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                                                                                             2020-083837

XXXXXXXXXX

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling for the Estate of XXXXXXXXXX

We are writing in response to your request dated XXXXXXXXXX for an advance income tax ruling on behalf of the taxpayers described below (the “Taxpayers”). We also acknowledge the additional information provided in your various email correspondence, as well as information provided during our telephone conversations (XXXXXXXXXX).

PRELIMINARY MATTERS

We understand that to the best of your knowledge and that of the Taxpayers, none of the proposed transactions and/or issues involved in this ruling are the same as or substantially similar to transactions and/or issues that are:

i. in a previously filed return of the Taxpayers or a related person and;

A. being considered by the Canada Revenue Agency in connection with such return;

B. under objection by the Taxpayers or a related person;

C. the subject of a current or completed court process involving the Taxpayers or a related person; or

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

The tax account numbers, Tax Services Offices and the Tax Centres and addresses of the Taxpayers involved are as follows:

XXXXXXXXXX

The above-referenced Taxpayers have confirmed that the proposed transactions described herein will not affect their ability to pay any of their outstanding tax liabilities.

Unless otherwise stated:

i. all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended, (the “Act”), or the Income Tax Regulations, C.R.C., c.945 (the “Regulations”), as appropriate;

ii. all terms and conditions used in this Ruling request that are defined in the Act (or in the Regulations) have the meaning given in such definition;

iii. all references to monetary amounts are in Canadian dollars; and

iv. the singular should be read as plural and vice versa where the circumstances so require..

DEFINITIONS

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:

“ACB” means “adjusted cost base” as that expression is defined in section 54 and subsection 248(1);

“Aco” means XXXXXXXXXX, a corporation incorporated under Act1 on XXXXXXXXXX;

“Act1” means The Business Corporations Act XXXXXXXXXX;

“agreed amount” means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1);

“Amalco” means the corporation formed on the amalgamation of Aco, Bco and Newco as described in Paragraph 31;

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

“Bco” means XXXXXXXXXX a corporation incorporated on XXXXXXXXXX and continued under Act1 on XXXXXXXXXX;

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

“Business” means the management of the royalty interests and investment portfolio businesses that were carried on by each of Aco and Bco or Amalco as described in Paragraph 33;

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

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

“Estate” means the XXXXXXXXXX that was created as a consequence of the death of Sibling 1 and governed by the terms of Sibling 1’s Will. The Estate is and will be a resident of Canada at all relevant times and its first taxation year-end was XXXXXXXXXX;

“FMV” means fair market value or more specifically the highest price available in an open and unrestricted market, between informed prudent parties, acting at arm’s length and under no compulsion to act, expressed in terms of money or money’s worth;

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

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

“Newco” means a corporation to be incorporated under Act1 as described in Paragraph 21; “

Newco Note 1” means the note issued as consideration in Subparagraph 24(a);

“Newco Note 2” means the note issued as consideration in Subparagraph 25(a);

“Newco Note 3” means the note issued as consideration in Subparagraph 26(a);

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

"Proposed Transactions" means the proposed transactions that are described under the heading Proposed Transactions below;

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

“QSBC share” means “qualifying small business corporation share” as that term is defined in subsection 110.6(1);

“Sibling 1" means XXXXXXXXXX, a deceased individual who was resident in Canada at all relevant times before his death on XXXXXXXXXX and who was the brother of Sibling 2;

“Sibling 2” means XXXXXXXXXX, an individual who is and will be at all relevant times resident in Canada and who was the brother of Sibling 1;

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

“V-Day basis” has the meaning determined under paragraph 84.1(2)(a.1) for the purposes of element “B” in paragraph 84.1(1)(a); and

“Will” means the last will and testament of Sibling 1.

FACTS

1. Aco is a CCPC and a TCC with a taxation year end of XXXXXXXXXX. Aco was formed on XXXXXXXXXX to hold the royalty interests in several properties in the XXXXXXXXXX and investment assets for its two shareholders, Sibling 1 and Sibling 2. Currently, the issued and outstanding shares of Aco consist of:

• XXXXXXXXXX Class A common shares having full voting rights (XXXXXXXXXX vote per share) and PUC of $XXXXXXXXXX per share (“Aco Common Shares”); and

• XXXXXXXXXX Class C redeemable, retractable (at $XXXXXXXXXX per share) cumulative preferred shares with a dividend rate of XXXXXXXXXX% and an aggregate PUC of $XXXXXXXXXX (“Aco Preferred Shares”).

