2020-0844991R3 Internal Reorganization - 55(3)(a)

Principal Issues: (i) Whether the proposed internal reorganization qualifies for the rollover provision of subsection 98(5); (ii) Whether the proposed internal reorganization qualifies for the exemption from the application of subsection 55(2) in paragraph 55(3)(a)

Position: (i) Yes; and (ii) Yes.

Reasons: (i) The proposed internal reorganization will satisfy the requirements found in subsection 98(5) to the extent that GP continues to carry the Partnership Business, and to earn income from the Partnership Assets during the Holding Period in its capacity of sole proprietor; and (ii) None of the transaction steps to be undertaken as part of the proposed internal reorganization is subject to any of the tainting events described in subparagraphs 55(3)(a)(i) to (v).

Author: XXXXXXXXXX
Section: 20(1)(c)(ii); 55(3)(a); 55(3.01); 55(4); 98(5); 187.1; 187.2; and 191(1) and (2) Income Tax Act; 1100(2) and (2.2); 1102(14) Income Tax Regulations

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                                                                                                                                         2020-084499

XXXXXXXXXX, 2020

Dear XXXXXXXXXX

RE:     Advance income tax rulings request
           XXXXXXXXXX

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

To the best of your knowledge and that of the Taxpayers involved, none of the Proposed Transactions (as defined below) or the issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:

1. in a previously filed tax return of any of the Taxpayers or a related person and:
   1. being considered by the CRA in connection with such return;
   2. under objection by any of the Taxpayers or a related person; or
   3. the subject of a current or completed court process involving any of the Taxpayers or a related person; or
2. the subject of a Ruling request previously considered by the Income Tax Rulings Directorate.

Unless otherwise stated, all references to a statute are to the relevant provision of the Income Tax Act, R.S.C. 1985 (5^th Supp.), c.1, as amended (“Act”), or where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended (“Regulations”).

In addition, all references to monetary amounts are in Canadian dollars.

DEFINITIONS:

“A” means XXXXXXXXXX, who is an individual resident in Canada;

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

“Act” means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof;

“Accrued Gain Assets” refers to the Real Estate Property and Investment Property that GP will transfer to CCo as further described in Paragraph 45;

“Accrued Gain Assets Liability” refers to the liabilities pertaining to the Accrued Gain Assets including the mortgages on the Real Estate Property to be transferred to CCo as further described in Paragraph 46;

“Accrued Gain Assets Preferred Shares” refers to the preferred shares that CCo will issue to GP in partial consideration for the transfer of the Accrued Gain Assets as further described in Paragraph 46;

“Agreed Amount” refers to the amount agreed on by the transferor and transferee in respect of a transfer of an Eligible Property in a joint election filed pursuant to subsection 85(1);

“A Holdco” means XXXXXXXXXX, which is controlled by A;

“A Holdco Partnership Liability” refers to the portion of the Partnership Liability assumed by A Holdco as further described in Paragraph 36;

“Articles” refers to all the constating documents of a corporation;

“B” means XXXXXXXXXX, who is an individual resident in Canada;

“B Holdco” means XXXXXXXXXX, which is controlled by B;

“B Holdco Partnership Liability” refers to the portion of the Partnership Liability assumed by B Holdco as further described in Paragraph 36;

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

“CCo” refers to the corporation that will be created to receive a portion of the Partnership Assets for the benefit of C as further described in Paragraph 31;

“C Holdco” means XXXXXXXXXX, which is controlled by C;

“C Holdco Partnership Liability” refers to the portion of the Partnership Liability assumed by C Holdco as further described in Paragraph 36;

“C Preferred Shares” refers to the portion of the GP Preferred Shares that C Holdco will receive for the Units that it holds in the Partnership as further described in Paragraph 37;

“CCA” means capital cost allowance as determined under paragraph 20(1)(a);

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

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

“Canadian Partnership” has the meaning assigned in section 102;

“Capital Dividend” means a dividend to which subsection 83(2) applies;

“Capital Gain” has the meaning assigned by paragraph 39(1)(a);

“Capital Event and Liquidation Proceeds” refers to the entitlement to receive the net cash proceeds from the Partnership’s sale of real estate assets, and the remaining assets of the Partnership upon its liquidation subject to the payment of the capital account of the Partners;

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

“Capital Reorganization” refers to the Series of Transactions or Events that was undertaken by GP on XXXXXXXXXX as further described in Paragraphs 10 and 11;

“Cash and Near-Cash Property” means the cash and near-cash property held by the Partnership immediately before the Proposed Transactions;

“CBCA” means the Canada Business Corporations Act (R.S.C., 1985, C-44); XXXXXXXXXX;

“Connected” has the meaning assigned by subsection 186(4);

“Consent” refers to the consent to the dissolution of the Partnership granted by GP in accordance with the XXXXXXXXXX;

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

“CRA” means the Canada Revenue Agency;

“D” means XXXXXXXXXX, who is an individual resident in Canada and the father of A, B and C;

“D Holdco” means XXXXXXXXXX which is controlled by D;

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

“Disability” has the meaning assigned by the USA as further described in Paragraph 59;

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

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

“Dividend Rental Arrangement” has the meaning assigned by subsection 248(1);

“Eligible Dividend” has the meaning assigned by subsection 89(1) and subsection 248(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 in subsection 129(4);

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

“Financial Intermediary Corporation” has the meaning assigned by subsection 191(1);

