2020-0863171R3 Gross basis split-up Butterfly

Principal Issues: Do the Proposed Transactions qualify for the butterfly exemption under paragraph 55(3)(b)?

Position: Yes.

Reasons: Standard butterfly reorganization.

Author: XXXXXXXXXX
Section: Paragraph 55(3)(b), subsection 55(2)

XXXXXXXXXX

                                                                                                 2020-086317

XXXXXXXXXX

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letters dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request. The information that you provided in such correspondence and in the telephone discussions form part of this letter only to the extent described herein.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues contained herein:

(i) is in an earlier return of the taxpayers or a related person;

(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayers or a related person;

(iii) is under objection by the taxpayers or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired;

(v) is the subject of a ruling previously issued by the Directorate.

DEFINITIONS

Unless otherwise stated:

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

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

(c) all references to monetary amounts are in Canadian dollars; and

(d) the singular should be read as plural and vice versa where the circumstances so require.

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

“AB” means XXXXXXXXXX;

“AB Family” means AB, his spouse, his children, his grandchildren and the spouse of any such children or grandchildren and any trust for the benefit thereof;

“AB Holdco” means XXXXXXXXXX, a corporation existing under the BCA;

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

“Agreement” means the agreement of AB, CD, DC, Holdco1 and Holdco2, inter alia, as described in Paragraph 19.

"arm's length" has the meaning assigned by section 251;

“BCA” mean XXXXXXXXXX;

“BCA2” means XXXXXXXXXX;

“BN” means business number;

“Business” means the business of DC described in Paragraph 4;

"capital property" has the meaning assigned by section 54;

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

“CD” means XXXXXXXXXX;

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

“CD Family” means CD, his spouse, his children, his grandchildren and the spouse of any such children or grandchildren and any trust for the benefit thereof;

“CD Holdco” means XXXXXXXXXX, a corporation existing under the BCA;

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

“DC” means XXXXXXXXXX, a corporation existing under the BCA2;

“DC Transfers” means the transfers of property by DC to TC1 and TC2 described in Paragraph 32;

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

“Families” means the AB Family and the CD Family;

"FMV" means fair market value, being the highest price available in an open and unrestricted market between informed and prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale;

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

“Holdco Transfers” means the transfers of DC common shares by Holdco1 and Holdco2 to TC1 and TC2, respectively, described in Paragraph 28;

“Holdco1” means XXXXXXXXXX, a corporation existing under the BCA2;

“Holdco2” means XXXXXXXXXX, a corporation existing under the BCA2;

“LTTA” XXXXXXXXXX;

“Nominee1” means a corporation to be formed under the BCA2, as described in Paragraph 21;

“Nominee2” means a corporation to be formed under the BCA2, as described in Paragraph 22;

“Notes” means the TC1 Note and the TC2 Note;

"Paragraph" refers to a numbered paragraph in this letter;

“pre-1972 CSOH” means “pre-1972 capital surplus on hand”, as that term is defined in subsection 88(2.1);

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

“Properties” means Property1, Property2, Property3 and Property4;

“Property1” means the land, building, other improvements and related chattels located at XXXXXXXXXX;

“Property2” means the land, building, other improvements and related chattels located at XXXXXXXXXX;

“Property3” means land, building, other improvements and related chattels located at XXXXXXXXXX;

“Property4” means land, building, other improvements and related chattels located at XXXXXXXXXX;

“Proposed Transactions” means the transactions described in Paragraphs 21 to 41;

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

“RDTOH” means “eligible refundable dividend tax on hand” and “non-eligible refundable dividend tax on hand”, as those terms are defined in subsection 129(4);

“safe income on hand” means income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation after 1971 and before the safe-income determination time for a transaction, event or series of transactions or events;

"stated capital" means the amount of capital in respect of a class or series of shares determined in accordance with the BCA2;

“TC1” means a corporation to be formed under the BCA2, as described in Paragraph 26;

“TC1 Note” means the non-interest bearing demand promissory note to be issued by TC1 to DC on the redemption of the TC1 Preferred Shares described in Paragraph 37;

“TC1 Preferred Shares” means the preferred shares of TC1 described in Paragraph 26;

“TC2” means a corporation to be formed under the BCA2, as described in Paragraph 27;

“TC2 Note” means the non-interest bearing demand promissory note to be issued by TC2 to DC on the redemption of the TC2 Preferred Shares described in Paragraph 37;

“TC2 Preferred Shares” means the preferred shares of TC2 described in Paragraph 27; and

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

FACTS

1. AB and CD were brothers. Individual members of the AB Family are not related to individual members of the CD Family for purposes of the Act. Holdco1, Holdco2 and DC are not related for purposes of the Act.

