2022 Ruling 2021-0906231R3 - Internal Reorganization - 55(3)(a)

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: Whether the proposed internal reorganization meets the requirements for the paragraph 55(3)(a) exception from subsection 55(2).

Position: Proposed internal reorganization meets the requirements for the paragraph 55(3)(a) exception for internal reorganizations.

Reasons: See below.

XXXXXXXXXX 2021-090623

XXXXXXXXXX, 2022

Dear XXXXXXXXXX:

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

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

We understand that to the best of your knowledge and that of the Taxpayer, none of the proposed transactions or issues involved in this Ruling are the same as or substantially similar to transactions or issues that are:

i. in a previously filed return of the Taxpayer or a related person and;

A. being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Taxpayer or a related person;

B. under objection by the Taxpayer or a related person;

C. the subject of a current or completed court process involving the Taxpayer or a related person; or

ii. the subject of a ruling previously considered by the Income Tax Rulings Directorate in relation to the Taxpayer or a related person.

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

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

XXXXXXXXXX

Unless otherwise noted, all references herein to sections or components thereof are references to the Income Tax Act, RSC 1985, c 1 (5th Supp), as amended (the “Act”), or, where appropriate, the Income Tax Regulations C.R.C., c. 945, as amended (the “Regulations”) and all terms and conditions used herein that are defined in the Act or Regulations have the meaning given in such definition unless otherwise indicated. All references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this letter, unless otherwise noted, the following terms have the meaning specified herein. All references in the singular include the plural.

“Act 1” means the XXXXXXXXXX;

“Act 2” means the XXXXXXXXXX;

“ACB” means “adjusted cost base,” as defined in section 54 of the Act and subsection 248(1);

“BeneficiaryCo A” means XXXXXXXXXX, a corporation incorporated pursuant to Act 1;

“BeneficiaryCo B” means XXXXXXXXXX, a corporation incorporated pursuant to Act 1;

“BeneficiaryCo C” means XXXXXXXXXX, a corporation incorporated pursuant to Act 1;

“Brother A Reorganization” means the proposed transactions listed in Paragraphs 53 to 60;

“Brother A” means XXXXXXXXXX;

“Brother B Reorganization” means the proposed transactions listed in Paragraphs 61 to 68;

“Brother B” means XXXXXXXXXX;

“Brother C Reorganization” means the proposed transactions listed in Paragraphs 69 to 76;

“Brother C” means XXXXXXXXXX;

“CCPC” means “Canadian-controlled private corporation,” as defined in subsection 125(7) of the Act;

“CRA” means the Canada Revenue Agency;

“direct safe income” or “DSI” means the safe income on hand realized by a corporation as opposed to safe income on hand consolidated from another corporation;

“FMV” refers to “fair market value” and means the highest price available in an open and unrestricted market between informed, prudent parties acting at arm’s length (within the meaning assigned by subsection 251(1)) and under no compulsion to act, expressed in terms of money or money’s worth;

“HoldCo” means one of HoldCo A, HoldCo B or HoldCo C;

“HoldCo A” means XXXXXXXXXX, a corporation duly incorporated pursuant to Act 2;

“HoldCo B” means XXXXXXXXXX, a corporation duly incorporated pursuant to Act 1;

“HoldCo C” means XXXXXXXXXX, a corporation duly incorporated pursuant to Act 2;

“HoldCos” means all of HoldCo A, HoldCo B and HoldCo C;

“indirect safe income” or “ISI” means safe income on hand that has been consolidated from another corporation;

“InvestCo” means XXXXXXXXXX, a corporation duly incorporated pursuant to Act 1;

“NewCo” means one of NewCo A, NewCo B or NewCo C;

“NewCo A” means the new corporation to be incorporated as described in Paragraph 53;

“NewCo B” means the new corporation to be incorporated as described in Paragraph 61;

“NewCo C” means the new corporation to be incorporated as described in Paragraph 69;

“NewCos” means all of NewCoA, NewCoB and NewCoC;

“OpCo” means XXXXXXXXXX, a corporation duly incorporated pursuant to Act 1;

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

“Proposed Transactions” means the transactions described in Paragraphs 53 to 76;

“PUC” means “paid-up capital”, as defined in subsection 89(1) of the Act;

“safe income on hand” in respect of a particular dividend received (as part of a transaction or event or a series of transactions or events) on a particular share means the income earned or realized (as determined for purposes of section 55) by any corporation after 1971 and before the safe-income determination time for the transaction, event or series that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at fair market value of the particular share immediately before the dividend;

“Series of Transactions or Events” has the meaning assigned by subsection 248(10);

“Spouse A” means XXXXXXXXXX;

“Spouse B” means XXXXXXXXXX;

“Trust A” means the XXXXXXXXXX Trust;

“Trust B” means the XXXXXXXXXX Trust; and

“Trust C” means the XXXXXXXXXX Trust.

