2021-0884331R3 Gross Asset Butterfly

Principal Issues: Whether the proposed double-wing split-up butterfly reorganization meets the requirements of paragraph 55(3)(b).

Position: Yes.

Reasons: Meets technical requirements.

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

XXXXXXXXXX                                                                2021-088433

XXXXXXXXXX, 2022

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 above-noted taxpayer. We also acknowledge the additional information provided in your letters and in various email correspondence as well as information provided in our telephone conversations (XXXXXXXXXX).

PRELIMINARY MATTERS

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

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

i. being considered by the CRA in connection with such return;

ii. under objection by any of the above-noted taxpayers or a related person; or

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

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

Unless otherwise stated, all references herein to a part, section, subsection, paragraph, subparagraph, clause is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) as amended (the “Act”), or where appropriate, the Income Tax Regulations, C.R.C., c.945 (the “Regulations”) as amended, or where appropriate, the Income Tax Application Rules, R.S.C. 1985, c.2 (5th Supp.) as amended (the “ITARs”). All references to monetary amounts are to Canadian dollars.

DEFINITIONS

In this ruling application, unless otherwise specified, the following terms have the meanings specified below:

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

“Act1” means XXXXXXXXXX;

“Act2” means XXXXXXXXXX;

“agreed amount” means the amount that a transferor and a transferee have agreed on in a joint election under subsection 85(1) in respect of the transfer of an eligible property;

“Articles” means XXXXXXXXXX;

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

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

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

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

“Closing Day” is the day on which the transactions described in Paragraphs 21 to 34 will occur;

“DC” means XXXXXXXXXX, a corporation formed under XXXXXXXXXX and continued under Act1;

“DC Common Shares” means the class of common shares of DC;

“DC Preferred Shares” means the class of preferred shares of DC, as described in Paragraph 3;

“DC Redemption Note 1” means the non-interest bearing demand promissory note issued by DC to TC1 as described in Paragraph 32;

“DC Redemption Note 2” means the non-interest bearing demand promissory note issued by DC to TC2 as described in Paragraph 32;

“distribution” has the meaning assigned by subsection 55(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” and has the meaning assigned by subsection 129(4);

“FMV” means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at arm’s length and without compulsion to act, expressed in terms of money;

“GRIP” means “general rate income pool” and has the meaning assigned by subsection 89(1);

“Investment Portfolio” means all of the publicly traded shares of corporations which are owned by DC immediately before the distribution described in Paragraph 26;

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

“Paragraph” means a numbered paragraph in this letter;

“permanent establishment” has the meaning assigned by Reg. 400(2);

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

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

“private holding corporation” has the meaning assigned by subsection 191(1);

“Proposed Transactions” means the proposed transactions described in Paragraphs 9 to 34;

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

“Reorganization Agreement” means the agreement to be entered into among the Siblings, TC1, TC2 and DC as described in Paragraph 17;

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

“Sibling 1” means XXXXXXXXXX of Sibling 2 and Sibling 3, and a resident of Canada;

“Sibling 2” means XXXXXXXXXX of Sibling 1 and Sibling 3, and a resident of Canada;

“Sibling 3” means XXXXXXXXXX of Sibling 1 and Sibling 2, and a resident of Canada;

“Siblings” means Sibling 1, Sibling 2 and Sibling 3, collectively, and “Sibling” means any one of them in the singular;

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

“stated capital” means:

(i) in respect of a class of shares of DC, the amount of the stated capital of that class maintained for the purposes of Act1;

(ii) in respect of a class of shares of TC1, the amount of the stated capital of that class maintained for the purposes of Act1; and

(iii) in respect of a class of shares of TC2, the amount of the stated capital of that class maintained for the purposes of Act1;

“TCs” means TC1 and TC2, and “TC” means either TC1 or TC2 as the context requires;

“TC Common Shares” means TC1 Common Shares and TC2 Common Shares, collectively;

“TC Special Shares” means TC1 Special Shares and TC2 Special Shares, collectively;

“TC1” means the corporation to be incorporated under Act1 as described in Paragraph 9;

“TC1 Common Shares” means the class of common shares of TC1 which will be created upon the incorporation of TC1;

“TC1 Redemption Note” means the non-interest bearing demand promissory note to be issued by TC1 to DC as described in Paragraph 30;

“TC1 Special Shares” means the class of preferred shares of TC1 which will be created upon the incorporation of TC1;

“TC2” means the corporation to be incorporated under Act1 as described in Paragraph 9;

“TC2 Common Shares” means the class of common shares of TC2 which will be created upon the incorporation of TC2;

“TC2 Redemption Note” means the non-interest bearing demand promissory note to be issued by TC2 to DC as described in Paragraph 30;

“TC2 Special Shares” means the class of preferred shares of TC2 which will be created upon the incorporation of TC2;

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

XXXXXXXXXX.