Facts Relating to DC

2. DC is a private corporation, a taxable Canadian corporation and a CCPC. DC was formed by amalgamation on XXXXXXXXXX. DC’s fiscal period and taxation year ends on XXXXXXXXXX. DC’s tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre. DC’s address is XXXXXXXXXX.

3. The authorized capital of DC consists of an unlimited number of common shares, XXXXXXXXXX Class “A” preference shares and XXXXXXXXXX Class “B” preference shares. XXXXXXXXXX common shares are issued and outstanding, owned equally (XXXXXXXXXX shares each) by Holdco1 and Holdco2. There are no issued and outstanding preference shares. Holdco1’s ACB of the DC shares, and the PUC of the DC shares owned by Holdco1, is $XXXXXXXXXX. Holdco2’s ACB of the DC shares, and the PUC of the DC shares owned by Holdco2, is $XXXXXXXXXX.

4. DC’s principal activity is XXXXXXXXXX (the “Business”), the principal assets of which consist of XXXXXXXXXX the Properties and cash. The aggregate FMV of DC’s assets is approximately $XXXXXXXXXX, and the FMV of each of the Properties is as follows:

i. Property1:XXXXXXXXXX;

ii. Property2:XXXXXXXXXX;

iii. Property3: XXXXXXXXXX; and

iv. Property4: XXXXXXXXXX.

5. The building and equipment in respect of each Property is treated as a separate class for UCC purposes.

6. Immediately before the Proposed Transactions, DC’s principal assets will consist of:

i. cash and cash-like assets (such as units in money market funds or GICs);

ii. the Properties; and

iii. property of the Business other than the Properties (including accounts receivable, pre-paid expenses, office equipment and an automobile).

7. The liabilities of DC were approximately $XXXXXXXXXX as at XXXXXXXXXX, which consisted principally of XXXXXXXXXX.

8. DC employs in the Business more than XXXXXXXXXX full-time employees; XXXXXXXXXX. DC therefore considers the property of the Business owned by it to be business property for purposes of the classification described in Paragraph 30.

9. As at XXXXXXXXXX, DC’s (a) GRIP balance was $XXXXXXXXXX; (b) RDTOH balance was XXXXXXXXXX; (c) CDA balance was XXXXXXXXXX and (d) pre-1972 CSOH balance was estimated at $XXXXXXXXXX.

Facts Relating to Holdco1

10. Holdco1 is a private corporation, a taxable Canadian corporation and a CCPC. Holdco1 was incorporated on XXXXXXXXXX. Holdco1’s fiscal period and taxation year ends on XXXXXXXXXX. Holdco1’s tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre. Holdco1’s address is XXXXXXXXXX.

11. The authorized capital of Holdco1 consists of an unlimited number of common shares, Class “A” special shares, Class “B” special shares and Class “C” special shares. XXXXXXXXXX Class “A” special shares and XXXXXXXXXX Class “C” special shares are owned by the estate of AB, XXXXXXXXXX Class “B” special shares are owned by a child of AB, XXXXXXXXXX Class “B” special shares are owned by a child of AB, XXXXXXXXXX Class “B” special shares are owned by a child of AB and XXXXXXXXXX common shares are owned by AB Holdco. All of the shareholders of Holdco1 hold their shares as capital property and did not acquire the shares in contemplation of the Proposed Transactions.

12. All of the shares of AB Holdco are held directly or indirectly by members of the AB Family. All of the shareholders of AB Holdco hold their shares as capital property and did not acquire the shares in contemplation of the Proposed Transactions.

13. Holdco1’s assets consist of the XXXXXXXXXX common shares of DC referenced in Paragraph 3 and approximately $XXXXXXXXXX in cash and near cash.

Facts Relating to Holdco2

14. Holdco2 is a private corporation, a taxable Canadian corporation and a CCPC. Holdco2 was incorporated on XXXXXXXXXX. Holdco2’s fiscal period and taxation year ends on XXXXXXXXXX. Holdco2’s tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre. Holdco2’s address is XXXXXXXXXX.

