2019-0827591R3 Split-up butterfly

Principal Issues: Whether the proposed split-up butterfly transactions described below meet legislative and administrative requirements?

Position: Transactions meet requirements.

Reasons: Consistent with law and administrative requirements.

Author: XXXXXXXXXX
Section: subsections 55(2), (3.1)

XXXXXXXXXX                                                                2019-082759

XXXXXXXXXX

Dear XXXXXXXXXX:

    Re: XXXXXXXXXX
    Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the additional information provided to us in subsequent letters and emails, and during our various telephone conversations.

To the best of your knowledge, and that of the taxpayers involved, none of the issues involved in this ruling request is:

(i) in a previously filed tax return of the taxpayers or persons related to the taxpayers;

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

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

(iv) the subject of a current or completed court process involving the taxpayers or persons related to the taxpayers; or

(v) the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate.

I. ENTITIES INVOLVED

1. Throughout this letter, the entities below will be referred to as follows:

“DC” means XXXXXXXXXX, as more particularly described in Paragraphs 3 to 10;

“Mr. A” means XXXXXXXXXX, who is resident of Canada, as more particularly described in Paragraphs 3, 4 and 12;

“Mr. B” means XXXXXXXXXX, who is resident of Canada, as more particularly described in Paragraphs 3, 4 and 12;

“Mr. C” means XXXXXXXXXX, who is resident of Canada, as more particularly described in Paragraphs 3, 4 and 12;

“Mr. D” means XXXXXXXXXX, who is resident of Canada, as more particularly described in Paragraphs 3, 4 and 12;

“TC 1” means XXXXXXXXXX, as more particularly described in Paragraph 13; and

“TC 2” means XXXXXXXXXX, as more particularly described in Paragraph 14.

II. DEFINITIONS

Unless otherwise expressly stated, every reference herein to the “Act” or to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and the Income Tax Regulations thereunder are referred to as the “Regulations.”

Unless otherwise noted, all references herein to a currency are a reference to Canadian dollars.

2. In this letter, the following terms have the meanings specified and, where the circumstances so require, the singular should be read as plural and vice versa:

“ACB” means adjusted cost base, as defined in section 54;

“Act 1” means the Corporations Act (XXXXXXXXXX), XXXXXXXXXX, as amended to the date hereof;

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

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

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

“CRA” means the Canada Revenue Agency;

“XXXXXXXXXX” means XXXXXXXXXX, as described in Paragraph 6;

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

“DC Class A Common Shares” has the meaning set out in Paragraph 3(a);

“DC Class B Common Shares” has the meaning set out in Paragraph 3(b);

“DC Class C Common Shares” has the meaning set out in Paragraph 3(c);

“DC Class D Common Shares” has the meaning set out in Paragraph 3(d);

“DC Class C Preference Shares” has the meaning set out in Paragraph 3(e);

“DC Dividend 1” means the dividend, deemed by subsection 84(3), to have been paid by DC and received by TC 1, arising on the purchase for cancellation the XXXXXXXXXX DC Class C Common Shares owned by TC 1, as described in Ruling B(g);  

“DC Dividend 2” means the dividend, deemed by subsection 84(3), to have been paid by DC and received by TC 1, arising on the redemption of the XXXXXXXXXX DC Class C Preference Shares owned by TC 1, as described in Ruling B(g);

“DC Dividend 3” means the dividend, deemed by subsection 84(3), to have been paid by DC and received by TC 2, arising on the purchase for cancellation the XXXXXXXXXX DC Class D Common Shares owned by TC 2, as described in Ruling B(h);  

“DC Dividend 4” means the dividend, deemed by subsection 84(3), to have been paid by DC and received by TC 2, arising on the redemption of the XXXXXXXXXX DC Class C Preference Shares owned by TC 2, as described in Ruling B(h);

“DC Dividends I” means collectively the DC Dividend 1 and the DC Dividend 2, as described in Ruling B(g);

“DC Dividends II” means collectively the DC Dividend 3 and the DC Dividend 4, as described in Ruling B(h);

“DC Redemption 1” has the meaning set out in Paragraph 28;

“DC Redemption 2” has the meaning set out in Paragraph 32;

“DC Redemption Amount 1” has the meaning set out in Paragraph 28;

“DC Redemption Amount 2” has the meaning set out in Paragraph 32;

“DC Redemption Note 1” has the meaning set out in Paragraph 28;

“DC Redemption Note 2” has the meaning set out in Paragraph 32;

“DC Transfer” has the meaning set out in Paragraph 22;

“DC Shares 1” means collectively the XXXXXXXXXX DC Class C Common Shares and the XXXXXXXXXX DC Class C Preference Shares owned by Mr. C, as described in Paragraph 15, and then owned by TC 1, as described in Paragraph 15;

“DC Shares 2” means collectively the XXXXXXXXXX DC Class D Common Shares and the XXXXXXXXXX DC Class C Preference Shares owned by Mr. D, as described in Paragraph 17, and then owned by TC 2, as described in Paragraph 17;

“Depreciable Property” has the meaning assigned by subsection 13(21);

“Distribution Property 1” has the meaning set out in Paragraph 22;

“Distribution Property 2” has the meaning set out in Paragraph 22;

“Effective Date” means a date chosen by the parties to implement the Proposed Transactions;

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

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

“ERDTOH” means “eligible refundable dividend tax on hand” as that term is defined by subsection 129(4);

“FMV” means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at Arm’s Length and without compulsion to act, expressed in terms of cash;

“Forgiven Amount” has the meaning assigned by subsections 80(1) and 80.01(1);

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

“Mr. C Transfer” has the meaning set out in Paragraph 15;

“Mr. D Transfer” has the meaning set out in Paragraph 17;

“NERDTOH” means “non-eligible refundable dividend tax on hand” as that term is defined by subsection 129(4);

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

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

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

“Proceeds of Disposition” has the meaning assigned by section 54;

“Proposed Transactions” means the transactions described in Paragraphs 15 to 35;

“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);

“Rulings” means the advance income tax rulings labelled “A” to “F” in this letter;

“Series of Transactions or Events” has the meaning assigned by subsection 248(10);

“Short-Term Preferred Share” has the meaning assigned by subsection 248(1);

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

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

“Stated Capital” in respect of the share capital of a corporation has the meaning assigned by the statute by which the corporation is governed at the relevant time;

“Subject Transactions” means the transactions described in Paragraphs 13 and 14;

“Substantial Interest” has the meaning assigned by subsection 191(2);

“TC 1 Class A Common Shares” has the meaning set out in Paragraph 13(a);

“TC 1 Class E Preference Shares” has the meaning set out in Paragraph 13(b);

“TC 1 Class E Redemption Amount” has the meaning set out in Paragraph 13(b);

“TC 1 Class F Preference Shares” has the meaning set out in Paragraph 13(c);

“TC 1 Class F Redemption Amount” has the meaning set out in Paragraph 13(c);

