2021-0886471R3 Split Up Butterfly

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

Position: Yes.

Reasons: Wording of the Act and previous positions.

Author: XXXXXXXXXX
Section: 55(2), 55(3)(b), 55(3.1)

XXXXXXXXXX                                                                                    2021-088647

XXXXXXXXXX, 2022

Object:   Income Tax Ruling – Butterfly Transactions

               XXXXXXXXXX

Dear XXXXXXXXXX,

We are writing in response to your request for an advance income tax ruling (“Ruling Request”) dated XXXXXXXXXX behalf of the above-noted taxpayers (the “Taxpayers”). We also acknowledge the additional information provided in various email correspondence, as well as the information provided during telephone conversations.

We understand that to the best of your knowledge and that of the Taxpayers, none of the proposed transactions and/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 the Taxpayers or a related person and;

(i) being considered by the CRA in connection with any such tax return;

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

(iii) the subject of a current or completed court process involving the Taxpayers or a related person;

or

(b) the subject of a ruling request previously considered by the Income Tax Ruling Directorate in relation to the Taxpayers or a related person.

The addresses, tax account numbers, Tax Services Offices and the Tax Centres of the Taxpayers involved are as follows:

XXXXXXXXXX

This document is based solely on the facts and proposed transactions described below. The documentation submitted with the Ruling Request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Unless otherwise stated:

1. all statutory references are to provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the “Act”) and all references to regulations are to the Income Tax Regulations, C.R.C., c. 945, as amended (the “Regulations”);
2. each term or expression mentioned in this letter and for which the Act (or the Regulations) provide a definition has the meaning given to it by that definition;
3. all amounts are in Canadian dollars;
4. Words importing the singular number only include the plural and vice versa.

I. 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” and has the meaning assigned by section 54;

“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;

“arm’s length” has the meaning assigned by subsection 251(1);

“BCA” means the XXXXXXXXXX;

“CCPC” means “Canadian-controlled private corporation” and has the meaning assigned by subsection 125(7);

“CDA” means “capital dividend account” and has the meaning assigned by subsection 89(1);

“CRA” refers to the Canada Revenue Agency;

“Class A Preference Shares” means the Class A Preference Shares in the capital stock of DC, described in Paragraph 8;

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

“DC” means XXXXXXXXXX;

“DC Common Shares” means the common shares in the capital stock of DC, described in Paragraph 7;

“DC Transfer” means the transfers of property described in Paragraph 38 which meet the definition of “distribution” assigned by subsection 55(1);

“Demand Debts” mean debts owing by DC to corporations with direct or indirect shareholders that are also indirect shareholders of DC (or persons related to such indirect shareholders of DC), each of which is payable on demand and for which there is no fixed repayment schedule;

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

“designated person” has the meaning assigned by subsection 74.4(5);

“dividend refund” has the meaning assigned by subsection 129(1);

“eligible property” has the meaning assigned by 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” which is the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm’s length and under no compulsion to act, expressed in cash;

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

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

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

“Parentco 1” means XXXXXXXXXX;

“Parentco 2” means XXXXXXXXXX;

“Pre-1972 CSOH” means “pre-1972 capital surplus on hand” and has the meaning assigned by subsection 88(2.1);

“Principal 1” means XXXXXXXXXX;

“Principal 2” means XXXXXXXXXX;

“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 the Proposed Transactions section of this letter;

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

“related” has the meaning assigned by subsection 251(1);

“Shareholder Loans” means the loans made by Principal 1 and Principal 2 to DC, each of which is payable on demand and for which there is no fixed repayment schedule;

“significant influence” has the meaning assigned by section 3051.05 of the Accounting Standards for Private Enterprises;

“stated capital” means the amount included in the stated capital account attributable to a share of the capital stock of a corporation;

“stated capital account” refers to an account that a corporation is required to maintain for each class and series of its share capital, issued in accordance with the BCA;

“Subco” means XXXXXXXXXX, a wholly-owned subsidiary of DC;

“TC1” means XXXXXXXXXX, a wholly-owned subsidiary of Parentco 1 or another corporation incorporated under the BCA for the purposes of the Proposed Transactions;

“TC2” means XXXXXXXXXX, a wholly-owned subsidiary of Parentco 2 or another corporation incorporated under the BCA for the purposes of the Proposed Transactions;

“TC1 Special Shares” means the TC1 Special Shares in the capital stock of TC1, described in Paragraph 33;

“TC2 Special Shares” means the TC2 Special Shares in the capital stock of TC2, described in Paragraph 34;

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

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

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

“Winding Up Dividend” has the meaning assigned in Ruling C below.