15. The authorized capital of Holdco2 consists of an unlimited number of common shares, Class “A” special shares, Class “B” special shares and Class “C” special shares. XXXXXXXXXX Class “C” special shares are owned by CD, XXXXXXXXXX common shares and XXXXXXXXXX Class “B” special shares are owned by a child of CD, XXXXXXXXXX common shares and XXXXXXXXXX Class “B” special shares are owned by a child of CD, XXXXXXXXXX common shares and XXXXXXXXXX Class “B” special shares are owned by a child of CD, XXXXXXXXXX Class “B” special shares are owed by the spouse of CD and XXXXXXXXXX common shares are owned by CD Holdco. All of the shareholders of Holdco2 hold their shares as capital property and did not acquire the shares in contemplation of the Proposed Transactions.

16. All of the shares of CD Holdco are held directly or indirectly by members of the CD Family. All of the shareholders of CD Holdco hold their shares as capital property and did not acquire the shares in contemplation of the Proposed Transactions.

17. Holdco2’s assets consist of the XXXXXXXXXX common shares of DC referenced in Paragraph 3, approximately $XXXXXXXXXX in cash and near cash, a life insurance policy with a value of approximately $XXXXXXXXXX and shares of XXXXXXXXXX, a corporation controlled by CD.

Other Relevant Facts

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

19. AB, CD, Holdco1, Holdco2 and DC, inter alios, entered into an agreement dated as of XXXXXXXXXX (the “Agreement”) concerning certain assets directly or indirectly held by the Families, including the Properties. Under the Agreement each Family has the right to initiate a divisive reorganization of the assets of DC in accordance with paragraph 55(3)(b).

20. Representatives of the Families have agreed to proceed with the divisive reorganization of the assets of DC, pending the receipt of a favourable advance income tax ruling.

PROPOSED TRANSACTIONS

Formation of and Transfers of Bare Legal Title to the Properties to Nominee Corporations

21. Prior to the implementation of the steps described in Paragraphs 28 to 41, Holdco1 will form a new corporation, Nominee1, under the BCA2XXXXXXXXXX. Nominee1 will be a private corporation, a taxable Canadian corporation and a CCPC. The authorized capital of Nominee1 will consist of an unlimited number of common shares. On incorporation, Holdco1 will subscribe for XXXXXXXXXX common share of Nominee1 for nominal consideration.

Nominee1 will have no purpose or activity other than to acquire legal title, but not beneficial title, to Property2, Property3 and Property4, and to hold such title to such properties solely as nominee, agent and bare trustee for the beneficial owner of such properties, as described below.

22. Prior to the implementation of the steps described in Paragraphs 28 to 41, Holdco2 will form a new corporation, Nominee2, under the BCA2XXXXXXXXXX. Nominee2 will be a private corporation, a taxable Canadian corporation and a CCPC. The authorized capital of Nominee2 will consist of an unlimited number of common shares. On incorporation, Holdco2 will subscribe for XXXXXXXXXX common share of Nominee2 for nominal consideration.

Nominee2 will have no purpose or activity other than to acquire legal title, but not beneficial title, to Property1, and to hold such title to such property solely as nominee, agent and bare trustee for the beneficial owner of such property, as described below.

23. DC will transfer legal title to Property2, Property3 and Property4 to Nominee1, and legal title to Property1 to Nominee2. As a result, Nominee1 will hold legal title to the real properties to be transferred by DC to TC1, and Nominee2 will hold legal title to the real property to be transferred by DC to TC2, as described in Paragraphs 32 and 33, below.

DC will enter into a bare trust agreement with Nominee1 in respect of Property2, Property3 and Property4, the terms of which will include the following:

i. Nominee1 will hold legal title to Property2, Property3 and Property4 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

ii. Nominee1, as agent for DC, will deal with Property2, Property3 and Property4 exclusively as directed by DC.

    DC will enter into a similar bare trust agreement with Nominee2 in respect of Property1.

PUC Increase

24. Prior to the implementation of the steps described in Paragraphs 28 to 41, DC will increase the PUC in respect of its common shares by the lesser of (a) the safe income on hand attributable to the common shares at that time and (b) the aggregate of (i) its pre-1972 CSOH and (ii) an amount sufficient to trigger a refund of its RDTOH balance at that time, if any.

