2020-0843131R3 XXXXXXXXXX Butterfly

Principal Issues: Whether the proposed transactions qualify for the butterfly exemption found in paragraph 55(3)(b).

Position: Yes.

Reasons: The proposed transactions meet the requirements found in paragraph 55(3)(b) and are not subject to any of the butterfly exemption denial rules found in subsection 55(3.1).

Author: XXXXXXXXXX
Section: 55(3)(b), 55(3.1)

XXXXXXXXXX 2020-084313

RE: Advance Income Tax Ruling

XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, updated on XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided in your letters and in various email correspondence as well as information provided in our telephone conversations (XXXXXXXXXX).

PRELIMINARY MATTERS

To the best of your knowledge, and that of the responsible officers of the above-noted taxpayers, none of the proposed transactions or issues involved in this letter are the same as or substantially similar to transactions or issues that are:

(a) in a previously filed tax return of any of the above-noted taxpayer or a related person and:

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

ii. under objection by the above-noted taxpayer or a related person; or

iii. the subject of a current or completed court process involving any of the above-noted taxpayers or a related person; or

(b) the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

Unless otherwise stated, all references herein to a part, section, subsection, paragraph, subparagraph, clause or subclause 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, and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

Unless otherwise specified, the following terms have the meanings specified below:

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

“Act1” means the XXXXXXXXXX;

“XXXXXXXXXX Loan” means the arm’s length loan made by DC XXXXXXXXXX. The loan bears interest at a rate of XXXXXXXXXX% per annum and XXXXXXXXXX;

“capital property” has the meaning assigned by section 54 and subsection 248(1);

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

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

“CorpShareholder1” means XXXXXXXXXX, a corporation incorporated under Act1, controlled by Shareholder1;

“CorpShareholder2” means XXXXXXXXXX, a corporation incorporated under Act1, controlled by Shareholder2;

“CRA” means the Canada Revenue Agency;

XXXXXXXXXX;

“DC” means XXXXXXXXXX;

“DC CDA Purchase Note 1” means the non-interest bearing demand promissory note issued by DC to TC1 as consideration for the purchase for cancellation by DC of a portion of the Class D common shares held by TC1, having a principal amount and FMV equal to the aggregate FMV of the Class D common shares so purchased;

“DC CDA Purchase Note 2” means the non-interest bearing demand promissory note issued by DC to TC2 as consideration for the purchase for cancellation by DC of a portion of the Class D common shares held by TC2, having a principal amount and FMV equal to the aggregate FMV of the Class D common shares so purchased;

“DC CDA Purchase Note 3” means the non-interest bearing demand promissory note issued by DC to TC3 as consideration for the purchase for cancellation by DC of a portion of the Class D common shares held by TC3, having a principal amount and FMV equal to the aggregate FMV of the Class D common shares so purchased;

“DC Redemption Note 1” means the non-interest bearing demand promissory note issued by DC to TC1 as consideration for the purchase for cancellation and/or redemption by DC of the various classes of shares of DC held by TC1, having a principal amount and FMV equal to the aggregate redemption amount of the DC shares so purchased/redeemed;

“DC Redemption Note 2” means the non-interest bearing demand promissory note issued by DC to TC2 as consideration for the purchase for cancellation and/or redemption by DC of the various classes of shares of DC held by TC2, having a principal amount and FMV equal to the aggregate redemption amount of the DC shares so purchased/redeemed;

“DC Redemption Note 3” means the non-interest bearing demand promissory note issued by DC to TC3 as consideration for the purchase for cancellation and/or redemption by DC of the various classes of shares of DC held by TC3, having a principal amount and FMV equal to the aggregate redemption amount of the DC shares so purchased/redeemed;

XXXXXXXXXX;

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

“dividend shares” means special shares which are: (i) non-voting, (ii) entitled to non-cumulative annual dividends at a rate to be determined for each year by the directors of the corporation, and (iii) are redeemable at retractable for ten cents per share plus the amount of any declared but outstanding dividends;

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

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

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

“freeze shares” means special shares which are: (i) non-voting; (ii) entitled to noncumulative dividends at the discretion of the directors at a rate which is not to exceed the corporate prime lending rate at the time of issuance plus XXXXXXXXXX%; (iii) rank ahead of all other classes of shares upon the dissolution of the corporation; and (iv) are redeemable and retractable for an amount equal to the aggregate FMV of the consideration received by the corporation on the issuance thereon plus any declared but outstanding dividends;

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

“GRIP” means “general rate income pool” and has the meaning assigned to that term in subsection 89(1);

“NERDTOH” means “non-eligible refundable dividend tax on hand” and has the meaning assigned to that term by subsection 129(4);

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

“Proposed Transactions” means the proposed transactions, which are described in Paragraphs 36 to 58;

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

“QFP” means “qualified farm or fishing property” and has the meaning assigned to that term in subsection 110.6(1);

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

“Shareholder1” means XXXXXXXXXX, an individual who is a resident of Canada for purposes of the Act and the sibling of Shareholder2;

