2020-0860401R3 Multi-wing farm split-up butterfly

Principal Issues: Whether the exception to subsection 55(2) provided in paragraph 55(3)(b) applies to the Proposed Transactions.

Position: Yes.

Reasons: The conditions have been satisfied and the butterfly denial provisions of subsection 55(3.1) do not apply.

Author: XXXXXXXXXX
Section: 55(1), 55(2), 55(3)(b), 55(3.1), 85(1), 84.1(1), 245

XXXXXXXXXX
                                                                       2020-086040

XXXXXXXXXX

Dear XXXXXXXXXX,

Re:   Advance Income Tax Ruling
        XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers described below (the “Taxpayers”). We also acknowledge the additional information provided in your various other communications with us in respect of this matter.

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

We understand that to the best of your knowledge and that of each of the Taxpayers involved, none of the issues described herein are:

(a)   in a previously filed tax return of the Taxpayers or person related to the Taxpayers;

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

(c)   under objection by the Taxpayers or a person related to the Taxpayers;

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

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

The tax account number, Tax Services Office, Tax Centre and address of each of the corporate Taxpayers involved are as follows:

XXXXXXXXXX

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

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

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

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

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

DEFINITIONS

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

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

“Act 1” means the XXXXXXXXXX;

“agreed amount” means 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);

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

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

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

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

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

“Corporation 3” means XXXXXXXXXX, a corporation incorporated under Act 1;

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

“CRA” means the Canada Revenue Agency;

“CSV” means “cash surrender value” as that term is defined in subsection 148(9);

“DC” means XXXXXXXXXX, a corporation incorporated under Act 1;

“DC Promissory Note #1” means the non-interest bearing demand promissory note to be issued by DC to TC1 on the redemption of its DC special shares held by TC1, as described in Paragraph 44;

“DC Promissory Note #2” means the non-interest bearing demand promissory note to be issued by DC to TC2 on the redemption of its DC special shares held by TC2, as described in Paragraph 44;

“DC Transfer” refers to the transfer of property by DC to TC1 and TC2 as described in Paragraphs 37 to 42;

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

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

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

“ERDTOH” means “eligible refundable dividend tax on hand” which has the meaning assigned by subsection 129(4);

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

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

“GRIP” means “general rate income pool” as that expression is defined 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);

“Newco 1” means a corporation to be incorporated under Act 1, as provided in Paragraph 28;

“Newco 2” means a corporation to be incorporated under Act 1, as provided in Paragraph 29;

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

“Parent A” means XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Parent A’s spouse is Parent B and their children include Sibling 1, Sibling 2 and Sibling 3;

“Parent A Insurance Policy” means the term life insurance policies on the life of Parent A, owned by DC;

“Parent B” means XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Parent B’s spouse is Parent A and their children include Sibling 1, Sibling 2 and Sibling 3;

“Parent B Insurance Policy” means the term life insurance policies on the life of Parent B, owned by DC;

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

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

“Proposed Transactions” means the transactions described in Paragraphs 28 to 47;

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

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

“Sibling 1” means XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Sibling 1 is the child of Parent A and Parent B and the sibling of Sibling 2 and Sibling 3;

“Sibling 1 Insurance Policy” means the term life insurance policies on the life of Sibling 1, owned by DC;

“Sibling 2” means XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Sibling 2 is the child of Parent A and Parent B and the sibling of Sibling 1 and Sibling 3. Sibling 2 is the spouse of Sibling 2 Spouse;

“Sibling 2 Insurance Policy” means the term life insurance policies on the life of Sibling 2, owned by DC;

“Sibling 2 Spouse” means XXXXXXXXXX, an individual resident in Canada for purposes of the Act. Sibling 2 Spouse is the spouse of Sibling 2;

“Sibling 2 Spouse Insurance Policy” means the term life insurance policies on the life of Sibling 2 Spouse, owned by DC;

“Sibling 3” means XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Sibling 3 is the child of Parent A and Parent B and the sibling of Sibling 1 and Sibling 2. Sibling 3 is the spouse of Sibling 3 Spouse;

“Sibling 3 Insurance Policy” means the term life insurance policies on the life of Sibling 3, owned by DC;

“Sibling 3 Spouse” means XXXXXXXXXX, an individual resident in Canada for purposes of the Act. Sibling 3 Spouse is the spouse of Sibling 3;

“Sibling 3 Spouse Insurance Policy” means the term life insurance policies on the life of Sibling 3 Spouse, owned by DC;