“TC 1 Dividend” means the dividend, deemed by subsection 84(3), to have been paid by TC 1 and received by DC, arising on the TC 1 Redemption, as described in Ruling B(e);

“TC 1 Redemption” has the meaning described in Paragraph 26;

“TC 1 Redemption Note” has the meaning set out in Paragraph 26;

“TC 2 Class A Common Shares” has the meaning set out in Paragraph 14(a);

“TC 2 Class E Preference Shares” has the meaning set out in Paragraph 14(b);

“TC 2 Class E Redemption Amount” has the meaning set out in Paragraph 14(b);

“TC 2 Class F Preference Shares” has the meaning set out in Paragraph 14(c);

“TC 2 Class F Redemption Amount” has the meaning set out in Paragraph 14(c);

“TC 2 Dividend” means the dividend, deemed by subsection 84(3), to have been paid by TC 2 and received by DC, arising on the TC 2 Redemption, as described in Ruling B(f);

“TC 2 Redemption” has the meaning described in Paragraph 30;

“TC 2 Redemption Note” has the meaning set out in Paragraph 30;

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

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

“Taxable Preferred Share” has the meaning assigned by subsection 248(1); and

“Taxable RFI Share” has the meaning assigned by subsection 248(1).

Our understanding of the Facts, Subject Transactions, Proposed Transactions and purposes of the Proposed Transactions are as follows:

III. FACTS

DC

3. DC is a TCC and a CCPC that was incorporated on XXXXXXXXXX, under Act 1. The articles of incorporation were amended on XXXXXXXXXX, to change the name of the corporation from XXXXXXXXXX to XXXXXXXXXX

DC deals with the XXXXXXXXXX and files its T2 Corporation Income Tax Returns at the XXXXXXXXXX. The taxation year-end of DC is XXXXXXXXXX.

The current issued and outstanding share capital of DC consists of:

(a) XXXXXXXXXX Class A voting common shares (the DC Class A Common Shares), having XXXXXXXXXX vote per share, all of which are owned by Mr. A;

(b) XXXXXXXXXX Class B voting common shares (the DC Class B Common Shares), having XXXXXXXXXX vote per share, all of which are owned by Mr. B;

(c) XXXXXXXXXX Class C voting common shares (the DC Class C Common Shares), having XXXXXXXXXX vote per share, all of which are owned by Mr. C;

(d) XXXXXXXXXX Class D voting common shares (the DC Class D Common Shares), having XXXXXXXXXX vote per share, all of which are owned by Mr. D; and

(e) XXXXXXXXXX Class C non-voting, redeemable and retractable preference shares (the DC Class C Preference Shares), of which:

(i) XXXXXXXXXX shares are owned by Mr. A;

(ii) XXXXXXXXXX shares are owned by Mr. B;

(iii) XXXXXXXXXX shares are owned by Mr. C; and

(iv) XXXXXXXXXX shares are owned by Mr. D.

Each DC Class C Preference Share has a redemption amount and a FMV of $XXXXXXXXXX.

The aggregate FMV of all of the issued and outstanding shares of DC is approximately $XXXXXXXXXX.

Mr. A is the father of Mr. B, Mr. C and Mr. D. All four men are residents of Canada.

4. Mr. A’s XXXXXXXXXX DC Class A Common Shares, Mr. B’s XXXXXXXXXX DC Class B Common Shares, Mr. C’s XXXXXXXXXX DC Class C Common Shares and Mr. D’s XXXXXXXXXX DC Class D Common Share, each, in aggregate, have a PUC and an ACB of $XXXXXXXXXX, and a FMV of approximately $XXXXXXXXXX.

Mr. A’s XXXXXXXXXX DC Class C Preference Shares, Mr. B’s XXXXXXXXXX DC Class C Preference Shares, Mr. C’s XXXXXXXXXX DC Class C Preference Shares and Mr. D’s XXXXXXXXXX DC Class C Preference Shares, each, in aggregate, have a PUC and an ACB of $XXXXXXXXXX.

Mr. A’s, Mr. B’s, Mr. C’s and Mr. D’s voting common share ownership in DC provides each of them XXXXXXXXXX% of the voting rights in DC. However, with respect to the value of their shareholding interests in DC:

(a) Mr. C owns approximately XXXXXXXXXX%;

(b) Mr. D owns approximately XXXXXXXXXX%; and

(c) Mr. A and Mr. B own approximately XXXXXXXXXX% in aggregate.  

The FMV of each of their shareholding interests in DC is approximately $XXXXXXXXXX.

5. DC carries on the business of XXXXXXXXXX. DC uses the cash basis for computing its income for tax purposes.

As at XXXXXXXXXX:

(a) DC’s assets included:

(i) accounts receivable of $XXXXXXXXXX;

(ii) inventory includes XXXXXXXXXX of $XXXXXXXXXX, in aggregate;

(iii) prepaid expenses of $XXXXXXXXXX;

(iv) investments held in patronage equity accounts in XXXXXXXXXX;

(v) XXXXXXXXXX account balance of XXXXXXXXXX;

(vi) investment in shares of XXXXXXXXXX

(vii) long-term investments include investments in XXXXXXXXXX;

(viii) land of $XXXXXXXXXX;

(ix) the UCC balance of the following assets:

(A) Class 6 (XXXXXXXXXX) of $XXXXXXXXXX;

(B) Class 8 (XXXXXXXXXX) of $XXXXXXXXXX;

(C) Class 10 (XXXXXXXXXX) of $XXXXXXXXXX;

(D) Class 16 (XXXXXXXXXX) of $XXXXXXXXXX;

(E) Class 45 (XXXXXXXXXX) of $XXXXXXXXXX;

(F) Class 50 (XXXXXXXXXX) of $XXXXXXXXXX, and

(G) Class 14.1 of $XXXXXXXXXX.

(b) DC’s liabilities included:

(i) current liabilities:

(I) bank indebtedness of $XXXXXXXXXX;

(II) accounts payable of $XXXXXXXXXX;

(III) shareholders’ loans of $XXXXXXXXXX, of which $XXXXXXXXXX is owing to each of Mr. A, Mr. B, Mr. C and Mr. D; and

(IV) current portion of the long-term liabilities of $XXXXXXXXXX; and

(ii) long-term liabilities of $XXXXXXXXXX.      

(c) DC had a CDA balance of $XXXXXXXXXX, but no account balance in its ERDTOH, NERDTOH and GRIP. It had no non-capital loss, capital loss or farm loss carry-forward balance.    

6. The following are some of the relevant facts related to DC’s assets and liabilities:

Class 6

Class 6 (XXXXXXXXXX) includes XXXXXXXXXX.

Class 14.1

Class 14.1 is comprised of accounting fees incurred by DC, that related to the reorganization of DC, as described in the Proposed Transactions.

