2021-0889411R3 Multi-wing net asset butterfly reorganization

Principal Issues: Whether the proposed butterfly reorganization meets the requirements stated in paragraph 55(3)(b).

Position: Yes.

Reasons: The proposed butterfly reorganization meets the requirements stated in paragraph 55(3)(b) and is not subject to any of the butterfly denial rules found in paragraphs 55(3.1)(a), (b) and (c).

Author: XXXXXXXXXX
Section: 55(1) and (2); 55(3)(b); 55(5); 55(3.1); 84(2) and (3); 85; 88(1) and (2); 186(1) and (2); 187.1; 191(1) and (2); 251(2)

XXXXXXXXXX                                                                        2021-088941

XXXXXXXXXX, 2021

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

We are writing in response to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the abovementioned taxpayers (“Rulings Request”). We also acknowledge receipt of your e-mails as well as the information provided during various telephone conversations in connection with the Rulings Request.

To the best of your knowledge and that of the taxpayers involved, none of the issues considered in the Rulings Request is:

(i) dealt with in an earlier tax return of any of the above mentioned taxpayers or a related person;

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

(iii) under objection by any of the abovementioned taxpayers or a related person;

(iv) before the courts or, if a decision has been rendered, the time limit to appeal to a higher court has not expired;

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The tax affairs of the abovementioned taxpayers are administered by the XXXXXXXXXX.

Unless otherwise stated, all references herein to a section or subsection, paragraph or subparagraph and clause or sub-clause is a reference to the relevant provisions of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1 as amended (“ACT”). In addition, all references to monetary amounts are in Canadian dollars.

DEFINITIONS:

In this letter, unless otherwise expressly stated, the following terms have the meanings specified below:

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

“ACo” means XXXXXXXXXX, which is wholly-owned by A;

“ACoSub” means the corporation to be incorporated and wholly-owned by ACo;

“ACoSub Preferred Shares” means the Class A preferred shares to be issued by ACoSub in partial consideration for the proportionate share of DC’s property that it will receive on the Transfer of Property as further described in Paragraph 40;

“ACoSub Promissory Note” means the non-interest bearing demand promissory note having a principal amount and a FMV equal to the redemption price of the ACoSub Preferred Shares to be issued by ACoSub in full payment of the redemption of such shares as further described in Paragraph 43;

“ACoSub Redemption Amount” means the redemption price for ACoSub Preferred Shares;

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

“Agreed Amount” in respect of an Eligible Property means the amount that the transferor and the transferee of the property have agreed upon in a joint election under subsection 85(1);

“Amalgamation” refers to the amalgamation of DCo and Eco to form DC as further described in Paragraph 19;

“Arm’s Length” has the meaning assigned by subsection 251(1);

“A Shares” means the XXXXXXXXXX common shares in DC shares that A will transfer to ACo as further described in Paragraph 33;

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

“BCA” means the XXXXXXXXXX;

“BCo” means XXXXXXXXXX, which is wholly-owned by B;

“BCoSub” means the corporation to be incorporated and wholly-owned by BCo;

“BCoSub Preferred Shares” means the Class A preferred shares to be issued by BCoSub in partial consideration for the proportionate share of DC’s property that it will receive on the Transfer of Property as further described in Paragraph 40;

“BCoSub Promissory Note” means the non-interest bearing demand promissory note having a principal amount and a FMV equal to the redemption price of the BCoSub Preferred Shares to be issued by BCoSub in full payment of the redemption of such shares as further described in Paragraph 43;

“BCoSub Redemption Amount” means the redemption price for BCoSub Preferred Shares;

“B Shares” means the XXXXXXXXXX common shares in DC that B will transfer to BCo as further described in Paragraph 34;

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

“Capital Dividend” has the meaning assigned by subsection 83(2);

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

“CCo” means the corporation to be incorporated by C as further described in Paragraph 16;

“CCoSub” means the corporation to be incorporated and wholly-owned by CCo;

“CCoSub Preferred Shares” means the Class A preferred shares to be issued by CCoSub in partial consideration for the proportionate share of DC’s property that it will receive on the Transfer of Property as further described in Paragraph 40;

“CCoSub Promissory Note” means the non-interest bearing demand promissory note having a principal amount and a FMV equal to the redemption price of the CCoSub Preferred Shares to be issued by CCoSub in full payment of the redemption of such shares as further described in Paragraph 43;

“CCoSub Redemption Amount” means the redemption price for CCoSub Preferred Shares;

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

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

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

“CRA” means the Canada Revenue Agency;

“Co-Owners” means ACo, BCo and CCo collectively that will enter into the Co-Ownership Agreement;

“Co-Owned Property” means the land that will be subject to the Co-Ownership Agreement;

“Co-Ownership Agreement” means the co-ownership agreement to be entered into by ACo, BCo and CCo pursuant to which they will respectively hold an undivided interest in the Land that will be distributed to ACoSub, BCoSub and CCoSub in the course of the Property Transfer, and will subsequently be transferred to each of ACo, BCo and CCo as part of the Series of Transactions or Events that includes the Proposed Transactions;

“C Shares” means the XXXXXXXXXX common shares in DC that C will transfer to CCo as further described in Paragraph 35;