FACTS

INDIVIDUALS

1. Brother A, Brother B and Brother C are brothers.

2. Brother A and Spouse A are married to each other.

3. Brother A and Spouse A have four children.

4. Brother B and Spouse B are married to each other.

5. Brother B and Spouse B have two children.

6. Brother C is not married.

7. Brother C has four children.

8. All of the individuals described in Paragraphs 1-7 are resident in Canada.

TRUST A

9. Trust A is a discretionary family trust that was created by a deed of settlement on XXXXXXXXXX.

10. Brother A and Spouse A are the only trustees of Trust A.

11. The beneficiaries of Trust A are Brother A, Spouse A, the children of Brother A and Spouse A, and BeneficiaryCo A.

TRUST B

12. Trust B is a discretionary family trust that was created by a deed of settlement on XXXXXXXXXX.

13. Brother B is the only trustee of Trust B.

14. The beneficiaries of Trust B are Brother B, Spouse B, the children of Brother B and Spouse B, and BeneficiaryCo B.

TRUST C

15. Trust C is a discretionary family trust that was created by a deed of settlement on XXXXXXXXXX.

16. Brother C is the sole trustee of Trust C.

17. The beneficiaries of Trust C are Brother C, the children of Brother C and BeneficiaryCo C.

HOLDCO A

18. HoldCo A is a CCPC, a taxable Canadian corporation and is resident in Canada for income tax purposes.

19. Brother A is the sole director of HoldCo A.

20. Brother A owns XXXXXXXXXX Class “F” Preferred Shares of HoldCo A that are non-voting, redeemable and retractable with a redemption amount of $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate, and ACB and PUC of $XXXXXXXXXX in aggregate.

21. Brother A owns XXXXXXXXXX Class “D” Preferred Shares of HoldCo A that are voting, redeemable and retractable with a redemption amount of $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate, and ACB and PUC of $XXXXXXXXXX in aggregate.

22. Trust A owns XXXXXXXXXX Class “A” Common Shares of HoldCo A that are voting, participating shares with ACB and PUC of $XXXXXXXXXX in aggregate.

23. HoldCo A owes $XXXXXXXXXX to Brother A.

HOLDCO B

24. HoldCo B is a CCPC, a taxable Canadian corporation and is resident in Canada for income tax purposes.

25. Brother B is the sole director of HoldCo B.

26. Brother B owns XXXXXXXXXX Class “F” Preferred Shares of HoldCo B that are non-voting, redeemable and retractable with a redemption amount of $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate, and ACB and PUC of $XXXXXXXXXX in aggregate.

27. Brother B owns XXXXXXXXXX Class “D” Preferred Shares of HoldCo B that are voting, redeemable and retractable with a redemption amount of $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate, and ACB and PUC of $XXXXXXXXXX in aggregate.

28. Trust B owns XXXXXXXXXX Class “A” Common Shares of HoldCo B that are voting, participating shares with ACB and PUC of $XXXXXXXXXX in aggregate.

29. HoldCo B owes $XXXXXXXXXX to Brother B.

HOLDCO C

30. HoldCo C is a CCPC, a taxable Canadian corporation and is resident in Canada for income tax purposes.

31. Brother C is the sole director of HoldCo C.

32. Brother C owns XXXXXXXXXX Class “F” Preferred Shares of HoldCo C that are non-voting, redeemable and retractable with a redemption amount of $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate, and ACB and PUC of $XXXXXXXXXX in aggregate.

33. Brother C owns XXXXXXXXXX Class “D” Preferred Shares of HoldCo C that are voting, redeemable and retractable with a redemption amount of $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate, and ACB and PUC of $XXXXXXXXXX in aggregate.

34. Trust C owns XXXXXXXXXX Class “A” Common Shares of HoldCo C that are voting, participating shares with ACB and PUC of $XXXXXXXXXX in aggregate.

