2021 Ruling 2021-0879141R3 - Advance Income Tax Ruling - XXXXXXXXXX Butterfly

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Advance Income Tax Ruling - XXXXXXXXXX Butterfly.

Position: See below.

Reasons: See below.

XXXXXXXXXX									   2021-087914

XXXXXXXXXX, 2021

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling
XXXXXXXXXX
(Collectively referred to as the “Taxpayers”)

We are writing in response to your request for an advance income tax ruling (“Ruling request”) dated XXXXXXXXXX on behalf of the above-noted 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.

DEFINITIONS

Unless otherwise stated:

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

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

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

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

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:

“Act1” means the Canada Business Corporations Act and, where applicable, its predecessor statutes;

“ACB” means “adjusted cost base” as that expression is defined in 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);

“CRA” means the Canada Revenue Agency;

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

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

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

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

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

“DC” means XXXXXXXXXX as described in Paragraphs 1 and 2;

“DC Class A Preferred Shares” means the voting, non-participating preferred shares of DC, as described in Paragraph 3;

“DC Class B Preferred Shares” means the voting, non-participating preferred shares of DC, as described in Paragraph 3;

“DC Common Shares” means the voting common shares of DC, as described in Paragraph 3;

“DC Purchase Note” means the non-interest bearing demand promissory note to be issued by DC to TC on the purchase for cancellation of its DC Common Shares owned by TC, described in Paragraph 26;

“DC Transfer” refers to the transfer of property by DC to TC, as described in Paragraphs 22 and 23;

“depreciable property” has the meaning assigned by subsection 13(21);

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

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

“distribution property” has the meaning assigned in Paragraph 22;

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

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

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

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

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

“FMV” refers to “fair market value” and means the highest price available in an open and unrestricted market between informed and prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of cash;

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

“forgiven amount” has the meaning assigned by subsection 80(1);

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

“Marketable Securities” means a diversified portfolio of investments owned by DC including cash and cash equivalents, fixed income instruments such as government and corporate bonds, shares of public corporations and units in mutual funds;

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

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

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

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

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

“Proposed Transactions” means the transactions described in Paragraphs 13 to 28 of this letter;

“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);

“Shareholder Loans” means the amounts due from DC to Sibling1 and Sibling2, which are unsecured, non-interest bearing and due on demand with no fixed terms of repayment;

“Sibling 1” refers to XXXXXXXXXX, sibling of Sibling 2;

“Sibling 2” refers to XXXXXXXXXX, sibling of Sibling 1;

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

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

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

“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 each of DC and TC are required to maintain for each class and series of their respective share capital, issued in accordance with Act1, and reflects the aggregate amount of the stated capital for each class and series of shares in the share capital of each of DC and TC, respectively;

“substantial interest” has the meaning assigned by subsection 191(2);

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

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

“TC” refers to a corporation to be incorporated as a part of the Proposed Transactions, as described in Paragraph 14;

“TC Class A Common Shares” means the Class A common shares in the share capital of TC described in Paragraph 15;

“TC Class B Preferred Shares” means the Class B preferred shares in the share capital of TC described in Paragraph 15; and

“TC Redemption Note” means the non-interest bearing demand promissory note to be issued by TC to DC on the redemption of its TC Class B Preferred Shares owned by DC, as described in Paragraph 24.

FACTS

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

1. DC was incorporated on XXXXXXXXXX and continued under Act1 on XXXXXXXXXX. DC is a TCC and a CCPC. DC is a resident of Canada under the Act, and has an XXXXXXXXXX taxation year end.

2. DC carries on a specified investment business, and trades various types of marketable securities in the ordinary course of its business operations, based on advice from its independent investment advisors. DC does not exercise significant influence over any corporation, partnership or other entity in which it invests.

3. DC’s authorized share capital consists of an unlimited number of DC Common Shares, DC Class A Preferred Shares and DC Class B Preferred Shares, with the following rights, privileges and conditions:

(a) The DC Common Shares are voting, participating shares, and include 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.

(b) The DC Class A Preferred Shares are voting, non-participating, redeemable and retractable for an amount equal to their redemption amount, plus any declared and unpaid dividends thereon. These shares have a non-cumulative cash dividend entitlement of up to XXXXXXXXXX% per annum of the redemption amount of the shares. These shares rank ahead of the DC Class B Preferred Shares and the DC Common Shares in regards to any return of capital and on the liquidation, dissolution or winding-up of DC.