“General Partner” means the general partner in the Partnership, which is GP;

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

“GP” means XXXXXXXXXX, which is a TCC and a CPCC that is controlled by D;

“GP Preferred Shares” refers to the preferred shares that each of A Holdco, B Holdco and C Holdco will receive from GP in consideration for the Units that they respectively hold in the Partnership as further described in Paragraph 37;

“Guarantee Agreement” has the meaning assigned by subsection 112(2.2);

“Head Office Building” means the building held by the Partnership in which XCo’s furniture business is carried on;

“Holding Period” refers to the period of at least XXXXXXXXXX to XXXXXXXXXX months during which GP will continue to carry on the Partnership Business after the Partnership has legally ceased to exist under the XXXXXXXXXX as further described in Paragraph 41;

“Investment Property” means the shares in Real EstateCo, XXXXXXXXXX ManagementCo and XXXXXXXXXX ManagementCo that will be held by the Partnership immediately before the Proposed Transactions;

“Limited Partners” means the XXXXXXXXXX partners in the Partnership as that term is defined in the XXXXXXXXXX, which are A Holdco, B Holdco and C Holdco;

“ManagementCo” refers to the corporation to be created under the CBCA to manage the real estate held in CCo and GP as further described in Paragraph 55;

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

“Net Capital Loss” has the meaning assigned in subsection 111(8);

“Non-Capital Loss” has the meaning assigned in subsection 111(8);

“XXXXXXXXXX ManagementCo” refers to XXXXXXXXXX, which manages the real estate properties held by the Partnership that are located in XXXXXXXXXX;

“Paragraph” means a numbered paragraph in this Ruling request;

“Partners” means the General Partner and the Limited Partners;

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

“Partnership” means XXXXXXXXXX;

“Partnership Assets” refers to the Cash and Near-Cash Property, Investment Property and the Real Estate Property;

“Partnership Business” means the investment business carried on by the Partnership prior to the Proposed Transactions;

“Partnership Liability” refers to the aggregate of all the Partnership’s liabilities owing immediately before the implementation of the Proposed Transactions;

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

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

“Property Transfer” refers to GP’s transfer of XXXXXXXXXX of the Cash and Near- Cash Property (including the X Subco Note), XXXXXXXXXX of the Investment Property; and XXXXXXXXXX of the Real Estate Property to CCo as further described in Paragraph 45;

“Proposed Transactions” means the proposed transactions described in Paragraphs 31 to 62;

“Purchase for Cancellation” refers to GP’s purchase for cancellation of the XXXXXXXXXX Class A3 shares, the remaining Class F3 shares and the C Preferred Shares held by CCo as further described in Paragraph 51;

“XXXXXXXXXX ManagementCo” refers to XXXXXXXXXX, which manages the real estate properties held by the Partnership that are located in XXXXXXXXXX;

“Real EstateCo” means XXXXXXXXXX, which owns a piece of land in XXXXXXXXXX;

“Real Estate Property” refers to the real estate properties each of which is held by the Partnership carrying on the Partnership Business immediately before the Proposed Transactions;

“Redemption Note” refers to the non-interest bearing promissory note to be issued by CCo to GP on CCo’s redemption of the Accrued Gain Assets Preferred Shares held by GP as further described in Paragraph 48;

“Remaining Transferred Assets” refers to the Cash and Near-Cash Property that GP will transfer to CCo as further described in Paragraph 45;

“Remaining Transferred Assets Liability” refers to the liabilities pertaining to the Remaining Transferred Assets that will be transferred to CCo as further described in Paragraph 47;

“Remaining Transferred Assets Note” refers to the promissory note that CCo will issue to GP in partial consideration for the Remaining Transferred Assets as further described in Paragraph 47;

“Repurchase Notes” refers to the demand non-interest bearing promissory notes to be issued by GP to CCo on GP’s purchase for cancellation of the XXXXXXXXXX Class A3 shares, the remaining Class F3 shares and the C Preferred Shares that CCo will hold in GP as further described in Paragraph 51;

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

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

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

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

“Taxable Capital Gain” has the meaning assigned by paragraph 38(a);

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

“Taxation Year” has the meaning assigned by subsection 249(1);

“Taxpayers” means the Partnership, GP, A Holdco, B Holdco and C Holdco;

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

“Units” means the Class A1 units, Class B1 units, Class C units and Class D units in the Partnership;

“Units Transfer” refers to the transfer of the Units that each of A Holdco, B Holdco and C Holdco holds in the Partnership to GP as further described in Paragraph 37;

“Unrelated Person” has the meaning assigned by paragraph 55(3.01)(a);

“USA” means the unanimous shareholders’ agreement to be entered into by the shareholders of GP and CCo further to the completion of the Proposed Transactions as further described in Paragraph 59;

“XCo” means XXXXXXXXXX, which is controlled by D;

“X Subco” refers to the corporation to be incorporated by XCo as further described in Paragraph 34; and

“X Subco Note” refers to the promissory note to be issued by X Subco to GP in consideration for the acquisition of the Head Office Building as further described in Paragraph 42.