“DC” means the corporation to be formed as a result of the Amalgamation, which will undertake the Property Transfer as further described in Paragraph 39;

“DCo” means XXXXXXXXXX, which is a CCPC and a TCC that is equally owned by A, B and C as further described in Paragraph 6;

“DCo Advances” refers to the advances payable by DCo to ECo prior to the Proposed Transactions;

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

“Distribution” has the meaning assigned by subsection 55(1);

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

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

“ECo” means XXXXXXXXXX, which is a CCPC and a TCC that is wholly-owned by DCo;

“ECo Receivables” refers to the advances receivable by ECo from DCo before the Proposed Transactions;

“ERDTOH” means eligible refundable dividend tax on hand as that term is defined in subsection 129(4);

“Effective Date” means the date on which certain Proposed Transactions will occur;

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

“Eligible Property” has the meaning assigned by subsection 85(1.1);

“FMV” means fair market value, which refers to the highest price that is available in an open and unrestricted market, between prudent and informed parties acting at Arm’s Length and with no compulsion to act, that is expressed in terms of money or money’s worth;

“Financial Intermediary Corporation” has the meaning assigned by subsection 248(1);

“Forgiven Amount” has the meaning assigned by subsections 80(1) and 80.01(1);

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

“Gain” has the meaning assigned by paragraph 40(1)(a);

“Land” refers to the vacant parcels of land held by DCo that will become property of DC after the Amalgamation;

“Liability Assumption” means the assumption of a proportionate share of DC’s liabilities by each of ACoSub, BCoSub and CCoSub on the Transfer of Property as further described in Paragraph 40;

“Loss” has the meaning assigned by paragraph 40(1)(b);

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

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

“Paragraph” means a numbered paragraph in this letter;

“Predecessor Corporations” means DCo and ECo collectively;

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

“Promissory Notes” means the aggregate of the ACoSub Promissory Notes, the BCoSub Promissory Note and the CCoSub Promisory Note;

“Proposed Transactions” means the transactions described in Paragraphs below;

“Property Transfer” refers to DC’s transfer of property to ACoSub, BCoSub and CCoSub as further described in Paragraph 39;

“Regulations” means the Income Tax Regulations;

“Related Person” means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2) as modified by paragraph 55(5)(e) for the purposes of subsection 55(2);

“Rental Property” has the meaning assigned by subsection 1100(14) of the Regulations;

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

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

“Specified Investment Business” has the meaning assigned by subsection 125(7);

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

“Short-Term Preferred Share” has the meaning assigned by subsection 248(1);

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

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

“Taxable Preferred Share” has the meaning assigned by subsection 248(1);

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

“Wind-Up” means the winding-up of DC as further described in Paragraph 46; and

“Wind-Up Dividend” means the Taxable Dividend that DC will be deemed to have paid to each of ACo, BCo and CCo as a result of the distribution of its property in the course of the Wind-Up as further described in Paragraphs 47 and 52.

FACTS:

Siblings

1. A, B and C are siblings who are resident in Canada.

DCo

2. On XXXXXXXXXX, DCo was incorporated under the BCA to carry on an XXXXXXXXXX.

3. DCo is a CCPC and a TCC that has a taxation year ending on XXXXXXXXXX.

4. According to its balance sheet for the period ended XXXXXXXXXX, DCo’s principal assets consist of:

a) Advances receivable that are receivable from ACo and BCo within the next XXXXXXXXXX months,

b) XXXXXXXXXX parcels of vacant land, and

c) XXXXXXXXXX in all the common and preferred shares in ECo.

There has not been any material change in the composition of DCo’s assets since XXXXXXXXXX.

DCo is not expected to have any liabilities at the Effective Date.

5. The authorized share capital of DCo consists of an unlimited number of:

a) voting and participating Class A common shares without par value;

b) non-voting and participating Class B common shares without par value; and

c) non-voting preferred shares carrying a: (i) non-cumulative and discretionary dividend entitlement not exceeding XXXXXXXXXX% of the FMV of the consideration for which they were issued, (ii) redemption/retraction feature pursuant to which they can be purchased for cancellation for an amount not exceeding the amount for which they were issued together with a premium of XXXXXXXXXX% thereof and all unpaid dividends thereon, and (iii) liquidation entitlement pursuant to which their holders are entitled to receive the amount for which they were issued together with all unpaid dividends thereon.

6. The issued and outstanding capital of DCo is held as follows:

	Class	Number of Shares	ACB	PUC	FMV
A	XXXXX	XXXXX	XXXXX	XXXXX	XXXXX
B	XXXXX	XXXXX	XXXXX	XXXXX	XXXXX
C	XXXXX	XXXXX	XXXXX	XXXXX	XXXXX

Each of A, B and C respectively holds their class A common shares in DCo as Capital Property, and all such shares are Eligible Property to A, B and C.

DCo’s shareholding has not changed since it was incorporated. In addition, none of the shares in DCo were acquired by A, B and C in contemplation of the Proposed Transactions.

7. As of XXXXXXXXXX, DCo had the following tax account balances: (a) CDA: $XXXXXXXXXX; (b) GRIP: XXXXXXXXXX; and (c) NERDTOH: XXXXXXXXXX.