(c) The DC Class B Preferred Shares are voting, non-participating, redeemable and retractable for an amount equal to the amount paid up thereon, plus any declared and unpaid dividends thereon. These shares have a non-cumulative dividend right of up to XXXXXXXXXX% per annum on the amount paid up thereon. These shares rank ahead of the DC Common Shares in regards to any return of capital and on the liquidation, dissolution or winding-up of DC.

4. The directors of DC are Sibling 1 and Sibling 2.

5. The issued and outstanding share capital of DC, and the tax attributes at XXXXXXXXXX are as follows:

Shareholder	Number		Share Class	FMV($)		ACB($)		PUC($)
Sibling 1	XXXXXX		DC Common	XXXXXX		XXXXXX		XXXXXX
Sibling 2	XXXXXX		DC Common	XXXXXX		XXXXXX		XXXXXX
Total						$XXXXXX		$XXXXXX		$XXXXXX

None of the shares of DC were acquired by the shareholders in contemplation of the Proposed Transactions. The shareholdings and share structure of DC has not changed since XXXXXXXXXX.

6. The DC Common Shares are capital property to Sibling 1 and Sibling 2, and constitute eligible property.

7. Sibling 1 and Sibling 2 are residents in Canada under the Act.

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

9. As at XXXXXXXXXX, pursuant to its unaudited financial statements, DC had the following assets: cash, due from broker, accrued interest receivable, equipment and furniture, and the Marketable Securities.

10. As at XXXXXXXXXX, pursuant to its unaudited financial statements, DC had the following liabilities: accrued liabilities, income taxes payable and the Shareholder Loans.

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.

11. The approximate FMV of the assets of DC on XXXXXXXXXX are as follows:

	Assets						FMV $
	Cash						      XXXXXXXXXX
	Accrued interest receivable               XXXXXXXXXX
	Due from broker					XXXXXXXXXX
	Furniture and equipment				XXXXXXXXXX
	Marketable Securities				XXXXXXXXXX
	Total						      $XXXXXXXXXX

12. The approximate principal amounts and FMVs of the liabilities of DC on XXXXXXXXXX are as follows:

	Liabilities					      FMV $
	Accrued liabilities				XXXXXXXXXX
	Taxes payable					XXXXXXXXXX
	Shareholder Loans				      XXXXXXXXXX
	Total						      $XXXXXXXXXX

PROPOSED TRANSACTIONS

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

Stated capital increase and CDA election

13. DC will pass a resolution to increase the stated capital (and consequently the PUC) of the DC Common Shares by an amount approximating (but not exceeding) its CDA balance at that time. DC will elect in prescribed manner and prescribed form and within the time referred to in subsection 83(2), such that the full amount of the deemed dividend arising as a result of this increase of stated capital/PUC is deemed to be paid out of DC’s CDA.

Incorporation of TC

14. Sibling 1 will incorporate TC under Act1. TC will be a TCC and a CCPC at all relevant times.

15. The authorized share capital of TC will consist of an unlimited number of the following shares:

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

TC may also authorize additional classes of common shares.

(b) TC Class B Preferred Shares that will be non-voting, non-participating, and redeemable and retractable for the amount of consideration received by TC upon issuance of the shares (redemption amount), plus any declared and unpaid dividends thereon. These shares will have a non-cumulative dividend right of up to XXXXXXXXXX% per annum on the redemption amount of the shares.

16. Sibling 1 will subscribe for XXXXXXXXXX TC Class A Common Shares for aggregate consideration of $XXXXXXXXXX.

17. Sibling 1 will transfer all XXXXXXXXXX DC Common Shares owned by Sibling1 to TC. As consideration for the XXXXXXXXXX DC Common Shares, Sibling 1 will receive additional TC Class A Common Shares with an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX DC Common Shares, at the time of the transfer.

Sibling 1 and TC will jointly elect, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to this transfer. The agreed amount will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), nor will the agreed amounts exceed the FMV of the XXXXXXXXXX DC Common Shares transferred to TC at the time of the transfer.

