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 butterfly dividend is exempt from 55(2) as a result of qualifying under 55(3)(b)?
Position: Yes.
Reasons: Proposed transactions meet the requirements of paragraph 55(3)(b).
XXXXXXXXXX 2022-092431
XXXXXXXXXX, 2023
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
We are writing in response to your request dated XXXXXXXXXX and the revised requests received XXXXXXXXXX for an advance income tax ruling (ruling) on behalf of the taxpayers described below (Taxpayers). We also acknowledge the additional information provided in your various email correspondence (XXXXXXXXXX).
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 are the same as, or substantially similar to, transactions and/or issues that are:
a) in a previously filed return of the Taxpayers or a related person and;
i. being considered by the Canada Revenue Agency in connection with such return;
ii. under objection by the Taxpayers or a related person; or
iii. the subject of a current or completed court process involving the Taxpayers or a related person; or
b) the subject of a ruling previously considered by the Income Tax Rulings Directorate.
The tax account numbers, Tax Services Offices and the Tax Centres and addresses of the Taxpayers involved are as follows:
XXXXXXXXXX
Unless otherwise stated:
i. a reference 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, c.1 (5th Supp.), as amended (the “Act”);
ii. all terms and conditions used in this Ruling request that are defined in 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.
DEFINITIONS
Unless otherwise specified, the following terms have the meanings specified below:
“ACB” means “adjusted cost base” as that expression is defined in section 54 and subsection 248(1);
“agreed amount” in respect of a property means the amount that the transferor and transferee of the property have agreed upon in an election under subsection 85(1);
“arm’s length” has the meaning assigned by subsection 251(1);
“Canco1” means XXXXXXXXXX, a Canadian-controlled private corporation, as described in Paragraph 19;
“Canco1 Preferred Shares” has the meaning assigned by Paragraph 20;
“Canco2” means XXXXXXXXXX, a Canadian-controlled private corporation, as described in Paragraph 24;
“Canco3” means XXXXXXXXXX, a Canadian-controlled private corporation, as described in Paragraph 26;
“Canco4” means XXXXXXXXXX, a Canadian-controlled private corporation, as described in Paragraph 31;
“Canco5” means XXXXXXXXXX, a Canadian-controlled private corporation, as described in Paragraph 35;
“Canco6” means, XXXXXXXXXX, a Canadian-controlled private corporation, as described in Paragraph 37;
“capital dividend” has the meaning assigned by subsection 83(2);
“capital property” has the meaning assigned by section 54;
“CCPC” or “Canadian-controlled private corporation” has the meaning assigned by subsection 125(7);
“CDA” or “capital dividend account” has the meaning assigned by subsection 89(1);
“connected” has the meaning assigned by subsection 186(4);
“Corporations Act” means the Canada Business Corporations Act;
“CRA” refers to the Canada Revenue Agency;
“DC Amalco” has the meaning assigned by Paragraph 49;
“DC Amalco Common Shares” has the meaning assigned by Paragraph 49;
“DC Amalco Class A Preferred Shares” has the meaning assigned by Paragraph 49;
“DC Amalco Class B Preferred Shares” has the meaning assigned by Paragraph 49;
“DC Amalco Class C Preferred Shares” has the meaning assigned by Paragraph 49;
“DC Amalco Transfer” means the pro rata distribution of the property of DC Amalco to Sibling1 TC, Sibling2 TC and Sibling3 TC, as described in Paragraph 77;
“DC Amalco Winding Up Dividend” means the dividend arising on the winding-up of DC Amalco by virtue of subsection 84(2) and paragraph 88(2)(b), as described in Paragraphs 86 to 88, and Ruling E.