ECo

8. On XXXXXXXXXX, ECo was incorporated under the BCA to carry XXXXXXXXXX.

9. ECo is a CCPC and a TCC that has a taxation year ending on XXXXXXXXXX.

10. According to its balance sheet for the period ended XXXXXXXXXX, ECo’s principal assets and liabilities respectively consist of:

Assets

a) Cash, accounts receivable and prepaid expenses,

b) Deposits and income tax receivable,

c) DCo Advances and advances receivable from related parties, and

d) XXXXXXXXXX, and

Liabilities

a) Accounts payable and accrued liabilities,

b) Government remittances payable,

c) Customer deposits,

d) Advances that are payable within the next XXXXXXXXXX months, and

e) Mortgages payable on its XXXXXXXXXX.

There has not been any material change in the composition of ECo’s assets since XXXXXXXXXX.

11. The authorized share capital of ECo consists of an unlimited number of:

a) common shares: voting, participating and without par value;

b) voting Class A preferred shares carrying a : (i) redemption/retraction feature pursuant to which they can be redeemed/retracted for an amount as determined by a resolution of the ECo’s board of directors together with all declared but unpaid dividends thereon, (“Class A PS Redemption Amount”); and (ii) non-cumulative and discretionary dividend entitlement not exceeding XXXXXXXXXX% of the Class A PS Redemption Amount;

c) non-voting Class B preferred shares carrying a : (i) redemption/retraction feature pursuant to which they can be redeemed/retracted for an amount as determined at the time of their issuance (“Class B PS Redemption Amount”); (ii) non-cumulative and discretionary dividend entitlement not exceeding XXXXXXXXXX% of the Class B PS Redemption Amount, and (iii) liquidation entitlement pursuant to which their holders are entitled to receive the Class B PS Redemption Amount together with all declared but unpaid dividends thereon.

12. DCo holds all of the issued and outstanding capital in ECo consisting of:

a) XXXXXXXXXX common shares having an aggregate PUC and an ACB of $XXXXXXXXXX and

b) XXXXXXXXXX class B preferred shares having an aggregate PUC, ACB and FMV of $XXXXXXXXXX.

DCo has always been ECo’s sole shareholder since its incorporation.

13. As of XXXXXXXXXX, ECo had the following tax account balances:

a) CDA: $XXXXXXXXXX

b) GRIP: $XXXXXXXXXX

c) NERDTOH: $XXXXXXXXXX

ACo and BCo

14. ACo is a CCPC and a TCC incorporated on XXXXXXXXXX under the BCA that has a taxation year ending XXXXXXXXXX. ACo owns a XXXXXXXXXX. As of XXXXXXXXXX, ACo’s retained earnings were approximately equal to $XXXXXXXXXX.

The authorized share capital of ACo consists in an unlimited number of voting and participating common shares without par value.

A holds, and has always held, all of the issued and outstanding common shares in ACo.

15. BCo is a CCPC and a TCC incorporated on XXXXXXXXXX under the BCA that has a taxation year ending XXXXXXXXXX. BCo owns a XXXXXXXXXX. As of XXXXXXXXXX, BCo had a deficit approximately equal to $XXXXXXXXXX.

The authorized share capital of BCo consists in an unlimited number of voting and participating common shares.

B holds, and has always held, all of the issued and outstanding common shares in BCo.

PROPOSED TRANSACTIONS:

The following transactions will be implemented in the following order unless otherwise indicated.

Incorporation of CCo

16. C will incorporate CCo under the provisions of the BCA.

17. CCo’s authorized share capital will consist of an unlimited number of:

a) Voting and participating common shares without par value, and

b) Non-voting Class A preferred shares carrying a: (i) non-cumulative and discretionary dividend entitlement not exceeding XXXXXXXXXX% of the FMV of the consideration for which they were issued (“Redemption Price”), (ii) redemption/retraction feature pursuant to which they can be redeemed/retracted for an amount equal to their Redemption Price plus all declared and unpaid dividends thereon (“Redemption Amount”), and (iii) liquidation entitlement pursuant to which their holders are entitled to receive and amount equal to their Redemption Amount in the event of the liquidation, dissolution or winding-up of CCo.

18. C will subscribe to XXXXXXXXXX common shares in CCo upon its incorporation, which will have an aggregate PUC, ACB and FMV of $XXXXXXXXXX.

Amalgamation of DCo and ECo

19. After CCo’s incorporation, the Predecessor Corporations will be amalgamated in a short‑form amalgamation in accordance with the provisions of the BCA to form DC, which will be a CCPC and a TCC having a taxation year ending XXXXXXXXXX.

20. Upon the Amalgamation:

a) all of the property (except amounts receivable from any Predecessor Corporation or shares of the capital stock of any Predecessor Corporation) of the Predecessor Corporations immediately before the Amalgamation will become property of DC by virtue of the Amalgamation;

b) all of the liabilities (except amounts payable to any Predecessor Corporation) of the Predecessor Corporations immediately before the Amalgamation will become liabilities of DC by virtue of the Amalgamation; and

c) all the shareholders (except any Predecessor Corporation) who owned shares of the capital stock of any Predecessor Corporation immediately before the Amalgamation will receive shares of DC because of the Amalgamation.