35. HoldCo C owes $XXXXXXXXXX to Brother C.

BENEFICIARYCO A

36. BeneficiaryCo A is a CCPC, a taxable Canadian corporation and is resident in Canada for income tax purposes.

37. Brother A is the sole director of BeneficiaryCo A.

38. Brother A and Spouse A are the only shareholders of BeneficiaryCo A.

BENEFICIARYCO B

39. BeneficiaryCo B is a CCPC, a taxable Canadian corporation and is resident in Canada for income tax purposes.

40. Brother B is the sole director of BeneficiaryCo B.

41. Brother B is the sole shareholder of BeneficiaryCo B.

BENEFICIARYCO C

42. BeneficiaryCo C is a CCPC, a taxable Canadian corporation and is resident in Canada for income tax purposes.

43. Brother C is the sole director of BeneficiaryCo C.

44. Brother C is the sole shareholder of BeneficiaryCo C.

INVESTCO

45. InvestCo is a CCPC, a taxable Canadian corporation and is resident in Canada for income tax purposes.

46. Brother A, Brother B and Brother C are the only directors of InvestCo.

47. InvestCo owes $XXXXXXXXXX to each of HoldCo A, HoldCo B and HoldCo C.

48. The issued and outstanding shares of InvestCo, their estimated FMVs, and their relevant income tax attributes are as follows:

Shareholder		Number and Class	FMV		Redemption	 ACB	PUC
			 of Shares				Amount
HoldCo A		XXXX Class “A”		XXXX		XXXX		XXXX	XXXX
			Common Shares
HoldCo A		XXXX Class “G”		XXXX		XXXX		XXXX	XXXX
			Preferred Shares
HoldCo B		XXXX Class “A”		XXXX		XXXX		XXXX	XXXX
			Common Shares
HoldCo B		XXXX Class “H”		XXXX		XXXX		XXXX	XXXX
			Preferred Shares
HoldCo C		XXXX Class “A”		XXXX		XXXX		XXXX	XXXX
			Common Shares
HoldCo C		XXXX Class “I”		XXXX		XXXX		XXXX	XXXX
			Preferred Shares

OPCO

49. OpCo is a CCPC, a taxable Canadian corporation and is resident in Canada for income tax purposes.

50. Brother A, Brother B, Brother C and XXXXXXXXXX are the only directors of OpCo.

51. OpCo owes approximately $XXXXXXXXXX to each of HoldCo A, HoldCo B and HoldCo C.

52. HoldCo A, HoldCo B and HoldCo C each own XXXXXXXXXX Class “A” Common Shares of OpCo having an FMV of approximately $XXXXXXXXXX, or $XXXXXXXXXX in aggregate.

PROPOSED TRANSACTIONS

Brother A Reorganization

53. Brother A will incorporate NewCo A. The authorized share capital of NewCo A will be:

(a) Class A voting common shares;

(b) Class B voting common shares;

(c) Class C non-voting common shares;

(d) Class D voting non-participating shares;

(e) Class E non-voting preferred shares;

(f) Class F non-voting preferred shares; and

(g) Class G voting preferred shares.

On incorporation, Trust A will subscribe for XXXXXXXXXX Class “A” Common Shares of NewCo A for a subscription price of $XXXXXXXXXX per share. Brother A will be appointed as the only director of NewCo A.

54. HoldCo A will sell its XXXXXXXXXX Class “A” Common Shares of InvestCo (having an FMV, ACB and PUC of $XXXXXXXXXX) and its XXXXXXXXXX Class “G” Preferred Shares of InvestCo (having an estimated FMV of $XXXXXXXXXX and ACB and PUC of $XXXXXXXXXX) to NewCo A in exchange for: XXXXXXXXXX Class “E” Preferred Shares (non-voting) of NewCo A, having an aggregate redemption amount of $XXXXXXXXXX and ACB and PUC of $XXXXXXXXXX; and a credit to HoldCo A’s inter-corporate debt account in the amount of $XXXXXXXXXX. This transfer will occur on a tax deferred basis pursuant to subsection 85(1). A price adjustment clause will be included in the transfer documents to ensure that the FMV of the transferred shares equals the FMV of the consideration received by HoldCo A.

55. NewCo A will assume the $XXXXXXXXXX debt that InvestCo owes to HoldCo A in consideration for InvestCo crediting $XXXXXXXXXX to the inter-corporate debt account it maintains for NewCo A.