The issued and outstanding shares of Aco are currently held equally (i.e., XXXXXXXXXX% each) by the Estate and Sibling 2.

2. The Aco Common Shares and the Aco Preferred Shares do not qualify as QSBC shares.

3. As of XXXXXXXXXX, Aco had a NERDTOH balance of $XXXXXXXXXX and a GRIP balance of $XXXXXXXXXX.
4. Aco’s current business activity is to hold and manage its royalty interests and investments. Aco’s primary assets include cash, royalty interests, guaranteed investment certificates and amounts receivable from Bco. Aco’s primary liabilities are current liabilities from operations, taxes payable and amounts due to its shareholders.

Aco has a general history of paying annual dividends to its shareholders from a portion of its net income earned.

5. Reserved

6. Bco is a CCPC and TCC with a taxation year end of XXXXXXXXXX. Bco was formed to operate the various business interests of the XXXXXXXXXX including, but not limited to, holding the royalty and working interests in several properties in the XXXXXXXXXX and the holding of investments. Currently, the only issued and outstanding shares of Bco are XXXXXXXXXX Class A common shares having full voting rights (XXXXXXXXXX vote per share) and PUC of $XXXXXXXXXX per share (“Bco Common Shares”).

The issued and outstanding shares of Bco are currently held equally (i.e., XXXXXXXXXX% each) by the Estate and Sibling 2.

7. The Bco Common Shares do not qualify as QSBC shares.

8. As of XXXXXXXXXX, Bco had a NERDTOH balance of $XXXXXXXXXX and a GRIP balance of $XXXXXXXXXX.

9. Bco’s current activities include the holding and management of its royalty interests and investments. Bco’s primary assets include cash, XXXXXXXXXX and working interests, mutual funds and marketable securities. Bco’s primary liabilities are current liabilities from operations, taxes payable and amounts due to Aco and to its shareholders.

Bco has a general history of paying annual dividends to its shareholders from a portion of its net income earned.

10. Immediately prior to Sibling 1’s death, Sibling 1 owned the shares of Aco and Bco that are currently held by the Estate. Sibling 1 held such shares as capital property and they had the following tax attributes at the time of Sibling 1’s death:

Aco

Bco

11. Pursuant to paragraph 70(5)(a), Sibling 1 was deemed to have disposed of each class of his Aco and Bco shares immediately before his death and to have received proceeds of disposition equal to the FMV of such class of shares at that time as set out in Paragraph 10. Pursuant to paragraph 70(5)(b), the Estate was deemed to have acquired each class of Sibling 1’s Aco and Bco shares for an amount equal to Sibling 1’s proceeds of disposition as set out in Paragraph 10, at the time of Sibling 1’s death.

12. The following table details the proceeds of disposition and capital gains reported on Sibling 1’s terminal T1 income tax return in respect of each class of Aco and Bco shares:

13. There is no V-Day basis included in the respective ACBs of the Aco Common Shares or Aco Preferred Shares, or any shares for which such shares may have been substituted, within the meaning of subsection 248(5).

14. For greater certainty, no capital gains exemption was claimed on Sibling 1’s terminal T1 return with respect to the shares of Aco. Sibling 1 nor any person not dealing at arm’s length with Sibling 1, or with the Estate, have previously claimed a deduction under section 110.6 in respect of such shares or any shares which they were substituted for, within the meaning of subsection 248(5).

15. There is V-Day basis included in the ACB of the Bco Common Shares of $XXXXXXXXXX held by Sibling 1.

16. The ACB attributable to the shares of Bco held by the Estate, as adjusted by paragraphs 84.1(2)(a) and (a.1), is $XXXXXXXXXX (“hard ACB”).