For greater certainty, any shares of the capital stock of a Predecessor Corporation owned by a shareholder (except any Predecessor Corporation) immediately before the Amalgamation that were not cancelled on the Amalgamation shall be deemed to be shares of DC received by the shareholder by virtue of the Amalgamation.

21. DC’s authorized share capital will consist of an unlimited number of voting and participating common shares without par value.

22. DC’s issued and outstanding class A common shares will be held as follows immediately after the Amalgamation:

	Class	Number of Shares	ACB	PUC	FMV
A	Common shares	XXXXX	XXXXX	XXXXX	XXXXX
B	Common shares	XXXXX	XXXXX	XXXXX	XXXXX
C	Common shares	XXXXX	XXXXX	XXXXX	XXXXX

23. Immediately after the Amalgamation, DC will carry on the business of holding and managing the properties that became the property of DC on the Amalgamation. DC will have the following tax account balances immediately after the Amalgamation: (a) CDA: $XXXXXXXXXX; (b) GRIP: $XXXXXXXXXX; and (c) NERDTOH: $XXXXXXXXXX.

Incorporation of ACoSub, BCoSub and CCoSub

ACoSub

24. ACo will incorporate ACoSub, which will be a CCPC and a TCC having a taxation-year ending XXXXXXXXXX.

25. ACoSub’s authorized share capital will consist of an unlimited number of:

a) Voting and participating common shares without par value, and

b) Non-voting Class A preferred shares carrying a: (i) non-cumulative and discretionary dividend entitlement not exceeding XXXXXXXXXX% of the FMV of the consideration for which they were issued (“Redemption Price”), (ii) redemption/retraction feature pursuant to which they can be redeemed/retracted for an amount equal to their Redemption Price plus all declared and unpaid dividends thereon (“Redemption Amount”), and (iii) liquidation entitlement pursuant to which their holders are entitled to receive and amount equal to their Redemption Amount in the event of the liquidation, dissolution or winding-up of ACoSub.

26. ACo will subscribe to XXXXXXXXXX common shares upon ACoSub’s incorporation, which will have an aggregate PUC, ACB and FMV of $XXXXXXXXXX.

BCoSub

27. BCo will incorporate BCoSub, which will be a CCPC and a TCC having a taxation-year ending XXXXXXXXXX.

28. BCoSub’s authorized share capital will consist of an unlimited number of:

a) Voting and participating common shares without par value, and

b) Non-voting Class A preferred shares carrying a: (i) non-cumulative and discretionary dividend entitlement not exceeding XXXXXXXXXX% of the FMV of the consideration for which they were issued (“Redemption Price”), (ii) redemption/retraction feature pursuant to which they can be redeemed/retracted for an amount equal to their Redemption Price plus all declared and unpaid dividends thereon (“Redemption Amount”), and (iii) liquidation entitlement pursuant to which their holders are entitled to receive and amount equal to their Redemption Amount in the event of the liquidation, dissolution or winding-up of BCoSub.

29. BCo will subscribe to XXXXXXXXXX common shares upon BCoSub’s incorporation, which will have an aggregate PUC, ACB and FMV of $XXXXXXXXXX.

CCoSub

30. CCo will incorporate CCoSub, which will be a CCPC and a TCC having a taxation-year ending XXXXXXXXXX.

31. CCoSub’s authorized share capital will consist of an unlimited number of:

a) Voting and participating common shares without par value, and

b) Non-voting Class A preferred shares carrying a: (i) non-cumulative and discretionary dividend entitlement not exceeding XXXXXXXXXX% of the FMV of the consideration for which they were issued (“Redemption Price”), (ii) redemption/retraction feature pursuant to which they can be redeemed/retracted for an amount equal to their Redemption Price plus all declared and unpaid dividends thereon (“Redemption Amount”), and (iii) liquidation entitlement pursuant to which their holders are entitled to receive and amount equal to their Redemption Amount in the event of the liquidation, dissolution or winding-up of CCo.

32. CCo will subscribe to XXXXXXXXXX common shares upon CCoSub’s incorporation, which will have an aggregate PUC, ACB and FMV of $XXXXXXXXXX.

Permitted exchanges

33. A will transfer the A Shares to ACo in consideration for XXXXXXXXXX common shares in ACo having an aggregate FMV equal to the aggregate FMV of the A Shares.

A and ACo will jointly elect in prescribed form and within the time limit referred in subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of the A Shares. The Agreed Amount will be equal to the ACB of the A Shares, which will not be greater than the FMV of the A Shares.

The amount to be added to the stated capital account maintained by ACo in respect of the common shares to be issued to A will not exceed the greater of: (i) the PUC of the A Shares, and (ii) the ACB of the A Shares as adjusted by paragraphs 84.1(2)(a) and (a.1).

The A Shares will be held by ACo as Capital Property.

34. B will transfer the B Shares to BCo in consideration for XXXXXXXXXX common shares in BCo having an aggregate FMV equal to the aggregate FMV of the B Shares.

B and BCo will jointly elect in prescribed form and within the time limit referred in subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of the B Shares. The Agreed Amount will be equal to the ACB of the B Shares, which will not be greater than the FMV of the B Shares.