56. NewCo A will assume the $XXXXXXXXXX debt that HoldCo A owes to Brother A in consideration for HoldCo A setting off $XXXXXXXXXX of the inter-corporate debt NewCo A owes to HoldCo A. Immediately after this transaction, NewCo A will be indebted to HoldCo A in the net amount of $XXXXXXXXXX, calculated as the total of the debts payable from NewCo A to HoldCo A from the transactions in Paragraphs 54 and 55 minus the $XXXXXXXXXX of inter-corporate debt set-off from the transaction in this Paragraph.

57. Brother A will transfer to NewCo A preferred shares of HoldCo A having an FMV of $XXXXXXXXXX, being equal to the amount of the debt that NewCo A owes to HoldCo A plus the FMV of the Class “E” Preferred Shares received in the transaction in Paragraph 54, in consideration for preferred shares of NewCo A. This transfer will occur on a tax-deferred basis pursuant to subsection 85(1). The preferred shares transferred by Brother A will include XXXXXXXXXX of the Class “D” Preferred Shares of HoldCo A owned by Brother A with an ACB and PUC of $XXXXXXXXXX and XXXXXXXXXX Class “F” Preferred shares of HoldCo A with an ACB and PUC of $XXXXXXXXXX. Brother A will therefore own XXXXXXXXXX Class “D” Preferred Shares (voting) with an ACB and PUC of XXXXXXXXXX and XXXXXXXXXX Class “F” Preferred Shares (non-voting) of NewCo A (with an ACB and PUC of $XXXXXXXXXX).

58. HoldCo A will redeem the preferred shares owned by NewCo A for their aggregate redemption amount of $XXXXXXXXXX. HoldCo A will pay for the redemption by crediting the inter-corporate debt account it maintains for NewCo A. This share redemption will result in a deemed dividend paid by HoldCo A to NewCo A in the amount of $XXXXXXXXXX, calculated as the difference between the FMV and the PUC of the redeemed shares.

59. NewCo A will redeem the Class “E” Preferred Shares owned by HoldCo A for their aggregate redemption amount of $XXXXXXXXXX. NewCo A will pay for the redemption by crediting the inter-corporate debt account it maintains for HoldCo A. This share redemption will result in a deemed dividend paid by NewCo A to HoldCo A in the amount of $XXXXXXXXXX, calculated as the difference between the FMV and the PUC of the redeemed shares. As a result of these transactions, NewCo A and HoldCo A will both be indebted to the other in the amount of $XXXXXXXXXX.

60. NewCo A and HoldCo A will set-off and cancel their $XXXXXXXXXX of inter-corporate indebtedness. Following these transactions, NewCo A will own all of the shares and indebtedness of InvestCo originally owned by HoldCo A. The aggregate value of the shareholder loan owing by NewCo A to Brother A and the preferred shares of NewCo A owned by Brother A will equal the FMV of the shares and debt of InvestCo transferred from HoldCo A to NewCo A. Trust A will own all of the common shares of NewCo A.

Brother B Reorganization

61. Brother B will incorporate NewCo B. The authorized share capital of NewCo B will be:

(a) Class A voting common shares;

(b) Class B voting common shares;

(c) Class C non-voting common shares;

(d) Class D voting non-participating shares;

(e) Class E non-voting preferred shares;

(f) Class F non-voting preferred shares; and

(g) Class G voting preferred shares.

On incorporation, Trust B will subscribe for XXXXXXXXXX Class “A” Common Shares of NewCo B for a subscription price of $XXXXXXXXXX per share. Brother B will be appointed as the only director of NewCo B.

62. HoldCo B will sell its XXXXXXXXXX Class “A” Common Shares of InvestCo (having an FMV, ACB and PUC of $XXXXXXXXXX) and its XXXXXXXXXX Class “H” Preferred Shares of InvestCo (having an estimated FMV of $XXXXXXXXXX and ACB and PUC of $XXXXXXXXXX) to NewCo B in exchange for: (i) XXXXXXXXXX Class “E” Preferred Shares (non-voting) of NewCo B, having an aggregate redemption amount of $XXXXXXXXXX ACB and PUC of $XXXXXXXXXX; and (ii) a credit to HoldCo B’s inter-corporate debt account in the amount of $XXXXXXXXXX. This transfer will occur on a tax-deferred basis pursuant to subsection 85(1). A price adjustment clause will be included in the transfer documents to ensure that the FMV of the transferred shares equals the FMV of the consideration received by HoldCo B.