The amount added to the stated capital account of the TC Class A Common Shares issued to Sibling 1 will be restricted to the greater of (i) the PUC, immediately before the disposition, in respect of the XXXXXXXXXX DC Common Shares transferred to TC; and (ii) the ACB to Sibling 1, immediately before the disposition, of the XXXXXXXXXX DC Common Shares transferred to TC, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the addition to the PUC of the TC Class A Common Shares 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).

18. After the share transfer described in Paragraph 17, TC’s only asset will be the XXXXXXXXXX DC Common Shares, which it will own as capital property.

19. [Reserved]

Types of Property

20. Immediately before the DC Transfer described below, the property owned by DC will be classified into the following three types of property for the purposes of the definition of “distribution” as follows:

(a) cash or near-cash property, comprising all of DC’s current assets, including cash and cash equivalents, accounts receivable (incl. due from broker and accrued interest receivable), prepaid expenses, if any, and marketable securities (other than portfolio investments);

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

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

It is anticipated that DC will not own any property classified as business property immediately before the DC Transfer, based on this methodology for classification.

For greater certainty, for purposes of the DC Transfer:

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

(e) advances made by DC 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;

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

(g) any amount in respect of refunds of taxes, and interest thereon, actually receivable will be treated as cash or near-cash property and any potential refunds of taxes and interest thereon will, due to their contingent nature, not be considered property.

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

(a) All current liabilities 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 and Shareholder Loans exceeds the aggregate FMV of the cash or near-cash property, it will constitute excess unallocated liabilities. The treatment of excess unallocated liabilities is discussed below, in Paragraph 21(c).

(b) Liabilities of DC, other than those described in Paragraph 21(a), 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 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;

(c) if there are any excess unallocated liabilities after the allocations described in Paragraphs 21(a) and (b), 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 21(a) and (b). However, where DC would have a negative amount of a type of property because of the allocations in Paragraphs 21(a) or (b), 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.

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

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

(e) amounts owing by DC that have a term of less than 12 months or are due on demand with no fixed terms of repayment (i.e., the Shareholder Loans) are deducted from cash or near cash property;

(f) current liabilities include amounts normally classified as current liabilities, including taxes payable; and

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

DC Transfer

22. DC will transfer to TC, a proportionate share of each type of property owned by DC at that time (collectively referred to as the “distribution property”), such that immediately following the DC Transfer of property and the assumption by TC of DC’s liabilities, as described in Paragraph 23(a), the net FMV of each type of property transferred by DC to TC will be equal to or approximate that proportion of each type of property determined by the formula:

A x B/C, where

A is the net FMV, immediately before the 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 DC Common Shares owned, at that time, by TC; and

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

The expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of each type of property that TC 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.

23. As consideration for the DC Transfer, TC will:

(a) assume such liabilities of DC, as appropriate, so that TC will receive a proportionate share of the net FMV of each type of property owned by DC; and

(b) issue TC Class B Preferred Shares to DC which will have an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV, at the time of the DC Transfer, of the distribution property received by TC, exceeds the aggregate amount of DC’s liabilities assumed by TC, as described in Paragraph 23(a).

DC will hold the TC Class B Preferred Shares as capital property. The TC Class B Preferred Shares will be taxable preferred shares.

DC and TC 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 TC.

The agreed amount in respect of each such eligible property so transferred will be as follows:

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

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

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 TC, which are allocated to a particular eligible property that is subject to an election under subsection 85(1), will not exceed the agreed amount for that particular property. The amount of liabilities assumed by TC which are allocated to a particular property that is not subject to an election under subsection 85(1) will not exceed the FMV of any such property.

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

Redemption: TC

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

25. TC will have its first taxation year-end.

Share purchase for cancellation: DC

26. DC will purchase for cancellation from TC, all of its XXXXXXXXXX DC Common Shares owned by TC for an amount equal to their FMV at that time. As consideration therefor, DC will issue to TC the DC Purchase Note, with a principal amount and FMV equal to the aggregate FMV of the XXXXXXXXXX DC Common Shares so purchased for cancellation. TC will accept the DC Purchase Note as payment in full for its XXXXXXXXXX DC Common Shares so purchased for cancellation.

DC will designate, pursuant to subsection 89(14), to treat a portion of the taxable dividend resulting from the purchase for cancellation in this Paragraph to be an eligible dividend by notifying TC in writing, at the time of the purchase for cancellation, the portion of the dividend that will be an eligible dividend. The amount designated as an eligible dividend will equal approximately one-half of DC’s GRIP balance at the end of DC’s taxation year in which the DC Transfer occurred.