“Shareholder2” means XXXXXXXXXX, an individual who is a resident of Canada for purposes of the Act and the sibling of Shareholder1;

“Shareholder3” means XXXXXXXXXX, an individual who is a resident of Canada for purposes of the Act; the son of Shareholder1 and sibling of Shareholder4 and Shareholder5;

“Shareholder4” means XXXXXXXXXX, an individual who is a resident of Canada for purposes of the Act; the son of Shareholder1 and sibling of Shareholder3 and Shareholder5;

“Shareholder5” means XXXXXXXXXX, an individual who is a resident of Canada for purposes of the Act; the daughter of Shareholder1 and sibling of Shareholder3 and Shareholder4;

“shares of a specified class” has the meaning assigned by subsection 256(1.1);

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

“super voting shares” means the special shares authorized by TC1, TC2 and TC3, as the case may be, which are: (i) entitled to XXXXXXXXXX votes per share, (ii) not entitled to dividends, (iii) rank ahead of common shares upon the dissolution of the corporation and (iv) are redeemable and retractable for XXXXXXXXXX per share;

“TC1” means XXXXXXXXXX, a corporation incorporated XXXXXXXXXX under Act1, the sole shareholder of which is Shareholder2;

“TC1 Butterfly Share” means a Class C share of the capital stock of TC1 which will be non-voting, will entitle the holder to discretionary non-cumulative dividends, will be redeemable and retractable at any time (subject to applicable law) for an amount equal to the aggregate FMV of the consideration received by TC1 on the issuance thereof (excluding the amount of any liabilities assumed) plus any declared but unpaid dividends. No dividends or other distribution will be paid on shares ranking junior to the TC1 Butterfly Shares if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets of TC1 to an amount less than the aggregate redemption amount of the issued and outstanding TC1 Butterfly Shares;

“TC1 Redemption Note” means a non-interest bearing demand promissory note issued by TC1 to DC as consideration for the redemption by TC1 of the TC1 Butterfly Shares held by DC having a principal amount and FMV equal to the aggregate redemption amount of the TC1 Butterfly Shares so redeemed;

“TC2” means XXXXXXXXXX, a corporation incorporated XXXXXXXXXX under Act1, the sole shareholder of which is Shareholder3;

“TC2 Butterfly Share” means a Class C share of the capital stock of TC2 which will be non-voting, will entitle the holder to discretionary non-cumulative dividends, will be redeemable and retractable at any time (subject to applicable law) for an amount equal to the aggregate FMV of the consideration received by TC2 on the issuance thereof (excluding the amount of any liabilities assumed) plus any declared but unpaid dividends. No dividends or other distribution will be paid on shares ranking junior to the TC2 Butterfly Shares if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets of TC2 to an amount less than the aggregate redemption amount of the issued and outstanding TC2 Butterfly Shares;

“TC2 Redemption Note” means a non-interest bearing demand promissory note issued by TC2 to DC as consideration for the redemption by TC2 of the TC2 Butterfly Shares held by DC having a principal amount and FMV equal to the aggregate redemption amount of the TC2 Butterfly Shares so redeemed;

“TC3” means XXXXXXXXXX, a corporation incorporated XXXXXXXXXX under Act1, the sole shareholder of which is Shareholder4;

“TC3 Butterfly Share” means a Class C share of the capital stock of TC3 which will be non-voting, will entitle the holder to discretionary non-cumulative dividends, will be redeemable and retractable at any time (subject to applicable law) for an amount equal to the aggregate FMV of the consideration received by TC3 on the issuance thereof (excluding the amount of any liabilities assumed) plus any declared but unpaid dividends. No dividends or other distribution will be paid on shares ranking junior to the TC3 Butterfly Shares if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets of TC3 to an amount less than the aggregate redemption amount of the issued and outstanding TC3 Butterfly Shares;

“TC3 Redemption Note” means a non-interest bearing demand promissory note issued by TC3 to DC as consideration for the redemption by TC3 of the TC3 Butterfly Shares held by DC having a principal amount and FMV equal to the aggregate redemption amount of the TC3 Butterfly Shares so redeemed;

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

“transferee corporation” or “TC” has the meaning assigned to the term within the definition of “distribution” in subsection 55(1) and for the purposes of paragraph 55(3.1)(b), in paragraph 55(3.2)(h).

FACTS

Facts Relating to DC

1. DC is a corporation that was incorporated under Act1 on XXXXXXXXXX. DC is, and will be, at all relevant times, a TCC and a CCPC. There were Articles of Amendment filed XXXXXXXXXX and Articles of Amalgamation filed XXXXXXXXXX. There were further Articles of Amendment filed XXXXXXXXXX to authorize shares necessary to complete the Proposed Transactions described below.

2. DC’s head office is located at: XXXXXXXXXX. DC files its tax returns with XXXXXXXXXX Tax Centre and is served by XXXXXXXXXX Tax Services Office. DC’s taxation year and fiscal period end on XXXXXXXXXX.