63. NewCo B will assume the $XXXXXXXXXX debt that InvestCo owes to HoldCo B in consideration for InvestCo crediting $XXXXXXXXXX to the inter-corporate debt account it maintains for NewCo B.

64. NewCo B will assume the $XXXXXXXXXX debt that HoldCo B owes to Brother B in consideration for HoldCo B setting off $XXXXXXXXXX of the inter-corporate debt NewCo B owes to HoldCo B. Immediately after this transaction, HoldCo B will be indebted to NewCo B in the net amount of $XXXXXXXXXX, calculated as the total of the debts payable from NewCo B to HoldCo B from the transactions in Paragraphs 62 and 63 minus the $XXXXXXXXXX of inter-corporate debt set-off in this Paragraph.

65. Brother B will transfer to NewCo B preferred shares of HoldCo B having an FMV of $XXXXXXXXXX, being equal to the amount of the debt that NewCo B owes to HoldCo B plus the FMV of the Class “E” Preferred Shares received in Paragraph 62, in consideration for preferred shares of NewCo B. This transfer will occur on a tax-deferred basis pursuant to subsection 85(1). The preferred shares transferred by Brother B will include XXXXXXXXXX of the Class “D” Preferred Shares of HoldCo B owned by Brother B, with an ACB and PUC of $XXXXXXXXXX and XXXXXXXXXX Class “F” Preferred Shares of HoldCo B with an ACB and PUC of $11.23. Brother B will acquire XXXXXXXXXX Class “D” Preferred Shares (voting) with ACB and PUC of $XXXXXXXXXX and XXXXXXXXXX Class “F” Preferred Shares (non-voting) with an ACB and PUC of $XXXXXXXXXXof NewCo B.

66. HoldCo B will redeem the preferred shares owned by NewCo B for their aggregate redemption amount of $XXXXXXXXXX. HoldCo B will pay for the redemption by crediting the inter-corporate debt account it maintains for NewCo B. This share redemption will result in a deemed dividend paid by HoldCo B to NewCo B in the amount of $XXXXXXXXXX, calculated as the difference between the FMV and the PUC of the redeemed shares.

67. NewCo B will redeem the Class “E” Preferred Shares owned by HoldCo B for their aggregate redemption amount of $XXXXXXXXXX. NewCo B will pay for the redemption by crediting the inter-corporate debt account it maintains for HoldCo B. This share redemption will result in a deemed dividend paid by NewCo B to HoldCo B in the amount of $XXXXXXXXXX, calculated as the difference between the FMV and the PUC of the redeemed shares. As a result of these transactions, NewCo B and HoldCo B will both be indebted to the other in the amount of $XXXXXXXXXX.

68. NewCo B and HoldCo B will set-off and cancel their $XXXXXXXXXX of inter-corporate indebtedness. Following these transactions, NewCo B will own all of the shares and indebtedness of InvestCo originally owned by HoldCo B. The aggregate value of the shareholder loan owing by NewCo B to Brother B and the preferred shares of NewCo B owned by Brother B will equal the FMV of the shares and debt of InvestCo transferred from HoldCo B to NewCo B. Trust B will own all of the common shares of NewCo B.

Brother C Reorganization

69. Brother C will incorporate NewCo C. The authorized share capital of NewCo C will be:

(a) Class A voting common shares;

(b) Class B voting common shares;

(c) Class C non-voting common shares;

(d) Class D voting non-participating shares;

(e) Class E non-voting preferred shares;

(f) Class F non-voting preferred shares; and

(g) Class G voting preferred shares.

On incorporation, Trust C will subscribe for XXXXXXXXXX Class “A” Common Shares of NewCo C for a subscription price of $XXXXXXXXXX per share. Brother C will be appointed as the only director of NewCo C.

70. HoldCo C will sell its XXXXXXXXXX Class “A” Common Shares of InvestCo (having an FMV, ACB and PUC of $XXXXXXXXXX) and its XXXXXXXXXX Class “I” Preferred Shares of InvestCo (having an estimated FMV of $XXXXXXXXXX and ACB and PUC of $XXXXXXXXXX) to NewCo C in exchange for: (i) XXXXXXXXXX Class “E” Preferred Shares (non-voting) of NewCo C, having an aggregate redemption amount of $XXXXXXXXXX and ACB and PUC of $XXXXXXXXXX; and (ii) a credit to HoldCo C’s inter-corporate debt account in the amount of $XXXXXXXXXX. This transfer will occur on a tax-deferred basis pursuant to subsection 85(1). A price adjustment clause will be included in the transfer documents to ensure that the FMV of the transferred shares equals the FMV of the consideration received by HoldCo C.