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

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

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

“Subsidiary” means XXXXXXXXXX, a corporation incorporated under Act 1;

“taxable Canadian corporation” has the meaning assigned in subsection 89(1);

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

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

“TC1” means XXXXXXXXXX, a corporation incorporated under Act 1;

“TC1 Promissory Note #1” means the non-interest bearing demand promissory note to be issued by TC1 to DC on the redemption of its TC1 Class C special shares held by DC, as described in Paragraph 45;

“TC2” means XXXXXXXXXX, a corporation incorporated under Act 1;

“TC2 Promissory Note #2” means the non-interest bearing demand promissory note to be issued by TC2 to DC on the redemption of its TC2 Class C special shares held by DC, as described in Paragraph 45;

“TCC” means “taxable Canadian corporation” and has the meaning assigned by subsection 89(1); and

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

FACTS

Facts Relating to DC

1.    DC is a corporation that was incorporated on XXXXXXXXXX and amalgamated on XXXXXXXXXX and XXXXXXXXXX under Act 1. DC is a TCC and a CCPC.

2.    DC carries on a farming business. DC’s taxation year and fiscal period end on XXXXXXXXXX and DC reports income from its farming business for tax purposes using the cash method.

3.    Each of Parent A, Parent B, Sibling 1, Sibling 2, Sibling 2 Spouse, Sibling 3 and Sibling 3 Spouse are actively engaged in the farm operations. Sibling 1 operates XXXXXXXXXX, Sibling 2 and Sibling 2 Spouse operate XXXXXXXXXX and Sibling 3 and Sibling 3 Spouse operate XXXXXXXXXX. Parent A and Parent B provide oversight over all farming operations.

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

a.    An unlimited number of Class 1, 2, 3, 4 and 5 voting common shares;
b.    An unlimited number of Class A voting special shares; and
c.    An unlimited number of Class B, C, D, E, F, G and H non-voting special shares.

5.    Currently, and at the time the Proposed Transactions will commence, the issued and outstanding share capital of DC are (will be) owned as follows:

Shareholder      Class of Shares       #of Shares       PUC        ACB

Parent A            Class A special        XXXX               XXXX       XXXX
Parent A            Class C special       XXXX               XXXX       XXXX
Parent A            Class E special       XXXX               XXXX       XXXX
Parent B            Class B special       XXXX               XXXX       XXXX
Parent B            Class E special       XXXX               XXXX       XXXX
Parent B            Class F special       XXXX               XXXX       XXXX
TC1                   Class 3 common     XXXX               XXXX       XXXX
TC2                   Class 1 common     XXXX               XXXX       XXXX
Corporation 3    Class 4 common     XXXX               XXXX       XXXX

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

7.    As at XXXXXXXXXX, DC has an ERDTOH and NERDTOH balance of XXXXXXXXXX, and a GRIP balance of $XXXXXXXXXX.

Facts relating to Subsidiary

8.    Subsidiary is a corporation that was incorporated under Act 1. Subsidiary is a TCC and a CCPC.

9.    Subsidiary’s taxation year and fiscal period end on XXXXXXXXXX.

10.   The real estate used in DC’s XXXXXXXXXX is owned by Subsidiary.

11.   DC owns XXXXXXXXXX Class 1 common shares of Subsidiary and Parent A and Parent B each own 1 Class D super-voting special share of Subsidiary.

12.   All shareholders of Subsidiary hold their shares as capital property.

Facts relating to TC1

13.   TC1 is a corporation that was incorporated under Act 1. TC1 is a TCC and a CCPC.

14.   TC1’s taxation year and fiscal period end on XXXXXXXXXX.

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

a.    An unlimited number of Class 1 and 2 voting common shares;
b.    An unlimited number of Class 3 and 4 non-voting common shares;
c.    An unlimited number of Class A, B, and C, non-voting special shares, redeemable and retractable for the FMV of the consideration received upon issuance (subject to a price adjustment clause);
d.    An unlimited number of Class D, E, F, G, H, non-voting special shares, redeemable and retractable for $XXXXXXXXXX per share; and
e.    An unlimited number of Class I special shares, with XXXXXXXXXX votes per share.