3. DC’s authorized share capital consists of the following:

a. Unlimited Class A special preferred shares, non-voting;

b. Unlimited Class B special preferred shares, non-voting;

c. Unlimited Class C special preferred shares, voting

d. Unlimited Class D non-voting common shares; and

e. Unlimited Class E voting common shares.

4. The following chart illustrates the current issued and outstanding shares of DC:

				Class C	XXXXX	XXXXX
Shareholder3	Class D	XXXXX	XXXXX
				Class A	XXXXX	XXXXX
Shareholder4	Class D	XXXXX	XXXXX
				Class A	XXXXX	XXXXX
Shareholder5				Class A	XXXXX	XXXXX
CorpShareholder1 (owned by Shareholder1)				Class A	XXXXX	XXXXX
				Class B	XXXXX	XXXXX
CorpShareholder2 (owned by Shareholder1)				Class B	XXXXX	XXXXX

5. The issued and outstanding preferred shares of DC have the following attributes:

Share	Redemption Value	ACB	PUC
Class A preferred shares	$XXXXX/share; total - $XXXXX	XXXXX	XXXXX
Class B preferred shares	$XXXXX/share; total - $XXXXX	XXXXX	XXXXX
Class C preferred shares	$XXXXX/share; total - $XXXXX	XXXXX	XXXXX

The total redemption value of all the issued and outstanding preferred shares of DC is $XXXXXXXXXX.

6. The shareholders of DC hold their shares as capital property.

7. DC carries on a farming business XXXXXXXXXX which consists of XXXXXXXXXX. The shares of DC meet the definition of QFP. Each of Shareholder1, Shareholder2, Shareholder3 and Shareholder4 are actively engaged in the farming operations of DC.

8. As at XXXXXXXXXX, the balance in DC’s CDA was $XXXXXXXXXX, the balance in DC’s ERDTOH account was $XXXXXXXXXX, the balance in DC’s NERDTOH account was XXXXXXXXXX and DC’s GRIP balance was $XXXXXXXXXX.

Facts Relating to CorpShareholder1

9. CorpShareholder1 is a corporation that was incorporated under Act1 on XXXXXXXXXX. CorpShareholder1 is, and will be, at all relevant times, a TCC and a CCPC.

10. CorpShareholder1’s head office is located at: XXXXXXXXXX. CorpShareholder1 files its tax returns with XXXXXXXXXX Tax Centre and is served by XXXXXXXXXX Tax Services Office. CorpShareholder1’s taxation year and fiscal period end on XXXXXXXXXX.

11. CorpShareholder1’s authorized share capital consists of the following:

a. Unlimited number of common shares

b. Unlimited number of Class A Special Shares (Non-Voting)

12. Shareholder1 owns XXXXXXXXXX% of the common and preferred shares issued and outstanding. Shareholder1 holds the CorpShareholder1 shares as capital property.

13. CorpShareholder1 is a holding corporation, whose main assets consist of shares of DC.

14. As at XXXXXXXXXX, the balance in CorpShareholder1’s CDA was $XXXXXXXXXX, the balance in CorpShareholder1’s ERDTOH and NERDTOH accounts was nil and CorpShareholder1’s GRIP balance was $XXXXXXXXXX.

Facts Relating to CorpShareholder2

15. CorpShareholder2 is a corporation that was incorporated under Act1 on XXXXXXXXXX. CorpShareholder2 is, and will be, at all relevant times, a TCC and a CCPC.

16. CorpShareholder2’s head office is located at: XXXXXXXXXX. CorpShareholder2 files its tax returns with XXXXXXXXXX Tax Centre and is served by XXXXXXXXXX Tax Services Office. CorpShareholder2’s taxation year and fiscal period end on XXXXXXXXXX.

17. CorpShareholder2’s authorized share capital consists of the following:

a. Unlimited number of common shares

b. Unlimited number of Class A Special Shares (Non-Voting)

c. Unlimited number of Class B Special Shares (Voting)

18. Shareholder2 owns XXXXXXXXXX% of the common and preferred shares issued and outstanding. Shareholder2 holds the CorpShareholder2 shares as capital property.

19. CorpShareholder2 is a holding corporation, whose main assets consist of shares of DC.

20. As at XXXXXXXXXX, the balance in CorpShareholder2’s CDA was $XXXXXXXXXX, the balance in CorpShareholder2’s ERDTOH account was $XXXXXXXXXX, the balance in CorpShareholder2’s NERDTOH account was XXXXXXXXXX, and CorpShareholder2’s GRIP balance was $XXXXXXXXXX.

Facts Relating to TC1

21. TC1 is a corporation that was incorporated under Act1 on XXXXXXXXXX. TC1 is, and will be, at all relevant times, a TCC and a CCPC.

22. TC1’s head office is located at: XXXXXXXXXX. TC1 files its tax returns with XXXXXXXXXX Tax Centre and is served by XXXXXXXXXX Tax Services Office. TC1’s taxation year and fiscal period ends on XXXXXXXXXX.