71. NewCo C will assume the $XXXXXXXXXX debt that InvestCo owes to HoldCo C in consideration for InvestCo crediting $XXXXXXXXXX to the inter-corporate debt account it maintains for NewCo C.

72. NewCo C will assume the $XXXXXXXXXX debt that HoldCo C owes to Brother C in consideration for HoldCo C setting off $XXXXXXXXXX of the inter-corporate debt NewCo C owes to HoldCo C. Immediately after this transaction, HoldCo C will be indebted to NewCo C in the net amount of $XXXXXXXXXX, calculated as the total of the debts payable from NewCo C to HoldCo C from the transactions in Paragraphs 70 and 71 minus the $XXXXXXXXXX of inter-corporate debt set-off in this Paragraph.

73. Brother C will transfer to NewCo C preferred shares of HoldCo C having an FMV of $XXXXXXXXXX, being equal to the amount of the debt that NewCo C owes to HoldCo C plus the FMV of the Class “E” Preferred Shares received in Paragraph 70, in consideration for preferred shares of NewCo C. This transfer will occur on a tax-deferred basis pursuant to subsection 85(1). The preferred shares transferred by Brother C will include XXXXXXXXXX of the Class “D” Preferred Shares of HoldCo C owned by Brother C with an ACB and PUC of $XXXXXXXXXX and XXXXXXXXXX Class “F” Preferred Shares (non-voting) of HoldCo C with an ACB and PUC of $XXXXXXXXXX. Brother C will acquire XXXXXXXXXX Class “D” Preferred Shares (voting) with an ACB and PUC of $XXXXXXXXXX and XXXXXXXXXX Class “F” Preferred Shares (non-voting) with an ACB and PUC of $XXXXXXXXXX of NewCo C.

74. HoldCo C will redeem the preferred shares owned by NewCo C for their aggregate redemption amount of $XXXXXXXXXX. HoldCo C will pay for the redemption by crediting the inter-corporate debt account it maintains for NewCo C. This share redemption will result in a deemed dividend paid by HoldCo C to NewCo C in the amount of $XXXXXXXXXX calculated as the difference between the FMV and the PUC of the redeemed shares.

75. NewCo C will redeem the Class “E” Preferred Shares owned by HoldCo C for their aggregate redemption amount of $XXXXXXXXXX. NewCo C will pay for the redemption by crediting the inter-corporate debt account it maintains for HoldCo C. This share redemption will result in a deemed dividend paid by NewCo C to HoldCo C in the amount of $XXXXXXXXXX, calculated as the difference between the FMV and the PUC of the redeemed shares. As a result of these transactions, NewCo C and HoldCo C will both be indebted to the other in the amount of $XXXXXXXXXX.

76. NewCo C and HoldCo C will set-off and cancel their $XXXXXXXXXX of inter-corporate indebtedness. Following these transactions, NewCo C will own all of the shares and indebtedness of InvestCo originally owned by HoldCo C. The aggregate value of the shareholder loan owing by NewCo C to Brother C and the preferred shares of NewCo C owned by Brother C will equal the FMV of the shares and debt of InvestCo transferred from HoldCo C to NewCo C. Trust C will own all of the common shares of NewCo C.

PURPOSE OF THE PROPOSED TRANSACTIONS

77. The purpose of the Brother A Reorganization is to separate Brother A’s indirect ownership of OpCo and InvestCo into two separate holding companies in order to provide flexibility in Brother A’s estate planning. Specifically, Brother A would like the option to have his indirect interests in OpCo and InvestCo be divided between his children in different proportions following his death.

78. The purpose of the Brother B Reorganization is to separate Brother B’s indirect ownership of OpCo and InvestCo into two separate holding companies in order to provide flexibility in Brother B’s estate planning. Specifically, Brother B would like the option to have his indirect interests in OpCo and InvestCo be divided between his children in different proportions following his death.