Goodwill

There is no goodwill in DC, as it is a XXXXXXXXXX corporation and its value is based solely on its assets. Any prudent purchaser of DC would not pay more than the fair value for its assets. This is because, inter alia: (a) a XXXXXXXXXX corporation’s name has no value; (b) a XXXXXXXXXX corporation’s customer base is limited to certain XXXXXXXXXX that will buy the XXXXXXXXXX; (c) customer relations are not substantial and would not have a value; and (d) XXXXXXXXXX.

XXXXXXXXXX account

During DC’s XXXXXXXXXX taxation year, DC made a withdrawal from its XXXXXXXXXX account of $XXXXXXXXXX(Fund 1 of $XXXXXXXXXX and Fund 2 of $XXXXXXXXXX). The cash amounts were used for day to day farming operations.

As at XXXXXXXXXX, DC’s XXXXXXXXXX account balance was XXXXXXXXXX.

An XXXXXXXXXX account is a self-managed producer-government savings account designed to help XXXXXXXXXX manage small income declines and make investments to manage risk and improve market income.

The XXXXXXXXXX account consists of two different funds: (a) XXXXXXXXXX, which are held in Fund 1 and are not taxable upon withdrawal (similar to a bank account); and (b) government contributions and interest earned on both funds, which are held in Fund 2 and are taxed as investment income upon withdrawal.  

XXXXXXXXXX can make a deposit up to XXXXXXXXXX% of their allowable net sales and receive a matching government contribution on XXXXXXXXXX% of their allowable net sales. The maximum allowable net sales they can have in a year is $XXXXXXXXXX. Based on this limit, it is anticipated that DC’s XXXXXXXXXX account balance on the Effective Date will be minimal, as the maximum amount that could be allocated to DC through this program is $XXXXXXXXXX per year.

Patronage equity accounts

DC’s investments held in patronage equity accounts in XXXXXXXXXX are related to DC’s business of XXXXXXXXXX.  

XXXXXXXXXX.

Investment in XXXXXXXXXX

DC’s investment in the shares of XXXXXXXXXX is required by XXXXXXXXXX in order to do business with XXXXXXXXXX. Without this investment, DC would not be able to sell its XXXXXXXXXX through XXXXXXXXXX. XXXXXXXXXX.

DC plans to continue the XXXXXXXXXX portion of the business and XXXXXXXXXX on a smaller scale after the DC Transfer. For this reason, DC’s investment in XXXXXXXXXX is an essential asset for DC and must remain with DC.

Long-term investments

DC’s investments in XXXXXXXXXX.  

The XXXXXXXXXX is a hedge account used for investment purposes. It is a brokerage account that facilitates the trading of grain commodity future and options.

The products offered by XXXXXXXXXX. XXXXXXXXXX are able to take a position in the futures market (buy or sell) for specific traded commodities to offset future cash sales in order to guarantee a sale price. How much a XXXXXXXXXX uses this strategy and adjoining account depends on market conditions and other risk management options. Although reported as investments, the purpose of the account is strictly for risk management purposes. The corresponding balance will fluctuate depending on whether the client is actively holding a position in the futures market at that time.

In XXXXXXXXXX, DC withdrew $XXXXXXXXXX from its XXXXXXXXXX to use the cash for operations. At the time of the withdrawal, the account held only cash, no investments or futures contracts. As at XXXXXXXXXX, DC’s XXXXXXXXXX.

Long-term liabilities

All long-term liabilities relate to DC’s equipment purchases. DC pledged its accounts receivable, inventory and some property, plant and equipment as security for the bank indebtedness.

Shareholders’ loans

All shareholders’ loans are non-interest bearing and due on demand. The shareholders have no intent to demand payment on their loans in the foreseeable future.

History of DC Shareholdings

7. On XXXXXXXXXX, Mr. A, Mr. B, Mr. C and Mr. D formed a partnership and they each transferred certain XXXXXXXXXX assets to the partnership.

As consideration for the transfer, the partnership assumed certain liabilities of, and issued a certain number of partnership units to, Mr. A, Mr. B, Mr. C and Mr. D.

Mr. A gifted a portion of his partnership units under subsection 73(4) at that time to Mr. C and Mr. D, in order to ensure that each of Mr. A, Mr. B, Mr. C and Mr. D had approximately the same number of partnership units in the partnership. As a result, they each owned a XXXXXXXXXX% partnership interest in the partnership.

8. DC was incorporated on XXXXXXXXXX, under Act 1.

On XXXXXXXXXX:

(a) Mr. A subscribed for XXXXXXXXXX DC Class A Common Shares for cash consideration of $XXXXXXXXXX per share;

(b) Mr. B subscribed for XXXXXXXXXX Class B Common Shares for cash consideration of $XXXXXXXXXX per share;

(c) Mr. C subscribed for XXXXXXXXXX Class C Common Shares for cash consideration of $XXXXXXXXXX per share; and

(d) Mr. D subscribed for XXXXXXXXXX Class D Common Shares for cash consideration of $XXXXXXXXXX per share.

9. On XXXXXXXXXX, Mr. B, Mr. A, Mr. C and Mr. D each transferred their XXXXXXXXXX% partnership interests in the partnership to DC under subsection 85(1), respectively.

As consideration for the transfers, pursuant to subsection 85(1), DC issued a non-interest bearing promissory note and XXXXXXXXXX DC Class C Preference Shares to each of Mr. A, Mr. B, Mr. C and Mr. D.

Each of Mr. A’s, Mr. B’s, Mr. C’s and Mr. D’s XXXXXXXXXX DC Class C Preference Shares had an aggregate PUC and an aggregate ACB of $XXXXXXXXXX, and a redemption amount of $XXXXXXXXXX per share.  

As a result of the transfers, by Mr. A. Mr. B, Mr. C and Mr. D, of their partnership interests in the partnership to DC, the partnership was wound up and all its assets were transferred to DC pursuant to subsection 98(5).

At the time of the wind up of the partnership, each partner of the partnership (i.e., Mr. A, Mr. B, Mr. C and Mr. D) retained his own net income stabilization account Fund No. 1 and Fund No. 2, and DC registered for its own new net income stabilization account Fund No. 1 and Fund No. 2.