23. TC1’s authorized share capital consists of the following:

a. Unlimited number of voting Class A and voting Class B common shares

b. Unlimited number of Class A and Class B freeze shares (non-voting)

c. Unlimited number of Class C and Class D shares of a specified class (non-voting)

d. Unlimited number of Class E dividend shares (non-voting)

e. Unlimited number of Class F super voting shares.

24. Upon incorporation, TC1 issued XXXXXXXXXX Class A common shares to Shareholder2 at a price of $XXXXXXXXXX per share. As of the date of this letter, these are TC1’s only issued and outstanding shares. Shareholder2 holds the TC1 shares as capital property.

25. As of the date of this letter, TC1 does not have a balance in its CDA, GRIP, NERDTOH or ERDTOH accounts.

Facts Relating to TC2

26. TC2 is a corporation that was incorporated under Act1 on XXXXXXXXXX. TC2 is, and will be, at all relevant times, a TCC and a CCPC.

27. TC2’s head office is located at: XXXXXXXXXX. TC2 files its tax returns with XXXXXXXXXX Tax Centre and is served by the Kitchener Tax Services Office. TC2’s taxation year and fiscal period end on XXXXXXXXXX.

28. TC2’s authorized share capital consists of the following:

a. Unlimited number of Class A and Class B voting common shares

b. Unlimited number of Class A and Class B freeze shares

c. Unlimited number of Class C and Class D shares of a specified class

d. Unlimited number of Class E dividend shares

e. Unlimited number of Class F super voting shares

29. Upon incorporation, TC2 issued XXXXXXXXXX Class A common shares to Shareholder3 at a price of $XXXXXXXXXX per share. As of the date of this letter, these are TC2’s only issued and outstanding shares. Shareholder3 holds the TC2 shares as capital property.

30. As of the date of this letter, TC2 does not have any balance in its CDA, GRIP, NERDTOH or ERDTOH accounts.

Facts Relating to TC3

31. TC3 is a corporation that was incorporated under Act1 on XXXXXXXXXX. TC3 is, and will be, at all relevant times, a TCC and CCPC.

32. TC3’s head office is located at: XXXXXXXXXX. TC3 files its tax returns with XXXXXXXXXX Tax Centre and is served by XXXXXXXXXX Tax Services Office. TC3 taxation year and fiscal period end on XXXXXXXXXX.

33. TC3’s authorized share capital consists of the following:

a. Unlimited number of Class A and Class B voting common shares

b. Unlimited number of Class A and Class B freeze shares

c. Unlimited number of Class C and Class D shares of a specified class

d. Unlimited number of Class E dividend shares

e. Unlimited number of Class F super voting shares.

34. Upon incorporation, TC3 issued XXXXXXXXXX Class A common shares to Shareholder4 at a price of $XXXXXXXXXX per share. As of the date of this letter, these are TC3’s only issued and outstanding shares. Shareholder4 holds the TC3 shares as capital property.

35. As of the date of this letter, TC3 does not have a balance in its GRIP, CDA, NERDTOH or ERDTOH accounts.

PROPOSED TRANSACTIONS

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

36. Prior to the distribution, the XXXXXXXXXX will be sold XXXXXXXXXX to an arm’s length party for cash. In connection with the sale of XXXXXXXXXX, DC will not be entering into any transactions that would require them to lease or rent any of their property. It is estimated that the cash proceeds from the sale of the XXXXXXXXXX will be approximately $XXXXXXXXXX and will be deposited into the bank account of DC.

37. Prior to the distribution, the XXXXXXXXXX will be sold XXXXXXXXXX to an arm’s length party for cash. In connection with the sale of the XXXXXXXXXX, DC will not be entering into a transaction that would require them to lease or rent their property. The cash proceeds from the sale of the XXXXXXXXXX will be deposited into the bank account of DC.

37.1 Pursuant to its terms and conditions, the XXXXXXXXXX Loan must be repaid in full XXXXXXXXXX. A repayment, which will consist of cash in the amount equal to the principal amount plus all accrued and outstanding interest will be delivered to DC after the XXXXXXXXXX and XXXXXXXXXX has been sold. DC will accept such payment in full satisfaction of the XXXXXXXXXX Loan.

38. Shareholder2 will transfer all of his XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares, XXXXXXXXXX Class C preferred shares and XXXXXXXXXX Class D common shares of DC to TC1. Shareholder2 will jointly elect with TC1 in prescribed form and within the time limit referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). Consideration for the transfer of the Class A preferred shares, Class B preferred shares, Class C preferred shares and Class D common shares of DC will consist of a number of Class A freeze shares of TC1 having an aggregate FMV and redemption amount equal to the aggregate FMV of the shares of DC so transferred.

39. CorpShareholder2 will (contemporaneously with the transfer described in Paragraph 38) transfer all of the XXXXXXXXXX Class B preferred shares of DC owned by it to TC1. CorpShareholder2 will jointly elect with TC1 in prescribed form and within the time limit referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). Consideration for the transfer of the Class B preferred shares of DC will consist of a number of Class B freeze shares of TC1 having an aggregate FMV and redemption amount equal to the aggregate FMV of the shares of DC so transferred.