"disposition" 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” or “eligible refundable dividend tax on hand” has the meaning assigned by subsection 129(4);
“Family Trust” means the XXXXXXXXXX Family Trust as defined in Paragraph 15;
“FMV” means “fair market value” being 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;
“GRIP” means “general rate income pool” as that term is defined by subsection 89(1);
“InsuranceCo Common Shares” has the meaning assigned by Paragraph 70;
“InsuranceCo” means a corporation to be incorporated under the Corporations Act, as described in Paragraph 70;
“life insurance policies” mean the life insurance policies currently owned by Canco1 and Canco4 as described in Paragraphs 22 and 33, respectively.
“NERDTOH” or “non-eligible refundable dividend tax on hand” has the meaning assigned by subsection 129(4);
“New Sibling1 Trust” has the meaning assigned by Paragraph 60;
“New Sibling2 Trust” has the meaning assigned by Paragraph 61;
“New Sibling3 Trust” has the meaning assigned by Paragraph 62;
“Paragraph” means a numbered paragraph in this letter;
“Parent” means XXXXXXXXXX, the mother of Sibling1, Sibling2, and Sibling3 and the surviving spouse of XXXXXXXXXX;
“Preliminary Transactions” mean the transactions described in Paragraphs 40 to 65.1;
“principal amount” has the meaning assigned by subsection 248(1);
“Proposed Transactions” means the transactions described in Paragraphs 66 to 88;
“Pubco” means XXXXXXXXXX, a Canadian public corporation, the shares of the capital stock of which are traded on the XXXXXXXXXX;
"public corporation" has the meaning assigned to that term in subsection 89(1);
“PUC” or “paid-up capital” has the meaning assigned by subsection 89(1);
"related person" has the meaning assigned to that term in section 251;
“ReserveCo Common Shares” has the meaning assigned by Paragraph 68;
“ReserveCo” means a corporation to be incorporated under the Corporations Act, as described in Paragraph 68;
“series of transactions or events” includes the transactions or events referred to in subsection 248(10);
“Sibling1 TC Class A Preferred Shares” has the meaning assigned by Paragraph 46;
“Sibling1 TC Class B Preferred Shares” has the meaning assigned by Paragraph 46;
“Sibling1 TC Class C Preferred Shares” has the meaning assigned by Paragraph 46;
“Sibling1 TC Common Shares” has the meaning assigned by Paragraph 46;
“Sibling1 TC Note” has the meaning assigned by Paragraph 82;
“Sibling1 TC” means a Canadian-controlled private corporation to be incorporated by Sibling1 under the Corporations Act as described in Paragraph 46;
“Sibling1 Trust” means the XXXXXXXXXX Trust as defined in Paragraph 6;
“Sibling1’s children” means XXXXXXXXXX, each of which is over 18 years of age;
“Sibling1” means XXXXXXXXXX as defined in Paragraph 3;
“Sibling2 TC Class A Preferred Shares” has the meaning assigned by Paragraph 47;
“Sibling2 TC Class B Preferred Shares” has the meaning assigned by Paragraph 47;
“Sibling2 TC Class C Preferred Shares” has the meaning assigned by Paragraph 47;
“Sibling2 TC Common Shares” has the meaning assigned by Paragraph 47;
“Sibling2 TC Note” has the meaning assigned by Paragraph 83;
“Sibling2 TC” means a Canadian-controlled private corporation to be incorporated by Sibling2 under the Corporations Act as described in Paragraph 47;
“Sibling2 Trust” means the XXXXXXXXXX Trust as defined in Paragraph 9;
“Sibling2’s children” means XXXXXXXXXX, each of which are over 18 years of age;
“Sibling2” means XXXXXXXXXX as defined in Paragraph 3;
“Sibling3 TC” means a Canadian-controlled private corporation to be incorporated by Sibling3 under the Canadian Business Corporations Act as described in paragraph 49;
“Sibling3 TC Common Shares” has the meaning assigned by Paragraph 49;
“Sibling3 TC Class A Preferred Shares” has the meaning assigned by Paragraph 48;
“Sibling3 TC Class B Preferred Shares” has the meaning assigned by Paragraph 48;
“Sibling3 TC Class C Preferred Shares” has the meaning assigned by Paragraph 48;
“Sibling3 TC Note” has the meaning assigned by Paragraph 84;
“Sibling3 Trust” means XXXXXXXXXX Trust as defined in Paragraph 12;
“Sibling3” means XXXXXXXXXX as defined in Paragraph 3;
“Siblings” means collectively XXXXXXXXXX;
“Spousal Trust” means Spousal Trust of XXXXXXXXXX;
“stated capital account” has the meaning assigned by the Corporations Act;
“taxable Canadian corporation” has the meaning assigned by subsection 89(1); and
“taxable dividend” has the meaning assigned by subsection 89(1).