II. FACTS

A complete description of all the relevant facts is as follows:

1. Principal 1 is the sole shareholder of Parentco 1.

2. Principal 2 is the sole shareholder of Parentco 2.

3. Each of Principal 1 and Principal 2 is a resident of Canada for purposes of the Act.

4. Principal 1 and Principal 2 are not related by blood or marriage and deal with each other at arm’s length within the meaning of the Act.

Facts Relating to DC

5. DC was incorporated on XXXXXXXXXX and was subject to Articles of Amendment, dated XXXXXXXXXX.

6. DC is a CCPC and a taxable Canadian corporation. All shareholders of DC are residents of Canada. DC has a taxation year end for purposes of the Act of XXXXXXXXXX each year.

7. The authorized share capital of DC consists of an unlimited number of common shares and Class A Preference Shares. The DC Common Shares are voting and participating shares with the right to receive dividends as and when declared by the board of directors, and to receive the remaining property of DC on a liquidation, dissolution or on the winding-up of DC.

8. The Class A Preference Shares are retractable, redeemable, non-voting shares that entitle their owner to a non-cumulative dividend calculated on their redemption price if and when declared by the board of directors. In the case of a liquidation, dissolution or winding-up, the holders of Class A Preference Shares have the right to receive the redemption price of such shares in priority to the rights of other shareholders.

9. Apart from the DC Common Shares and the Class A Preference Shares, DC has no other issued and outstanding shares of its capital stock.

10. The directors of DC are Principal 1 and Principal 2.

11. DC does not have a unanimous shareholders agreement.

12. Parentco 1 and Parentco 2 are the only common shareholders of DC, each owning XXXXXXXXXX DC Common Shares.

13. Each of Principal 1 and Principal 2 owns XXXXXXXXXX Class A Preference shares of DC.

14. All shares in the capital stock of DC represent capital property to the shareholders. None of the shares of DC was acquired by the shareholders in contemplation of the Proposed Transactions.

15. XXXXXXXXXX.

16. DC is in the business of XXXXXXXXXX.

17. The only corporation over which DC exercises significant influence is Subco.

18. DC has XXXXXXXXXX.

19. The tax attributes of DC as at XXXXXXXXXX include:

a. ERDTOH balance of $XXXXXXXXXX;

b. NERDTOH balance of $XXXXXXXXXX;

c. CDA balance of $XXXXXXXXXX;

d. GRIP balance of $XXXXXXXXXX; and

e. Pre-1972 CSOH balance of $XXXXXXXXXX.

20. As at XXXXXXXXXX, pursuant to its unaudited financial statements, DC’s assets consist of:

XXXXXXXXXX

21. None of the real property owned by DC is inventory of DC.

22. As at XXXXXXXXXX, pursuant to its unaudited financial statements, DC’s liabilities consist of:

XXXXXXXXXX

23. Since its XXXXXXXXXX taxation year end, there has not been a material change in the composition of DC’s assets and liabilities described above that would impact the Proposed Transactions. Moreover, there will not be any significant change in DC’s assets or liabilities (except as contemplated in the Proposed Transactions) from the date of this letter until the date that the Proposed Transactions are completed.

Facts Related to Other Parties

24. Parentco 1 was amalgamated on XXXXXXXXXX. The sole shareholder of Parento 1 is Principal 1. Parentco 1’s taxation year-end is XXXXXXXXXX.

25. Parentco 2 was incorporated on XXXXXXXXXX. The sole shareholder of Parento 2 is Principal 2. Parentco 2’s taxation year-end is XXXXXXXXXX.

26. TC1 was incorporated by Parentco 1 on XXXXXXXXXX. Upon incorporation, XXXXXXXXXX common shares were issued to Parentco 1 for $XXXXXXXXXX.

27. TC2 was incorporated by Parentco 2 on XXXXXXXXXX. Upon incorporation, XXXXXXXXXX common shares were issued to Parentco 2 for $XXXXXXXXXX.