40. The amount added to the respective stated capital accounts maintained for the Class A freeze shares and Class B freeze shares of TC1 issued to Shareholder2 and CorpShareholder2, as the case may be, will not exceed the amount determined under section 84.1 and subsection 85(2.1), as the case may be.

41. Shareholder3 will (contemporaneously with the transfer described in Paragraph 38) transfer all of his XXXXXXXXXX Class A preferred shares and 12 Class D common shares of DC to TC2. Shareholder3 will jointly elect with TC2 in prescribed form and within the time limit referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). Consideration for the transfer of the Class A preferred shares and Class D common shares of DC will consist of a number of Class A freeze shares of TC2 having an aggregate FMV and redemption amount equal to the aggregate FMV of the shares of DC so transferred.

42. TC2 will add to the stated capital account maintained for its Class A freeze shares issued as a result of the Proposed Transactions an amount not exceeding the aggregate PUC of the shares of DC currently by Shareholder3. For greater certainty, the increase to the PUC of the freeze shares of TC2 will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 84.1(1).

43. Shareholder4 will (contemporaneously with the transfer described in Paragraph 38) transfer all of his XXXXXXXXXX Class A preferred shares and 12 Class D common shares of DC to TC3. Shareholder4 will jointly elect with TC3 in prescribed form and within the time limit referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). Consideration for the transfer of the Class A preferred shares and Class D common shares of DC will consist of a number of Class A freeze shares of TC3 having an aggregate FMV and redemption amount equal to the aggregate FMV of the shares of DC so transferred.

44. TC3 will add to the stated capital account maintained for its Class A freeze shares issued as a result of the Proposed Transactions an amount not exceeding the aggregate PUC of the shares of DC currently by Shareholder4. For greater certainty, the increase to the PUC of the freeze shares of TC3 will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 84.1(1).

45. Immediately before the transfer of property described in Paragraph 47 below, the property owned by DC will be classified into the following three types of property for the purposes of distribution, as follows:

a. cash or near-cash property, comprised of all the current assets of DC, including cash (and cash proceeds received from the sale of XXXXXXXXXX), accounts receivable, inventory and prepaid expenses, sales and/or income taxes receivable, income taxes recoverable, cash surrender value of life insurance policies, XXXXXXXXXX, and cash contained in the investment futures account;

b. investment property, comprising of all 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, the shares of XXXXXXXXXX, and the common shares of XXXXXXXXXX; and

c. 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 a business (other than a specified business), including for greater certainty investment futures (net of cash component), amounts due from shareholder loans to each of CorpShareholder1 and CorpShareholder2, property/plant/equipment, fair market value of the corporate-owned life insurance policies in excess of cash surrender value.

For greater certainty:

d. tax accounts or other tax related amounts of DC, such as the balance of non-capital losses, net capital losses, CDA, GRIP, NERDTOH and ERDTOH will not be considered property;

e. advances that are payable on demand or that are due within the next 12 months will be considered cash or near-cash property;

f. no amount will be considered a liability unless it represents a true legal liability capable of quantification;

g. the amount of any deferred tax will not be considered to be a property or a liability, as the case may be; and

h. any amount in respect of refunds of taxes, and interest thereon, actually receivable will be treated as cash or near-cash property and any potential refunds of taxes and interests thereon will, due to their contingent nature, be ignored.

46. In determining the net FMV of each type of property of DC immediately before the transfers described in Paragraph 47, 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 will be allocated to cash or near-cash property in the proportion that the FMV of such property is of the FMV of all cash or near cash property. The total amount of DC’s current liabilities to be allocated to DC’s cash or near-cash property herein will not exceed the aggregate FMV of all the cash or near-cash property of DC;

b. Following the allocation of the current liabilities, described in Paragraph 46(a), any remaining net FMV of accounts receivable, taxes receivable, inventory, prepaid expenses will be reclassified as business property and excluded from the net FMV of DC’s cash or near-cash property, to the extent that such property will be collected, sold or consumed by DC or TC1, as the case may be, in the ordinary course of the business to which they relate (for clarity, cash and the XXXXXXXXXX will not be reclassified as business property);

c. liabilities of DC, other than liabilities described in Paragraph 46(a), that relate to a particular property, will 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. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and

d. any liabilities that remain after the allocations described in Paragraphs 46(a) and 46(c) are made will then be allocated among all types of property on the basis of the relative net FMV of each type of property immediately prior to the allocation of such excess, but after the allocation of liabilities as described in Paragraphs 46(a) and 46(c). However, where DC is considered to have a negative amount of a type of property because of the allocations in Paragraphs 46(a) or (c), for the purposes of allocating the remaining liabilities, the net FMV of that type of property will be deemed nil resulting in none of those remaining liabilities being allocated to that type of property.