FACTS:

The participants to the Proposed Transactions:

A Holdco, B Holdco, C Holdco and D Holdco

1. Each of A Holdco, B Holdco, C Holdco and D Holdco is a TCC and CCPC.

GP

2. GP was incorporated on XXXXXXXXXX under the CBCA.

3. GP has a taxation year ending on XXXXXXXXXX.

4. At the end of its XXXXXXXXXX taxation year, the outstanding balance of GP’s GRIP was equal to $XXXXXXXXXX.

5. At the end of its XXXXXXXXXX taxation year, the outstanding balance of GP’s Net Capital Loss and Non-Capital Loss was equal to nil.

6. The outstanding balance of GP’s CDA is currently equal to nil.

7. GP’s issued and outstanding capital includes:
   1. Class B voting, redeemable and retractable preferred shares having a fixed annual non-cumulative entitlement;
   2. Class A1, A2 and A3 non-voting common shares having an unfixed non- cumulative dividend entitlement;
   3. Class F1, F2, and F3 non-voting, redeemable and retractable preferred shares having a fixed annual non-cumulative discretionary entitlement;
   4. Class X non-voting and redeemable preferred shares having an unfixed non- cumulative discretionary dividend entitlement; and
   5. Class X1 non-voting, redeemable and retractable preferred shares having a fixed annual cumulative dividend entitlement.

8. D has always controlled GP.

9. Prior to XXXXXXXXXX, GP’s shareholding was as follows:

10. On XXXXXXXXXX, GP undertook the following series of transactions as part of the Capital Reorganization:
    1. GP exchanged the XXXXXXXXXX Class A1 shares that were held by A Holdco for XXXXXXXXXX Class F1 preferred shares having a PUC and an ACB of $XXXXXXXXXX and a FMV of $XXXXXXXXXX;
    2. GP exchanged the XXXXXXXXXX Class A2 shares that were held by B Holdco for XXXXXXXXXX Class F2 preferred shares having a PUC and an ACB of $XXXXXXXXXX and a FMV of $XXXXXXXXXX; and
    3. GP exchanged the XXXXXXXXXX Class A3 shares that were held by C Holdco in exchange for XXXXXXXXXX Class F3 preferred shares having a PUC and an ACB of $XXXXXXXXXX and a FMV of $XXXXXXXXXX;

11. Immediately afterwards, the following share subscriptions were completed:
    1. A Holdco   subscribed   for   XXXXXXXXXX   Class   A1   shares   in GP   for $XXXXXXXXXX;
    2. B Holdco subscribed for XXXXXXXXXX3 Class A2 shares in GP for $XXXXXXXXXX;
    3. C Holdco   subscribed   for   XXXXXXXXXX   Class   A3   shares   in   GP   for $XXXXXXXXXX;
    4. D     Holdco     subscribed     for     XXXXXXXXXX      Class     X1 shares              for$XXXXXXXXXX, and
    5. D subscribed for XXXXXXXXXX Class X shares for $XXXXXXXXXX.

12. The tax attributes of the shares that each of A Holdco, B Holdco, C Holdco, D Holdco and D currently holds in GP are approximately equal to:

13. All the issued and outstanding shares in GP are respectively held by A Holdco, B Holdco, C Holdco, D Holdco and D as capital property.

14. The Class X and X1 shares were respectively issued to directly and indirectly provide D with a substantial dividend entitlement.

15. None of the shares in GP were acquired by A Holdco, B Holdco, C Holdco, D Holdco and D in contemplation of the Proposed Transactions.

Partnership

16. The Partnership is a Canadian Partnership that was created under the laws of the Province of XXXXXXXXXX on XXXXXXXXXX to acquire, operate, develop and manage real estate properties pursuant the exclusive authority of the General Partner.

17. The Partnership has issued Units having the following features:
    1. Class A1 Units are non-voting. They also provide a XXXXXXXXXX% entitlement in the Partnership’s net income, a XXXXXXXXXX% entitlement in the Partnership’s net loss and a XXXXXXXXXX% entitlement in the Capital Event and Liquidation Proceeds after satisfaction of any amount owing on the Class B1 and the Class D Units;
    2. Class B1 Units are voting. They also provide a XXXXXXXXXX% entitlement in the Partnership’s net income and an entitlement to the first $XXXXXXXXXX of any Capital Event and Liquidation Proceeds;
    3. Class C Units are non-voting. They also provide a XXXXXXXXXX% entitlement in the Partnership’s net loss and a XXXXXXXXXX% entitlement in the Capital Event and Liquidation Proceeds after satisfaction of any amount owing on the Class B1 and the Class D Units; and
    4. Class D Units are non-voting.    They also provide an entitlement to the first $XXXXXXXXXX of any Capital Event and Liquidation Proceeds pro rata to the entitlement of the Class B1 Units in such Capital Event and Liquidation Proceeds.

18. The tax attributes of the Units that each of GP, A Holdco, B Holdco and C Holdco respectively holds are approximately equal to:

Note: The FMV of the Units is an approximate figure that will be crystallized at the time of the Proposed Transactions.

19. GP and each of the Limited Partners holds the Units as a capital property.

20. D was the original owner of the Class A1 and the Class B1 Units, which entitled him with all the voting rights in respect of the business operations of the Partnership.

21. D subsequently transferred the Class A1 and the Class B1 Units to GP in exchange for preferred shares in GP, which were redeemed over time. As a result of such transfer, GP controls the Partnership.

22. The Partnership will hold the following assets immediately before the Proposed Transactions:
    1. ​​​​​​​Cash and Near-Cash Property;
    2. Investment Property; and
    3. ​​​​​​​Real Estate Property.