FACTS

1. DC is a corporation that was incorporated in XXXXXXXXXX. DC is a TCC and a CCPC and its taxation year ends on XXXXXXXXXX.

2. DC is a private holding corporation. DC’s only undertaking is the investment of its funds and the distribution of income XXXXXXXXXX to its shareholders. DC’s only permanent establishment is an office located in XXXXXXXXXX. As of the date of this letter, DC’s assets consist solely of publicly-traded shares of corporations held within the Investment Portfolio. All of the shares held within the Investment Portfolio are held by DC as capital property. The aggregate ACB to DC of all the shares within the Investment Portfolio is $XXXXXXXXXX. The aggregate FMV of those shares is approximately $XXXXXXXXXX. DC has no liabilities.

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

a. unlimited number DC Common Shares; and

b. unlimited DC Preferred Shares which: XXXXXXXXXX.

4. The only shareholders of DC are the Siblings.

5. The DC Common Shares and DC Preferred Shares owned by the Siblings were all acquired by way of inheritance from XXXXXXXXXX. The Siblings dealt at arm’s length with XXXXXXXXXX but pursuant to paragraph 251(1)(a) are deemed not to have dealt at arm’s length with XXXXXXXXXX.

6. The Siblings’ XXXXXXXXXX:

a. owned his shares of DC on XXXXXXXXXX, and

b. did not make the election under subsection 26(7) of the ITARs with respect to the shares.

Accordingly, the ACB of the DC Common Shares and DC Preferred Shares owned by the Siblings which were inherited from XXXXXXXXXX have been computed in accordance with the rules in section 26 of the ITARs, and in particular, subsections 26(3), (4) and (5). The ACB of the DC Common Shares and the DC Preferred Shares owned by the Siblings which were inherited from XXXXXXXXXX have been computed in accordance with paragraph 70(5)(b).

7. The issued and outstanding share capital of DC is as follows:

Shareholder	Class of Shares	# of Shares	PUC	ACB
Sibling 1	Common	XXXX	XXXX	XXXX
	Preferred	XXXX	XXXX	XXXX
Sibling 2	Common	XXXX	XXXX	XXXX
	Preferred	XXXX	XXXX	XXXX
Sibling 3	Common	XXXX	XXXX	XXXX
	Preferred	XXXX	XXXX	XXXX

All of the issued and outstanding shares were issued XXXXXXXXXX. All of the DC Common Shares and DC Preferred Shares owned by each of the Siblings are held as capital property. There are no agreements or trusts of any kind in respect of the DC Common Shares or the DC Preferred Shares.

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

8.1 When amounts are received by DC in respect of its Investment Portfolio, the amount received (less any operating costs that may have arisen) is paid out shortly thereafter (usually within a month) in the form of distributions to DC’s shareholders. As a result of this practice, there is typically very little cash or near-cash property in DC.

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.

Transactions to be Completed Prior to Closing Day

Incorporation of TCs

9. TC1 and TC2 will be incorporated under Act1. Each of TC1 and TC2 will be a TCC and a CCPC and its taxation year will end on XXXXXXXXXX. Each of TC1 and TC2 will be a private holding corporation. The only permanent establishment of each of TC1 and TC2 will be an office located in XXXXXXXXXX. During the taxation year in which the Proposed Transactions occur, its only undertaking will be the investment of its funds, the distribution of income therefrom to its shareholder and the completion of the Proposed Transactions.

10. Each of the TCs will have an authorized share capital consisting of an unlimited number of each of the following classes of shares, and the terms and conditions of such shares are as follows:

a. TC Common Shares – voting, participating, and without nominal or par value. These shares will include the right to participate in and receive the remaining property of TC on a liquidation, dissolution or on the winding-up of TC.

b. TC Special Shares – non-voting, non-participating (beyond the redemption amount) and redeemable and retractable for a redemption amount equal to the FMV of the property transferred to the TC in consideration for the issuance of these shares.

11. [Reserved]

12. [Reserved]

13. [Reserved]

14. [Reserved]

15. [Reserved]

16. Sibling 1 will subscribe for one (1) TC1 Common Share for $XXXXXXXXXX. Sibling 2 will subscribe for one (1) TC2 Common Share for $XXXXXXXXXX.