28. None of DC, Parentco 1 and Parentco 2 are “related” to each other within the meaning of the Act.

III. PROPOSED TRANSACTIONS

The Proposed Transactions will be completed in the sequence described below, with the exception of the filing the applicable election forms, which will be filed within the applicable due dates, unless otherwise indicated, following the completion of the Proposed Transactions.

Preliminary Steps

29. DC may use available cash on hand to repay Demand Debts.

30. Principal 1 will transfer his Class A Preference Shares in the capital of DC to Parentco 1 in exchange for additional common shares of the capital of Parentco 1 with an aggregate FMV equal to the aggregate FMV of the transferred Class A Preference Shares, at the time of transfer. Principal 1 and Parentco 1 will elect jointly, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) to apply to the transfer. The agreed amount will be equal to the ACB of the transferred Class A Preference Shares and, for greater certainty, will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), nor greater than the FMV of the transferred Class A Preference Shares, at the time of the transfer.

The amount added to the stated capital account of the common shares of Parentco 1 issued to Principal 1 will be restricted to the greater of (i) the PUC, immediately before the disposition, in respect of the Class A Preference Shares transferred to Parentco 1; and (ii) the ACB to Principal 1, immediately before the disposition, of the Class A Preference Shares transferred to Parentco 1, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the addition to the PUC of the common shares of Parentco 1 will not exceed the maximum amount that could be added to the PUC of such shares without an adjustment under paragraph 84.1(1)(a).

31. Principal 2 will transfer his Class A Preference Shares in the capital of DC to Parentco 2 in exchange of additional common shares of the capital of Parentco 2 with an aggregate FMV equal to the aggregate FMV of the transferred Class A Preference Shares, at the time of transfer. Principal 2 and Parentco 2 will elect jointly, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) to apply to the transfer. The agreed amount will be equal to the ACB of the transferred Class A Preference Shares and, for greater certainty, will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), nor greater than the FMV of the transferred Class A Preference Shares, at the time of the transfer.

The amount added to the stated capital account of the common shares of Parentco 2 issued to Principal 2 will be restricted to the greater of (i) the PUC, immediately before the disposition, in respect of the Class A Preference Shares transferred to Parentco 2; and (ii) the ACB to Principal 2, immediately before the disposition, of the Class A Preference Shares transferred to Parentco 2, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the addition to the PUC of the common shares of Parentco 2 will not exceed the maximum amount that could be added to the PUC of such shares without an adjustment under paragraph 84.1(1)(a).

32. After the share transfer described in Paragraphs 30 and 31, each of Parentco 1 and Parentco 2 will own, as capital property, 50% of Class A Preference Shares and 50% of the common shares in the capital of DC.

Creation of TC1 Special Shares and TC2 Special Shares

33. The authorized share capital of TC1 will be amended to create TC1 Special Shares that will be voting, non-participating, and redeemable and retractable for the amount (redemption amount) of consideration received by TC1 upon issuance of the shares (excluding the amount of any liabilities assumed), plus any declared and unpaid dividends thereon. A TC1 Special Share entitles its holder to XXXXXXXXXX per share and to receive dividends if, as and when declared at the discretion of the TC1 directors at a rate not exceeding XXXXXXXXXX% of its redemption amount per annum. No dividends or other distribution will be paid on shares ranking junior to the TC1 Special Shares if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets of TC1 to an amount less than the aggregate redemption amount of the issued and outstanding TC1 Special Shares.

Furthermore, and for the purposes of subsection 191(4), the terms and conditions of each of the TC1 Special Shares will, pursuant to a resolution of TC1’s board of directors that is effective on the issuance of such shares, specify an amount for which each such share is to be redeemed, acquired or cancelled. The amount to be specified will be expressed as a dollar amount (and not determined by a formula), will not exceed the FMV of the consideration for which each TC1 Special Share is issued and will not be subject to change thereafter.

34. The authorized share capital of TC2 will be amended to create TC2 Special Shares that will be voting, non-participating, and redeemable and retractable for the amount (redemption amount) of consideration received by TC2 upon issuance of the shares (excluding the amount of any liabilities assumed), plus any declared and unpaid dividends thereon. A TC2 Special Share entitles its holder to XXXXXXXXXX per share and to receive dividends if, as and when declared at the discretion of the TC2 directors at a rate not exceeding XXXXXXXXXX% of its redemption amount per annum. No dividends or other distribution will be paid on shares ranking junior to the TC2 Special Shares if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets of TC2 to an amount less than the aggregate redemption amount of the issued and outstanding TC2 Special Shares.