The amount to be added to the stated capital account maintained by BCo in respect of the common shares to be issued to B will not exceed the greater of: (i) the PUC of the B Shares, and (ii) the ACB of the B Shares as adjusted by paragraphs 84.1(2)(a) and (a.1).

The B Shares will be held by BCo as Capital Property.

35. C will transfer the C Shares to CCo in consideration for XXXXXXXXXX common shares in CCo having an aggregate FMV equal to the aggregate FMV of the C Shares.

C and CCo will jointly elect in prescribed form and within the time limit referred in subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of the C Shares. The Agreed Amount will be equal to the ACB of the C Shares, which will not be greater than the FMV of the C Shares.

The amount to be added to the stated capital account maintained by CCo in respect of the common shares to be issued to C will not exceed the greater of: (i) the PUC of the C Shares, and (ii) the ACB of the C Shares as adjusted by paragraphs 84.1(2)(a) and (a.1).

The C Shares will be CCo’s only asset, which will be held as Capital Property.

Distribution

The classification of DC’s property

36. Immediately prior to the Property Transfer described in Paragraph 39, all the property owned by DC will be classified into two types of property for the purposes of the definition of distribution, as follows:

(a) cash or near-cash property, comprising of DC’s cash, accounts receivable, deposits, prepaid expenses, income tax recoverable and advances that are payable by related parties.

(b) investment property, comprising of DC’s assets, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or from a Specified Investment Business including, for greater certainty, commercial rental properties and the Land that will be subject to the Co-Ownership Agreement.

For greater certainty, for the purposes of the distribution:

(c) tax accounts or other tax related amounts of DC, such as CDA, GRIP and RDTOH will not be considered property;

(d) the amount of any deferred tax will not be considered to be a property or a liability, as the case may be, for the purposes of the Proposed Transactions;

(e) advances that are due on demand or that have a term of less than XXXXXXXXXX months will be considered cash or near-cash property;

(f) any amount in respect of refund of taxes, and interest thereon, actually receivable will be treated as cash or near-cash property.

37. As a result of DC’s classification of property described in Paragraph 36, DC will have no business property immediately prior to the Property Transfer described in Paragraph 39.

The allocation of DC’s liabilities

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

(a) current liabilities of DC including accounts payable, accrued liabilities, tenant deposits and the current portion of any long-term debt will be allocated to the cash or near-cash property of DC in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property of DC. The total amount of DC’s current liabilities to be allocated to DC’s cash or near cash property will not exceed the aggregate FMV of all of DC’s cash or near-cash property;

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

(c) any liabilities that remain after the allocations described in Paragraphs 38(a) and (b) are made, will then be allocated to the cash or near-cash property, business property and investment property of DC, on the basis of the relative net FMV of each type of property immediately prior to the allocation of such excess, but after the allocation of liabilities described in Paragraphs 38(a) and (b).

For greater certainty, for purposes of the determination described in Paragraph 38:

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

(ii) amounts owing such as advances or government remittances that are due on demand or that have a term of less than XXXXXXXXXX months are considered current liabilities;

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

The indirect transfer of each type of DC’s property to ACo, BCo and CCo

39. Immediately following the determination of the net FMV of each type of property that it owns as described in Paragraphs 36 and 38, DC will transfer to each of ACoSub, BCoSub and CCoSub a proportionate share (XXXXXXXXXX) of each type of property owned by DC such that immediately after the Property Transfer and the Liability Assumption, the net aggregate FMV of each type of property transferred to each of ACoSub, BCoSub and CCoSub will be equal or approximate the proportion determined by the formula:

A x B/C

where:

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

B is the aggregate FMV, immediately before the Property Transfer, of all the shares of the capital stock of DC owned, as the case may be, by ACo, BCo or CCo at that time

C is the aggregate FMV, immediately before the Property Transfer, of all the issued and outstanding shares of the capital stock of DC at that time

For the purpose of this Paragraph, the expression “approximate the proportion” means that the discrepancy from that proportion of XXXXXXXXXX%, if any, will not exceed XXXXXXXXXX%, determined as a percentage of the net FMV of each type of property which each of ACoSub, BCoSub and CCoSub will receive as compared to what each of ACoSub, BCoSub and CCoSub would have received had it received its appropriate pro rata (XXXXXXXXXX%) share of the net FMV of that type of property.

40. As consideration for the Property Transfer, each of ACoSub, BCoSub and CCoSub will:

(a) assume an appropriate amount of liabilities of DC so that each ACoSub, BCoSub and CCoSub respectively receive a proportionate share of the net FMV of each type of property owned by DC; and

(b) issue the ACoSub Preferred Shares, BCoSub Preferred Shares and CCoSub Preferred Shares, as the case may be, to DC having an aggregate FMV and redemption value equal to aggregate FMV of the property that each of them received on the Property Transfer less the amount of the liabilities that each of them respectively assumed on the Liability Assumption.

For greater certainty, the ACoSub Preferred Shares, the BCoSub Preferred Shares and the CCoSub Preferred Shares will be Taxable Preferred Shares and Short-Term Preferred Shares, which will be held by DC as Capital Property.