FACTS
1. All individuals, corporations, and trusts referred to in this letter are resident in Canada for income tax purposes and not residents of any other country, unless otherwise noted.
2. XXXXXXXXXX.
3. XXXXXXXXXX (“Sibling1”), XXXXXXXXXX (“Sibling2”), and XXXXXXXXXX (“Sibling3”) are the children of XXXXXXXXXX.
4. XXXXXXXXXX is the spouse of Sibling1. XXXXXXXXXX and Sibling1 have three children, XXXXXXXXXX (collectively, “Sibling1’s children”).
5. XXXXXXXXXX is the spouse of Sibling 2. XXXXXXXXXX and Sibling2 have three children, XXXXXXXXXX (collectively, “Sibling2’s children”).
6. The XXXXXXXXXX Family Trust (“Sibling1 Trust”) is a discretionary, inter vivos trust that was settled on XXXXXXXXXX. The Sibling1 Trust is a “personal trust" as defined in subsection 248(1). The trustees of the Sibling1 Trust are Sibling1, XXXXXXXXXX, and Sibling3.
7. The capital beneficiaries of the Sibling1 Trust are:
i. Sibling1;
ii. The children of Sibling1, whether born before or after the date of the Trust Agreement; and
iii. The grandchildren of Sibling1 born after the date of the Trust Agreement.
8. The income beneficiaries of the Sibling1 Trust are:
i. Each one of the Capital Beneficiaries;
ii. Any charity which is a registered charity;
iii. The spouse, if any, of Sibling1, XXXXXXXXXX;
iv. Any person who is cohabiting with Sibling1 in a conjugal relationship XXXXXXXXXX;
9. The XXXXXXXXXX Family Trust (“Sibling2 Trust”) is a discretionary, inter vivos trust that was settled on XXXXXXXXXX. The Sibling2 Trust is a “personal trust" as defined in subsection 248(1). The trustees of the Sibling2 Trust are Sibling2, XXXXXXXXXX, and Sibling1.
10. The capital beneficiaries of the Sibling2 Trust are:
i. Sibling2;
ii. The children of Sibling2, whether born before or after the date of the Trust Agreement; and
iii. The grandchildren of Sibling2 born after the date of the Trust Agreement.
11. The income beneficiaries of the Sibling2 Trust are:
i. Each one of the Capital Beneficiaries;
ii. Any charity which is a registered charity;
iii. The spouse, if any, of Sibling2, XXXXXXXXXX;
iv. Any person who is cohabiting with Sibling2 in a conjugal relationship XXXXXXXXXX;
12. The XXXXXXXXXX Family Trust (“Sibling3 Trust”) is a discretionary, inter vivos trust that was settled on XXXXXXXXXX. The Sibling3 Trust is a “personal trust" as defined in subsection 248(1). The trustees of the Sibling3 Trust are Sibling3, XXXXXXXXXX, and Sibling2.
13. The capital beneficiaries of the Sibling3 Trust are:
i. Sibling3;
ii. The children of Sibling3, whether born before or after the date of the Trust Agreement; and
iii. The grandchildren of Sibling3 born after the date of the Trust Agreement.
