b); and

(c)   Any liabilities that remain after the allocations described in Paragraphs 21(a) and (b) are made ("excess DC unallocated liabilities"), will then be allocated to the cash or near-cash property, business property and investment property, if any, of DC, based on the relative net FMV of each type of property prior to the allocation of such excess DC unallocated liabilities but after the allocations described in Paragraphs 21(a) and (b). However, where DC is considered to have a negative amount of a type of property because of Paragraph 21(a) or (b), for the purposes of allocating such excess DC unallocated liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of such excess DC unallocated liabilities being allocated to that type of property.

22.   Immediately following the determination of the types of property and the net FMV of each type of property described in Paragraphs 20 and 21, DC will simultaneously transfer (the “DC Transfers”) to each of TC1 and TC2 one-half of all of its three types of property (collectively referred to as the “Distribution Property”), such that immediately following the DC Transfers and the liability assumptions described in Paragraph 21, the net FMV of each type of property of DC so transferred to each of TC1 and TC2 will approximate 50% of the net FMV of all property of DC of that type of property determined immediately before the DC Transfers.

For the purpose of this Paragraph, the expression “approximate” means that the discrepancy from 50%, if any, would not exceed 1%, determined as a percentage of the net FMV of each type of property which each of TC1 and TC2 has received as compared to the amount of property that TC1 or TC2 would have received had it received its appropriate 50% share of the net FMV of that type of property at that time.

23.   As consideration for the DC Transfers, TC1 and TC2, as the case may be, will:

(a)   assume such liabilities of DC, as appropriate, so that TC1 and TC2, respectively, will receive a proportionate share of the net FMV of each type of property owned by DC, as determined in accordance with Paragraphs 20 and 21; and

(b)   issue Class I preferred shares in the capital of TC1 (the “TC1 Preferred Shares”) or Class I preferred shares in the capital of TC2 (the “TC2 Preferred Shares”), as the case may be, to DC which will have an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV, at the time of the DC Transfers, of the Distribution Property received by TC1 and TC2, as the case may be, exceeds the aggregate amount of the liabilities of DC assumed by TC1 and TC2, as the case may be, as described in Paragraph 23(a). DC will hold the TC1 Preferred Shares and the TC2 Preferred Shares as capital property. The TC1 Preferred Shares and the TC2 Preferred Shares will be taxable preferred shares and short-term preferred shares.

For greater certainty, the TC1 Preferred Shares and TC2 Preferred Shares issued to DC as described above will represent more than 10% of the issued share capital of TC1 or TC2, as applicable, having full voting rights in all circumstances.  The preferred shares will also represent more than 10% of the FMV of all the issued and outstanding shares of the capital stock of TC1 or TC2, respectively.

24.   In respect of the DC Transfers, DC will jointly elect with each of TC1 and TC2, respectively, in prescribed form and within the time allowed by subsection 85(6) but prior to the dissolution of DC described in Paragraph 32, to have the provisions of subsection 85(1) apply to the transfers of each Eligible Property of DC that is transferred by DC to TC1 and TC2, as the case may be.  The agreed amount in respect of each such Eligible Property will be as follows:

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

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

(c)   in the case of farm inventory owned in connection with the farming business of DC, an amount determined in accordance with the formula set out in paragraph 85(1)(c.2).

The amount of the liabilities assumed by TC1 or TC2, as the case may be, which are allocated by DC to a particular Eligible Property that is subject to an election under subsection 85(1), will not exceed the agreed amount for that particular property. The amount of liabilities assumed by TC1 or TC2, as the case may be, which are allocated by DC to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of any such property.

TC1 and TC2, respectively, will add to the stated capital maintained for the TC1 Preferred Shares and TC2 Preferred Shares issued to DC, as the case may be, an amount equal to the amount by which the aggregate of the agreed amounts, in the case of each Eligible Property, and the aggregate FMV, in the case of other properties, in respect of the Distribution Property transferred to TC1 and TC2, respectively, exceeds the liabilities of DC assumed by TC1 and TC2, respectively.  For greater certainty, the amount added to the stated capital account for the TC1 Preferred Shares and TC2 Preferred Shares to be issued by TC1 and TC2, respectively, as partial consideration for the Eligible Property included in the DC Transfers, will not exceed the maximum amount that could be added to the aggregate PUC of the TC1 Preferred Shares or the TC2 Preferred Shares, as the case may be, without a reduction taking place pursuant to subsection 85(2.1).