23. The composition of the Partnership Assets and Partnership Liability has not materially changed over the years, and will not change until the implementation of the Proposed Transactions.

XCo

24. XCo was incorporated under the CBCA on XXXXXXXXXX.

25. Although A, B and C as well as their respective family trusts hold common shares in XCo, D has always controlled Xco.

26. XCo owns various companies which operate a XXXXXXXXXX business.

27. D has been contemplating for years to transfer the Head Office Building to a subsidiary of XCo for creditor-proofing purposes.

The reasons underlying the Proposed Transactions:

28. D created the Partnership. D was also the original owner of the class A1 and B1 Units in the Partnership, which entitled him with all the voting rights in respect of the Partnership’s business operations. Further to D’s transfer of the Class A1 and B1 Units in the Partnership to GP, D’s economic interest in respect of the Partnership Business was secured through the ownership of preferred shares in GP, which were gradually redeemed until the completion of the Capital Reorganization. D has always held all the voting shares in GP, and has always decided all matters arising at GP’s meetings of the board of its directors. Therefore, D has always had the sole and exclusive authority over the day-to-day management and long-term planning of GP. Further to the Capital Reorganization, D’s economic interest in respect of the Partnership Business was maintained through GP’s issuance of the Class X shares to D, and the Class X1 shares to D Holdco. Although Class X shares and Class X1 shares do not capture any growth in the value of GP, they entitle D and his holding company to receive significant dividends.

29. XXXXXXXXXX.

30. XXXXXXXXXX.

PROPOSED TRANSACTIONS:

The creation of CCo and X Subco

31. A new company (“CCo”) will be incorporated by D under the CBCA.

32. CCo’s issued and outstanding capital will include:
    1. Class B non-voting shares having an unfixed discretionary non-cumulative dividend entitlement;
    2. ​​​​​​​Class C1 voting shares having a fixed monthly non-cumulative dividend entitlement, which shall be redeemed by CCo at the time of the shareholder’s death;​​​​​​​
    3. Class C2 voting and redeemable shares having a fixed monthly non-cumulative dividend entitlement;
    4. ​​​​​​​Class F non-voting and redeemable preferred shares having a fixed monthly non- cumulative dividend entitlement;
    5. ​​​​​​​Class H non-voting and redeemable preferred shares having a fixed monthly non- cumulative dividend entitlement;
    6. ​​​​​​​Class I non-voting and redeemable preferred shares having an annual non- cumulative dividend entitlement;
    7. ​​​​​​​Class X non-voting and redeemable shares having an unfixed discretionary non- cumulative dividend entitlement; and
    8. ​​​​​​​Class X1 non-voting and redeemable shares having a fixed annual cumulative dividend in an amount equal to $XXXXXXXXXX or such greater aggregate amount.
33. Upon CCo’s incorporation, the following entities and individuals will subscribe for the following shares in CCo:

34. XCo will incorporate a wholly-owned subsidiary under the CBCA (“X Subco”).

The dissolution of the Partnership

35. GP’s Articles will be amended to add Class H, Class I, Class J, Class K, Class L, Class M, Class N, Class O and Class P shares, which will be preferred non-voting shares that are redeemable and retractable for the consideration for which they were issued.

GP’s Articles will also be amended to add Class C1 shares, which will be voting shares that are redeemable for the consideration for which they were issued. However, the Class C1 shares shall be redeemed by GP at the time of their shareholder’s death.

36. Prior to the dissolution of the Partnership, each of A Holdco, B Holdco, and C Holdco will equally assume the liabilities of the Partnership, being the A Holdco Partnership Liability, the B Holdco Partnership Liability and the C Holdco Partnership Liability, respectively.

37. Each of A Holdco, B Holdco, and C Holdco will transfer their Units to GP pursuant to subsection 85(1) in consideration for GP’s assumption of the portion of the Partnership Liability that they had respectively assumed and GP Preferred Shares. The redemption value of the GP Preferred Shares will be equal to the FMV of the Units that each of A Holdco, B Holdco, and C Holdco held less the A Holdco Partnership Liability, B Holdco Partnership Liability and the C Holdco Partnership Liability that they respectively assumed.

Each of A Holdco, B Holdco and C Holdco will make a joint election with GP in prescribed form and in accordance with subsection 85(6) to ensure that the Agreed Amount filed in the joint election is equal to the ACB of the transferred Units, which will not be greater than the FMV of such Units.

GP will add to the stated capital of the GP Preferred Shares an amount that will not exceed the amount by which the aggregate of the Agreed Amounts filed by each of A Holdco, B Holdco and C Holdco in respect of the Units that they transferred to GP exceeds the Partnership Liability. For greater certainty, the increase in the PUC of the GP Preferred Shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

38. Further to the Units Transfer and after the Consent is granted, the Partnership will be legally terminated under the XXXXXXXXXX, which will result in the distribution of the Partnership Assets and any remaining liabilities of the Partnership to GP. For the purposes of the Act, the Partnership will be deemed not to have ceased to exist until the requirements found in paragraph 98(1)(a) are satisfied.

39. According to subsection 99(1), the Partnership will be deemed to have a taxation year ending immediately before the time that is immediately before the time when it would, but for subsection 98(1), have legally ceased to exist under the XXXXXXXXXX.