41. In respect of the Property Transfer, DC will jointly elect with ACoSub, BCoSub and CCoSub, as the case may be, in prescribed form and within the time allowed by subsection 85(6) but prior to the wind-up of ACoSub, BCoSub and CCoSub described in Paragraph 44 and the winding-up of DC described in Paragraph 46, to have the provisions of subsection 85(1) apply to the transfers of each Eligible Property of DC that is transferred to ACoSub, BCoSub and CCoSub, as the case may be.

42. The Agreed Amount in respect of each Eligible Property transferred to ACoSub, BCoSub and CCoSub, as the case may be, described in Paragraph 41 will be within the limits prescribed 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, if any, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).

For greater certainty, the amount of liabilities that are allocated by DC to a particular Eligible Property that is subject to an election under subsection 85(1), and that are assumed by ACoSub, BCoSub and CCoSub, as the case may be, which, will not exceed the Agreed Amount for that particular property in accordance with paragraph 85(1)(b). The amount of liabilities assumed by ACoSub, BCoSub and CCoSub, as the case may be, which are allocated by DC to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of any such property.

ACoSub, BCoSub and CCoSub will add to the stated capital account maintained for the ACoSub Preferred Shares, the BCoSub Preferred Shares and the CCoSub Preferred Shares, as the case may be, an amount equal to the amount by which the aggregate of the Agreed Amounts, in the case of each Eligible Property, and the aggregate FMV, in the case of other properties respectively transferred to ACoSub, BCoSub and CCoSub exceeds the DC liabilities respectively assumed by ACoSub, BCoSub and CCoSub.

For greater certainty, the amount added to the stated capital account for the ACoSub Preferred Shares, BCoSub Preferred Shares and CCoSub Preferred Shares to be respectively issued by ACoSub, BCoSub and CCoSub as partial consideration for the Property Transfer will not exceed the maximum amount that could be added to the aggregate PUC of the ACoSub Preferred Shares, BCoSub Preferred Shares and the CCoSub Preferred Shares without a reduction taking place pursuant to subsection 85(2.1).

The redemption of the ACoSub Preferred Shares, BCoSub Preferred Shares and the CCoSub Preferred Shares held by DC

43. Each of ACoSub, BCoSub and CCoSub will respectively redeem the ACoSub Preferred Shares, BCoSub Preferred Shares and CCoSub Preferred Shares held by DC at their redemption price in consideration for the ACoSub Promissory Note, BCoSub Promissory Note and the CCoSub Promissory Note, which DC will accept as full payment of the redemption price of the redeemed shares.

The wind-up of ACoSub, BCoSub and CCoSub into ACo, BCo and CCo

44. Following the transactions described in Paragraph 43, each of ACo, BCo and CCo will resolve to wind-up and dissolve ACoSub, BCoSub and CCoSub, as the case may be, in accordance with the provisions of the BCA.

45. In the course of their winding-up, each of ACoSub, BCoSub and CCoSub will respectively distribute their aggregate assets including their proportionate share of each type of DC’s property, and their aggregate liabilities including their proportionate share of DC’s liabilities and the ACoSub Promissory Note, BCoSub Promissory Note and the CCoSub Promissory Note, as the case may be, to ACo, BCo and CCo.

Winding-up of DC

46. Further to the respective wind-up of ACoSub, BCoSub and CCoSub, ACo, BCo and CCo will resolve to wind-up and dissolve DC in accordance with the provisions of the BCA.

47. In the course of the Wind-Up, DC will:

(a) assign and distribute the ACoSub Promissory Note to ACo;

(b) assign and distribute the BCoSub Promissory Note to BCo;

(c) assign and distribute the CCoSub Promissory Note to CCo;

which will represent all or substantially all the property owned by DC immediately before the Wind-Up.

48. To the extent that there is a positive balance in the CDA of DC immediately prior to the distribution of the ACoSub Promissory Note, BCoSub Promissory Note and the CCoSub Promissory Note, DC will elect, in the manner and form required under subsection 83(2), to treat the portion of the Winding-Up Dividend referred in subparagraph 88(2)(b)(i) as a separate Capital Dividend paid on the DC common shares.

49. To the extent that there is a positive GRIP balance in DC at the time of the Wind-Up, DC will designate, pursuant to subsection 89(14), to treat the portion of the dividend referred to in subsection 88(2)(b)(iii) arising on the Wind-Up, which is deemed to be a separate Taxable Dividend, to be an Eligible Dividend by notifying each of ACo, BCo and CCo in writing, in a timely manner, that the dividend is an Eligible Dividend.

50. As a result of the assignment and distribution of the Promissory Notes described in Paragraph 47, the obligation of each of ACo, BCo and CCo under the ACoSub Promissory Note, BCoSub Promissory Note and the CCoSub Promissory Note, as the case may be, will be extinguished and cancelled.

51. Immediately after the distribution of the Promissory Notes described in Paragraph 47, but before the formal dissolution of DC, DC will not own or acquire any property or carry on any activity or undertaking.

52. Upon the receipt of any Dividend Refund to which DC may become entitled as a result of the Proposed Transactions, DC will immediately transfer the cash received in the form of Dividend Refund (under the terms of the agreement governing the Wind-Up) to each of ACo, BCo and CCo in the same proportion as described in Paragraph 39.