16.   Currently, and at the time the Proposed Transactions will commence, the issued and outstanding share capital of TC1 are (will be) owned as follows:

Shareholder      Class of Shares       #of Shares       PUC        ACB

Sibling 1            Class 1 common     XXXX               XXXX      XXXX
Sibling 1            Class A special        XXXX               XXXX      XXXX

17.   All shareholders of TC1 hold their shares as capital property.

18.   As at XXXXXXXXXX, TC1 has an ERDTOH, NERDTOH and a GRIP balance of XXXXXXXXXX.

Facts relating to TC2

19.   TC2 is a corporation that was incorporated under Act 1. TC1 is a TCC and a CCPC.

20.   TC2’s taxation year and fiscal period end on XXXXXXXXXX.

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

a.    An unlimited number of Class 1 and 2 voting common shares;
b.    An unlimited number of Class 3 and 4 non-voting common shares;
c.    An unlimited number of Class A, B, and C, non-voting special shares, redeemable and retractable for the FMV of the consideration received upon issuance (subject to a price adjustment clause);
d.    An unlimited number of Class D, E, F, G, H, non-voting special shares, redeemable and retractable for $XXXXXXXXXX per share; and
e.    An unlimited number of Class I special shares, with XXXXXXXXXX votes per share and redeemable and retractable for $XXXXXXXXXX per share.

22.   Currently, and at the time the Proposed Transactions will commence, the issued and outstanding share capital of TC2 are (will be) owned as follows:

Shareholder          Class of Shares     #of Shares     PUC        ACB

Sibling 2                Class 1 common   XXXX              XXXX     XXXX
Sibling 2                Class A special      XXXX              XXXX     XXXX
Sibling 2 Spouse   Class 2 common   XXXX              XXXX     XXXX

23.   All shareholders of TC2 hold their shares as capital property.

24.   As at XXXXXXXXXX, TC2 has an ERDTOH, NERDTOH and a GRIP balance of XXXXXXXXXX.

Facts relating to Corporation 3

25.   Corporation 3 is a corporation that was incorporated under Act 1. Corporation 3 is a TCC and a CCPC.

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

a.    An unlimited number of Class 1 and 2 voting common shares;
b.    An unlimited number of Class 3 and 4 non-voting common shares;
c.    An unlimited number of Class A, B, and C, non-voting special shares, redeemable and retractable for the FMV of the consideration received upon issuance (subject to a price adjustment clause);
d.    An unlimited number of Class D, E, F, G, H, non-voting special shares, redeemable and retractable for $XXXXXXXXXX per share; and
e.    An unlimited number of Class I special shares, with XXXXXXXXXX votes per share.

27.   Currently, and at the time the Proposed Transactions will commence, the issued and outstanding share capital of Corporation 3 are (will be) owned as follows:

Shareholder         Class of Shares       #of Shares    PUC        ACB

Sibling 3               Class 1 common     XXXX            XXXX      XXXX
Sibling 3               Class A special        XXXX            XXXX      XXXX
Sibling 3 Spouse  Class 2 common      XXXX           XXXX      XXXX

PROPOSED TRANSACTIONS

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

28.   Newco 1 will be incorporated. Parent A will be issued super-voting special shares of Newco 1 and Sibling 1 will be issued voting common shares of Newco 1.

Newco 1 will have no purpose or activity other than to acquire legal title (but not beneficial ownership) to certain real estate property owned by DC and situated in XXXXXXXXXX, and to hold such title to all such property solely as nominee, agent and bare trustee for the beneficial owner of such property, as described in Paragraph 34.

29.   Newco 2 will be incorporated. Parent A will be issued super-voting special shares of Newco 2 and Sibling 2 and Spouse 2 will be issued voting common shares of Newco 2.

Newco 2 will have no purpose or activity other than to acquire legal title (but not beneficial ownership) to certain real estate property owned by DC and situated inXXXXXXXXXX, and to hold such title to all such property solely as nominee, agent and bare trustee for the beneficial owner of such property, as described in Paragraph 34.

30.   On a contemporaneous basis with the share transfers described in Paragraphs 31 to 33, Parent A will transfer XXXXXXXXXX of Parent A’s Class A, Class C and Class E special shares of DC to TC2. As sole consideration for Parent A’s shares of DC to TC2, TC2 will issue to Parent A, a number of Class B special shares and Class I special shares having a combined redemption value and FMV equal to the aggregate FMV of the shares of DC so transferred to it. Parent A and TC2 will jointly elect, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to these transfers. The respective agreed amounts will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) as they apply to each transfer of shares, nor will such agreed amounts exceed the FMV of the DC shares transferred and the TC2 shares received, as the case may be.