For greater certainty, for purposes of the determination described in Paragraph 46:

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

(ii) amounts owing that have a term of less than 12 months or are due on demand are considered current liabilities;

(iii) current liabilities include amounts normally classified as current liabilities, including accounts payable, bonuses payable and the current portion of any long-term debt; and

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

47. DC will contemporaneously transfer to each of TC1, TC2 and TC3 a pro rata portion of the net FMV of each type of property owned by DC, such that immediately following such property transfer, the aggregate net FMV of each type of property of DC transferred to TC1, TC2 or TC3, as the case may be, will be equal to or approximate the proportion determined by the formula: A x B/C

where:

A is the net FMV (determined as described above) immediately before the transfer, of all property of that type owned at that time by DC

B is the FMV, immediately before the transfer, of all the shares of the capital stock of DC owned, at that time, by TC1, TC2 or TC3, as the case may be; and

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

For the purposes of this Paragraph, the expression “approximate the proportion” above means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of each type of property that TC1, TC2, and TC3 has received on such transfer as compared to what each would have received had it received its exact pro rata share of the net FMV of that type of property.

47.1 Among the business properties to be transferred to TC1 will be the amounts due from the shareholder loan to CorpShareholder2. For greater certainty, the amounts due from the shareholder loan to CorpShareholder1 will remain with DC.

48. As consideration for the property transferred by DC to TC1, TC2 and TC3, TC1, TC2 and TC3, as the case may be, will:

a. assume an amount of DC’s existing liabilities; and

b. TC1 will issue a number of TC1 Butterfly Shares to DC, TC2 will issue a number of TC2 Butterfly Shares to DC and TC3 will issue a number of TC3 Butterfly Shares to DC.

49. DC will jointly elect with TC1, TC2 or TC3, as the case may be, in prescribed form and within the time limit referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer of each eligible property that is transferred by DC to that corporation. The agreed amount in respect of each eligible property so transferred will not be greater than the FMV of such property nor will it be less than the FMV, at the time of disposition, of the consideration therefor other than shares of the capital stock of that corporation or a right to receive such shares. For greater certainty, the agreed amount in respect of each such transferred property will be within the limits prescribe as follows:

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

c. in the case of inventory to which paragraph 85(1)(c.2) applies, the amount deemed by that paragraph.

50. Each of TC1, TC2 and TC3 will add to the stated capital account maintained for its respective TC Butterfly Shares an amount that will not exceed the amount by which the aggregate of, in the case of eligible properties, the agreed amounts, and in the case of other properties, the amount equal to the amount by which the FMV of the properties transferred to TC1, TC2, or TC3, as the case may be, exceeds the liabilities assumed by TC1, TC2 or TC3, as the case may be. For greater certainty, the increase to the PUC of the TC1 Butterfly Shares, TC2 Butterfly Shares or TC3 Butterfly Shares will not exceed the maximum amount that could be added to the PUC of each such shares, having regard to subsection 85(2.1).

51. TC1, TC2 and TC3 will redeem the TC1 Butterfly Shares, TC2 Butterfly Shares and TC3 Butterfly Shares, respectively. As consideration for the redemption, TC1 will issue the TC1 Redemption Note, TC2 will issue the TC2 Redemption Note and TC3 will issue the TC3 Redemption Note to DC as full payment for the aggregate redemption amount of the shares so redeemed. DC will accept each such TC Redemption Note as payment in full for the redemption of such TC’s Butterfly Shares.

52. DC will purchase for cancellation, a sufficient portion of the Class D common shares held by TC1 having a FMV equal to one-third of DC’s CDA at that time. DC will elect pursuant to the provisions in subsection 83(2) such that the full amount of such dividend deemed to be paid to TC1 as a result of such purchase for cancellation of Class D common shares shall be deemed to be a dividend paid out of the CDA of DC. In consideration therefor, DC will issue to TC1 the DC CDA Purchase Note 1 payable on demand and having a principal amount and FMV equal to the aggregate FMV of such Class D common shares purchased. TC1 will accept the DC CDA Purchase Note 1 as payment in full for shares so purchased.

53. Immediately after the transaction described in Paragraph 52, DC will redeem the XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares, XXXXXXXXXX Class C preferred shares and purchase for cancellation any remaining Class D common shares held by TC1 for an amount equal to the aggregate FMV and/or redemption amount, as applicable. As consideration therefor, DC will issue to TC1 the DC Redemption Note 1 equal to the aggregate FMV and/or aggregate redemption amount of the shares so purchased for cancellation or redeemed. TC1 will accept the DC Redemption Note 1 as payment in full for the redemption of such shares.

54. Concurrently with the redemption described in Paragraph 52, DC will purchase for cancellation from TC2 a sufficient portion of the Class D common shares held by TC2 having a FMV equal to one-third of DC’s CDA at that time. DC will elect pursuant to the provisions in subsection 83(2) such that the full amount of such dividend deemed to be paid to TC2 as a result of such purchase for cancellation of Class D common shares shall be deemed to be a dividend paid out of the CDA of DC. In consideration therefor, DC will issue to TC2 the DC CDA Purchase Note 2 payable on demand and having a principal amount and FMV equal to the aggregate FMV of such Class D common shares purchased. TC2 will accept the DC CDA Purchase Note 2 as payment in full for shares so purchased.