10. On XXXXXXXXXX:

(a) Mr. A transferred his net income stabilization account Fund No. 1 and Fund No. 2 to DC pursuant to subsection 85(1). As consideration for the transfer, DC issued a non-interest bearing promissory note and XXXXXXXXXX DC Class C Preference Shares to Mr. A, having an aggregate PUC and an aggregate ACB of $XXXXXXXXXX, and a redemption amount of $XXXXXXXXXX per share;    

(b) Mr. B transferred his net income stabilization account Fund No. 1 and Fund No. 2 to DC pursuant to subsection 85(1). As consideration for the transfer, DC issued a non-interest bearing promissory note and XXXXXXXXXX DC Class C Preference Shares to Mr. B, having had an aggregate PUC and an aggregate ACB of $XXXXXXXXXX, and a redemption amount of $XXXXXXXXXX per share;  

(c) Mr. C transferred his net income stabilization account Fund No. 1 and Fund No. 2 to DC pursuant to subsection 85(1). As consideration for the transfer, DC issued a non-interest bearing promissory note and XXXXXXXXXX DC Class C Preference Shares to Mr. C, having an aggregate PUC and an aggregate ACB of $XXXXXXXXXX, and a redemption amount of $XXXXXXXXXX per share; and

(d) Mr. D transferred his net income stabilization account Fund No. 1 and Fund No. 2 to DC pursuant to subsection 85(1). As consideration for the transfer, DC issued a non-interest bearing promissory note and XXXXXXXXXX DC Class C Preference Shares to Mr. D, having an aggregate PUC and an aggregate ACB of $XXXXXXXXXX, and a redemption amount of $XXXXXXXXXX per share.  

TC 1 and TC 2

11. Mr. C and Mr. D incorporated TC 1 and TC 2, respectively, under Act 1 on XXXXXXXXXX, as described in Paragraphs 13 and 14.

Mr. A, Mr. B, Mr. C, Mr. D, DC, TC 1 and TC 2

12. For the purposes of the Act, other than section 55:

(a) Mr. A, Mr. B, Mr. C and Mr. D are related to each other pursuant to paragraph 251(2)(a), and they constitute a related group (under subsection 251(4)) that controls DC, and each of them is related to DC by virtue of subparagraph 251(2)(b)(ii); and

(b) DC, TC1 and TC 2 are related to each other by virtue of subparagraphs 251(2)(c)(ii) and (iii).  

However, for the purposes of section 55, by virtue of subparagraph 55(5)(e)(i):

(i) Mr. B, Mr. C and Mr. D are not related to each other, and Mr. A, Mr. B, Mr. C and Mr. D do not constitute a related group (under subsection 251(4)) that controls DC;

(ii) each of Mr. A, Mr. B, Mr. C and Mr. D is not related to DC under paragraph 251(2)(b); and

(iii) DC, TC 1 and TC 2 are not related to each other under paragraph 251(2)(c).

IV. SUBJECT TRANSACTIONS

Incorporation of TC 1

13. Mr. C incorporated TC 1 under Act 1 on XXXXXXXXXX, for the purpose of implementing the Proposed Transactions.

TC 1 is a CCPC and a TCC. The taxation year-end of TC 1 will be XXXXXXXXXX, so as to align with government XXXXXXXXXX programs. It will file a T2 corporate tax return for the stub year (XXXXXXXXXX) at the XXXXXXXXXX, and will deal with the XXXXXXXXXX.

The authorized share capital of TC 1 includes:

(a) an unlimited number of class A voting common shares (the TC 1 Class A Common Shares), XXXXXXXXXX vote per share;

(b) an unlimited number of class E non-voting, redeemable and retractable preference shares (the TC 1 Class E Preference Shares), having a redemption amount (the TC 1 Class E Redemption Amount) equal to the amount by which the aggregate FMV of the property received by TC 1 for the issuance of such shares, exceeds any debt issued or liabilities assumed by TC 1 on their issuance, if any, and then dividing such amount by the number of the TC 1 Class E Preference Shares issued as consideration therefor; and

(c) an unlimited number of class F non-voting, redeemable and retractable preference shares (the TC 1 Class F Preference Shares), having a redemption amount (the TC 1 Class F Redemption Amount) equal to the amount by which the aggregate FMV of the property received by TC 1 for the issuance of such shares, exceeds any debt issued or liabilities assumed by TC 1 on their issuance, if any, and then dividing such amount by the number of the TC 1 Class F Preference Shares issued as consideration therefor.

No shares have been issued by TC 1, and no activities have been carried out by TC 1 since its incorporation.

Mr. C is the president and sole director of TC 1.

Incorporation of TC 2

14. Mr. D incorporated TC 2 under Act 1 on XXXXXXXXXX, for the purpose of implementing the Proposed Transactions.

TC 2 is a CCPC and a TCC. The taxation year-end of TC 2 will be XXXXXXXXXX, so as to align with government XXXXXXXXXX programs. It will file a T2 corporate tax return for the stub year (XXXXXXXXXX) at the XXXXXXXXXX, and will deal with the XXXXXXXXXX.

The authorized share capital of TC 2 includes:

(a) an unlimited number of class A voting common shares (the TC 2 Class A Common Shares), XXXXXXXXXX vote per share;

(b) an unlimited number of class E non-voting, redeemable and retractable preference shares (the TC 2 Class E Preference Shares), having a redemption amount (the TC 2 Class E Redemption Amount) equal to the amount by which the aggregate FMV of the property received by TC 2 for the issuance of such shares, exceeds any debt issued or liabilities assumed by TC 2 on their issuance, if any, and then dividing such amount by the number of the TC 2 Class E Preference Shares issued as consideration therefor; and

(c) an unlimited number of class F non-voting, redeemable and retractable preference shares (the TC 2 Class F Preference Shares), having a redemption amount (the TC 2 Class F Redemption Amount) equal to the amount by which the aggregate FMV of the property received by TC 2 for the issuance of such shares, exceeds any debt issued or liabilities assumed by TC 2 on their issuance, if any, and then dividing such amount by the number of the TC 2 Class F Preference Shares issued as consideration therefor.

No shares have been issued by TC 2, and no activities have been carried out by TC 2 since its incorporation.

Mr. D is the president and sole director of TC 2.

V. PROPOSED TRANSACTIONS

The Proposed Transactions will occur on the Effective Date in the order presented unless otherwise indicated, with the exception of the filing of any applicable election forms in respect of the Proposed Transactions described in Paragraphs 16, 18 and 24, which will be filed on or before the applicable due date.

Butterfly Transactions

Mr. C Transfer

15. Mr. C will transfer (the Mr. C Transfer) all of his XXXXXXXXXX DC Class C Common Shares and XXXXXXXXXX DC Class C Preference Shares (collectively referred to as the DC Shares 1) to TC 1.

As consideration for the DC Shares 1, TC 1 will issue to Mr. C:

(a) XXXXXXXXXX TC 1 Class A Common Shares, having an aggregate FMV equal to the aggregate FMV at that time of the XXXXXXXXXX DC Class C Common Shares so transferred to TC 1; and

(b) XXXXXXXXXX TC 1 Class E Preference Shares, having an aggregate redemption amount and an aggregate FMV equal to the aggregate redemption amount and the aggregate FMV at that time of the XXXXXXXXXX DC Class C Preference Shares so transferred to TC 1. Each TC 1 Class E Preference Share will have a redemption amount and a FMV of $XXXXXXXXXX.