The amount added to the stated capital amount of the Class B and Class I special shares of TC2, issued to Parent A, will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, of the DC shares transferred to TC2 by Parent A; and (ii) the aggregate ACB to Parent A, immediately before the disposition of the DC shares transferred to TC2 by Parent A, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the increase in the PUC of the TC2 Class B and Class I special shares will not exceed the maximum amount that could be added to the PUC of such class of shares without an adjustment under paragraph 84.1(1)(a).

31.   Parent A will transfer XXXXXXXXXX of Parent A’s Class A, Class C and Class E special shares of DC to TC1. As sole consideration for Parent A’s shares of DC transferred to TC1, TC1 will issue to Parent A, a number of Class B special shares and Class I special shares having a combined redemption value and FMV equal to the aggregate FMV of the shares of DC so transferred to it. Parent A and TC1 will jointly elect, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to these transfers. The respective agreed amounts will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) as they apply to each transfer of shares, nor will such agreed amounts exceed the FMV of the DC shares transferred and the TC1 shares received, as the case may be.

The amount added to the stated capital amount of the Class B special shares and Class I special shares of TC1, issued to Parent A, will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, of the DC shares transferred to TC1 by Parent A; and (ii) the aggregate ACB to Parent A, immediately before the disposition of the DC shares transferred to TC1 by Parent A, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the increase in the PUC of the TC1 Class B and Class I special shares will not exceed the maximum amount that could be added to the PUC of such class of shares without an adjustment under paragraph 84.1(1)(a).

32.   Parent B will transfer XXXXXXXXXX of Parent B’s Class B, Class F and Class E special shares of DC to TC2. As sole consideration for Parent B’s shares of DC transferred to TC2, TC2 will issue to Parent B, a number of Class D special shares and Class E special shares having a combined redemption value equal and FMV to the aggregate FMV of the shares of DC so transferred to it. Parent B and TC2 will jointly elect, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to these transfers. The respective agreed amounts will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) as they apply to each transfer of shares, nor will such agreed amounts exceed the FMV of the DC shares transferred and the TC2 shares received, as the case may be.

The amount added to the stated capital amount of the Class D special shares and Class E special shares of TC2, issued to Parent B, will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, of the DC shares transferred to TC2 by Parent B; and (ii) the aggregate ACB to Parent B, immediately before the disposition of the DC shares transferred to TC2 by Parent B, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the increase in the PUC of the TC2 Class D special shares and Class E special shares will not exceed the maximum amount that could be added to the PUC of such class of shares without an adjustment under paragraph 84.1(1)(a).

33.   Parent B will transfer XXXXXXXXXX of Parent B’s Class B, Class F and Class E special shares of DC to TC1. As sole consideration for Parent B’s shares of DC transferred to TC1, TC1 will issue to Parent B, a number of Class D special shares and Class E special shares having a combined redemption value and FMV equal to the aggregate FMV of the shares of DC so transferred to it. Parent B and TC1 will jointly elect, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to these transfers. The respective agreed amounts will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) as they apply to each transfer of shares, nor will such agreed amounts exceed the FMV of the DC shares transferred and the TC1 shares received, as the case may be.

The amount added to the stated capital amount of the Class D special shares and Class E special shares of TC1, issued to Parent B, will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, of the DC shares transferred to TC1 by Parent B; and (ii) the aggregate ACB to Parent B, immediately before the disposition of the DC shares transferred to TC1 by Parent B, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the increase in the PUC of the TC1 Class D special shares and Class E special shares will not exceed the maximum amount that could be added to the PUC of such class of shares without an adjustment under paragraph 84.1(1)(a).

34.   DC will transfer legal title of certain real estate situated in XXXXXXXXXX, to each of Newco 1 and Newco 2 such that Newco 1 and Newco 2, as the case may be, will ultimately hold legal title to the particular real estate to be transferred by DC to TC1 and TC2, as the case may be, as part of the DC Transfer described in Paragraph 37.

DC will enter into a bare trust agreement with each of Newco 1 and Newco 2 in respect of the particular real estate situated in Ontario, the terms of which will include the following:

a.    Each of Newco 1 and Newco 2 will hold legal title to the respective properties described above as nominee, agent and bare trustee for the sole benefit and account of DC, and for greater certainty, DC will be the only beneficiary of such trust and will remain the beneficial owner of such property; and

b.    Newco 1 and Newco 2, as agent for DC, will deal with the property described in a. exclusively as directed by DC.