14. The income beneficiaries of the Sibling3 Trust are:
i. Each one of the Capital Beneficiaries;
ii. Any charity which is a registered charity;
iii. The spouse, if any, of Sibling3, XXXXXXXXXX;
iv. Any person who is cohabiting with Sibling3 in a conjugal relationship XXXXXXXXXX;
15. The XXXXXXXXXX Family Trust (“Family Trust”) is a discretionary, inter vivos trust that was settled on XXXXXXXXXX. The sole trustee of the Family Trust is XXXXXXXXXX.
16. The capital beneficiaries of the Family Trust are:
i. The children of XXXXXXXXXX and Parent, namely Sibling1, Sibling2, XXXXXXXXXX, and Sibling3;
ii. The spouses from time to time of the said children of XXXXXXXXXX and Parent; and
iii. The children of the said children of XXXXXXXXXX and Parent (i.e. grandchildren).
17. The Spousal Trust of the Estate of XXXXXXXXXX (“Spousal Trust”) was created under the last will and testament of XXXXXXXXXX. The trustees of the Spousal Trust are Parent and Sibling1.
18. The trustees hold the property of the Spousal Trust for the benefit of Parent. Upon the death of Parent, the property of the Spousal Trust will be transferred to the Family Trust in specie or in cash.
Canco1
19. Canco1 is a taxable Canadian corporation and a Canadian-controlled private corporation. It has a taxation year ending XXXXXXXXXX. Canco1 was incorporated under the XXXXXXXXXX.
20. The issued and outstanding share capital of Canco1 consists of XXXXXXXXXX voting participating common shares and XXXXXXXXXX non-voting fixed-value preference shares (“Canco1 Preferred Shares”) owned as follows:
Shareholder Number and Class of Shares Voting Status
Canco2 XXXXXXXXXX Canco1 Preferred Shares Non-voting
Sibling1 XXXXXXXXXX and one-third common Voting
Sibling2 XXXXXXXXXX and one-third common Voting
Sibling3 XXXXXXXXXX and one-third common Voting
21. The Canco1 Preferred Shares are redeemable at $XXXXXXXXXX per share or $XXXXXXXXXX in aggregate.
22. The property owned by Canco1 includes:
i. Cash;
ii. 1 Class A voting common share of XXXXXXXXXX. / Canco6, representing XXXXXXXXXX% of the issued and outstanding share capital of the company;
iii. XXXXXXXXXX Class A voting preferred shares of XXXXXXXXXX / Canco3 with a redemption value of $XXXXXXXXXX per share or $XXXXXXXXXX in aggregate;
iv. XXXXXXXXXX shares of XXXXXXXXXX, an unrelated corporation; and
v. Separate life insurance policies on the lives of Sibling1 and Sibling2 with Canco1 the beneficiary of said life insurance policies.
There has not been a material change in the composition of Canco1’s assets and liabilities described herein, since XXXXXXXXXX. Moreover, there will not be any material change in the composition of Canco1’s assets or liabilities from the date of this letter until the date the transactions described herein are completed.
23. During the XXXXXXXXXX taxation year and prior to the Preliminary Transactions and Proposed Transactions, Canco1 paid a taxable dividend to its common shareholders, Sibling1, Sibling2 and Sibling3. These dividends were eligible dividends to the common shareholders aggregating $XXXXXXXXXX. These dividends were paid in the normal course and were not paid in contemplation of the Proposed Transactions.
Canco2
24. Canco2 is a taxable Canadian corporation and a Canadian-controlled private corporation. It has a taxation year ending XXXXXXXXXX. Canco2 was incorporated under the XXXXXXXXXX.