53. Within a reasonable time following the distribution of such tax refund, articles of dissolution will be filed by DC with the appropriate corporate registry and, upon receipt of a certificate of dissolution, DC will be dissolved.

ADDITIONAL INFORMATION:

54. Except as described in the Facts and the Proposed Transactions, no property has been or will be acquired by DC, in contemplation of and before the Property Transfer as described in Paragraph 39, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

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

56. None of the property received by ACo, BCo and CCo as part of the Series of Transactions or Events that includes the Property Transfer will be acquired by a person unrelated to ACo, BCo or CCo, or by a partnership, in the circumstances described in paragraph 55(3.1)(c).

57. Furthermore, none of the property distributed to ACo, BCo and CCo as part of the Series of Transactions or Events that includes the Proposed Transactions will be transferred, directly or indirectly, to an unrelated person or a partnership, and will result in the creation of a partnership for legal purposes in respect of the undivided interest that ACo, BCo and CCo will hold in any of the property that they will receive in the course of the Proposed Transactions.

58. The Land will be subject to a Co-Ownership Agreement to be entered into by ACo, BCo and CCo further to the completion of the Proposed Transactions stating that: (i) the Co-Owners do not create a partnership in respect of the Co-Owned Property; (ii) the Co-Owners can act on behalf of another Co-Owner with respect to the Co-Owned Property without obtaining prior consent from that Co-Owner; (iii) a Co-Owner cannot charge or grant security in respect of the Co-Owned Property as it is only entitled to deal with its interest in the Co-Owned Property; (iv) profit and loss in respect of the Co-Owned Property individually in the absence of provisions in the Co-Ownership Agreement specifically dealing with the distribution of such profits and losses; and (v) the liability of each Co-Owner is limited to their own expenses in respect of the Co-Owned Property.

59. None of DC, ACo, BCo or CCo is or will be, at any time during the Series of Transactions or Events that includes the Proposed Transactions, a Specified Financial Institution, a Restricted Financial Institution or a corporation described in any of the paragraphs (a) to (f) of the definition of Financial Intermediary Corporation.

60. During the implementation of the Proposed Transactions, none of the shares of DC, ACo, BCo or CCo will be:

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

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

(c) the subject of a Dividend Rental Arrangement;

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

(e) issued for consideration that is or includes:

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

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

61. None of the DC common shares is a Taxable Preferred Share, a Short-Term Preferred Share or a Term Preferred Share.

62. Each of ACoSub, BCoSub and CCoSub will have the financial capacity to honour, upon presentation for payment, the amount payable under the Promissory Notes that they respectively issued as part of the Series of Transactions or Events that includes the Proposed Transactions.

63. Immediately before the redemption of the ACoSub Preferred Shares, BCoSub Preferred Shares and the CCoSub Preferred Shares, each of ACoSub, BCoSub and CCoSub will be connected to DC pursuant to paragraph 186(4)(a) and subsection 186(2). DC will also have a substantial interest in each of ACoSub, BCoSub and CCoSub as that term is defined in subsection 191(2) at that time.

64. Immediately before the distributions of property by DC to each of ACo, BCo and CCo on the winding-up of DC described in Paragraphs 47 and 52, DC will be connected to each of ACo, BCo and CCo pursuant to subsection 186(4).

PURPOSE OF THE PROPOSED TRANSACTIONS:

The purpose of the Proposed Transactions is to allow A, B and C to own, directly or indirectly, their proportionate share of DCo and ECo’s property in order to independently invest their share of the distributed property in a manner that best meets their investment goals, and estate planning objectives.

RULINGS GIVEN:

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, Proposed Transactions and 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 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) A’s transfer of the ACo Shares to ACo as described in Paragraph 33;

(b) B’s transfer of the BCo Shares to BCo as described in Paragraph 34;

(c) C’s transfer of the CCo Shares to CCo as described in Paragraph 35; and

(d) DC’s transfer of each Eligible Property that it owns to ACoSub, BCoSub and CCoSub as part of the Property Transfer as described in Paragraph 39;

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.

In determining the Agreed Amount of Depreciable Property to be transferred to ACoSub, BCoSub and CCoSub, as the case may be, 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 mean that proportion of the UCC to the taxpayer of all property of that class immediately before the disposition that the FMV of the property that is transferred is of the aggregate FMV at that time of all the property of that class.

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

B. On the redemption of all the ACoSub Preferred Shares, the BCoSub Preferred Shares and the CCoSub Preferred Shares held by DC as described in Paragraph 43, by virtue of paragraphs 84(3)(a) and 84(3)(b), each of ACoSub, BCoSub and CCoSub 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 ACo Redemption Amount, BCo Redemption Amount or CCo Redemption Amount, as the case may be, exceeds the PUC of the ACoSub Preferred Shares, BCoSub Preferred Shares and CCoSub Preferred Shares to be redeemed.