Furthermore, and for the purposes of subsection 191(4), the terms and conditions of each of the TC2 Special Shares will, pursuant to a resolution of TC2’s board of directors that is effective on the issuance of such shares, specify an amount for which each such share is to be redeemed, acquired or cancelled. The amount to be specified will be expressed as a dollar amount (and not determined by a formula), will not exceed the FMV of the consideration for which each TC2 Special Share is issued and will not be subject to change thereafter.

Butterfly Split-up of DC’s Assets

35. Immediately before the transfers of property described in Paragraph 38 (the “DC Transfer”), the property owned by DC will be determined on a consolidated look-through basis by including the appropriate pro rata share of the assets of Subco and all such property will be classified into the following three types of property for the purpose of the definition “distribution” in subsection 55(1):

a. cash or near-cash property, comprising all current assets of DC, including cash, accounts receivable, assets held for sale, note receivable from suppliers, deposits, prepaid expenses, inventory plus the proportion of the FMV of shares or debt of Subco held by DC that the net FMV of the cash or near-cash property is of the total net FMV of all the property owned by Subco.

b. investment property, comprising all of the assets, other than cash or near-cash, any income from which would, for the purposes of the Act be income from property or from a specified investment business plus the proportion of the FMV of shares or debt of Subco held by DC that the net FMV of the investment property is of the total net FMV of all the property owned by Subco; and

c. business property, comprising all of the assets, 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) plus the proportion of the FMV of shares or debt of Subco held by DC that the net FMV of the business property is of the total net FMV of all the property owned by Subco.

36. For greater certainty, for purposes of the DC Transfer the following principles will apply:

a. any tax accounts of DC, such as the balances in its ERDTOH and NERDTOH accounts, GRIP and CDA, will not be considered property;

b. advances made by DC (other than advances to Subco) that have a term of less than 12 months, that have no fixed term for repayment, or that are due on demand, if any, will be considered cash or near-cash property;

c. assets held for resale, if any, will be considered cash or near cash property;

d. rental properties held by DC will be considered to be investment properties;

e. deferred tax assets and deferred expenses (which are capitalized and amortized for accounting purposes but fully deducted for income tax purposes), if any, will not be considered property;

f. no amount will be considered to be a liability unless it represents a true legal liability that is capable of quantification; 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 interest thereon will, due to their contingent nature, not be considered property.

37. In determining the net FMV of each of the three types of property of DC on a consolidated look-through basis, immediately before the DC Transfer, the liabilities of DC and Subco will be allocated to and will be deducted in the calculation of the net FMV of each type of property of DC or Subco, as the case may be, in the following manner:

a. in determining the net FMV of each type of property of Subco immediately before the DC Transfer, the liabilities of Subco (other than any amount owing by Subco to DC) will be allocated to, and be deducted in the calculation of the net FMV of, each type of property of Subco in the following manner:

i. current liabilities of Subco will be allocated to each cash or near-cash property of Subco in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by Subco. To the extent that the total amount of current liabilities to be allocated to the cash or near-cash property exceeds the total FMV of all of the cash or near-cash property, Subco will be considered to have a negative amount of cash or near-cash property;

ii. liabilities, other than current liabilities, of Subco that relate to a particular property will be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertains to a particular type of property, but not to a particular property, will be allocated to that particular type of property. To the extent that the total amount of liabilities allocated to a particular type of property as described herein exceeds the total FMV of that type of property, Subco will be considered to have a negative amount of that type of property;

iii. any liabilities that remain after the allocations described in Paragraph 37 (a)(i) and (ii) are made, will then be allocated to the cash or near-cash property, investment property and business property of Subco, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. However, where Subco is considered to have a negative amount of a type of property because of Paragraph 37 (a)(i) and (ii), for the purposes of allocating those remaining liabilities, the net FMV of that type of property will be deemed to be nil, resulting in none of those remaining liabilities being allocated to that type of property.