In the subsequent transfer of the beneficial ownership of the particular real estate by DC to TC1 and by DC to TC2 as described in Paragraph 37, a similar bare trust agreement between Newco 1 and TC1 and between Newco 2 and TC2 will be implemented.

Types of Property

35.   Immediately before the DC Transfer of property described in Paragraph 37, the property of DC will be classified into the following three types of property for purposes of the definition of distribution, provided in subsection 55(1), as follows:

a.    cash or near-cash property, comprising of all the current assets of DC including, accounts receivable, inventory, prepaid expenses, demand loans receivable, indirect tax receivable, income taxes receivable, income taxes recoverable, and the cash surrender value of life insurance policies;

b.    business property, comprising all of the assets of DC other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business (other than a specified investment business), which will include the property, plant and equipment, farm residences located on corporate-owned property, shares of XXXXXXXXXX, excess of FMV over cash surrender value of life insurance policies; and

c.    investment property, comprising all of the investments 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 which will include the shares of XXXXXXXXXX and loans receivable from the XXXXXXXXXX.

As DC has significant influence over Subsidiary, DC will be required to use the consolidated look-through method for determining the appropriate proportion of each of the three types of property (cash or near cash, business and investment property) that the shares of the capital stock of Subsidiary and the indebtedness receivable by DC from Subsidiary will represent. For greater certainty, the FMV of the shares of the capital stock of Subsidiary, and of any indebtedness receivable by DC from Subsidiary, will be allocated between the three types of property by multiplying the FMV of the shares of the capital stock of Subsidiary or the amount of indebtedness receivable therefrom, as the case may be, by the proportion that the net FMV of each type of property owned by Subsidiary is of the aggregate net FMV of all of the property owned by Subsidiary.

For greater certainty, for purposes of the DC Transfer described in Paragraph 37:

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

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

iii.  any advances by DC to other corporations that have a term of less than 12 months or are due on demand, if any, are considered cash or near-cash property;

36.   In determining the net FMV of each type of property of DC immediately before the DC Transfer described in Paragraph 37, the liabilities of DC will be allocated to, and deducted in the calculation of, the net FMV of each such type of property of DC in the following manner:

a.    all current liabilities and shareholder loans will be allocated to each cash or near-cash property of DC in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property of DC. The total amount of DC’s current liabilities to be allocated to DC’s cash or near cash property will not exceed the aggregate FMV of all of DC’s cash or near-cash property;

b.    following the allocation of the current liabilities and shareholder loans described in subparagraph a, any remaining net FMV of accounts receivable, inventory and 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, TC1 or TC2, as the case may be, in the ordinary course of the business to which they relate (for clarity, cash will not be reclassified to business property);

c.    liabilities of DC, other than those described in subparagraph a, that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and

d.    if any liabilities remain after the allocations described in subparagraphs a and c are made, such remaining liabilities will then be allocated to the cash or near-cash property, business property and investment property of DC, on the basis of relative net FMV of each type of property immediately prior to the allocation of such remaining liabilities, but after the allocation of the liabilities as described in subparagraphs a and c. However, where DC is considered to have a negative amount of a type of property because of the allocations in subparagraphs a or c, for purposes of allocating the remaining liabilities, the net FMV of that type of property will be deemed nil resulting in none of these liabilities being allocated to that type of property.

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

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

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

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

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

DC Transfer

37.   DC will transfer to TC1 and TC2, each corporation’s proportionate share of the net FMV of each type of property owned by DC at that time, such that immediately following the transfer of the properties and the assumption by each of TC1 and TC2 of DC’s liabilities as described in Paragraph 41, including the transfer of the life insurance policies as described in Paragraphs 39 and 40, the aggregate net FMV of each type of property transferred by DC to each of TC1 and TC2 will be equal to, or approximate, that proportion of each type of property determined by the formula:

A x B/C, where

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

B is the FMV, immediately before the distribution, of all the DC shares owned, at that time, by such TC; and

C is the FMV, immediately before the distribution, of all the issued and outstanding DC shares.

The expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of each type of property that each of TC1 and TC2 will receive as compared to what it would have received had it received its appropriate pro rata share of the net FMV of that type of property of DC.

For greater certainty, the shares of the capital stock of Subsidiary and the indebtedness receivable by DC from Subsidiary will be distributed entirely to TC2 and the Sibling 3 Insurance Policy and the Sibling 3 Spouse Insurance Policy will be retained by DC.