25.   Immediately after the DC Transfers, each of TC1 and TC2 will redeem all of the issued TC1 Preferred Shares and TC2 Preferred Shares, as the case may be, held by DC at an amount equal to the aggregate redemption amount and FMV of such shares.  As consideration therefor: (a) TC1 will issue a promissory note which will have a principal amount and FMV equal to the aggregate FMV and the redemption amount of the TC1 Preferred Shares (“Promissory Note #1”); and (b) TC2 will issue a promissory note which will have a principal amount and FMV equal to the aggregate FMV and the redemption amount of the TC2 Preferred Shares (“Promissory Note #2”).  DC will accept Promissory Note #1 and Promissory Note #2, respectively, as payment in full for the preferred shares so redeemed.

26.   Following the DC Transfers, TC1 and TC2 will resolve to wind-up and dissolve DC pursuant to the relevant provisions of the BCA.

27.   In connection with the winding-up of DC, DC will distribute all of its assets, which will consist only of Promissory Note #1 and Promissory Note #2 and the rights to any tax refunds referred to in Paragraph 30, to TC1 and TC2 in accordance with their shareholdings. In particular, DC will:

(a)   Assign and distribute Promissory Note #1 issued by TC1 to TC1; and

(b)   Assign and distribute Promissory Note #2 issued by TC2 to TC2.

As a result of the assignment and distribution of the Redemption Notes held by DC as described in this Paragraph, the obligation of each TC1 and TC2 under its own note will merge and be extinguished.

28.   To the extent that the CDA of DC has a positive balance at the time of the winding-up of DC and immediately prior to the distribution of the Redemption Notes by DC to TC1 and TC2 as described in Paragraph 27, DC will elect, in the prescribed manner and prescribed form required under subsection 83(2), to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend paid on the DC Common Shares. Pursuant to subparagraph 88(2)(b)(iv), TC1 and TC2 will each be deemed to have received a proportionate capital dividend from DC.

29.   To the extent that DC has a GRIP balance at the time of the winding-up of DC, DC will designate, pursuant to subsection 89(14), to treat a portion of the winding-up dividend referred to in subparagraph 88(2)(b)(iii) to be an eligible dividend by notifying each of TC1 and TC2 in writing, within the time limit prescribed in section 89(14), that the portion of such dividend is an eligible dividend.

30.   Any refund of tax to which DC is entitled pursuant to the provisions of the Act as a result of over-payment of tax instalments will be distributed (under the terms of the agreement governing the winding-up of DC) pro rata to each of TC1 and TC2.

31.   After the distribution of the Redemption Notes as described in Paragraph 27 and the distribution of any tax refunds as described in Paragraph 30, but immediately before the formal dissolution of DC described in Paragraph 32, DC will not own or acquire any property or carry on any activity or undertaking.

32.   Within a reasonable time following the distribution of any tax refund by DC described in Paragraph 30, articles of dissolution will be filed by DC with the appropriate Corporate Registry and, upon receipt of a certificate of dissolution, DC will be dissolved.

ADDITIONAL INFORMATION

33.   DC does not exercise significant influence over any corporation or partnership.

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

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

36.   None of the Distribution Property received by TC1 or TC2 on the DC Transfers will be acquired by a person unrelated to TC1 or TC2, as the case may be, or by a partnership, as part of a series of transactions or events that includes any of the Proposed Transactions, other than in the ordinary course of its business.

37.   None of DC, TC1 or TC2 is, or will be at any time during the series of transactions or events that includes the Proposed Transactions, 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.

38.   During the implementation of the Proposed Transactions, none of the shares of DC, TC1 or TC2 will be:

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

(b)   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);

(c)   the subject of a dividend rental arrangement;

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

(e)   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)); or

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

39.   Immediately before the redemption of the TC1 Preferred Shares and the TC2 Preferred Shares held by DC described in Paragraph 25, DC will be connected with each of TC1 and TC2 pursuant to paragraph 186(4)(a) and subsection 186(2) and will have a substantial interest in each of TC1 and TC2.

40.   Immediately before the distributions of property by DC to TC1 and TC2 on the winding up of DC described in Paragraphs 27 and 30, each of TC1 and TC2 will be connected with DC pursuant to paragraph 186(4)(a) and subsection 186(2) and will have a substantial interest in DC.

41.   TC1 and TC2 will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions, being Promissory Note #1 and Promissory Note #2, respectively.

42.   The Proposed Transactions will not result in DC or a related person being unable to pay its existing tax liabilities.

43.   Except as specified described herein, none of DC, TC1, TC2, Mr. A or Mr. B will dispose of any shares of any corporation described herein as part of a series of transactions or events that includes the Proposed Transactions.

44.   There has never been and there is not currently a shareholders' agreement binding the shareholders of DC.

PURPOSE OF THE PROPOSED TRANSACTIONS

45.   Mr. A and Mr. B have farmed together all their lives; first with their father and currently just with each other. In recent years, XXXXXXXXXX. Mr. A and Mr. B are no longer willing to work together and wish to divide DC into two separate operations to enable each of them to farm independently from the other.