55. Immediately after the transaction described in Paragraph 54, DC will redeem the XXXXXXXXXX Class A preferred shares and purchase for cancellation any remaining Class D common shares held by TC2 for an amount equal to the aggregate FMV and/or redemption amount, as applicable. As consideration therefor, DC will issue to TC2 the DC Redemption Note 2 equal to the aggregate FMV and/or aggregate redemption amount of the shares so purchased for cancellation or redeemed. TC2 will accept the DC Redemption Note 2 as payment in full for the redemption of such shares.

56. Concurrently with the transactions described in Paragraph 52 and 54, DC will purchase for cancellation from TC3 a sufficient portion of the Class D common shares held by TC3 having a FMV equal to one-third of DC’s CDA at that time. DC will elect pursuant to the provisions in subsection 83(2) such that the full amount of such dividend deemed to be paid to TC3 as a result of such purchase for cancellation of Class D common shares shall be deemed to be a dividend paid out of the CDA of DC. In consideration therefor, DC will issue to TC3 the DC CDA Purchase Note 3 payable on demand and having a principal amount and FMV equal to the aggregate FMV of such Class D common shares purchased. TC3 will accept the DC CDA Purchase Note 3 as payment in full for shares so purchased.

57. Immediately after the redemption described in Paragraph 56, DC will redeem the XXXXXXXXXX Class A preferred shares and purchase for cancellation any remaining Class D common shares held by TC3 for an amount equal to the aggregate FMV and/or redemption amount, as applicable. As consideration therefor, DC will issue to TC3 the DC Redemption Note 3 equal to the aggregate FMV and/or aggregate redemption amount of the shares so purchased for cancellation or redeemed. TC3 will accept the DC Redemption Note 3 as payment in full for the redemption of such shares.

58. Following the redemptions set out above:

(i) DC Redemption Note 1, together with DC CDA Purchase Note 1 will be set-off in full against TC1 Redemption Note,

(ii) DC Redemption Note 2, together with DC CDA Purchase Note 2 will be set-off in full against TC2 Redemption Note, and

(iii) DC Redemption Note 3, together with DC CDA Purchase Note 3 will be set-off in full against TC3 Redemption Note,

and such notes will be cancelled without payment.

ADDITIONAL INFORMATION

59. None of DC, TC1, TC2 or TC3 will exercise significant influence over any of the other corporations involved in the Proposed Transactions.

60. Except as described in this letter, 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 permitted transaction described in subparagraphs 55(3.1)(a)(i)-(iv).

61. There has not been and will not be, as part of a series of transactions or events that includes 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 the circumstances described in subparagraph 55(3.1)(b)(ii).

62. None of the property received by TC1, TC2, and TC3 on the transfer described above in Paragraph 47 will be acquired by a person unrelated to the initial shareholders of DC, or by a partnership, as part of a series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(c).

63. None of the property retained by DC after the transfer described above in Paragraph 47 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 Proposed Transactions, in the circumstances described in paragraph 55(3.1)(d).

64. None of the shares of DC, TC1, TC2, or TC3 will be at any time during a series of transactions and events that includes the Proposed Transactions:

a. the subject of a guarantee agreement within the meaning of subsection 112(2.2);

b. 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); or

c. the subject of a dividend rental agreement within the meaning of subsection 112(2.3).

65. Neither DC nor TC1, TC2 or TC3 is or will be at any time during a series of transactions or events that includes the Proposed Transactions be a restricted financial institution or specified financial institution as defined in subsection 248(1).

66. Each of DC, TC1, TC2 and TC3 will have the financial capacity to honour, upon presentation for payment, the amount payable under the DC Redemption Note, TC1 Redemption Note, TC2 Redemption Note or TC3 Redemption Note, as the case may be.

67. DC currently has two shareholder loan receivables outstanding, due from each of CorpShareholder1 and CorpShareholder2, which are referred to in both Paragraphs 45 and 47.1. These loans arose as a result of reorganization transactions undertaken in XXXXXXXXXX and have remained outstanding XXXXXXXXXX. The amounts were loaned to CorpShareholder1 and CorpShareholder2 to allow them to buy out a former shareholder. CorpShareholder1 and CorpShareholder2 represent that neither loan will be repaid before the four year anniversary of the implementation of the Proposed Transactions described herein.

PURPOSES OF THE PROPOSED TRANSACTIONS

68. The purpose of the sale of XXXXXXXXXX is to cease the XXXXXXXXXX as none of the current shareholders of DC are no longer interested in continuing with XXXXXXXXXX.

69. The purpose of the divisive reorganization is to allow Shareholder2, Shareholder3 and Shareholder4 to have direct and separate control of their respective share of DC’s property to permit them to undertake their future farming operations and estate planning independently.