25. The issued and outstanding share capital of Canco2 consists of XXXXXXXXXX non-voting fixed-value Class A preferred shares, XXXXXXXXXX non-voting fixed-value Class B preferred shares, XXXXXXXXXX voting fixed-value Class C preferred shares, and XXXXXXXXXX voting participating Class I common share owned as follows:
Shareholder Number and Class of Shares Voting Status
Spousal Trust XXXXXXXXXX Class A preferred Non-voting
Spousal Trust XXXXXXXXXX Class B preferred Non-Voting
Parent XXXXXXXXXX Class B preferred Non-Voting
Spousal Trust XXXXXXXXXX Class C preferred Voting
Family Trust XXXXXXXXXX Class A preferred Non-Voting
Family Trust XXXXXXXXXX Class I common Voting
Canco3
26. Canco3 is a taxable Canadian corporation and a Canadian-controlled private corporation. It has a taxation year ending XXXXXXXXXX. Canco3 was incorporated under the XXXXXXXXXX.
27. The issued and outstanding share capital of Canco3 consists of XXXXXXXXXX voting common shares and XXXXXXXXXX Class A shares as follows:
Shareholder Number and Class of Shares Voting Status
Canco2 XXXXXXXXXX Class A Voting
Sibling1 Trust XXXXXXXXXX voting common Voting
Sibling2 Trust XXXXXXXXXX voting common Voting
Sibling3 Trust XXXXXXXXXX voting common Voting
28. The Class A shares of Canco3 are voting fixed-value shares, redeemable at $XXXXXXXXXX per share or $XXXXXXXXXX in aggregate.
29. The property owned by Canco3 includes the investment in Canco4 and a nominal amount of cash.
30. During the XXXXXXXXXX taxation year and prior to the Preliminary Transactions and Proposed Transactions, Canco3 paid a taxable and capital dividend to its voting common shareholders, Sibling1 Trust, Sibling2 Trust, and Sibling3 Trust. These dividends to the common shareholders aggregated $XXXXXXXXXX and a portion of the taxable dividend, in aggregate amount of $XXXXXXXXXX, was designated as an eligible dividend and the capital dividend was designated as $XXXXXXXXXX, in aggregate.
Canco4
31. Canco4 is a taxable Canadian corporation and a Canadian-controlled private corporation. It has a taxation year ending XXXXXXXXXX. Canco4 was incorporated under the Corporations Act on XXXXXXXXXX.
32. The issued and outstanding share capital of Canco4 consists of XXXXXXXXXX voting participating common shares owned by Canco3.
33. The property owned by Canco4 includes:
i. Cash;
ii. Porfolio of marketable securities;
iii. XXXXXXXXXX common shares of XXXXXXXXXX, representing XXXXXXXXXX% of the issued and outstanding share capital of the company;
iv. XXXXXXXXXX Class A voting common share of Canco5, representing XXXXXXXXXX% of the issued and outstanding share capital of the company;
v. XXXXXXXXXX shares of Pubco, representing XXXXXXXXXX% of the issued and outstanding share capital of the company;
vi. Non-interest bearing debt from Canco6 in the amount of $XXXXXXXXXX;
vii. Non-interest bearing debt from Canco5 in the amount of $XXXXXXXXXX;
viii. Separate life insurance policies on the lives of Sibling1, Sibling2, and Sibling3 with Canco4 the beneficiary of said life insurance policies.
There has not been a material change in the composition of Canco4’s assets and liabilities described herein, since XXXXXXXXXX. Moreover, there will not be any material change in the composition of Canco4’s assets or liabilities from the date of this letter until the date the transactions described herein are completed.
34. During the XXXXXXXXXX taxation year and prior to the Preliminary Transactions and Proposed Transactions, Canco4 paid a taxable and capital dividend to its common shareholder, Canco3. These dividends to the common shareholder aggregated $XXXXXXXXXX and a portion of the taxable dividend, in aggregate amount of $XXXXXXXXXX, was designated as an eligible dividend and the capital dividend was designated as $XXXXXXXXXX, in aggregate. Canco3, in turn, paid a taxable and capital dividend to its shareholders in an equivalent amount, as described in Paragraph 27.
Canco5
35. Canco5 is a taxable Canadian corporation and a Canadian-controlled private corporation. It has a taxation year ending XXXXXXXXXX. Canco5 was incorporated under the XXXXXXXXXX.