25. DC may submit a request to the relevant Tax Services Office of the CRA to have a change of taxation year end, if there is a material balance of RDTOH, such that all proposed steps described in Paragraphs 28 to 41 will occur in the following taxation year of DC.

Formation of and Transfers to New Corporations

26. Prior to the implementation of the steps described in Paragraphs 28 to 41, Holdco1 will form a new corporation, TC1, under the BCA2XXXXXXXXXX. TC1 will be a private corporation, a taxable Canadian corporation and a CCPC. The authorized capital of TC1 will consist of:

i. an unlimited number of common shares, which will entitle the holders of the shares to XXXXXXXXXX vote per share; and

ii. an unlimited number of preferred shares (the “TC1 Preferred Shares”), which will entitle the holders of the shares to XXXXXXXXXX vote per share and an annual non-cumulative dividend of XXXXXXXXXX% per share in preference to the common shares. Each TC1 Preferred Share will be redeemable and retractable for an amount equal to the aggregate FMV of the consideration for which such share was issued (plus any declared but unpaid dividends). For the purposes of subsection 191(4), the terms and conditions of the TC1 Preferred Shares will specify an amount in respect of each such share, for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each of such share:

1. will be pursuant to a resolution of the board of directors of TC1;

2. will be expressed as a dollar amount;

3. will not be determined by a formula;

4. will not exceed the FMV of the consideration for which such TC1 Preferred Share is issued; and

5. will not be subject to change thereafter.

On incorporation Holdco1 will subscribe for XXXXXXXXXX common shares in consideration for a cash payment of $XXXXXXXXXX.

27. Prior to the implementation of the steps described in Paragraphs 28 to 41, Holdco2 will form a new corporation, TC2, under the BCA2XXXXXXXXXX. TC2 will be a private corporation, a taxable Canadian corporation and a CCPC. The authorized capital of TC2 will consist of:

i. an unlimited number of voting common shares;

ii. an unlimited number of preferred shares (the “TC2 Preferred Shares”), which will entitle the holders of the shares to XXXXXXXXXX vote per share and an annual non-cumulative dividend of XXXXXXXXXX% per share in preference to the common shares. Each TC2 Preferred Share will be redeemable and retractable for an amount equal to the aggregate FMV of the consideration for which such share was issued (plus any declared but unpaid dividends). For the purposes of subsection 191(4), the terms and conditions of the TC2 Preferred Shares will specify an amount in respect of each such share, for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each of such share:

1. will be pursuant to a resolution of the board of directors of TC2;

2. will be expressed as a dollar amount;

3. will not be determined by a formula;

4. will not exceed the FMV of the consideration for which such TC2 Preferred Share is issued; and

5. will not be subject to change thereafter.

On incorporation Holdco2 will subscribe for XXXXXXXXXX common shares in consideration for a cash payment of $XXXXXXXXXX.

28. Each of Holdco1 and Holdco2 will transfer its XXXXXXXXXX common shares of DC to TC1 and TC2, respectively (the “Holdco Transfers”). In consideration therefor, TC1 and TC2 will issue an additional XXXXXXXXXX common shares to Holdco1 and Holdco2, respectively, having an aggregate FMV equal to the aggregate FMV at that time of the XXXXXXXXXX common shares of DC so transferred. The aggregate amount added to the stated capital of the TC1 and TC2 common shares will be equal to the aggregate PUC attributable to the DC common shares transferred to the corporation.

29. Each of Holdco1 and TC1, and Holdco2 and TC2, will jointly elect, in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the DC shares described in Paragraph 28. The agreed amount in respect of the transferred shares will be equal to the ACB to the transferor of the transferred DC common shares. In each case, the agreed amount will not exceed the FMV of the transferred DC common shares.

Butterfly Split-up of DC’s Assets

30. Immediately before the transfers of property described in Paragraph 32, the property of DC will be determined and will be classified into the following three types of property:

i. cash or near-cash property, comprising all of the current assets for financial statement purposes of DC including any cash, deposits, accounts receivable and rights arising from prepaid expenses;

ii. 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 Property1, 2, 3 and 4; and

iii. investment 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 property or from a specified investment business.

DC will not have any investment property at the time of the transfers described in Paragraph 32.