27. Following the redemption and purchase for cancellation, DC and TC will enter into an agreement under which the DC Purchase Note will be set-off in full and cancelled without payment against the TC Redemption Note.

28. Immediately following the above Proposed Transactions, the net FMV of each type of DC’s property retained by DC, determined in the manner described in Paragraphs 20 and 21, will be equal to or approximate that proportion of the net FMV of each type of property of DC, determined immediately before the DC Transfer that:

(a) the aggregate FMV, immediately before the DC Transfer, of all the DC Common Shares owned at that time by Sibling 2,

is of

(b) the aggregate FMV, immediately before the DC Transfer, of all the issued and outstanding DC Common Shares.

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

ADDITIONAL INFORMATION

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

30. 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 subparagraphs 55(3.1)(b)(i) or (iii), or an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii).

31. None of the distribution property received by TC on the DC Transfer will be acquired by a person who was not related to TC, or ceased to be related to TC, or by a partnership, as part of the series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(c).

32. None of the property retained by DC after the DC Transfer will be acquired by a person who was not related to DC, or ceased to be related to DC, or by a partnership, as part of a series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(d).

33. Neither DC nor TC is, or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a specified financial institution, a restricted financial institution or a corporation described in any of the paragraphs (a) to (f) of the definition of financial intermediary corporation.

34. None of the shares of DC or TC has been or will be at any time before or during the series of transactions and events that includes the Proposed Transactions:

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

(b) the subject of a dividend rental arrangement;

(c) issued or acquired as part of a transaction or event or 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).

35. Except as described in this letter, no shares of DC and TC will be acquired or disposed of as part of a series of transactions or events that includes the Proposed Transactions.

36. Immediately before the redemption of the TC Class B Preferred Shares owned by DC, DC will be connected to TC pursuant to paragraph 186(4)(a) and subsection 186(2). Furthermore, DC will have a substantial interest in TC, at that time.

37. Immediately before the purchase for cancellation of the DC Common Shares owned by TC, TC will be connected to DC pursuant to paragraph 186(4)(a) and subsection 186(2). Furthermore, TC will have a substantial interest in DC, at that time.

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

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

40. The Proposed Transactions will be legally effective under Act1.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to permit the shareholders of DC to separate their interests in DC on a tax-deferred basis in order to enable each shareholder to own, manage and administer such interests independently of each other.

RULINGS

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

A. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limit specified in subsection 85(6), subsection 85(1) will apply to:

(a) the transfer of the XXXXXXXXXX DC Common Shares by Sibling 1 to TC, as described in Paragraph 17; and

(b) the transfer of each eligible property owned by DC to TC on the DC Transfer, as described in Paragraphs 22 and 23

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

B. As a result of the redemption by TC of the TC Class B Preferred Shares, as described in Paragraph 24, by virtue of subsection 84(3), TC will be deemed to have paid, and DC will be deemed to have received, a dividend at that time equal to the amount, if any, by which the amount paid by TC, in respect of the redemption of all the TC Class B Preferred Shares, exceeds the aggregate PUC of those shares immediately before the redemption.

C. As a result of the purchase for cancellation by DC of the XXXXXXXXXX DC Common Shares owned by TC, as described in Paragraph 26, by virtue of subsection 84(3), DC will be deemed to have paid, and TC will be deemed to have received, a dividend at that time equal to the amount, if any, by which the amount paid in respect of the purchase for cancellation of the XXXXXXXXXX DC Common Shares exceeds the aggregate PUC of those shares immediately before the purchase for cancellation.

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

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

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

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

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

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

(f) will not be subject to tax under Part IV except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it is deemed to pay dividends, pursuant to paragraph 186(1)(b).

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

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

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

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

(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 set-off and cancellation of the TC Redemption Note and the DC Purchase Note, as described in Paragraph 27, will not, in and of itself, give rise to a forgiven amount. In addition, neither DC nor TC will otherwise realize a gain or incur a loss as a result of such set-offs and cancellations.

G. Subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to any of the Proposed Transactions, in and by themselves.

H. 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 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.

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 PUC in respect of any share referred to herein;

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

(c) any other tax consequence (including provincial tax consequences) 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 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 26, 2015.

Yours truly,

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