RULINGS GIVEN

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

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

a. the transfer by Shareholder2 of all of his XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares, XXXXXXXXXX Class C preferred shares and XXXXXXXXXX Class D common shares of DC to TC1 as described in Paragraph 38;

b. the transfer by CorpShareholder2 of all its XXXXXXXXXX Class B preferred shares of DC to TC1 as described in Paragraph 39;

c. the transfer by Shareholder3 of all his XXXXXXXXXX Class A preferred shares and XXXXXXXXXX common shares of Class D common shares of DC to TC2 as described in Paragraph 41;

d. the transfer by Shareholder4 of all his XXXXXXXXXX Class A preferred shares and XXXXXXXXXX Class D common shares of DC to TC3 as described in Paragraph 43; and

e. the transfer of each eligible property owned by DC to each of TC1, TC2 and TC3 as described in Paragraph 47

such that the agreed amount in respect of each such transfer will be deemed pursuant to paragraph 85(1)(a) to be the transferor’s proceeds of disposition of the particular property and the transferee’s cost thereof.

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

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. On the redemption by each of TC1, TC2 and TC3 of its TC1 Butterfly Shares, TC2 Butterfly Shares and TC3 Butterfly Shares, respectively, owned by DC as described in Paragraph 51, by virtue of paragraphs 84(3)(a) and (b), TC1, TC2 and TC3 will each be deemed to have paid and DC deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid by the respective corporation on such redemption exceeds the PUC in respect of those particular shares immediately before that time.

C. Subsection 84(3) will apply on the purchase for cancellation of the Class D common shares of DC held by each of TC1, TC2 and TC3 described in Paragraphs 52, 54 and 56, to deem DC to have paid a dividend on a separate class of shares making up those shares purchased for cancellation and to deem each of TC1, TC2 and TC3 to have received a dividend on such separate class of shares of an amount equal to the amount, if any, by which the respective DC CDA Purchase Note exceeds the PUC in respect of such shares immediately before the purchase for cancellation. Any such dividend with respect to the purchases for cancellation described in Paragraphs 52, 54 and 56 above:

a. will be deemed by subsection 83(2) to be a capital dividend to the extent of DC’s CDA immediately before the purchase for cancellation and will not be included in computing the income of each of TC1, TC2 and TC3, in accordance with paragraphs 83(2)(a) and (b), provided that DC elects in respect of the full amount of each such deemed dividend in prescribed manner and prescribed form within the time required by subsection 83(2);

b. will be added to the respective CDA of each of TC1, TC2 and TC3 in accordance with paragraph (b) of the definition of “capital dividend account” in subsection 89(1); and

c. will not be subject to subsection 55(2).

For greater certainty, subsection 83(2.1) will not apply to deem the dividend resulting from the aforementioned purchase for cancellation of Class D common shares of DC held by each of TC1, TC2 and TC3 not to be a capital dividend.

D. As a result of the purchase for cancellation/redemption by DC of:

a. XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares, XXXXXXXXXX Class C preferred shares and any remaining Class D common shares owned by TC1;

b. XXXXXXXXXX Class A preferred shares and any remaining Class D common shares owned by TC2;

c. XXXXXXXXXX Class A preferred shares and any remaining Class D common shares owned by TC3;

as described in Paragraphs 53, 55 and 57, by virtue of subsection 84(3):

d. DC will be deemed to have paid, and each of TC1, TC2 and TC3, as the case may be, will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid by DC on such purchase for cancellation and/or redemption, as the case may be, exceeds the PUC in respect of those particular shares immediately before that time.

E. The taxable dividends described in Rulings B and D above:

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

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

c. will, pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54, be excluded in determining the proceeds of disposition to the recipient corporation of the shares so redeemed or purchased;

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

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

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

F. 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 insist the circumstances described in paragraph 55(3.1)(a);

b. the disposition of property in the circumstances described in paragraph 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 a share in the circumstances described in subparagraph 55(3.1)(b)(iii); or

e. an acquisition of property and circumstances described in paragraph 55(3.1)(c) or (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 D, 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.

G. The set-off and cancellation of TC1 Redemption Note, TC2 Redemption Note and TC3 Redemption Note against its corresponding DC Redemption Note and DC CDA Purchase Note as described in the Paragraph 58 will not, in and of itself, give rise to a forgiven amount within the meaning of either subsection 80(1) or section 80.01. In addition, neither DC nor TC1, TC2 or TC3 will realize a gain or incur any loss as a result of such set-off and cancellation.

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

I. The provisions of subsection 245(2) will not be applied to the Proposed Transactions, in and of themselves, to determine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R10 issued on September 29, 2020, and are binding on the CRA, provided that the Proposed Transactions are completed no later than six months after the date of this letter. The above rulings are based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

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

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

the balance of the CDA, GRIP, ERDTOH/NERDTOH of any corporation; or

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, whether any of the Proposed Transaction would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

To the extent that a deemed dividend arises from a corporation redeeming, acquiring or purchasing for cancellation of its shares, a problem of circularity may possibly arise when computing the Part IV tax and the dividend refund of each corporation. We do not provide any comments on that possible issue.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purposes of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1 Price Adjustment Clauses.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,



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

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