C. The provisions of subsection 88(1) will apply to the wind-up of ACoSub, BCoSub and CCoSub into ACo, BCo and CCo , such that:

(a) Each property of ACoSub, BCoSub and CCoSub respectively distributed to ACo, BCo and CCo, as the case may be, will be deemed to have been disposed for proceeds of disposition determined under paragraph 88(1)(a);

(b) The shares in the capital stock of ACoSub, BCoSub and CCoSub respectively held by ACo, BCo and CCo will be deemed to have been disposed of for proceeds of disposition determined under paragraph 88(1)(b); and

(c) Each property of ACoSub, BCoSub and CCoSub distributed to ACo, BCo and CCo as the case may be on the wind-up of ACoSub, BCoSub and CCoSub will be deemed to have been acquired by ACo, BCo and CCo for an amount deemed to be equal to the proceeds of disposition of such property as determined under paragraph 88(1)(a).

D. Subsection 84(2) and paragraph 88(2)(b) will apply to the Winding-Up Dividend such that:

(a) subject to (b), (c) and (d) herein, DC will be deemed to have paid a Taxable Dividend on the XXXXXXXXXX class A common shares held by each of ACo, BCo and CCo equal to the amount by which:

(i) the amount or value of the funds or property to be distributed, as the case may be, to each of ACo, BCo and Cco,

exceeds

(ii) the amount if any, by which the aggregate PUC in respect of the class A common shares held by ACo, BCo and CCo is reduced on the distribution of DC’s property, and

each of ACo, BCo and CCo will be deemed to have received a Taxable Dividend equal to the proportion of the amount of the aforementioned excess that the number of the DC class A common shares respectively held by ACo, BCo and CCo immediately before the distribution of DC’s property is of the number of DC class A common shares outstanding immediately before the distribution of DC’s property.

(b) pursuant to subparagraph 88(2)(b)(i), the portion of the Winding-Up Dividend that does not exceed the outstanding balance of DC’s CDA, as determined immediately before the payment of the Winding-Up Dividend, will be deemed, for the purposes of the subsection 83(2) election referred to in Paragraph 48, to be the full amount of a separate Capital Dividend;

(c) pursuant to subparagraph 88(2)(b)(iii), the portion of the Winding-Up Dividend that exceeds the amount of the separate Capital Dividend referred in Ruling D(b) will be deemed to be a separate dividend that is a Taxable Dividend;

(d) pursuant to subparagraph 88(2)(b)(iv), each of ACo, BCo and CCo will be deemed to have received their proportional share of the separate Capital Dividend and Taxable Dividend described in Rulings D(b) and (c).

E. The Taxable Dividends described in Rulings B and D above:

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

(b) will be deductible by the recipient 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 in section 54;

(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 be received; and

(e) will not be subject to tax under Part IV except, as provided in paragraph 186(1)(b), to the extent that the payer corporation is entitled to a Dividend Refund for its taxation year in which it paid such dividend, which, for greater certainty, will include the Taxable Dividends described in Rulings B and D above.

F. The Taxable Dividend described in Ruling B:

(a) will not be subject to Part IV.1 by virtue of paragraphs (b) and (c) of the definition of excepted dividend in section 187.1; and

(b) will not be subject to tax under Part VI.1 by virtue of paragraph (a) of the definition of excluded dividend in subsection 191(1).

G. Provided that, as part of the 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 property 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 55(3.1)(d),

which has not been described in the Facts and the Proposed Transactions, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the Taxable Dividends referred to in Rulings B and D above, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

H. The extinguishment of the DCo Advances and the ECo Receivabless a result of the Amalgamation; and the ACoSub Promissory Note, the BCoSub Promissory Note and the CCoSub Promissory Note pursuant to the transactions described in Paragraph 50 will not give rise to a Forgiven Amount.

Neither DCO nor ECo will realize a Gain or a Loss as a result of the extinguishment of the DCO Advances and the ECo Receivables. Furthermore, neither DC nor ACo, BCo and CCo will realize any Gain or Loss as a result of the extinguishment of ACoSub Promissory Note, the BCoSub Promissory Note and the CCoSub Promissory Note.

I. Provided that the condition specified in paragraph 1100(2.2)(f) or (g) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply in respect of the acquisition of a Depreciable Property of a prescribed class by each of ACoSub, BCoSub and CCoSub, as described in Paragraph 39 and to the subsequent acquisition of such Depreciable Property by each of ACo, BCo and CCo as a result of the winding-up of AcoSub, BCoSub and CCoSub as described in Paragraphs 44 and 45 such that no amount will be included in determining an amount for F in subsection 1100(2) in respect of the Depreciable Property acquired by each of ACoSub, BCoSub and CCoSub from DC and by each of ACo, BCo and CCo from ACoSub, BCoSub and CCoSub as the case may be.

J. By reason of the application of subsection 1102(14) of the Regulations, each property that was Depreciable Property of a prescribed class prior to the commencement of the Proposed Transactions, that is acquired by each of ACoSub, BCoSub and CCoSub, as the case may be, from DC as described in Paragraph 39 and by each of ACo, BCo and CCo as a result of the winding-up of AcoSub, BCoSub and CCoSub as described in Paragraphs 44 and 45 will be Depreciable Property of the same prescribed class.

K. Subsections 15(1), 56(2) and 246(1) will not apply to the Proposed Transactions.

L. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the Rulings given.

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.

COMMENTS:

Unless otherwise expressively 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 PUC of any share or the ACB or the FMV of any Capital Property;

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

(c) 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.

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

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