Pre-Butterfly Distributions to DC’s Shareholders

16.1 DC will make distributions to the Siblings in the normal course (as described in Paragraph 8.1) to the extent that DC has received taxable dividends from the Investment Portfolio prior to the implementation of the distribution described in Paragraph 26 below.

Reorganization Agreement

17. The Reorganization Agreement will be entered into among the Siblings, TCs and DC and will provide that each of the parties agrees: (i) to undertake the Proposed Transactions as they are described below; and (ii) to determine the Closing Day on which the transactions described in Paragraphs 21 to 34 will occur, and the Siblings agree to take all actions necessary to ensure that DC and each of the TCs fulfill their undertakings.

Exchange of DC Preferred Shares for DC Common Shares

18. By special resolution, the shareholders of DC will amend its Articles to change all of the DC Preferred Shares that are issued and outstanding into DC Common Shares. Specifically, all of the DC Preferred Shares owned by each Sibling will be exchanged for XXXXXXXXXX DC Common Shares. Following this exchange of shares, the only class of shares of DC issued and outstanding will be the DC Common Shares, and each Sibling will own XXXXXXXXXX DC Common Shares. No other consideration other than DC Common Shares will be receivable by the Siblings in exchange for their DC Preferred Shares. No elections under subsection 85(1) will be filed in respect of this exchange.

19. As a result of the exchange described in Paragraph 18, the amount to be added to the stated capital of the DC Common Shares will not exceed, in total, the PUC of the DC Preferred Shares immediately before the exchange.

20. The ownership, ACB and PUC of the DC Common Shares following the share exchange described in Paragraph 18 will be as follows:

Sibling 2	XXXX	XXXX	XXXX
Sibling 3	XXXX	XXXX	XXXX

Transactions to be Completed on Closing Day

Transfer of DC Shares to the TCs

21. Sibling 1 will transfer his XXXXXXXXXX DC Common Shares to TC1 pursuant to subsection 85(1). As sole consideration for the transfer, Sibling 1 will receive TC1 Common Shares having an aggregate FMV equal to the FMV of the DC shares so transferred. Sibling 1 will jointly elect with TC1 in prescribed form and within the time limit referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. For greater certainty, the agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital account in respect of the TC1 Common Shares issued to Sibling 1 will be restricted to the greater of: (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX DC Common Shares transferred by Sibling 1 to TC1, and (ii) the aggregate ACB to Sibling 1, immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

22. Contemporaneously with the transfer described in Paragraph 21, Sibling 2 will transfer his XXXXXXXXXX DC Common Shares to TC2 pursuant to subsection 85(1). As sole consideration for the transfer, Sibling 2 will receive TC2 Common Shares having an aggregate FMV equal to the FMV of the DC shares so transferred. Sibling 2 will jointly elect with TC2 in prescribed form and within the time limit referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. For greater certainty, the agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital account in respect of the TC2 Common Shares issued to Sibling 2 will be restricted to the greater of: (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX DC Common Shares transferred by Sibling 2 to TC2, and (ii) the aggregate ACB to Sibling 2, immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

Types of Property Classification

23. Immediately before the transfer of property described in Paragraph 26 below, the property owned by DC will be classified into the following three types of property for the purposes of distribution, as follows:

a. cash or near-cash property, comprised of all the current assets of DC, including cash, short-term deposits, accounts receivable, inventory, income taxes recoverable, and prepaid expenses;

b. investment property, comprised of all the assets of DC, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or from a specified investment business of DC; and

c. business property, comprised of all the assets of DC, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from a business (other than a specified business).

For greater certainty:

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

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

f. the amount of any deferred tax or deferred expense (which are capitalized and amortized for accounting purposes but deducted for income tax purposes) will not be considered to be a property; and

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

24. As a result of the classification of DC’s property as described above, it is expected that DC will only have investment property and cash or near-cash property.

25. In determining the gross FMV of each type of property of DC immediately before the transfer, no liabilities of DC will be allocated to, and deducted from, the calculation of the gross FMV of each type of property.

Butterfly Distribution

26. Immediately following the determination of the gross FMV of each type of property of DC as described above, DC will contemporaneously transfer to each of TC1 and TC2 its pro rata (one-third) share of each type of property owned by it at that time such that:

a. TC1 will receive property with an FMV equal to 1/3 of the FMV of the Investment Portfolio owned by DC immediately before the transfer;

b. TC2 will receive property with an FMV equal to 1/3 of the FMV of the Investment Portfolio owned by DC immediately before the transfer;

c. DC will retain property with an FMV equal to 1/3 of the FMV of the Investment Portfolio owned by DC immediately before the transfer;

d. TC1 will receive 1/3 of the cash or near-cash property owned by DC immediately before the transfer;

e. TC2 will receive 1/3 of the cash or near-cash property owned by DC immediately before the transfer; and

f. DC will retain 1/3 of the cash or near-cash property owned by DC immediately before the transfer.