b. in determining, on a consolidated look-through basis, the net FMV of each type of property of DC immediately before the DC Transfer, DC will include the appropriate pro rata share of the net FMV of each type of property of Subco, and, for greater certainty, the appropriate negative amount of such type of property of Subco, and any 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:

i. All current liabilities, Demand Debts and the 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. In the event that the aggregate amount of current liabilities, Demand Debts and Shareholder Loans exceeds the aggregate FMV of the cash or near-cash property, the excess will constitute excess unallocated liabilities. The treatment of excess unallocated liabilities is discussed below, in Paragraph 37 (b)(iii).

ii. Liabilities of DC, other than those described in Paragraph 37(b)(i), if any, 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, if any, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein, and;

iii. if there are any excess unallocated liabilities after the allocations described in Paragraphs 37 (b)(i) and (ii), such remaining liabilities will then be allocated to the cash or near-cash property, investment property, and business property of DC, on the basis of the 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 Paragraphs 37 (b)(i) and (ii). However, where DC would have a negative amount of a type of property because of the allocations in any Paragraphs 37 (b)(i) and (ii), for the purposes of allocating the remaining liabilities, the net FMV of that type of property will be deemed nil resulting in none of those remaining liabilities being allocated to that type of property.

DC Transfer

38. Immediately following the determination of the net FMV of the DC property on a consolidated look-through basis, DC will transfer simultaneously to each of TC1 and TC2 a pro rata portion of each type of property that it will own at that moment such that, immediately following the transfers, the aggregate net FMV of each type of property transferred to each of TC1 and TC2, respectively, will be equal to or approximate the proportion determined by the following formula:

A x B/C, where

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

B is the FMV, immediately before the DC Transfer, of all the shares of DC owned, at that time, by Parentco 1 and Parentco 2, as the case may be; and

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

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 TC1 or TC2, as the case may be, will receive as compared to what it would have received had it received its exact pro rata share of the net FMV of that type of property of DC.

39. As consideration for the DC Transfer, each of TC1 and TC2, as the case may be, will:

a. Assume a portion of the liabilities of DC, as appropriate, so that TC1 and TC2, respectively, will receive a proportionate share of the net FMV of each type of property owned by DC; and

b. Issue to DC XXXXXXXXXX TC1 Special Shares or TC2 Special Shares, respectively which will have an aggregate FMV and redemption amount equal to the amount by which the aggregate FMV of the DC Transfer, exceeds the aggregate amount of the liabilities of DC assumed by TC1 and TC2, as the case may be, in connection with the DC Transfer, as described in Paragraph 38.

For greater certainty, the TC1 Special Shares and the TC2 Special Shares issued to DC as described above will represent more than 10% (but less than 50%) of the issued share capital of TC1 and TC2, respectively having full voting rights in all circumstances, and represent more than 10% of the FMV of all the issued and outstanding shares of the capital stock of TC1 and TC2 as the case may be. Furthermore, the TC1 Special Shares and the TC2 Special Shares will be taxable preferred shares.

40. DC will hold the TC1 Special Shares and TC2 Special Shares as capital property.

41. DC and TC1 and DC and TC2, respectively, 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 transfers of each eligible property of DC that is transferred by DC to TC1 or to TC2, respectively.

42. The agreed amount in respect of each such eligible property so transferred 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); and

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

43. 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 TC1 or TC2, respectively, 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 or the FMV of that particular property.

44. Each of TC1 and TC2 will add to the stated capital account for the TC1 Special Shares or TC2 Special Shares, as the case may be, an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to TC1 or TC2, respectively, and (b) the FMV, in the case of each property transferred to TC1 or TC2, respectively, that is not an eligible property, less (c) the aggregate amounts of the liabilities of DC assumed by TC1 or TC2, as the case may be. For greater certainty, the amount added to the stated capital account for the TC1 Special Shares or TC2 Special Shares to be issued by TC1 or TC2, respectively, as partial consideration for the distribution property will not exceed the maximum amount that could be added to the PUC of the TC1 Special Shares or TC2 Special Shares, respectively, without a reduction taking place pursuant to subsection 85(2.1).

Redemption of TC1 Special Shares and TC2 Special Shares

45. TC1 will redeem all of the issued TC1 Special Shares owned by DC for an amount equal to the aggregate redemption amount of such shares. As consideration therefor, TC1 will issue the TC1 Redemption Note to DC, which will have a principal amount and FMV equal to the aggregate redemption amount of the TC1 Special Shares so redeemed. DC will accept the TC1 Redemption Note as payment in full for the TC1 Special Shares so redeemed.