31. For greater certainty:

(a) any tax accounts, such as future income tax assets or liabilities or balances of any non-capital losses, RDTOH, GRIP or CDA of DC will not be considered to be a property or liability, as the case may be;

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

(c) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and

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

32. Immediately following the classification of the types of property and the FMV of each type of property as described in Paragraph 30, DC will transfer (the “DC Transfers”) simultaneously to each of TC1 and TC2 XXXXXXXXXX% of its cash or near-cash and business property, on a gross FMV basis, such that immediately following such transfers the FMV of each type of property so received by TC1 and TC2 will be equal to or will approximate XXXXXXXXXX% of the FMV of that particular type of property of DC immediately before the DC Transfers. For the purposes of this Paragraph, the expression “approximate the proportion” means that the discrepancy of the proportion, if any, will not exceed one percent (1%), determined as a percentage of the FMV of each type of property which each of TC1 and TC2 will receive as compared to what each such recipient corporation would have received had each such corporation received its exact pro rata share of the FMV of that type of property.

33. As a result of the DC Transfers, TC1 will become the beneficial owner of Property2, Property3 and Property4 and TC2 will become the beneficial owner of Property1. TC1 will enter into a bare trust agreement with Nominee1, similar to the bare trust agreement described in Paragraph 23, which will specify for greater certainty that Nominee1 will hold legal title to Property2, Property3 and Property4 as nominee, agent and bare trustee for the sole benefit and account of TC1 as principal and beneficial owner. TC2 will enter into a similar bare trust agreement with Nominee2 in respect of Property1.

34. In consideration for the DC Transfers, TC1 and TC2, as the case may be, will:

i. assume XXXXXXXXXX% of the liabilities of DC; and

ii. issue TC1 Preferred Shares and TC2 Preferred Shares, respectively, 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 DC Transfers, of the distributed property received by TC1 and TC2, respectively, exceeds the aggregate amount of the liabilities of DC assumed by TC1 and TC2, respectively.

The TC1 Preferred Shares and the TC2 Preferred Shares issued to DC will constitute more than 10% of the issued shares having full voting rights under all circumstances, and will have a FMV more than 10% of the FMV of all of the issued shares, of TC1 and TC2, respectively. The TC1 Preferred Shares and the TC2 Preferred Shares issued to DC will not entitle DC to more than 50% of the votes to elect the board or directors of TC1 or TC2, respectively.

35. In respect of the DC Transfers, DC will jointly elect with each of TC1 and TC2, in prescribed form and within the time allowed by subsection 85(6), but prior to the dissolution of DC, to have the provisions of subsection 85(1) apply to the transfer of each eligible property transferred by DC to TC1 and TC2, respectively. The agreed amount in respect of each eligible property so transferred will be as follows:

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

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

In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b). The amount of liabilities to be allocated to the property that is the subject of an election under subsection 85(1) will not exceed the total of the agreed amounts elected for that property. The amount of liabilities to be allocated to the property that is not the subject of an election under subsection 85(1) will not exceed the FMV of any such property.

36. The amount to be added to the respective corporate stated capital accounts maintained in respect of the TC1 Preferred Shares and the TC2 Preferred Shares, as the case may be, will not exceed the maximum amount that could be added to the PUC of the shares, having regard to subsection 85(2.1).

37. Immediately following the DC Transfers, TC1 and TC2 will redeem the TC1 Preferred Shares and the TC2 Preferred Shares held by DC, respectively, and will each issue to DC, in full payment of the aggregate redemption price payable therefor, a demand, non-interest bearing, Canadian dollar denominated, promissory note having a principal amount and FMV equal to the redemption amount of the preferred shares so redeemed (the “TC1 Note” and the “TC2 Note”, respectively).

38. Immediately thereafter, the shareholders of DC (being TC1 and TC2) will resolve to wind-up and dissolve DC in accordance with the provisions of the BCA2XXXXXXXXXX. Under the terms of the agreement governing the winding-up of DC, the TC1 Note and the TC2 Note will be assigned and distributed to TC1 and TC2, respectively. As a result of the assignment and distribution of the TC1 Note and the TC2 Note, the obligation of each of TC1 and TC2 under the respective notes will be cancelled.

39. To the extent that DC has GRIP at the time of the winding-up and immediately prior to the distribution of the Notes described in Paragraph 38, DC will designate a portion of the winding-up dividend referred to in subparagraph 88(2)(b)(iii) to be an eligible dividend by notifying each of TC1 and TC2 in writing within the time prescribed in subsection 89(14) that the portion of such dividend is an eligible dividend. Pursuant to subparagraph 88(2)(b)(iv), TC1 and TC2 will each be deemed to have received a proportionate eligible dividend from DC.