40. Pursuant to subparagraph 98(5)(b)(i), GP will be deemed to have a cost in each Depreciable Property acquired from the Partnership equal to its Cost Amount to the Partnership immediately before the Partnership ceased to exist for the purposes of the Act.

If CCA is claimed by the Partnership for the taxation year deemed to have ended immediately before the time the Partnership ceased to exist under the XXXXXXXXXX, the Cost Amount of each such Depreciable Property will be reduced by the amount of such CCA in accordance with the UCC definition.

GP’s carrying on of the Partnership Business further to the dissolution of the Partnership

41. GP will continue to carry on the Partnership Business, and to earn income from the Partnership Assets during the Holding Period.

GP’s transfer of the Head Office Building to X Subco

42. GP will transfer the Head Office Building to X Subco at its FMV.

In consideration for the transfer of the Head Office Building, X Subco will assume the mortgage related to the Head Office Building and issue to GP the X Subco Note having a Principal Amount equal to the difference between the FMV of the Head Office Building and the value of the assumed mortgage.

​​​​​​​The Capital Gain and Taxable Capital Gain, if any, resulting from the sale of the Head Office Building will increase the CDA and NRDTOH of GP.

GP’s redemption of Class F1, F2 and F3 shares held by A Holdco, B Holdco and C Holdco

43. Immediately thereafter, GP will redeem a portion of its Class F1 shares, Class F2 shares and Class F3 shares respectively owned by A Holdco, B Holdco and C Holdco, which will result in a dividend deemed to be paid by GP and received by each of A Holdco, B Holdco and C Holdco. The number of Class F1 shares, Class F2 shares and Class F3 shares to be redeemed will ensure that the aggregate amount of dividends deemed to be paid by GP, and received by each of A Holdco, B Holdco and C Holdco, is equal to the increase in GP’s CDA resulting from the disposition of the Head Office Building. GP will make an election in prescribed form under subsection 83(2) to treat each of the dividends deemed to be paid by GP to A Holdco, B Holdco and C Holdco as a Capital Dividend.

C Holdco’s transfer of the GP shares to CCo

44. After the Holding Period, C Holdco will transfer the XXXXXXXXXX Class A3 shares, the Class F3 shares that it still holds and all the C Preferred Shares that it received from GP on the transfer of its Units to GP as further described in Paragraph 37 to CCo pursuant to subsection 85(1) in exchange for XXXXXXXXXX Class B shares, the same number of Class F shares as the Class F3 shares exchanged and Class H or I shares in CCo having an aggregate FMV equal to the FMV of the GP shares so transferred to CCo:

C Holdco and CCo will make a joint election in prescribed form in accordance with subsection 85(6) to ensure that each of the Agreed Amounts filed in the joint election is respectively equal to C Holdco’s ACB of the Class A3 shares, the remaining Class F3 shares and the C Preferred Shares transferred to CCo, which will not be greater than the respective FMV of such shares.

CCo will add to the stated capital of the Class B, Class F, Class H or Class I shares an amount not to exceed the Agreed Amount that will jointly be elected by C Holdco and

CCo in respect of each of the Class A3, Class F3 and the C Preferred Shares to be transferred to CCo. For greater certainty, the increase in the PUC of the Class B, Class F, Class H or Class I shares to be issued by CCo will not exceed the maximum amount that could be added to the PUC of such shares having regard to subsection 85(2.1).

GP’s transfer of a pro rata portion of the Partnership Assets to CCo

45. GP will transfer to CCo:
    1. ​​​​​​​XXXXXXXXXX of the Cash and Near-Cash Property (including the X Subco Note);
    2. ​​​​​​​XXXXXXXXXX of the Investment Property; and
    3. ​​​​​​​XXXXXXXXXX of the Real Estate Property;

consisting of Accrued Gain Assets and Remaining Transferred Assets, which will have an aggregate net FMV approximately equal to the aggregate FMV of the Class A3, the Class F3 and the C Preferred Shares that CCo will hold in GP.

46. As part of the Property Transfer, the Accrued Gain Assets will be transferred to CCo pursuant subsection 85(1) for the following consideration:
    1. ​​​​​​​The assumption of the Accrued Gain Assets Liability, and
    2. ​​​​​​​The issuance of the Accrued Gain Assets Preferred Shares having an aggregate FMV equal to the amount by which the FMV of the Accrued Gain Assets transferred to CCo exceeds the amount of the Accrued Gain Assets Liability.

GP and CCo will make a joint election in prescribed form in accordance with subsection 85(6) to ensure that each of the Agreed Amounts filed in the joint election is not greater than the FMV of the property but is not less than:

1. In the case of Depreciable Property, the least of the amounts specified in subparagraph 85(1)(e)(i), (ii) and (iii); and
2. In the case of Capital Property that is not Depreciable Property, the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

Furthermore, the Agreed Amount filed in the joint election in respect of Accrued Gain Assets transferred to CCo will not be less than the amount referred in paragraph 85(1)(b).

CCo will add to the stated capital of the Accrued Gain Assets Preferred Shares an amount that will not exceed the amount by which the aggregate of all Agreed Amounts jointly elected in respect to each of the Accrued Gain Assets transferred to CCo exceeds the amount of the Accrued Gain Assets Liability. For greater certainty, the increase in the PUC of the preferred shares to be issued by CCo will not exceed the maximum amount that could be added to the PUC of such shares having regard to subsection 85(2.1).