For the purposes of XXXXXXXXXX, the increase to the Stated Capital of:

(i) the XXXXXXXXXX TC 1 Class A Common Shares that are issued to Mr. C as consideration for the XXXXXXXXXX DC Class C Common Shares, will equal $XXXXXXXXXX, being the aggregate PUC of the XXXXXXXXXX DC Class C Common Shares so transferred to TC 1; and

(ii) the XXXXXXXXXX TC 1 Class E Preference Shares that are issued to Mr. C as consideration for the XXXXXXXXXX DC Class C Preference Shares, will equal $XXXXXXXXXX, being the aggregate PUC of the XXXXXXXXXX DC Class C Preference Shares so transferred to TC 1.

For greater certainty, such amounts described in Paragraphs 15(i) and (ii), in each case, will not exceed the amount determined as element “B” in paragraph 84.1(1)(a).

            TC 1 will hold the DC Shares 1 as Capital Property.

16. Mr. C and TC 1 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 in respect of the transfer of the DC Shares 1.

The Agreed Amount in respect of the joint election:

(a) with respect to the XXXXXXXXXX DC Class C Common Shares so transferred to TC 1, will be $XXXXXXXXXX, being Mr. C’s aggregate ACB of the XXXXXXXXXX DC Class C Common Shares immediately before the Mr. C Transfer; and  

(b) with respect to the XXXXXXXXXX DC Class C Preference Shares so transferred to TC 1, will be $XXXXXXXXXX, being Mr. C’s aggregate ACB of the XXXXXXXXXX DC Class C Preference Shares immediately before the Mr. C Transfer.

For greater certainty, the Agreed Amounts described in Paragraphs 16(a) and (b), in each case, will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

Mr. D Transfer

17. Mr. D will transfer (the Mr. D Transfer) all of his XXXXXXXXXX DC Class D Common Shares and XXXXXXXXXX DC Class C Preference Shares (collectively referred to as the DC Shares 2) to TC 2.

As consideration for the DC Shares 2, TC 2 will issue to Mr. D:

(a) XXXXXXXXXX TC 2 Class A Common Shares, having an aggregate FMV equal to the aggregate FMV at that time of the XXXXXXXXXX DC Class D Common Shares so transferred to TC 2; and

(b) XXXXXXXXXX TC 2 Class E Preference Shares, having an aggregate redemption amount and an aggregate FMV equal to the aggregate redemption amount and the aggregate FMV at that time of the XXXXXXXXXX DC Class C Preference Shares so transferred to TC 2. Each TC 2 Class E Preference Share will have a redemption amount and a FMV of $XXXXXXXXXX.

        For the purposes of Act 1, the increase to the Stated Capital of:

(i) the XXXXXXXXXX TC 2 Class A Common Shares that are issued to Mr. D as consideration for the XXXXXXXXXX DC Class D Common Shares, will equal $XXXXXXXXXX, being the aggregate PUC of the XXXXXXXXXX DC Class D Common Shares so transferred to TC 2; and

(ii) the XXXXXXXXXX TC 2 Class E Preference Shares that are issued to Mr. D as consideration for the XXXXXXXXXX DC Class C Preference Shares, will equal $XXXXXXXXXX, being the aggregate PUC of the XXXXXXXXXX DC Class C Preference Shares so transferred to TC 2.

For greater certainty, such amount described in Paragraphs 17(i) and (ii), in each case, will not exceed the amount determined as element “B” in paragraph 84.1(1)(a).

         TC 2 will hold the DC Shares 2 as Capital Property.

18. Mr. D and TC 2 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 in respect of the transfer of the DC Shares 2.

The Agreed Amount in respect of the joint election:

(a) with respect to the XXXXXXXXXX DC Class D Common Shares so transferred to TC 2, will be $XXXXXXXXXX, being Mr. D’s aggregate ACB of the XXXXXXXXXX DC Class D Common Shares immediately before the Mr. D Transfer; and  

(b) with respect to the XXXXXXXXXX DC Class C Preference Shares so transferred to TC 2, will be $XXXXXXXXXX, being Mr. D’s aggregate ACB of the XXXXXXXXXX DC Class C Preference Shares immediately before the Mr. D Transfer.

For greater certainty, the Agreed Amounts described in Paragraphs 18(a) and (b), in each case, will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

Types of Property

19. Immediately before the DC Transfer, the property of DC will be classified into the following three types of property, for the purposes of the definition of “distribution” in subsection 55(1), as follows:

(a) cash or near-cash property, consisting of all of the current assets of DC, including cash (if any), the XXXXXXXXXX, accounts receivable, inventory and prepaid expenses;

(b) business property, consisting of 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 (other than a Specified Investment Business), including for greater certainty:

(i) land, buildings and equipment;

(ii) investments held in patronage equity accounts in XXXXXXXXXX; and

(iii) investment in shares of XXXXXXXXXX; and

(c) investment property, consisting of 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 property or from a Specified Investment Business, including for greater certainty, investments in XXXXXXXXXX.

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

(i) any tax accounts of DC, such as any non-capital loss, farm loss, net capital loss, and the balance of ERDTOH, NERDTOH, GRIP or CDA, if any, will not be considered property; and

(ii) deferred expenses, which are expenses that are deferred and amortized for accounting purposes, but fully deducted for tax purposes, if any, will not be considered property.

20. In determining the net FMV of each type of property of DC immediately before the DC Transfer, 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) all current liabilities will be allocated to each 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) following the allocation of current liabilities to each cash or near-cash property as described in Paragraph 20(a), any remaining net FMV of any accounts receivable, inventory and prepaid expenses of DC will be reclassified as business property and excluded from the aggregate net FMV of DC’s cash or near-cash property, to the extent that such property will be collected, sold, used or consumed by DC, TC 1 or TC 2, in the ordinary course of the business to which such property relates (for greater certainty, cash will not be reclassified to business property);

(c) liabilities of DC, other than current liabilities, that relate to a particular property, will then be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property, and liabilities that pertain to a particular type of property, but not to a particular property, will then be allocated to that particular 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 in Paragraph 20(c); and

(d) if any liabilities remain after the allocations described in Paragraphs 20(a) and (c) are made, such excess unallocated liabilities will then be allocated to each type of property of DC, on the basis of the relative net FMV of each type of property immediately prior to the allocation of such excess unallocated liabilities, but after the allocation of the liabilities described in Paragraphs 20(a) and (c).

            For greater certainty, for the purposes of determining the net FMV of each type of property of DC:

(i) the amount of deferred income tax liability, if any, will not be considered a liability, because such amount does not represent a legal obligation;

(ii) amounts owing by DC that have a term of less than 12 months or are due on demand with no fixed terms of repayment are considered current liabilities;

(iii) current liabilities include amounts normally classified as current liabilities, including accounts payable, accrued liabilities and taxes payable; and

(iv) no amount will be considered to be a liability unless it represents a true legal liability that is capable of quantification.

21. Based on the principles described in Paragraphs 19 and 20, to the best of its knowledge, DC will have cash or near-cash property, business property and investment property at the time of the DC Transfer.