79. The purpose of the Brother C Reorganization is to separate Brother C’s indirect ownership of OpCo and InvestCo into two separate holding companies in order to provide flexibility in Brother C’s estate planning. Specifically, Brother C would like the option to have his indirect interests in OpCo and InvestCo be divided between his children in different proportions following his death.

ADDITIONAL INFORMATION

80. Each of the Brother A, Brother B and Brother C Reorganizations would be undertaken regardless of whether the other reorganizations take place. Specifically:

(a) the Brother A Reorganization would be undertaken regardless of whether the Brother B and C Reorganizations are undertaken;

(b) the Brother B Reorganization would be undertaken regardless of whether the Brother A and Brother C Reorganizations are undertaken; and

(c) the Brother C Reorganization would be undertaken regardless of whether the Brother A and Brother B Reorganizations are undertaken.

81. Each brother has independently decided to implement their respective reorganization. The temporal link between the three reorganizations is based on the fact that the brothers use the same professional advisers and have been presented with the same legal advice. Each of the Brother A, Brother B and Brother C Reorganizations is independent and will not facilitate or make possible any other one of those reorganizations.

82. The only material assets held by the HoldCos are the shares of OpCo and InvestCo as well as debts receivable from OpCo, InvestCo and corporations related to the HoldCos. The direct safe income (or DSI) realized by each of the HoldCos prior to the Proposed Transactions will be allocated between the HoldCos and the NewCos following the Proposed Transactions in a manner consistent with that described in CRA Documents 2021-0889611E5 and 2020-0861031C6. Specifically, in respect of each HoldCo and the relevant NewCo that is transferred shares in InvestCo by the HoldCo (for example HoldCo A and NewCo A):

(a) The DSI of the HoldCo shares immediately following the Proposed Transactions will be equal to the DSI of the HoldCo shares immediately prior to the Proposed Transactions multiplied by the ratio obtained when the aggregate of the ACB of the assets retained by the HoldCo immediately following the Proposed Transactions is divided by the aggregate of the ACB of all the assets held by the HoldCo immediately prior to the Proposed Transactions.

(b) The DSI of the NewCo shares immediately following the Proposed Transactions will be equal to the DSI of the HoldCo shares immediately prior to the Proposed Transactions minus the DSI of the HoldCo shares immediately following the Proposed Transactions.

In addition, the DSI of the OpCo Shares held by the respective HoldCos (and any indirect safe income or ISI of OpCo based on the DSI of the subsidiaries owned by OpCo) immediately following the Proposed Transactions will form part of the ISI of the HoldCos. Similarly, the DSI of the InvestCo Shares held by the respective NewCos (and any ISI of InvestCo based on the DSI of the subsidiaries owned by InvestCo) immediately following the Proposed Transactions will form part of the ISI of the NewCos.

RULINGS

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

A. By virtue of subsection 84(3), on the redemption of the HoldCo A Preferred Shares held by NewCo A described in Paragraph 58, HoldCo A will be deemed to have paid, and NewCo A will be deemed to have received, a dividend equal to the amount by which the amount paid on each redemption of preferred shares exceeds the PUC of such shares immediately before such redemption.

B. By virtue of subsection 84(3), on the redemption of the NewCo A Shares held by HoldCo A described in Paragraph 59, NewCo A will be deemed to have paid, and HoldCo A will be deemed to have received, a dividend equal to the amount by which the amount paid on the redemption of the NewCo A Shares exceeds the PUC of such shares immediately before each such redemption.

C. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to either of the taxable dividends referred to in Rulings A and B, provided that as part of the series of transactions or events that includes the Proposed Transactions, there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v). For greater certainty, the Proposed Transactions described herein, in and by themselves, will not be considered to result in a disposition or increase in interest described in subparagraphs 55(3)(a)(i) to (v).

These 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 no later than six months after the date of this letter. The above rulings are based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and the Regulations, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

Unless otherwise expressively confirmed in the above Rulings, 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 outstanding balance of various tax accounts such as refundable dividend tax on hand, non-eligible refundable tax on hand, eligible refundable tax on hand, general rate income pool, non-capital losses or capital dividend account, if any, for any of the corporate entities described herein;

(c) any provincial tax consequences of the Proposed Transactions; or

(d) any other income tax consequence relating to the facts, additional information or Proposed Transactions, or any transaction or event taking place either prior 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 purposes of any of the Rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, none of the Rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses.

Yours truly,

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