47. As part of the Property Transfer, the Remaining Transferred Assets will be transferred to CCo for the following consideration:
    1. ​​​​​​​The assumption of the Remaining Transferred Assets Liability, and
    2. ​​​​​​​The issuance of the Remaining Transferred Assets Note.

CCo’s redemption of the Accrued Gain Assets Preferred Shares

48. CCo will redeem the Accrued Gain Assets Preferred Shares held by GP in consideration for the Redemption Note whose Principal Amount will be equal to the FMV of the Accrued Gain Assets Preferred Shares to be redeemed.

49. CCo will elect to have its first taxation year-end immediately after CCo’s redemption of the Accrued Gain Assets Preferred Shares.

GP’s purchase for cancellation of the XXXXXXXXXX Class A3 shares, the Class F3 shares and the C Preferred Shares

50. To the extent that the outstanding balance of GP’s CDA is in excess of nil the day after CCo’s first taxation year-end, GP will purchase for cancellation any of the XXXXXXXXXX Class A3 shares, the Class F3 shares and the C Preferred Shares held by CCo such that a dividend the amount of which is equal to one-third of GP’s outstanding CDA at that time is deemed to be paid by GP, and received by CCo at that time. GP will elect in the manner and the form required under subsection 83(2) to treat such a dividend as a Capital Dividend.

51. Immediately thereafter, GP will purchase for cancellation the remainder of the XXXXXXXXXX Class A3 shares, the Class F3 shares and the C Preferred Shares that CCo will hold in GP. To the extent that the outstanding balance of GP’s GRIP is in excess of nil, GP will designate a portion of the dividend deemed to be paid by GP, and received by CCo on the Purchase for Cancellation equal to one-third of GP’s outstanding GRIP balance at that time by notifying CCo in writing in a timely manner that the designated portion of the dividend is an Eligible Dividend in accordance with subsection 89(14). As a result, the outstanding balance of CCo’s GRIP will be increased by the amount, if any, of the Eligible Dividend that CCo will be deemed to receive from GP on the Purchase for Cancellation.

In consideration for the purchases for cancellation described in Paragraphs 50 and in this Paragraph, GP will issue two notes, the Repurchase Notes, having a Principal Amount equal to the aggregate FMV of the XXXXXXXXXX Class A3 shares, the Class F3 shares and the C Preferred Shares to be purchased for cancellation.

Setting-off the Repurchase, Redemption and Remaining Transferred Assets Notes

52. After the Purchase for Cancellation, the Repurchase Notes will be set-off, to the extent possible, against the Redemption Note and the Remaining Transferred Assets Note.

Reorganization of GP’s shareholding

53. Immediately afterwards, GP will then purchase for cancellation each of the XXXXXXXXXX Class X shares held by D, and the XXXXXXXXXX Class X1 shares held by D Holdco for a price of $XXXXXXXXXX.

54. In accordance with subsection 51(1), D will exchange the XXXXXXXXXX Class B shares that he holds in GP in consideration for XXXXXXXXXX Class C1 shares in GP having an aggregate PUC, ACB and FMV of $XXXXXXXXXX.

Creation of ManagementCo

55. ManagementCo will then be incorporated by D under the CBCA.

56. D and A or the family trust in favor of A will subscribe for the ManagementCo shares in consideration for a nominal cash consideration.

57. D will own all the voting preferred shares in ManagementCo whereas the non-voting common shares in ManagementCo will be held by A or a family trust in favor of A to the extent that each beneficiary of that trust is related to Cco and GP before the trust subscribes for the non-voting common shares.

58. D will control ManagementCo until the date of his death or Disability at which time A will be vested with the control of that corporation.

USA to be entered to govern GP and CCo

59. XXXXXXXXXX.

Reorganization of CCo’s shareholding

60. XXXXXXXXXX years after the Transfer of Property, CCo will purchase for cancellation the XXXXXXXXXX Class C2 shares that GP will hold in CCo for $XXXXXXXXXX. Thereafter, CCo will be controlled by D through his ownership of XXXXXXXXXX Class C1 shares in CCo.

Control of GP and CCo further to D’s death

61. Upon the death or Disability of D, control of CCo will respectively be vested to C.

62. Upon the death or Disability of D, control of GP will be equally vested to A and B.

ADDITIONAL INFORMATION:

63. None of the GP and CCo shares described in this letter will be, at any time during the Series of Transactions or Events that includes the Proposed Transactions:
    1. the subject of any undertaking or agreement that is a Guarantee Agreement;
    2. ​​​​​​​the subject of a Dividend Rental Arrangement;
    3. ​​​​​​​the subject of any secured undertaking of the type described in paragraph 112(2.4)(a);
    4. ​​​​​​​issued for consideration that is or includes 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
    5. ​​​​​​​issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

64. None of the GP and CCo shares described in this letter will be at any time during the Series of Transactions or Events that includes the Proposed Transactions, shares of a Restricted Financial Institution, a Specified Financial Institution, or a corporation described in any of paragraphs (a) to (f) of the definition of Financial Intermediary Corporation.

65. As part of the series of transactions or events that includes any of the Proposed Transactions, there will not be:
    1. a disposition of property described in subparagraphs 55(3)(a)(i), (iii) or (iv); or
    2. a significant increase described in subparagraphs 55(3)(a)(ii) or (v).