DC Transfer

22. Immediately following the determination of the types of property and the net FMV of DC’s types of property as described in Paragraphs 19 and 20, DC will contemporaneously transfer to TC 1 and TC 2 (the DC Transfer), a proportionate share of the aggregate net FMV of each type of property owned by DC at that time (collectively referred to as the “Distribution Property 1” in the case of TC 1, and the “Distribution Property 2”, in the case of TC 2), such that immediately following the DC Transfer and the corresponding assumptions, by TC 1 and TC 2, in each case, of DC’s liabilities, as described in Paragraphs 23(a) and (b), respectively, the aggregate net FMV of each type of property transferred by DC to TC 1 and TC 2 (in each case, determined on the basis of the principles set out in Paragraphs 19 and 20) will be equal to, or approximate, that proportion of each type of property of DC determined by the formula:

                  A x B/C

where

A is the aggregate net FMV, immediately before the DC Transfer, of all property of that type owned at that time by DC;

B is the aggregate FMV, immediately before the DC Transfer, of all of the shares of the capital stock of DC owned, at that time, by TC 1 or TC 2, as the case may be; and

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

(that proportion, in respect of TC 1, is referred to as “the TC 1 Proportion”, and, in respect of TC 2, “the TC 2 Proportion”)

For the purposes of Paragraphs 22 and 35, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed XXXXXXXXXX, determined as a percentage of the aggregate net FMV of each type of property of DC that each of TC 1 and TC 2 has received (or DC has retained) on the DC Transfer, as compared to what each of TC 1 and TC 2 would have received (or DC would have retained) had it received (or retained) its appropriate pro rata share of the aggregate net FMV of that type of property of DC at that time.

For greater certainty, on the DC Transfer, each of the Distribution Property 1 and the Distribution Property 2 will include inventory, prepaid expenses, land, buildings (including XXXXXXXXXX), equipment, and investment property, and will be Eligible Property at the time of the DC Transfer.

23. As consideration for the Distribution Property 1 and the Distribution Property 2 transferred by DC to TC 1 and TC 2, respectively, as described in Paragraph 22, each of TC 1 and TC 2 will:

(a) assume such of DC’s liabilities, if any, as are specifically secured by assets received by TC 1 and TC 2, respectively;

(b) assume additional liabilities of DC as appropriate, so that on a net FMV basis, each of TC 1 and TC 2 will receive its pro rata share of each type of property owned by DC, as described in Paragraph 22 (the aggregate amount of the liabilities of DC assumed by TC 1 and TC 2, as described in these Paragraphs 23(a) and (b), is collectively referred as the TC 1 Assumed Liability and the TC 2 Assumed Liability, respectively); and

(c) issue to DC, a number of TC 1 Class F Preference Shares and TC 2 Class F Preference Shares, as the case may be, which will have an aggregate redemption amount and an aggregate FMV equal to the amount by which the aggregate FMV, at the time of the DC Transfer, of the Distribution Property 1 and the Distribution Property 2 received by TC 1 and TC 2, exceeds the TC 1 Assumed Liability and the TC 2 Assumed Liability, respectively.  

The TC 1 Assumed Liability will include the outstanding balance of the shareholder’s loan owing by DC to Mr. C, and the TC 2 Assumed Liability will include the outstanding balance of the shareholder’s loan owing by DC to Mr. D.

DC will hold the TC1 Class F Preference Shares and the TC 2 Class F Preference Shares as Capital Property.

24. With respect to the Distribution Property 1 and the Distribution Property 2, DC will jointly elect with TC 1 or TC 2, as the case may be, in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the DC Transfer of each Eligible Property of DC, that is transferred by DC to TC 1 and TC 2, as the case may be.

The Agreed Amount in respect of each such Eligible Property will not be greater than the FMV of such property nor will it be less than the amount permitted under paragraph 85(1)(b). For greater certainty, the Agreed Amount in respect of each such Eligible Property will be within the limits prescribed as follows:

(a) in the case of Capital Property (other than Depreciable Property of a prescribed class) described in paragraph 85(1)(c.1), 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, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and

(c) in the case of XXXXXXXXXX owned in connection with the XXXXXXXXXX carried on by DC, an amount determined in accordance with the formula set out in paragraph 85(1)(c.2).

For greater certainty, the amount of DC’s liabilities to be assumed by TC 1 and TC 2, as described in Paragraphs 23(a) and (b), and to be allocated to a particular property, in each case:

(i) that is the subject of an election under subsection 85(1), will not exceed the Agreed Amount elected for that particular property; and

(ii) that is not the subject of an election under subsection 85(1), will not exceed the FMV of such particular property.

25. TC 1 and TC 2 will add to the Stated Capital account for the TC 1 Class F Preference Shares and the TC 2 Class F Preference 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 1 transferred to TC 1, and of the Distribution Property 2 transferred to TC 2, exceeds the TC 1 Assumed Liability and the TC 2 Assumed Liability, respectively.

For greater certainty, the amount added to the Stated Capital account for the TC 1 Class F Preference Shares and the TC 2 Class F Preference Shares to be issued by TC 1 and TC 2, as partial consideration for the Distribution Property 1 and the Distribution Property 2, respectively, will not exceed the maximum amount that could be added to the aggregate PUC of the TC 1 Class F Preference Shares or the TC 2 Class F Preference Shares, without a reduction taking place pursuant to subsection 85(2.1).

Share Purchase For Cancellation and Share Redemption

DC and TC 1

26. TC 1 will redeem all of the TC 1 Class F Preference Shares owned by DC (the TC 1 Redemption) for an amount equal to the aggregate TC 1 Class F Redemption Amount.

In satisfaction of the aggregate TC 1 Class F Redemption Amount for such shares, TC 1 will issue a promissory note (the TC 1 Redemption Note), payable to DC on demand without interest or fixed terms of repayment, having a Principal Amount and a FMV equal to the aggregate TC 1 Class F Redemption Amount of the TC 1 Class F Preference Shares so redeemed.

DC will accept the TC 1 Redemption Note in full payment of the redemption price of the TC 1 Class F Preference Shares owned by it, and will assume the full risk of the note being dishonoured.

27. TC 1 will not designate the TC 1 Dividend to be an Eligible Dividend under subsection 89(14).

28. Following the redemption of the TC 1 Class F Preference Shares, as described in Paragraph 26, DC will:

(a) purchase for cancellation TC 1’s XXXXXXXXXX DC Class C Common Shares, and

(b) redeem TC 1’s XXXXXXXXXX DC Class C Preference Shares,

(collectively referred to as the DC Redemption 1) for an amount (the DC Redemption Amount 1) equal to the total of:

(c) the aggregate FMV at that time of TC 1’s XXXXXXXXXX DC Class C Common Shares, and

(d) the aggregate redemption amount of TC 1’s XXXXXXXXXX DC Class C Preference Shares.