38.   TC1 will enter into a bare trust agreement with Newco 1 and TC2 will enter into a bare trust agreement with Newco 2, similar to the bare trust agreement described in Paragraph 34. Each such bare trust agreement will specify, for greater certainty, that Newco 1 and Newco 2, as the case may be, will hold legal title as nominee, agent and bare trustee for the sole benefit and account of TC1 or TC2, as the case may be, that corresponds to the particular beneficial interest in the real estate property transferred by DC to TC1 and TC2, as the case may be, as described in Paragraph 37.

39.   As part of the DC Transfer, DC will transfer the interests in the Sibling 1 Insurance Policy as well as the proportionate interests in the Parent A Insurance Policy and the Parent B Insurance Policy to TC1 as a dividend in kind. The proceeds of the disposition of such interest in the policy will be determined in accordance with subsection 148(7) as the greater of the value of the interest; the FMV of the consideration given for the interest; and the adjusted cost basis of the interest to the holder of the policy immediately before the disposition of the policy.

The Parent A Insurance Policy and the Parent B Insurance Policy will be updated to reflect the beneficiary as being all of DC, TC1 and TC2. The Sibling 1 Insurance Policy will be updated to reflect the beneficiary as being TC1. The insurance policies transferred are not eligible property and no election will be made under subsection 85(1) in respect of the transfer of these policies.

40.   As part of the DC Transfer, DC will transfer the interests in the Sibling 2 Insurance Policy, the Sibling 2 Spouse Insurance Policy, as well as the proportionate interests in the Parent A Insurance Policy and the Parent B Insurance Policy to TC2 as a dividend in kind. The proceeds of the disposition of such interest in the policy will be determined in accordance with subsection 148(7) as the greater of the value of the interest; the FMV of the consideration given for the interest; and the adjusted cost basis of the interest to the holder of the policy immediately before the disposition of the policy.

The Parent A Insurance Policy and the Parent B Insurance Policy will be updated to reflect the beneficiary as being all of DC, TC1 and TC2. The Sibling 2 Insurance Policy and the Sibling 2 Spouse Insurance Policy will be updated to reflect the beneficiary as being TC2. The insurance policies transferred are not eligible property and no election will be made under subsection 85(1) in respect of these policies.

41.   As consideration for the transfer of property by DC to TC1 and TC2 on the DC Transfer described in Paragraph 37 (other than for greater certainty, the insurance policy transfers described in Paragraphs 39 and 40), TC1 and TC2 will each:

a.    assume an appropriate amount of liabilities of DC;

b.    TC1 will issue a number of TC1 Class C special shares to DC which will have an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV, at the time of the distribution, of the distribution property received by TC1, exceeds the aggregate amount of the liabilities of DC assumed by TC1, as described in subparagraph a. DC will hold the TC1 Class C special shares as capital property. The TC1 Class C special shares will be taxable preferred shares and short-term preferred shares; and

c.    TC2 will issue a number of TC2 Class C special shares to DC which will have an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV, at the time of the distribution, of the distribution property received by TC2, exceeds the aggregate amount of the liabilities of DC assumed by TC2, as described in subparagraph a. DC will hold the TC2 Class C special shares as capital property. The TC2 Class C special shares will be taxable preferred shares and short-term preferred shares.

42.   In respect of the distribution of property described in Paragraph 37, DC will jointly elect with each of TC1 and TC2, as the case may be, in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of each eligible property of DC that is transferred by DC to each of TC1 and TC2. The agreed amount in respect of each such eligible property will be as follows:

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

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

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

The agreed amount in respect of each eligible property so transferred using the provisions of subsection 85(1), will not be greater than the FMV of such eligible property. The amount of the liabilities assumed by each of TC1 and TC2, which are allocated to a particular eligible property that is subject to an election under subsection 85(1), will not exceed the agreed amount for that particular property. The amount of liabilities assumed by each of TC1 and TC2, which are allocated to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of any such property.

TC1 and TC2, as the case may be, will add to its respective stated capital account for the particular class of special shares issued to DC, an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to that TC, and (b) the aggregate FMV, in the case of each property transferred to that TC that is not an eligible property, less (c) the aggregate principal amounts of the liabilities of DC assumed by that TC. For greater certainty, the amount added to the stated capital account for the particular class of shares to be issued by such TC as partial consideration for property it will receive on the distribution will not exceed the maximum amount that could be added to the aggregate PUC of such shares without a reduction taking place pursuant to subsection 85(2.1).