66. Legal title to the Real Estate Property to be held by GP or CCo in the course of the Series of Transactions or Events that includes the Proposed Transactions may be held by a corporation as a nominee or a bare trustee for GP and/or CCo.

PURPOSE OF THE PROPOSED TRANSACTIONS:

The purpose of the Proposed Transactions is to allow D to reorganize the Partnership Business and the Partnership Assets to reduce the risk of discord between A, B and C subsequent to D’s death or Disability while allowing D to remain in control of such assets during his lifetime or prior to his Disability.

The purpose of GP’s subscription of XXXXXXXXXX C2 Class share in the capital stock of CCo described in Paragraph 33 and CCo’s purchase for cancellation of the XXXXXXXXXX Class C2 shares held by GP described in Paragraph 60 is to benefit from the exemption to the imposition of land transfer tax duties under the XXXXXXXXXX.

RULINGS GIVEN:

Provided that the above statements of Facts, Proposed Transactions, Additional Information and Purpose 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:

1. Provided that GP continues to carry on the Partnership Business during the Holding Period as described in Paragraph 41, the provisions of subsection 98(5) will apply in connection with the dissolution of the Partnership such that:
   1. ​​​​​​​Pursuant to paragraph 98(5)(a), GP's proceeds of disposition of its interest in the Partnership will be deemed to be an amount equal to the greater of:
      1. ​​​​​​​The total of
         1. ​​​​​​​the ACB to GP of its interest in the Partnership immediately before it has ceased to exist, and
         2. ​​​​​​​the ACB to GP of the interest in the Partnership that it is deemed to have acquired pursuant to paragraph 98(5)(g) when the Partnership ceased to exist, and
      2. The total of
         1. ​​​​​​​the Cost Amount to the Partnership, immediately before it ceased to exist, of each of the Partnership Assets that GP received as proceeds of disposition for its interest in the Partnership, and
         2. ​​​​​​​the amount of any other proceeds of the disposition of GP's interest in the Partnership received by GP.
   2. ​​​​​​​Pursuant to paragraph 98(5)(b), the cost to GP of each property received by it upon the dissolution of the Partnership will be deemed to be an amount equal to the total of:
      1. ​​​​​​​The Cost Amount to the Partnership of the property immediately before the dissolution of the Partnership; and
      2. ​​​​​​​Where the amount determined under subparagraph 98(5)(a)(i), in respect of the Partnership exceeds the amount determined under subparagraph 98(5)(a)(ii), in respect of that Partnership, the amount determined under paragraph 98(5)(c) in respect of the property; and
   3. ​​​​​​​Pursuant to paragraph 98(5)(f), the Partnership shall be deemed to have disposed of each such property for proceeds equal to the Cost Amount to the Partnership of the property immediately before the Partnership ceased to exist.
2. Interest paid or payable by GP on the Partnership Liability that it has assumed in partial consideration for the Units that it acquired from A Holdco, B Holdco and C Holdco and as a consequence of the dissolution of the Partnership as described in Paragraphs 37 and 38 will be deductible under paragraph 20(1)(c) until the expiration of the Holding Period to the same extent that such interest would have been deductible if the Partnership did not cease to exist provided that:
   1. ​​​​​​​GP has a legal obligation to pay interest on such Partnership Liability, and
   2. ​​​​​​​GP continues to use all the interests that it holds in the Partnership or the Partnership Assets that it will receive on the dissolution of the Partnership for the purpose of earning income from a business or property (other than income which is exempt from taxation).

After the Holding Period, the interest paid or payable by GP on the excess of the Partnership Liability over the sum of the Accrued Gain Assets Liability and the Remaining Transferred Assets Liability to be assumed by CCo as described in Paragraphs 46 and 47 will be deductible under paragraph 20(1)(c) to the same extent that such interest would have been deductible if the Partnership did not cease to exist provided that: (i) GP has a legal obligation to pay interest on such indebtedness, and (ii) continues to use all the interests that it holds in the Partnership or the Partnership Assets that it will receive on the dissolution that will not be transferred to CCo as described in Paragraph 45 for the purpose of earning income from a business or property (other than income which is exempt from taxation).

3. By virtue of subsection 1102(14) of the Regulations:
   1. Each property described in Paragraph 22 which, immediately before the transfer described in Paragraph 38, is Depreciable Property of a prescribed class or separate class of the Partnership and which is acquired by GP on the dissolution of the Partnership, will be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of GP; and
   2. The portion of the Accrued Gain Assets which, immediately before the Property Transfer, is Depreciable Property of a prescribed class or separate class of GP and which is acquired by CCo will be Depreciable Property of the same prescribed class or separate prescribed class, as the case may be, of CCo.
4. Provided that the conditions specified in paragraphs 1100(2.2)(f) or (g) of the Regulations are satisfied, paragraph 1100(2.2)(h) of the Regulations will apply such that no amount will be included by GP or CCo under paragraph 1100(2)(a) of the Regulations in respect of each Depreciable Property of a prescribed class that is property acquired by GP or CCo on the transfer of property described in Paragraphs 38 and 45 to 47.
5. Subject to the application of subsection 69(11), provided that the appropriate joint elections are filed in prescribed form and manner within the prescribed time specified in subsection 85(6), subsection 85(1) will apply to the following transfers:
   1. Each of the Limited Partners’ transfer of Units to GP as described in Paragraph 37;
   2. C Holdco’s transfer of the XXXXXXXXXX Class A3 shares, all the Class F3 shares and all the C Preferred Shares that it holds in GP to CCo as described in Paragraph 44; and
   3. GP’s transfer of the Accrued Gain Assets to CCo as described in Paragraph 46;

​​​​​​​such that the Agreed Amounts in respect of each of the particular properties so transferred will be deemed to be the particular transferor’s Proceeds of Disposition and the particular transferee’s Cost of such property pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to any of these transfers.