In satisfaction of the DC Redemption Amount 1 for such shares, DC will issue a promissory note (the DC Redemption Note 1), payable to TC 1 on demand without interest or fixed terms of repayment, having a Principal Amount and a FMV equal to the DC Redemption Amount 1.

TC 1 will accept the DC Redemption Note 1 in full payment of the purchase price of its XXXXXXXXXX DC Class C Common Shares and the redemption price of its XXXXXXXXXX DC Class C Preference Shares, and will assume the full risk of the note being dishonoured.

29. DC will not designate the DC Dividends I to be an Eligible Dividend under subsection 89(14).

DC and TC 2

30. TC 2 will redeem all of the TC 2 Class F Preference Shares owned by DC (the TC 2 Redemption) for an amount equal to the aggregate TC 2 Class F Redemption Amount.

In satisfaction of the aggregate TC 2 Class F Redemption Amount for such shares, TC 2 will issue a promissory note (the TC 2 Redemption Note), payable to DC on demand without interest or fixed terms of repayment, having a Principal Amount and a FMV equal to the aggregate TC 2 Class F Redemption Amount of the TC 2 Class F Preference Shares so redeemed.

DC will accept the TC 2 Redemption Note in full payment of the redemption price of the TC 2 Class F Preference Shares owned by it, and will assume the full risk of the note being dishonoured.

31. TC 2 will not designate the TC 2 Dividend to be an Eligible Dividend under subsection 89(14).

32. Following the redemption of the TC 2 Class F Preference Shares, as described in Paragraph 30, DC will:

(a) purchase for cancellation TC 2’s XXXXXXXXXX DC Class D Common Shares, and

(b) redeem TC 2’s XXXXXXXXXX DC Class C Preference Shares,

(collectively referred to as the DC Redemption 2) for an amount (the DC Redemption Amount 2) equal to the total of:

(c) the aggregate FMV at that time of TC 2’s XXXXXXXXXX DC Class D Common Shares, and

(d) the aggregate redemption amount of TC 2’s XXXXXXXXXX DC Class C Preference Shares.

In satisfaction of the DC Redemption Amount 2 for such shares, DC will issue a promissory note (the DC Redemption Note 2), payable to TC 2 on demand without interest or fixed terms of repayment, having a Principal Amount and a FMV equal to the DC Redemption Amount 2.

TC 2 will accept the DC Redemption Note 2 in full payment of the purchase price of its XXXXXXXXXX DC Class D Common Shares and the redemption price of its XXXXXXXXXX DC Class C Preference Shares, and will assume the full risk of the note being dishonoured.

33. DC will not designate the DC Dividends II to be an Eligible Dividend under subsection 89(14).

Promissory Notes Set-Off

34. Immediately following:

(a) the TC 1 Redemption and the DC Redemption 1, the Principal Amount owing by TC 1 to DC under the TC 1 Redemption Note and the Principal Amount owing by DC to TC 1 under the DC Redemption Note 1, which will be equal, will be set-off in full against each other and each such note will be marked paid in full and extinguished; and

(b) the TC 2 Redemption and the DC Redemption 2, the Principal Amount owing by TC 2 to DC under the TC 2 Redemption Note and the Principal Amount owing by DC to TC 2 under the DC Redemption Note 2, which will be equal, will be set-off in full against each other and each such note will be marked paid in full and extinguished.

Property Retained by DC

35. Immediately following the DC Transfer and the assumption of the TC 1 Assumed Liability and the TC 2 Assumed Liability by TC 1 and TC 2, the aggregate net FMV of each type of property retained by DC (determined in each case on the basis of the principles described in Paragraphs 19 and 20) will be equal to or approximate that proportion of the net FMV of all property of DC of that type, determined applying those principles, immediately before the DC Transfer that:

(a) the aggregate FMV, immediately before the DC Transfer, of all of:

(i) the XXXXXXXXXX DC Class A Common Shares and the XXXXXXXXXXDC Class C Preference Shares owned by Mr. A; and

(ii) the XXXXXXXXXX DC Class B Common Shares and the XXXXXXXXXX DC Class C Preference Shares owned by Mr. B, at that time,

    is of

(b) the aggregate FMV, immediately before the DC Transfer, of all the issued and outstanding shares of DC at that time.

For greater certainty, on the DC Transfer, DC will retain property including: (I) the patronage equity accounts; (II) the XXXXXXXXXX; (III) investment in XXXXXXXXXX, as DC plans to continue the XXXXXXXXXX of the business and XXXXXXXXXX on a smaller scale; and (IV) accounts receivable, as they relate to the XXXXXXXXXX business.

Post-Butterfly Transactions

36. Each of TC 1 and TC 2 will operate a XXXXXXXXXX business.

DC will continue to operate a XXXXXXXXXX as well as the XXXXXXXXXX and processing business. It will also XXXXXXXXXX on a smaller scale in order to XXXXXXXXXX.

37. TC 1 and TC 2 will enter into a joint venture arrangement post butterfly until each corporation has acquired its own equipment, as currently there is a limited number of equipment that TC 1 and TC 2 will receive on the DC Transfer. The agreement between TC 1 and TC 2 will not be a partnership but will be a formal joint venture, whereby TC 1 and TC 2 will retain legal ownership of these assets. The joint venture between TC 1 and TC 2 will be for a limited period of time, enough time to allow each of TC 1 and TC 2 to acquire its own equipment to fund its farming operations independently.

VI. ADDITIONAL INFORMATION

38. Except as described herein, 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).

39. There has not been, and will not be, as part of a Series of Transactions or Events that includes the Taxable Dividends, any disposition or acquisition of property in circumstances described in subparagraphs 55(3.1)(b)(i) or (iii), or an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii), that has not been described herein.

40. None of the property received by TC 1 or TC 2 on the DC Transfer, will be acquired by a person unrelated to TC 1 or TC 2, as the case may be, or by a partnership, as part of a Series of Transactions or Events that includes the Taxable Dividends, in the circumstances described in paragraph 55(3.1)(c).

41. None of the property retained by DC after the DC Transfer will be acquired by a person unrelated to DC, or by a partnership, as part of a Series of Transactions or Events that includes the Taxable Dividends, in the circumstances described in paragraph 55(3.1)(d).

42. None of DC, TC 1 or TC 2 is or will be, at any time during a Series of Transactions or Events that includes the Taxable Dividends, 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).

43. None of the shares of DC, TC 1 or TC 2 has been or will be, at any time prior to the completion of the Proposed Transactions:

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

(b) the subject of a “dividend rental arrangement” referred to in subsection 112(2.3), as that term is defined in subsection 248(1);

(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)); or

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

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

44. At the time of the TC 1 Redemption and the TC 2 Redemption, DC will be connected with each of TC 1 and TC 2, as the case may be, pursuant to paragraph 186(4)(a) and subsection 186(2), and will have a Substantial Interest in each of TC 1 and TC 2.