40. Any tax refund that DC is entitled to will be distributed (under the terms of the agreement governing the winding-up of DC) pro rata to each of TC1 and TC2.

41. Within a reasonable time following the distribution of the Notes and any tax refund described in Paragraphs 38 and 40, respectively, articles of dissolution will be filed by DC with the appropriate government body and, upon receipt of a certificate of dissolution, DC will be dissolved. Immediately before the dissolution DC will not own or acquire any property or carry on any activity or undertaking.

ADDITIONAL INFORMATION

42. DC does not exercise significant influence over any corporation or partnership.

43. Except as described herein, no liabilities have been or will be incurred, and no assets have been or will be acquired by or disposed of, by any of DC, Holdco1, Holdco2, TC1 or TC2 in contemplation of or before the Proposed Transactions.

44. Except as described herein, no property transferred to any corporation in the course of the reorganization contemplated herein will, thereafter, be transferred directly or indirectly, in the course of that reorganization to an unrelated person.

45. For greater certainty, before the Proposed Transactions DC shall, and following the Proposed Transactions TC1 and TC2 shall, incur liabilities and acquire assets in the ordinary course of carrying on the Business.

46. Except as described herein, none of the shareholders of Holdco1, Holdco2 or DC are contemplating the sale or transfer of any shares of the capital stock of those corporations.

47. Except as described herein, no acquisition of control of any corporation described herein is contemplated.

48. None of the shares of DC, TC1 or TC2 has been, or will be, at any time during the implementation of the proposed transactions described herein:

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

ii. the subject of a "dividend rental arrangement" as contemplated in subsection 112(2.3) and as defined in subsection 248(1); or

iii. a share that is issued or acquired as part of a transaction or event or a series of transactions or events of the type described in subsection 112(2.5).

49. None of DC, TC1 or TC2 is, or will be at the time of the Proposed Transactions described herein be a "specified financial institution" as defined in subsection 248(1).

PURPOSE OF THE PROPOSED TRANSACTIONS

50. The purpose of the Proposed Reorganization is to permit the AB Family and the CD Family to separate their indirect interests in the assets of DC, so as to enable them to own, manage and administer such interests independently of each other through TC1 and TC2, respectively.

51. The purpose of the transfer by DC of its legal title in the Properties to Nominee1 and Nominee2, as applicable and as described in Paragraph 23, is to allow the subsequent transfer of the beneficial ownership of the Properties described in Paragraphs 32 and 33 to be exempt from land transfer tax under the XXXXXXXXXX.

52. The purpose of the PUC increase at Paragraph 24 is:

i. to increase the ACB of each of Holdco1 and Holdco2 of the DC common shares, so as to eliminate or reduce the capital gain that would otherwise arise by virtue of the fact that an amount equal to DC’s pre-1972 CSOH will not be treated as a dividend on the wind-up distribution from DC at Paragraph 38, by virtue of subparagraph 88(2)(b)(ii), and will instead be treated as “proceeds of disposition”, by virtue of paragraph (i) of that definition in section 54; and

ii. to move any RDTOH balance in DC on a proportionate basis to its shareholders, provided that if the RDTOH balance is not material, DC likely will not request to have a change of taxation year end as described in Paragraph 25.

RULINGS GIVEN

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

A. The transfer by DC of its legal title to the Properties to Nominee1 and Nominee2, as applicable and as described in Paragraph 23, will not constitute a disposition for the purposes of the Act provided Nominee1 and Nominee2 can reasonably be considered to act as agent for DC, and ultimately TC1 and TC2, as applicable and as described in Paragraph 33, with respect to all dealings with the Properties.

B. The PUC increase described in Paragraph 24 will result in deemed dividends, within the meaning of subsection 84(1), to the holders of the common shares. Moreover:

(a) pursuant to paragraph 53(1)(b), the amount of the deemed dividends will be added to the ACB of the recipient’s DC common shares; and

(b) subsections 55(2) and 55(2.1) will not apply to deem such deemed dividends to be capital gains

provided that such deemed dividends do not exceed the safe income on hand that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at FMV, immediately before the dividend, of the common shares of DC held by each of Holdco1 and Holdco2 at the safe income determination time for the series of transactions that includes the payment of the deemed dividends.