17. The Estate currently holds the shares of Aco and Bco described in Paragraph 10 as capital property.

18. Sibling 2 owns all the remaining issued and outstanding shares of Aco and Bco (XXXXXXXXXX%) as capital property.

19. Sibling 2 is the sole executor of the Estate as well as its sole income and capital beneficiary.
20. Before Sibling 1’s death, Sibling 1 and Sibling 2 controlled Aco and Bco as a related group pursuant to subparagraph 251(2)(b)(ii).

PROPOSED TRANSACTIONS

The following transactions will be implemented in the order presented unless otherwise noted.

21. The Estate will incorporate a new corporation (“Newco”). Newco will, at all relevant times, be a CCPC and a TCC. The authorized share capital will be comprised of:

a. an unlimited number of voting (XXXXXXXXXX vote per share), fully participating Class A common shares;

b. an unlimited number of voting (XXXXXXXXXX vote per share), fully participating Class B common shares; and

c. an unlimited number of Class C, D, E and F preferred, non-voting, redeemable, retractable preferred shares, with a redemption value equal to the fair market value of the consideration received.

22. On a contemporaneous basis, the Estate will subscribe for XXXXXXXXXX Class A common shares in Newco for $XXXXXXXXXX and Sibling 2 will subscribe for XXXXXXXXXX Class B common shares in Newco for $XXXXXXXXXX.

23. Reserved.

24. The Estate will transfer its XXXXXXXXXX Bco Common Shares to Newco, and, in exchange, the Estate will receive the following consideration from Newco:

a. a non-interest bearing, demand, promissory note (“Newco Note 1”), having a principal amount and FMV equal to the aggregate FMV of the XXXXXXXXXX Bco Common Shares on XXXXXXXXXX; and

b. a number of Class C preferred shares of Newco having an aggregate FMV and redemption value equal to the amount, if any, that the aggregate FMV of the XXXXXXXXXX Bco Common Shares at the date of the transfer exceeds the aggregate FMV of such shares on XXXXXXXXXX.

The Estate and Newco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the Bco Common Shares held by the Estate to Newco. The agreed amount will be equal to the ACB of the Bco Common Shares to the Estate immediately before this transfer, subject to paragraph 85(1)(c). For greater certainty, the agreed amount will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), and will not be less than the amount described in paragraph 85(1)(b).

Newco will add a nominal amount to the legal stated capital account of the Class C preferred shares which, for greater certainty, will not exceed the maximum amount that could be added to the PUC of these shares without resulting in an adjustment in computing the PUC of such shares having regard to paragraph 84.1(1)(a).

For greater certainty, the sum of the principal amount of the Newco Note 1 and the PUC of the Class C preferred shares of Newco issued as consideration for the Bco Common Shares will not exceed the aggregate FMV of the XXXXXXXXXX Bco Common Shares owned by Sibling 1 immediately before Sibling 1’s death.

25. The Estate will transfer its XXXXXXXXXX Aco Common Shares and XXXXXXXXXX Aco Preferred Shares to Newco, and, in exchange, the Estate will receive the following consideration from Newco:

a. a non-interest bearing, demand promissory note (“Newco Note 2”) having a principal amount and FMV equal to the sum of the aggregate FMV of the XXXXXXXXXX Aco Common Shares and the aggregate FMV of the XXXXXXXXXX Aco Preferred Shares on XXXXXXXXXX; and

b. a number of Class D preferred shares of Newco having an aggregate FMV and redemption value equal to the amount, if any, that the aggregate FMV of the Aco Common Shares at the date of the transfer exceeds the aggregate FMV of such shares on XXXXXXXXXX.

The Estate and Newco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of the Aco Common Shares and Aco Preferred Shares held by the Estate to Newco. The respective agreed amounts will be equal to the ACB of such class of Aco shares to the Estate immediately before such transfers, subject to paragraph 85(1)(c). For greater certainty, the respective agreed amounts will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), and will not be less than the amount described in paragraph 85(1)(b).

Newco will add a nominal amount to the legal stated capital account of the Class D preferred shares issued as consideration which, for greater certainty, will not exceed the maximum amount that could be added to the PUC of these shares without resulting in an adjustment in computing the PUC of such shares having regard to paragraph 84.1(1)(a).