45. At the time of the DC Redemption 1 and the DC Redemption 2, each of TC 1 and TC 2 will be connected with DC, pursuant to paragraph 186(4)(a) and subsection 186(2), and each will have a Substantial Interest in DC.

46. Each of DC, TC 1 and TC 2 will have the financial capacity to honour, upon presentation for payment, the amount payable under their respective promissory notes issued as part of the Proposed Transactions.

47. The Proposed Transactions will not result in DC or a person who is a Related Person to DC described herein, being unable to pay its existing tax liabilities.

48. The TC 1 Class F Preference Shares, the TC 2 Class F Preference Shares and the DC Class C Preference Shares are not, and will not be, Taxable RFI Shares;   however, those shares are, and will be, Taxable Preferred Shares and Short-Term Preferred Shares.

49. The DC Class C Common Shares and the DC Class D Common Shares are not Taxable Preferred Shares nor Short-Term Preferred Shares.

50. TC 1 will not have a GRIP, ERDTOH or NERDTOH balance at the end of the taxation year in which the TC 1 Dividend is deemed to have been paid.

51. TC 2 will not have a GRIP, ERDTOH or NERDTOH balance at the end of the taxation year in which the TC 2 Dividend is deemed to have been paid.

52. DC will not have a GRIP, ERDTOH or NERDTOH balance at the end of the taxation year in which the DC Dividends I and the DC Dividends II are deemed to have been paid.

VII. PURPOSES OF THE PROPOSED TRANSACTIONS

53. Mr. A, Mr. B, Mr. C and Mr. D have been XXXXXXXXXX as a family for many years. Over time, it has been made clear that the three brothers (Mr. B, Mr. C and Mr. D) cannot XXXXXXXXXX, as they have different views on how XXXXXXXXXX should be operated, different successors for their XXXXXXXXXX operations as well as different plans for their future in XXXXXXXXXX.

Mr. B no longer wants to XXXXXXXXXX with his siblings, but has a strong relationship with his father, Mr. A. Mr. A would like his XXXXXXXXXX transitioned to his grandchildren, in particular Mr. B’s children, who are interested in XXXXXXXXXX.

Mr. C and Mr. D each have a XXXXXXXXXX designated for their own operations to continue into the future.

The purpose of the split of DC’s assets among DC, TC 1 and TC 2 is to allow each of Mr. C and Mr. D to XXXXXXXXXX from Mr. A and Mr. B, and make their own decisions regarding XXXXXXXXXX.

VIII. RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, transactions, Additional Information and the purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our Rulings are set forth below:

A. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to:

(a) the transfer, by Mr. C, of the DC Shares 1 to TC 1 on the Mr. C Transfer;  

(b) the transfer, by Mr. D, of the DC Shares 2 to TC 2 on the Mr. D Transfer; and

(c) the transfer, by DC, of the Distribution Property 1 to TC 1, and of the Distribution Property 2 to TC 2, on the DC Transfer,

such that the Agreed Amount in respect of each transfer of Eligible Property will be deemed to be the transferor’s Proceeds of Disposition and the transferee’s cost of such property pursuant to paragraph 85(1)(a).

For greater certainty,

(d) paragraph 85(1)(e.2) will not apply to the transfers described in Rulings A(a), (b) and (c); and

(e) in applying subsection 85(1) to the DC Transfer, the reference in subparagraph 85(1)(e)(i) to “the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition” shall be interpreted to mean the portion of the undepreciated capital cost to DC of all property of that class immediately before the disposition that the aggregate FMV at that time of the properties of that class transferred to TC 1 and TC 2, as the case may be, is of the aggregate FMV at that time of all property of that class.

B. Subsection 84(3) will apply to:

(a) the TC 1 Redemption, to deem TC 1 to have paid, and DC to have received;

(b) the TC 2 Redemption, to deem TC 2 to have paid, and DC to have received;

(c) the DC Redemption 1, to deem DC to have paid, and TC 1 to have received; and

(d) the DC Redemption 2, to deem DC to have paid, and TC 2 to have received,

a dividend that is a Taxable Dividend, on the:

(e) TC 1 Class F Preference Shares owned by DC (the TC 1 Dividend);

(f) TC 2 Class F Preference Shares owned by DC (the TC 2 Dividend);

(g) the XXXXXXXXXX DC Class C Common Shares (the DC Dividend 1) and the XXXXXXXXXX DC Class C Preference Shares (the DC Dividend 2), owned by TC 1 (collectively referred to as the DC Dividends I); and

(h) the XXXXXXXXXX DC Class D Common Shares (the DC Dividend 3) and the XXXXXXXXXX DC Class C Preference Shares (the DC Dividend 4), owned by TC 2 (collectively referred to as the DC Dividends II),

in each case, equal to the amount, if any, by which the aggregate amount paid upon such purchase for cancellation or redemption, as the case may be, exceeds the aggregate PUC in respect of such shares immediately before such purchase for cancellation or redemption, and such dividend:

(i) will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the recipient corporation;

(j) will be deductible by each recipient corporation in computing that recipient corporation’s taxable income, pursuant to subsection 112(1), for the taxation year in which such dividend is deemed to have been received;

(k) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) and (2.4) apply to deny the subsection 112(1) deduction described in (j) above;

(l) will be excluded, pursuant to paragraph (j) of the definition of Proceeds of Disposition, in determining the Proceeds of Disposition, to the recipient corporation, of the shares which are redeemed, purchased or cancelled;

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

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

(o) will, by virtue of subsection 112(3), reduce any loss that would otherwise be determined for the particular recipient corporation, in respect of that recipient corporation’s disposition of the shares on which the dividend is deemed to have been received.

C. Provided that as part of a Series of Transactions or Events that includes the Taxable Dividends described in Ruling B, 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 property in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(e) an acquisition of property in the circumstances described in paragraph 55(3.1)(c) or (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 described in Ruling B. For greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

D. The set-off and the extinguishment of:

(a) the TC 1 Redemption Note and the DC Redemption Note 1; and

(b) the TC 2 Redemption Note and the DC Redemption Note 2,

as described in Paragraphs 34(a) and (b), respectively, in each case, will not, in and of itself, result in a Forgiven Amount, nor will any of DC, TC 1 and TC 2 otherwise realize any gain or incur any loss therefrom.

E. The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not be applied, as a result of any of the Proposed Transactions, in and by themselves.

F. The provisions of subsection 245(2) will not be applied, as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in Rulings A to E.

The Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R10 issued by the CRA on September 29, 2020, and are binding on the CRA, provided that the Proposed Transactions are completed on or before XXXXXXXXXX.

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

COMMENTS

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

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

(b) any other tax account of any corporation referred to herein;

(c) the characterization of any property described herein to the holder thereof; or

(d) any other tax consequences relating to the facts, transactions, 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, 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.

Yours truly,

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

UNCLASSIFIED

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