27. Immediately following such property transfer, the aggregate gross FMV of each type of property of DC transferred to each of TC1 and TC2, as the case may be, will be equal to or approximate the proportion determined by the formula:

A x B/C

where:

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

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

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

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

28. As consideration for the property transferred by DC to TC1 and TC2, each of TC1 and TC2, as the case may be, will issue a number of TC Special Shares to DC which will have an aggregate redemption amount and aggregate FMV equal to the aggregate FMV of such transferred property received by TC1 or TC2, as the case may be, in connection with the transfer.

29. DC will jointly elect with each of TC1 and TC2, respectively, in prescribed form and within the time limits referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer of each eligible property that is transferred by DC to TC. The agreed amount in respect of each eligible property so transferred will not be greater than the FMV of such property nor will it be less than the lesser of the FMV and the cost amount to DC of such property. The agreed amount will be limited to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital account for the TC1 Special Shares and TC2 Special Shares received by DC, as the case may be, will not exceed the maximum amount that could be added to the PUC of such shares without a reduction taking place pursuant to subsection 85(2.1).

Share Redemptions and Set-Off of Notes

30. Immediately after the distribution, each of TC1 and TC2 will purchase for cancellation all the issued and outstanding TC1 Special Shares and TC2 Special Shares, as the case may be, owned by DC for an aggregate purchase price equal to the aggregate FMV of such shares. As consideration, TC1 and TC2 will issue the TC1 Redemption Note and TC2 Redemption Note, respectively, each having a principal amount and FMV equal to the aggregate FMV of the shares so purchased for cancellation. DC will accept the TC1 Redemption Note and TC2 Redemption Note as payment in full for the cancellation of the TC1 Special Shares and TC2 Special Shares.

31. [Reserved]

32. Immediately following the purchase for cancellation described in Paragraph 30 above, DC will purchase for cancellation all of the issued and outstanding DC Common Shares held by each of TC1 and TC2 for an aggregate purchase price equal to the aggregate FMV of such shares. As consideration, DC will issue to each of TC1 and TC2, the DC Redemption Note 1 and DC Redemption Note 2, respectively, each having a principal amount and FMV equal to the aggregate FMV of the shares so purchased for cancellation. Each of TC1 and TC2 will accept the DC Redemption Note 1 and DC Redemption Note 2, respectively, as payment in full for the shares so purchased for cancellation.

33. To the extent that DC has a positive GRIP balance, DC will designate, pursuant to subsection 89(14), to treat a portion of the taxable dividend resulting from the purchase for cancellation described in Paragraph 32 to be an eligible dividend by notifying TC1 and TC2, as the case may be, in writing, within the time limit prescribed in subsection 89(14).

34. The DC Redemption Note 1 will be set-off in full against the TC1 Redemption Note and the DC Redemption Note 2 will be set-off in full against the TC2 Redemption Note, and such notes will be cancelled without payment.

ADDITIONAL INFORMATION

35. Except as described in this letter, no property has been or will be acquired by DC in contemplation of and before the Proposed Transactions, other than in a permitted transaction described in subparagraphs 55(3.1)(a)(i)-(iv).

36. There has not been and will not be, as part of a series of transactions or events that includes the Proposed Transactions, any disposition or acquisition of property in circumstances described in subparagraphs 55(3.1)(b)(i) or (iii), or an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii) that has not been described herein.

37. None of the property received by TC1 or TC2 on the distribution described above in Paragraph 26 will be acquired by a person unrelated to TC1 or TC2, as the case may be, or by a partnership, as part of a series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(c).

38. None of the property retained by DC after the distribution described above in Paragraph 26 will be acquired by a person unrelated to DC, or by a partnership, as part of a series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(d).

39. None of the shares of any corporation described herein will be at any time during a series of transactions or events that includes the Proposed Transactions:

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

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

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

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

40. None of the corporations described herein is or will be at any time during the series of transactions or events that includes the Proposed Transactions a restricted financial institution or a specified financial institution as defined in subsection 248(1).

41. Each of DC, TC1 and TC2 will have the financial capacity to honour, upon presentation for payment, the amount payable under the DC Redemption Note 1, DC Redemption Note 2, TC1 Redemption Note and TC2 Redemption Note, as the case may be.