36. The issued and outstanding share capital of Canco5 consists of 1 Class A voting common share owned by Canco4.
Canco6
37. Canco6 is a taxable Canadian corporation and a Canadian-controlled private corporation. It has a taxation year ending XXXXXXXXXX. Canco6 was incorporated under the XXXXXXXXXX.
38. The issued and outstanding share capital of Canco6 consists of 1 Class A voting common share owned by Canco1.
39. During the XXXXXXXXXX taxation year and prior to the Preliminary Transactions and Proposed Transactions, Canco6 paid a taxable dividend to its common shareholder, Canco1. These dividends to the Class A common shareholder aggregated $XXXXXXXXXX and the full amount was designated as an eligible dividend.
PRELIMINARY TRANSACTIONS
Some or all of the Preliminary Transactions described in Paragraphs 40 to 65.1 might be completed in advance of the issuance of this letter and will occur in no particular order.
Trust Distributions
40. Sibling1 Trust will distribute all of its common shares of Canco3 to Sibling1 and/or Sibling1’s children in satisfaction of all or a part of their capital interests in Sibling1 Trust.
41. Sibling2 Trust will distribute all of its common shares of Canco3 to Sibling2 and/or Sibling2’s children in satisfaction of all or a part of their capital interests in Sibling2 Trust.
42. Sibling3 Trust will distribute all of its common shares of Canco3 to Sibling3 in satisfaction of all or a part of Sibling3’s capital interest in Sibling3 Trust.
Continuances
43. Canco3 will be continued from the jurisdiction of XXXXXXXXXX to the Corporations Act.
44. Canco1 will be continued from the jurisdiction of XXXXXXXXXX to the Corporations Act.
Sale of Canco1 Preferred Shares by Canco2
45. Canco2 will sell its Canco1 Preferred Shares (as described in Paragraphs 20 and 21) to Parent for an amount equal to the fair market value of the shares and receive a promissory note, payable on demand, as consideration to be settled at some point in the future in cash, transfer of property, and/or set-off.
Incorporation of Transferee Corporations
46. Sibling1 will cause the incorporation of a new corporation pursuant to the Corporations Act (“Sibling1 TC”). The authorized share capital of Sibling1 TC will include common shares (“Sibling1 TC Common Shares”), Class A preferred shares (“Sibling1 TC Class A Preferred Shares”), Class B preferred shares (“Sibling1 TC Class B Preferred Shares”) and Class C preferred shares (“Sibling1 TC Class C Preferred Shares”). No shares of Sibling1 TC will be issued on incorporation. The Sibling1 TC Common Shares will be non-voting and participating. The Sibling1 TC Class A Preferred Shares will be voting and non-participating. The Sibling1 TC Class B Preferred Shares will be non-voting and non-participating. The Sibling1 TC Class C Preferred Shares will be voting and non-participating.
47. Sibling2 will cause the incorporation of a new corporation pursuant to the Canada Business Corporations Act (“Sibling2 TC”). The authorized share capital of Sibling2 TC will include common shares (“Sibling2 TC Common Shares”), Class A preferred shares (“Sibling2 TC Class A Preferred Shares”), Class B preferred shares (“Sibling2 TC Class B Preferred Shares”) and Class C preferred shares (“Sibling2 TC Class C Preferred Shares”). No shares of Sibling2 TC will be issued on incorporation. The Sibling2 TC Common Shares will be non-voting and participating. The Sibling2 TC Class A Preferred Shares will be voting and non-participating. The Sibling2 TC Class B Preferred Shares will be non-voting and non-participating. The Sibling2 TC Class C Preferred Shares will be voting and non-participating.