For the purposes of the joint election in respect of Depreciable Property, the reference to the UCC to the taxpayer of all property of that class immediately before the disposition in subparagraph 85(1)(e)(i) will be read to mean the proportion of the UCC to GP of all the property of that class that the capital cost of the property so transferred before the disposition is of the capital cost of all property of that class immediately before the disposition.

6. Provided that CCo has a legal obligation to pay interest on the Accrued Gain Assets Liability and the Remaining Transferred Assets Liability that it has assumed in partial consideration for the Accrued Gain Assets and Remaining Transferred Assets that it has acquired as described in Paragraphs 46 and 47 for the purpose of gaining or producing income from a business or property, CCo will, pursuant to paragraph 20(1)(c), be entitled to deduct, in computing its income for a taxation year (depending on the method regularly followed by CCo), the lesser of :
   1. the interest paid or payable on the Accrued Gain Assets Liability and the Remaining Transferred Assets Liability assumed by CCo; and
   2. a reasonable amount in respect thereof.
7. Subsection 84(3) will apply to:
   1. CCo’s redemption of the Accrued Gain Assets Preferred Shares that GP will hold in CCo as described in Paragraph 48 such that CCo will be deemed to have paid, and GP will be deemed to have received, and
   2. GP’s purchase for cancellation of the XXXXXXXXXX Class A3 shares, the Class F3 shares and the C Preferred Shares that CCo will hold in GP as described​​​​​​​ in Paragraph 51 such that GP will be deemed to have paid, and CCo will be deemed to have received:

a dividend on such shares equal to the amount by which the amount respectively paid by CCo and GP on the redemption of such shares exceeds the PUC in respect of those particular shares immediately before their redemption.

8. Each of the dividends described in Ruling G above will be a Taxable Dividend that:
   1. will be included in computing the income of the corporation deemed to have received such a dividend pursuant to subsection 82(1) and paragraph 12(1)(j);
   2. will be deductible by the corporation deemed to have received such a dividend pursuant to subsection 112(1) in computing its taxable income for the 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);
   3. will be excluded in determining the Proceeds of Disposition of the shares deemed to have been disposed on their redemption and purchase for cancellation pursuant to paragraph (j) of the definition of Proceeds of Disposition;
   4. 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;
   5. will not be subject to tax under Part IV.1 or Part VI.1;
   6. will not be subject to tax under Part IV, except to the extent that the corporation deemed to have paid the dividend is entitled to a Dividend Refund for the taxation year in which it has paid such dividend; and
   7. will be added to the GRIP of CCo in the taxation year in which it is received pursuant to variable E of the GRIP definition in subsection 89(1) to the extent of the portion of the dividend that is designated as Eligible Dividend in the prescribed manner and within the time referred in Subsection 89(14).
9. By virtue of paragraph 55(3)(a), subsection 55(2) will not apply to any of the taxable dividends referred to in Rulings G and H, provided that as part of a series of transactions or events that includes any of the Proposed Transactions, there is no disposition or significant increase in interest as described in any of subparagraphs 55(3)(a)(i) to (v). For greater certainty, the Proposed Transactions described herein, in and of themselves, will not be considered to result in any disposition or significant increase in interest described in subparagraphs 55(3)(a)(i) to (v).
10. The cancellation of the Redemption Notes against the Repurchase Note and the Remaining Transferred Assets Note by way of legal set-off described in Paragraph 52 will not give rise to a forgiven amount to Cco and GP within the meaning of subsection 80(1) and 80.01(1). In addition, none of Cco and GP will otherwise realize a gain or a loss as a result of the cancellation of the Redemption Notes, the Repurchase Note and the Remaining Transferred Assets Note.
11. The amount of the Capital Dividend described in Paragraph 50:
    1. will not be included in computing CCo’s income pursuant to paragraph 83(2)(b); and
    2. will be added to CCo’s CDA pursuant to paragraph 83(2(a) and paragraph (b) of the CDA definition in subsection 89(1).
12. The provisions of subsection 51(1) will apply to H’s exchange of the XXXXXXXXXX Class B shares it holds in GP for XXXXXXXXXX Class C1 shares described in Paragraph 54.
13. Subsections 15(1), 55(4), 56(2) and 246(1), in and of themselves, will not apply to the Proposed Transactions.
14. Subsection 245(2) will not apply as a result of the Proposed Transactions, in and of themselves, to re-determine the tax consequences in the rulings given above.

These rulings are subject to the limitations and qualifications set out in Information Circular IC 70-6R10 dated 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, unless otherwise stated. The above rulings are based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

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

1. the PUC of any share or the ACB or FMV of any share or property referred to herein;
2. the balance of the CDA, GRIP, or RDTOH of any corporation, including any ERDTOH/NERDTOH balances;
3. whether any of the shares described herein constitute shares of a specified class; 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 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;

4. any relevant provincial legislation consequences arising as a result of the Proposed Transactions.

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

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