Capital Dividend

43.   The directors of DC will pass a resolution to increase the stated capital (and consequently the PUC) of the DC Class 3 common shares owned by TC1 and the Class 1 common shares owned by TC2, by an amount not exceeding in aggregate, its CDA balance at that time, currently expected to be approximately $XXXXXXXXXX. DC will elect in prescribed manner and prescribed form and within the time referred to in subsection 83(2) that each deemed dividend arising as a result of these increases of stated capital/PUC be paid out of its CDA.

Share Redemptions

44.   On XXXXXXXXXX, DC will redeem all of the Class A, B, C, E and F special shares held by TC1 and TC2 for an amount equal to the aggregate redemption amount of such shares. DC will also purchase for cancellation all of the Class 3 common shares held by TC1 and the all of the Class 1 common shares held by TC2 for an amount equal to the aggregate FMV of such shares. As consideration therefor, DC will issue DC Promissory Note #1 to TC1, and DC Promissory Note #2 to TC2, which will each have a principal amount and FMV equal to the aggregate redemption amount of the Class A, B, C, E and F DC special shares and the aggregate FMV of the Class 1 and Class 3 common DC common shares which were owned by TC1, and TC2, as the case may be, immediately before each such redemption. TC1 and TC2 will accept DC Promissory Note #1 and DC Promissory Note #2, respectively, as payment in full for the DC special shares redeemed and the particular classes of DC common shares purchased for cancellation.

45.   On XXXXXXXXXX, TC1 and TC2 will redeem all of the TC1 Class C special shares and all of the TC2 Class C special shares owned by DC for an amount equal to the aggregate redemption amount of such shares. As consideration therefor, TC1 will issue TC1 Promissory Note #1 to DC and TC2 will issue TC2 Promissory Note #2 to DC which will each have a principal amount and FMV equal to the aggregate redemption amount of the TC1 Class C special shares owed by DC and the TC2 Class C special shares owned by DC, as the case may be, immediately before each such redemption. DC will accept TC1 Promissory Note #1 and TC2 Promissory Note #2 as payment in full for the TC1 Class C special shares and the TC2 Class C special shares redeemed, respectively.

46.   The respective DC Promissory Notes will be set-off in full against the corresponding TC Promissory Notes and such notes will be cancelled without payment. In particular, DC Promissory Note #1 will be set-off in full against TC1 Promissory Note #1 and DC Promissory Note #2 will be set-off in full against TC2 Promissory Note #2.

47.   After a 36 month period following the effective date of the DC Transfer described in Paragraph 37, Newco 1 will be amalgamated with TC1 and Newco 2 will be amalgamated with TC2. As a result of the amalgamations, the beneficial and legal ownership of the real estate property will merge.

ADDITIONAL INFORMATION

48.   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 transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

49.   There has not, and will not be, as part of the 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).

50.   None of DC, TC1 or TC2 is or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a specified financial institution, a restricted financial institution or a corporation described in any of the paragraphs (a) to (f) of the definition of financial intermediary corporation.

51.   At any time before and during the series of transactions and events that include the Proposed Transactions, none of the shares of DC, TC1 or TC2 will be:

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

b.    issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5);

c.    the subject of a dividend rental arrangement;

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

e.    issued for consideration that is or includes:

i.    an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

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

52.   Each of DC, TC1 and TC2 will have the financial capacity to honor, upon presentation for payment, the amount payable under their respective promissory notes issued as part of the Proposed Transactions.

53.   The Proposed Transactions will not result in any of the Taxpayers being unable to pay its existing tax liabilities.

At any time before, during and after the series of transactions and events that include the Proposed Transactions, Parent A and Parent B will continue to be actively involved in the farming business operations carried on by DC, TC1 and TC2. Parent A and Parent B are XXXXXXXXXX of age. They wish to maintain control of the corporate group, following the Proposed Transactions, to allow continued control over their farmland, as well as control over their earned equity as they redeem their share ownership interest to fund their retirement.

PURPOSE OF THE PROPOSED TRANSACTIONS

54.   The purpose of the Proposed Transactions is to separate DC’s XXXXXXXXXX into separate corporations as Sibling 1 and Sibling 2/Sibling 2 Spouse wish to carry on their respective portion of the business independently from one another, and from Sibling 3/Sibling 3 Spouse, who will continue to carry on XXXXXXXXXX in DC. The Proposed Transactions will allow the Siblings and where applicable, such Sibling’s spouse to have direct, separate control over their pro rata share of DC’s property in order to achieve this purpose. The Proposed Transactions will also allow Parent A and Parent B to retain ownership in all farming operations, while carrying out estate planning objectives.