PURPOSE OF THE PROPOSED TRANSACTIONS

42. The purpose of the divisive reorganization is to allow each of the Siblings to have direct and separate control of their respective share of DC’s property, which will enable each of the Siblings to independently manage his respective share of the Investment Portfolio, allowing each Sibling to prepare for future personal estate planning.

RULINGS GIVEN

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

A. On the exchange of all the DC Preferred Shares owned by each Sibling for DC Common Shares, as described in Paragraph 18, the provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the disposition of DC Preferred Shares by each Sibling for XXXXXXXXXX DC Common Shares, provided that

a. each Sibling holds his DC Preferred Shares as capital property; and

b. each Sibling and DC do not file an election under subsection 85(1);

such that

c. the cost of the DC Common Shares received by each Sibling on the exchange will be deemed by paragraph 86(1)(b) to be an amount equal to the ACB to the Sibling, immediately before the exchange, of the DC Preferred Shares;

d. pursuant to paragraph 86(1)(c), each Sibling will be deemed to have disposed of his DC Preferred Shares for proceeds of disposition equal to the cost of the DC Common Shares received by him, as determined in (c) above; and

e. pursuant to subsection 86(2.1), the amount added to the PUC of the DC Common Shares will not exceed the PUC of the DC Preferred Shares which were exchanged for the DC Common Shares.

B. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limit specified in subsection 85(6), and provided each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1), subject to the application of subsection 26(5) of the ITAR, will apply to:

a. the transfer by Sibling 1 to TC1 of his DC Common Shares as described in Paragraph 21;

b. the transfer by Sibling 2 to TC2 of his DC Common Shares as described in Paragraph 22;

c. the transfer of property owned by DC to TC1 as described in Paragraph 26.a; and

d. the transfer of property owned by DC to TC2 as described in Paragraph 26.b

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

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

C. Subsection 84(3) will apply to the purchase for cancellation of:

a. the TC1 Special Shares held by DC as described in Paragraph 30 to deem TC1 to have paid and DC to have received a dividend on such shares equal to the amount, if any, by which the amount paid by TC1 on the purchase for cancellation exceeds the aggregate PUC in respect of such shares immediately before that time;

b. the TC2 Special Shares held by DC as described in Paragraph 30 to deem TC2 to have paid and DC to have received a dividend on such shares equal to the amount, if any, by which the amount paid by TC2 on the purchase for cancellation exceeds the aggregate PUC in respect of such shares immediately before that time;

c. the DC Common Shares held by TC1 as described in Paragraph 32 to deem DC to have paid and TC1 to have received a dividend on such shares equal to the amount, if any, by which the amount paid by DC on the purchase for cancellation exceeds the aggregate PUC in respect of such shares immediately before that time; and

d. the DC Common Shares held by TC2 as described in Paragraph 32 to deem DC to have paid and TC2 to have received a dividend on such shares equal to the amount, if any, by which the amount paid by DC on the purchase for cancellation exceeds the aggregate PUC in respect of such shares immediately before that time.

D. The taxable dividends described in Ruling C above:

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

b. will, pursuant to subsection 112(1), be deductible by the recipient corporation pursuant to subsection 112(1) in computing 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, pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54, be excluded in determining the proceeds of disposition to the recipient corporation of the shares so redeemed or purchased;

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

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

f. will not be subject to tax under Part IV except in accordance with paragraph 186(1)(b).

For greater certainty, subsection 129(1.2) will not apply to deem any dividend described in Ruling C not to be a taxable dividend for the purposes of subsection 129(1).

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

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

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

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

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

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

which has not been described herein, by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling C, 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 set-off and cancellation of

a. TC1 Redemption Note against the DC Redemption Note 1, as described in Paragraph 34; and

b. TC2 Redemption Note against the DC Redemption Note 2, as described in Paragraph 34

will not, in and of itself, give rise to a forgiven amount within the meaning of either subsection 80(1) or section 80.01. In addition, neither DC, TC1 nor TC2 will realize a gain or incur any loss as a result of such set-off and cancellation.

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

H. Subsection 245(2) will not apply as a result of the Proposed Transactions, in and of themselves, to re-determine the tax consequences in the rulings given above.

These rulings are subject to the limitations and qualifications set out in Information Circular IC 70-6R11 dated April 1, 2021, and are binding on the CRA provided that the Proposed Transactions are completed no later than six months after the date of this letter. The above rulings are based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

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

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

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

(c) the safe income on hand attributable to any shares of any corporation or

(d) any other tax consequence relating to the facts, additional information, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, including, whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

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

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

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

Yours Truly,

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

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2022

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2022