For greater certainty, the sum of the principal amount of the Newco Note 2 and the PUC of the Class D preferred shares issued as consideration for the Aco Common Shares will not exceed the aggregate FMV of the XXXXXXXXXX Aco Common Shares and the XXXXXXXXXX Aco Preferred Shares owned by Sibling 1 immediately before Sibling 1’s death.

26. Sibling 2 will transfer his XXXXXXXXXX Bco Common Shares to Newco, and, in exchange, Sibling 2 will receive the following consideration from Newco:

a. a non-interest bearing, demand promissory note (“Newco Note 3”) having a principal amount and FMV equal to the aggregate ACB of Sibling 2’s Bco Common Shares as determined pursuant to the rules in subsection 84.1(2); and

b. a number of Class E preferred shares of Newco having an aggregate FMV and redemption value equal to the aggregate FMV of the Bco Common Shares at the date of the transfer less the FMV of Newco Note 3.

Sibling 2 and Newco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the Bco Common Shares held by the Sibling 2 to Newco. The agreed amount will be equal to the ACB of the Bco Shares to the Sibling 2 immediately before this transfer, subject to paragraph 85(1)(c). For greater certainty, the agreed amount will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), and will not be less than the amount described in paragraph 85(1)(b).

Newco will add a nominal amount to the legal stated capital account of the Class E preferred shares which, for greater certainty, will not exceed the maximum amount that could be added to the PUC of these shares without resulting in an adjustment in computing the PUC of such shares having regard to paragraph 84.1(1)(a).

27. Sibling 2 will transfer his XXXXXXXXXX Aco Common Shares and XXXXXXXXXX Aco Preferred Shares to Newco, and, in exchange, Sibling 2 will receive the following consideration from Newco:

a. A number of Class F preferred shares of Newco having an aggregate FMV and redemption value equal to the sum of the aggregate FMV of the XXXXXXXXXX Aco Common Shares and the aggregate FMV of the XXXXXXXXXX Aco Preferred Shares at the date of the transfer.

Sibling 2 and Newco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the to the transfers of the Aco Common Shares and Aco Preferred Shares by Sibling 2 to Newco. The respective agreed amounts will be equal to the ACB of such class of Aco shares to Sibling 2 immediately before this transfer, subject to paragraph 85(1)(c). For greater certainty, the agreed amount will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), and will not be less than the amount described in paragraph 85(1)(b).

Newco will add a nominal amount to the legal stated capital account of the Class F preferred shares which, for greater certainty, will not exceed the maximum amount that could be added to the PUC of these shares without resulting in an adjustment in computing the PUC of such shares having regard to paragraph 84.1(1)(a).

28. Reserved

29. Aco and Bco will continue to carry on each of the businesses (“Business”) for at least XXXXXXXXXX following the transfers of the Aco and Bco shares to Newco, as described in Paragraphs 24 through 27. For greater certainty, the Business includes both the management of the royalty and working interests and the investment portfolio as detailed in Paragraphs 4, 9 and 33 with respect to Aco and Bco.

30. During the XXXXXXXXXX period following the transfer of the Aco and Bco shares to Newco, and consistent with both Aco’s and Bco’s history of paying annual dividends to its shareholders, both Aco and Bco will pay dividends to Newco up to an amount approximately equal to its after-tax net income. Newco will pay dividends to the Estate in an amount approximately equal to the dividends it will receive from each such corporation. The Estate will allocate the dividends it receives from Newco to Sibling 2 as the sole beneficiary, in accordance with the Will.

31. After a period of at least XXXXXXXXXX after the transfer of the Aco and Bco Shares to Newco, Newco, Aco and Bco will perform a vertical amalgamation pursuant to Act1 to form Amalco in such a manner that;

a. all of the property (except any amounts receivable from any predecessor corporation) of the predecessor corporations immediately before the amalgamation became property of Amalco by virtue of the amalgamation;

b. all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation, became liabilities of Amalco by virtue of the amalgamation;

c. the authorized share capital of Amalco will be the same as Newco's authorized share capital. Moreover, the PUC and ACB of each class of shares that the Estate and Sibling 2 will hold in Amalco after the amalgamation will be equal to the PUC and ACB of the corresponding classes of issued and outstanding shares that the Estate held in Newco immediately prior to the amalgamation.