55.   The purpose of the transfer by DC of its legal title to certain real estate situated in XXXXXXXXXX to Newco 1 and Newco 2, as described in Paragraph 34, is to allow the subsequent transfer of the beneficial ownership of the real estate on the DC Transfer, to be exempt from XXXXXXXXXX land transfer tax under sections 2 and 3 of the XXXXXXXXXX The exemption in section 2 of XXXXXXXXXX generally will apply in respect of an unregistered transfer of a beneficial interest in real property that occurs as a consequence of a “butterfly” reorganization under paragraph 55(3)(b).

RULINGS GIVEN

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

A.    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), subsection 85(1) will apply to:

a.    the transfer of the DC Class A, C and E special shares, owned by Parent A to each of TC1 and TC2, as described in Paragraphs 30 and 31;

b.    the transfer of the DC Class B, F and E special shares, owned by Parent B to each of TC1 and TC2, as described in Paragraphs 32 and 33; and

c.    the transfer of each eligible property owned by DC to TC1 and TC2, as the case may be, on the DC Transfer described in Paragraph 37;

such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor’s proceeds of disposition of the particular property and the transferee’s cost thereof.

For greater certainty, paragraph 85(1)(e.2) will not apply to any of these transfers.

B.    As a result of the redemption by DC of its particular classes of special shares and the purchase for cancellation its particular classes of common shares owned by TC1 and TC2, as the case may be, as described in Paragraph 44, by virtue of subsection 84(3), DC will be deemed to have paid, and such TC will be deemed to have received, a taxable dividend at that time equal to the amount, by which the amount paid by DC in respect of its redemption of those particular special shares owned by that TC and in respect of its purchase for cancellation of those particular common shares owned by that TC, exceeds the aggregate PUC attributable to those shares immediately before such redemption and purchase for cancellation, as the case may be.

C.    As a result of the redemption by each of TC1 and TC2 of its particular class of special shares owned by DC, as described in Paragraph 45, by virtue of subsection 84(3), each of TC1 and TC2 will be deemed to have paid, and DC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of such special shares exceeds the aggregate PUC in respect of such class of special shares immediately before such redemption.

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

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

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

c.    will be excluded in determining the recipient corporation’s proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of proceeds of disposition;

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

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

f.    will not be subject to tax under Part IV except to the extent 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).

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

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

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

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

d.    an acquisition of property in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

F.    The application of subsection 84.1(1) to the share transfers by Parent A and Parent B to each of TC1 and TC2, as described in Paragraphs 30 to 33, will not result in:

a.    a deemed dividend paid by TC1 and TC2, and received by Parent A and Parent B, pursuant to paragraph 84.1(1)(b);

b.    a reduction of the PUC of the TC1 Class B and Class I special shares, and the TC2 Class B and Class I special shares, issued to Parent A, provided that the PUC of each class of shares of the capital stock of TC1 and TC2, as the case may be, issued to Parent A, on the transfers is a nominal amount not exceeding the maximum amount that could be added to the PUC of such classes of shares having regard to paragraph 84.1(1)(a); and

c.    a reduction of the PUC of the TC1 Class D and Class E special shares and the TC2 Class D and Class E special shares, issued to Parent B provided that the PUC of each class of shares of the capital stock of TC1 and TC2, as the case may be, issued to Parent B, on the transfers is a nominal amount not exceeding the maximum amount that could be added to the PUC of such classes of shares having regard to paragraph 84.1(1)(a).

G.    The set-off and cancellation of the DC Promissory Notes and the TC Promissory Notes as described in Paragraph 46 will not, in and of itself, give rise to a forgiven amount. In addition, neither DC nor TC1 or TC2 will otherwise 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 by themselves.

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

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R9 dated September 29, 2020, and are binding on the CRA provided that the Proposed Transactions are completed within the time frame described in this letter, unless otherwise stated.

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

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:

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

(b)   the balance of the CDA, GRIP, ERDTOH or NERDTOH of any corporation;

(c)   whether any of the shares described herein constitute shares of a specified class;

(d)   whether there have been other dispositions of property by DC to a corporation controlled by DC or a predecessor of DC.

(e)   to the extent that a deemed dividend arises from a corporation redeeming, acquiring or purchasing for cancellation 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 comment on this possible circularity issue.

(f)   any other tax consequences 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.

Further, 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 Ruling Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  “Soft ACB” for purposes of section 84.1.

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