The overall purpose of the divisive reorganization is to allow Mr. A to manage his farm and business interests separately from Mr. B and vice versa.

46.   Mr. A and Mr. B wish to continue carrying on their respective farming business through TC1 and TC2. The proposed transactions will allow Mr. A and Mr. B to have separate ownership and control over their respective pro rata share of DC’s property so that each can be managed independently from each other.

RULINGS

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

A.    Subject to the application of 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 the transfer of each Eligible Property owned by DC to TC1 and TC2 on the DC Transfers such that the agreed amount in respect of each such transfer will be deemed to be the transferor’s proceeds of disposition of the particular Eligible Property and the transferee’s cost thereof.

For the purposes of the joint elections, when determining the agreed amounts of depreciable property in the course of the DC Transfers, 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 disposition that the FMV at that time of the property that is transferred is of the aggregate FMV at that time of all the property of that class.

   For greater certainty, paragraph 85(1)(e.2) will not apply to the DC Transfers.

B.    On the redemption of the TC1 Preferred Shares and TC2 Preferred Shares owned by DC, as described in Paragraph 25, by virtue of paragraphs 84(3)(a) and (b), each of TC1 and TC2 will be deemed to have paid, and DC 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 TC1 Preferred Shares and the TC2 Preferred Shares, as the case may be, exceeds the aggregate PUC in respect of each respective class of those shares immediately before the redemption.

C.    Subsection 84(2) and paragraph 88(2)(b) will apply to the distributions by DC described in Paragraphs 27 and 30 such that:

(a)   subject to Rulings C(b), (c), and (d), DC will be deemed to have paid a dividend (a “winding-up dividend”) on the DC Shares held by TC1 and TC2, as the case may be, equal to the amount, if any, by which:

(i)   the amount or value of the funds or property distributed with respect to the shares of that class, as the case may be,

exceeds

(ii)  the amount, if any, by which the aggregate PUC in respect of the shares of that class is reduced on the distribution, as the case may be,

and each of TC1 and TC2 will be deemed to have received a taxable dividend on such class equal to that proportion of the amount of the excess that the number of shares of that class held by TC1 and TC2, as the case may be, immediately before the distribution is of the number of shares of that class outstanding immediately before the distributions;

(b)   to the extent that the CDA of DC has a positive balance immediately prior to its winding up, pursuant to subparagraph 88(2)(b)(i), such portion of the winding up dividend which arises from the distributions as does not exceed DC’s CDA, determined immediately before the payment of the winding up dividend, will be deemed, for the purposes of the subsection 83(2) election referred to in Paragraph 28, to be the full amount of a separate dividend that is a capital dividend;

(c)   pursuant to subparagraph 88(2)(b)(iii), the winding up dividend arising from the distributions, to the extent that it exceeds the amount referred to in Ruling C(b), will be deemed to be a separate dividend that is a taxable dividend; and

(d)   pursuant to subparagraph 88(2)(b)(iv), each of TC1 and TC2 will be deemed to have received its proportional share of the dividends described in Rulings C(b) and C(c).

D.    The taxable dividends described in Rulings B and C 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 any of 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 provided under paragraph 186(1)(b).

E.    Provided that as part of the series of transactions or events that includes any of the Proposed Transactions, there is not:

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

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

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

(d)   an acquisition of shares of DC as described in subparagraph 55(3.1)(b)(iii);

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

(f)   an acquisition of property in the circumstances described in paragraph 55(3.1)(d),

which has not been described herein, by virtue of paragraph 55(3)(b) subsection 55(2) will not apply to the taxable dividends referred to in Rulings B and C above, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b) in respect of those dividends.

F.    The distribution and extinguishment of the Redemption Notes described in Paragraph 27 will not give rise to a forgiven amount. In addition, none of DC, TC1 nor TC2 will otherwise realize any gain or incur any loss therefrom.

G.    The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not apply to any of the Proposed Transactions.

H.    The provisions of subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings requested above.

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

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

COMMENTS

1.    Although we received, for review, certain documents relating to the Proposed Transactions, our rulings are based solely on the representations contained in the facts, Proposed Transactions, additional information and purposes of the Proposed Transactions disclosed in this letter.

2.    Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.  In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly:

(a)   the determination of the amount of the PUC of any share or the FMV or ACB of any property referred to herein or the amount of any other tax account, such as losses, RDTOH, GRIP or CDA, of any corporation referred to herein;

(b)   any provincial tax consequences of the Proposed Transactions; or

(c)   any other tax consequences relating to the facts, Proposed Transactions or additional information described herein, other than those described in the rulings given above, including whether any subsequent transaction or event is or is not considered to be part of a series of transactions or events described herein.

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 Ruling Directorate
Legislative Policy and Regulatory Affairs Branch

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