46. Simultaneously with the redemption described in Paragraph 45, TC2 will redeem all of the issued TC2 Special Shares owned by DC for an amount equal to the aggregate redemption amount of such shares. As consideration therefor, TC2 will issue the TC2 Redemption Note to DC, which will have a principal amount and FMV equal to the aggregate redemption amount of the TC2 Special Shares so redeemed. DC will accept the TC2 Redemption Note as payment in full for the TC2 Special Shares so redeemed.

47. Immediately after the redemptions of TC1 Special Shares and TC2 Special Shares as the case may be, each of TC1 and TC2 will have their first taxation year-end.

Winding-up of TC1, TC2 and DC

48. Each of Parentco 1 and Parentco 2, as the case may be, will resolve to wind-up and dissolve TC1 and TC2, respectively, in accordance with the provisions of the BCA.

49. On the winding-up of TC1 and TC2, respectively:

a. each property of TC1 and TC2, as the case may be, (consisting of 50% of the assets formerly owned by DC), will be acquired by Parentco 1 and Parentco 2, respectively, and

b. the TC1 Redemption Note and the TC2 Redemption Note, as the case may be, will be assumed by Parentco 1 and Parentco 2, respectively.

50. Articles of dissolution will then be filed and TC1 and TC2 will respectively be formally dissolved.

51. Immediately after the winding-up of TC1 and TC2, the shareholders of DC (being Parentco 1 and Parentco 2), will resolve to wind-up and dissolve DC in accordance with the provisions of the BCA.

52. Under the terms of the agreement governing the winding-up of DC, the TC1 Redemption Note and the TC2 Redemption Note will be assigned and distributed to Parentco 1 and Parentco 2, respectively. As a result of the assignment and distribution of the TC1 Redemption Note and the TC2 Redemption Note, the obligation of each of Parentco 1 and Parentco 2 under the respective notes will be extinguished and the notes will be cancelled.

53. To the extent that there is a positive balance in the CDA of DC immediately prior to the distribution of the TC1 Redemption Note and the TC2 Redemption Note described in Paragraph 52, DC will elect, in the prescribed manner and prescribed form required under subsection 83(2), to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend paid. Pursuant to subparagraph 88(2)(b)(iv), TC1 and TC2 will each be deemed to have received a proportionate capital dividend from DC.

54. To the extent that DC has GRIP at the time of the winding-up and immediately prior to the distribution of the TC1 Redemption Note and TC2 Redemption Note described in Paragraph 52, 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 Parentco 1 and Parentco 2 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), Parentco 1 and Parentco 2, as the case may be, will each be deemed to have received a proportionate eligible dividend from DC.

55. 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 Parentco 1 and Parentco 2.

56. Within a reasonable time following the distribution of the TC1 Redemption Note and the TC2 Redemption Note, and any tax refund described in Paragraphs 52, 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.

57. Immediately before the dissolution DC will not own or acquire any property or carry on any activity or undertaking.

Additional Information

58. 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 DC or Subco in contemplation of and before the Proposed Transactions, other than a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

59. 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).

60. 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, to an unrelated person or a partnership as part of the series of transactions that includes the Proposed Transactions in the circumstances described in paragraph 55(3.1)(c).

61. Except as described herein, none of the shareholders of Parentco 1 or Parentco 2 are contemplating the sale or transfer of any shares of the capital stock of those corporations.

62. Immediately before the redemption of the TC1 Special Shares and the TC2 Special Shares held by DC described in Paragraphs 45 and 46, DC will be connected with TC1 and TC2 pursuant to paragraph 186(4)(b).

63. None of the shares of DC, Parentco 1, Parentco 2, TC1 or TC2 has been, or will be, at any time during the implementation of the proposed transactions described herein:

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

b. the subject of a “dividend rental arrangement” as contemplated in subsection 112(2.3) and as defined in subsection 248(1);

c. 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);

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).

64. Each of TC1 and TC2 will have the financial capacity to honour, upon presentation for payment, the amount payable under any promissory note issued by it as part of the Proposed Transactions.

65. None of the corporations referred to herein is, or will be at the time of the Proposed Transactions described herein be a “specified financial institution” as defined in subsection 248(1).