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

(a) the Holdco Transfers, as described in Paragraphs 28 and 29; and

(b) the DC Transfers, as described in Paragraphs 32 to 35

such that the agreed amount in respect of each such transfer 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 the transfers referred to herein.

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

D. The acquisition of the TC1 and TC2 preferred shares by DC described in Paragraph 34, will not in and by itself result in a deemed acquisition of control of TC1 or TC2 under section 256.1.

E. As a result of the redemption by TC1 of its TC1 Preferred Shares and the redemption by TC2 of its TC2 Preferred Shares, each as described in Paragraph 37, by virtue of subsection 84(3):

(a) TC1 will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by TC1 in respect of the redemption of the TC1 Preferred Shares owned by DC exceeds the PUC of such TC1 Preferred Shares immediately before the redemption; and

(b) TC2 will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by TC2 in respect of the redemption of the TC2 Preferred Shares owned by DC exceeds the PUC of such TC2 Preferred Shares immediately before the redemption.

F. As a result of the distributions by DC in the course of its winding-up as described in Paragraph 38:

(a) by virtue of paragraph 88(2)(b) and subsection 84(2), but subject to (b) to (d) below, DC will be deemed to have paid, and each of TC1 and TC2, as the case may be, will be deemed to have received, a dividend (each referred to as a “winding-up dividend”) on the DC common shares held by such corporation, equal to XXXXXXXXXX% of the amount by which the aggregate FMV of the property of DC distributed to each of TC1 and TC2, as the case may be, on the winding-up and allocated to the common shares of DC exceeds the amount, if any, by which the PUC of the common shares of DC is reduced as a result of the distribution, and

(b) pursuant to subparagraph 88(2)(b)(i), such portion of any winding-up dividend referred to in (a) as does not, in aggregate, exceed DC's CDA (if any) immediately before the payment of such winding-up dividend will be deemed, for purposes of the election under subsection 83(2), to be the full amount of a separate dividend;

(c) pursuant to subparagraph 88(2)(b)(ii), such portion of any winding-up dividend referred to in (a) that is equal to the lesser of (A) DC's Pre-1972 CSOH (if any), as determined immediately before the payment of such winding-up dividend; and (B) the amount by which such winding-up dividend exceeds the portion of thereof in respect of which DC elects under subsection 83(2), will be deemed not to be a dividend; and

(d) pursuant to subparagraph 88(2)(b)(iii), any winding-up dividend, to the extent that it exceeds the portion thereof referred to in (b) that is deemed to be a separate dividend and the portion thereof referred to in (c) that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend.

G. The taxable dividends described in Rulings E and F 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 subsection 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” in section 54;

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

(e) will not be subject to tax under Part IV except to the extent provided under paragraph 186(1)(b) and

(f) 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 be received.

H. 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);

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

(e) an acquisition of property in the circumstances described in paragraph 55(3.1)(c) or (d);

which has not been described in the Facts, Proposed Transactions, and Additional Information, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings E and F 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.

I. The cancellation of the TC1 and TC2 Notes described in Paragraph 38 will not give rise to a “forgiven amount” within the meaning of subsection 80(1) and 80.01(1). In addition, none of DC, TC1, or TC2, as the case may be, will otherwise realize any gain or incur any loss therefrom.

J. The provisions of paragraph 1100(2.2)(a) of the Income Tax Regulations (the “Regulations”) will apply in respect of any property acquired by TC1 and TC2, as described in Paragraph 32, that is a depreciable property such that, provided the conditions in paragraphs 1100(2.2)(f) or (g) are satisfied, paragraphs 1100(2.2)(h), (i) and (j) of the Regulations will apply to such property;

K. The provisions of subsections 15(1), 56(2), and 246(1) will not apply to any of the Proposed Transactions described herein, in and by themselves.

L. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R10 dated September 29, 2020. They are binding on the CRA, provided that the Proposed Transactions are completed before XXXXXXXXXX.

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

COMMENTS

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

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

b) the balance of the CDA, GRIP, RDTOH, or any other tax account of any corporation referred to herein;

c) any provincial tax consequences of the Proposed Transactions or any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, 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.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred and 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, dated November 26, 2015.

Yours truly,

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

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