For greater certainty, the amalgamation of Aco and Bco to form Amalco will be governed by subsection 87(1).

32. After the amalgamation of Aco, Bco and Newco, Amalco will begin to gradually repay Newco Notes 1, 2, and 3 over a period of at least XXXXXXXXXX. For greater certainty, the amount of the repayments in any given quarter of that year will not exceed XXXXXXXXXX% of the principal amount of the Newco Notes when they were issued. Amalco may sell some of its investments to repay the notes but it will continue to carry on the Business carried on by Aco and Bco.

ADDITIONAL INFORMATION

33. Aco and Bco’s businesses, as described in Paragraphs 4 and 9 respectively, were operated by Sibling 1, Sibling 2 and their investment advisors prior to Sibling 1’s death. Sibling 1 held the XXXXXXXXXX. Sibling 1 was responsible for the XXXXXXXXXX. Sibling 2 currently holds (and has held) the XXXXXXXXXX. Sibling 2 is responsible for the overall XXXXXXXXXX, including but not limited to dealing with XXXXXXXXXX and dealing with the XXXXXXXXXX and subsequent to Sibling 1’s death, Sibling 2 has, along with an expanded group of advisors, increased his XXXXXXXXXX.

There will not be any material change to the business operations carried on by Aco, Bco, as the case may be, before the amalgamation of Newco, Aco and Bco described in Paragraph 31 or by Amalco following that amalgamation.

34. The share transfers described in Paragraphs 24, 25, 26, and 27, will take place on a contemporaneous basis.

35. For greater certainty, the Estate, Newco and Sibling 2 will not be persons dealing with each other at Arm’s Length.

PURPOSE OF THE PROPOSED TRANSACTIONS

36. The purpose of the Proposed Transactions is to return to the Estate, an amount up to the FMV immediately before Sibling 1’s death of the Class A common and Class C Preferred shares of Aco and the Class A common shares of Bco, while minimizing the inherent double tax exposure that can result from the application of subsections 70(5), 84(2) and 84(3).

RULINGS GIVEN

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

A. Section 84.1 will not apply to deem the Estate to have received a dividend from Newco, on the disposition to Newco of the XXXXXXXXXX Aco Common Shares and XXXXXXXXXX Aco Preferred Shares, described in Paragraph 25, provided that the aggregate FMV of the Newco Note 2 and the PUC of the Class D preferred shares of Newco received as consideration for such shares, immediately after the disposition, is equal to or less than the aggregate ACB of such Aco shares to the Estate, immediately before the disposition, as modified by paragraph 84.1(2)(a.1).

B. Section 84.1 will apply to deem the Estate to have received a dividend from Newco, on the disposition to Newco of the XXXXXXXXXX Bco Common Shares, described in Paragraph 24, to the extent that the aggregate FMV of the Newco Note 1 and the PUC of the Class C preferred shares of Newco received as consideration for such shares, immediately after the disposition, exceeds the aggregate ACB of such Bco shares to the Estate, immediately before the disposition, as modified by paragraph 84.1(2)(a.1).

C. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem Aco to have paid, and the Estate to have received, a dividend on the XXXXXXXXXX Aco Common Shares and XXXXXXXXXX Aco Preferred Shares held by the Estate.

D. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem Bco to have paid, and the Estate to have received, a dividend on the XXXXXXXXXX Bco Common Shares held by the Estate.

E. The provisions of subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences stated in the rulings given above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R9 dated April 23, 2019 and are binding on the CRA provided that the Proposed Transactions are completed within the time frame described in this letter, unless otherwise specified.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

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

a. the FMV or ACB of any property referred to herein, or the PUC in respect of any share referred to herein;

b. the balance of the NERDTOH, ERDTOH, GRIP, CDA or any other tax account for any corporation described herein;

c. the Executor’s ability to complete the Proposed Transactions under the terms of the Will;

d. whether any person described herein deals, or does not deal, with any other person at arm’s length; or

e. any other tax consequence relating to the facts, additional information, 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, including, but not limited to the tax consequences associated with the distribution of any assets of the Estate, other than those specifically described in the rulings given above.