66. None of the corporations referred to herein will be a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1).

67. None of the Taxpayers have any outstanding tax liabilities that could be affected by the Proposed Transactions.

IV. PURPOSE OF THE PROPOSED TRANSACTION

The primary objective of the proposed transactions is to separate, on a tax-deferred basis, the assets owned by DC equally among its shareholders to allow them to be the masters of their own destiny and to enable each Principal to engage in their own tax and estate planning without requiring the participation of the other Principal.

V. 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, 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 that the requisite joint elections are filed in prescribed form and manner within the prescribed time 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, the provisions of subsection 85(1) will apply to the transfer:

a. by Principal 1 of its shares in DC to Parentco 1 as described in Paragraph 30;

b. by Principal 2 of its shares in DC to Parentco 2 as described in Paragraph 31;

c. by DC of property to TC1 as described in Paragraphs 38 and 39; and

d. by DC of property to TC2 as described in Paragraphs 38 and 39;

such that, the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost thereof pursuant to paragraph 85(1)(a) and in respect of depreciable property, the transferee’s capital cost of each such property will be determined in accordance with subsection 85(5). For greater certainty, paragraph 85(1)(e.2) will not apply to apply to the transfers.

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.

B. As a result of the redemption by each of TC1 and TC2, as the case may be, of the TC1 Special Shares and TC2 Special Shares, respectively, as described in Paragraph 45 and 46, by virtue of subsection 84(3), TC1 and TC2, respectively, 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 by TC1 and TC2, as the case may be, in respect of the redemption of all the TC1 Special Shares and TC2 Special Shares, respectively, exceeds the aggregate PUC of those shares immediately before the redemption.

C. Subsection 84(2) and paragraph 88(2)(b) will apply to the distributions by DC described in Paragraphs 51 to 56 such that:

(i) subject to Rulings C(ii), (iii) and (iv) below, DC will be deemed to have paid a dividend (the “Winding Up Dividend”) on the particular class of shares held by Parentco 1 and Parentco 2, as the case may be, equal to the amount, if any, by which:

(a) the amount or value of the funds or property distributed with respect to the shares of that class, as the case may be,

    exceeds

(b) the amount, if any, by which the aggregate PUC in respect of the shares of that class is reduced on the distribution, as the case may be,

and each of Parentco 1 and Parentco 2 will be deemed to have received a dividend on such class equal to that proportion of the amount of the excess that the number of shares of that class held by Parentco 1 and Parentco 2, as the case may be, immediately before the distribution is of the number of shares of that class outstanding immediately before the distributions;

(ii) to the extent that the CDA of DC has a positive balance immediately prior to its winding up, pursuant to subparagraph 88(2)(b)(i), such portion of any Winding-Up Dividend referred to in (i) 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) referred to in Paragraph 53, to be the full amount of a separate dividend and provided that DC elects pursuant to subsection 83(2) in respect of the full amount of this separate dividend, in prescribed form and manner, such dividend will be deemed to be a capital dividend;

(iii) pursuant to subparagraph 88(2)(b)(iii), the Winding Up Dividend arising from the distributions, to the extent that it exceeds the amount referred to in (ii) above, will be deemed to be a separate dividend that is a taxable dividend; and

(iv) pursuant to subparagraph 88(2)(b)(iv), each of Parentco 1 and Parentco 2 will be deemed to have received its proportionate share of the dividends described in (ii) and (iii) above.

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 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 as provided in 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);

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 paragraphs 55(3.1)(c) or (d);

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

G. Subsection 245(2) will not be applied as a result of 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 forth in Information Circular 70-6R11 issued on April 1, 2021, and 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.

VI. COMMENTS

Unless otherwise expressly confirmed, nothing in this letter 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 or ACB of any property referred to herein or the stated capital or PUC in respect of any share referred to herein;

(b) the balance of the ERDTOH, NERDTOH, GRIP, CDA or any other tax account for any corporation described herein;

(c) the characterization of any property described herein to the holder thereof;

(d) any other tax consequence (including provincial tax consequences) relating to the facts, transactions, 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; or

(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 arise when computing the Part IV tax and the dividend refund of each corporation. For greater certainty, we do not provide any comment on any such circularity issue.

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 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 or 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, updated to November 24, 2015.

Yours truly,

XXXXXXXXXX

for Division Director

Reorganizations Division

Income Tax Rulings Directorate

Legislative Policy and Regulatory Affairs Branch

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