48. Sibling3 will cause the incorporation of a new corporation pursuant to the Canada Business Corporations Act (“Sibling3 TC”). The authorized share capital of Sibling3 TC will include common shares (“Sibling3 TC Common Shares”), Class A preferred shares (“Sibling3 TC Class A Preferred Shares”), Class B preferred shares (“Sibling3 TC Class B Preferred Shares”) and Class C preferred shares (“Sibling3 TC Class C Preferred Shares”). No shares of Sibling3 TC will be issued on incorporation. The Sibling3 TC Common Shares will be non-voting and participating. The Sibling3 TC Class A Preferred Shares will be voting and non-participating. The Sibling3 TC Class B Preferred Shares will be non-voting and non-participating. The Sibling3 TC Class C Preferred Shares will be voting and non-participating.
Amalgamation
49. Canco1, Canco3 and Canco4, each of which will be a predecessor corporation, will amalgamate under the provisions of the Corporations Act to form “DC Amalco” whereby:
i. all of the property (except any 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 Amalco by virtue of the amalgamation;
ii. all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of DC Amalco by virtue of the amalgamation; and
iii. all of 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 the capital stock of DC Amalco because of the amalgamation;
iv. the share capital of DC Amalco will include common shares that are non-voting and participating (“DC Amalco Common Shares”), Class A preferred shares that are voting and non-participating (“DC Amalco Class A Preferred Shares”), Class B preferred shares that are non-voting and non-participating (“DC Amalco Class B Preferred Shares”) and Class C preferred shares that are non-voting and non-participating (“DC Amalco Class C Preferred Shares”).
v. in respect of the common shares of Canco1 owned by Sibling1, Sibling2 and Sibling3, each of Sibling1, Sibling2 and Sibling3 will receive DC Amalco Class A Preferred Shares and XXXXXXXXXX DC Amalco Common Shares with an aggregate fair market value equal to the fair market value of the shares exchanged (with the fair market value of the DC Amalco Common Shares expected to be a nominal amount);
vi. in respect of the common shares of Canco3 owned by Sibling1 (if any), Sibling1’s children, Sibling2 (if any), Sibling2’s children, and Sibling3, each of Sibling1 (if applicable), Sibling1’s children, Sibling2 (if applicable), Sibling2’s children, and Sibling3 will receive DC Amalco Class B Preferred Shares with a fair market value equal to the fair market value of the shares exchanged;
vii. in respect of the Canco1 Preferred Shares owned by Parent or Canco2, Parent or Canco2 will receive DC Amalco Class C Preferred Shares with a fair market value equal to the fair market value of the shares exchanged; and
viii. DC Amalco will be a taxable Canadian corporation and a Canadian-controlled private corporation and will be governed by the Corporations Act.
Permitted Exchanges
50. Sibling1 and Sibling1’s children will transfer all of their shares of DC Amalco to Sibling1 TC whereby:
i. in respect of the DC Amalco Common Shares and the DC Amalco Class A Preferred Shares owned by Sibling1, Sibling1 will receive Sibling1 TC Class A Preferred Shares and XXXXXXXXXX Sibling1 TC Common Shares;
ii. in respect of the DC Amalco Class B Preferred Shares owned by Sibling1, if any, Sibling1 will receive Sibling1 TC Class B Preferred Shares; and
iii. in respect of the DC Amalco Class B Preferred Shares owned by Sibling1’s children, Sibling1’s children will receive Sibling1 TC Class B Preferred Shares.
The fair market value of the shares received by each of Sibling1 and Sibling1’s children will be equal to the fair market value to the shares transferred to Sibling1 TC.
51. Sibling1 and Sibling1 TC will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers by Sibling1 described in Paragrpah 50. The amount agreed upon in such election will be equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii). The amount added to the stated capital account maintained for the Sibling1 TC Class A Preferred Shares will not exceed the aggregate of the paid-up capital of the DC Amalco Common Shares and the paid-up capital of the DC Amalco Class A Preferred Shares so transferred. The amount added to the stated capital account maintained for the Sibling1 TC Class B Preferred Shares will not exceed the aggregate of the paid-up capital of the DC Amalco Class B Preferred Shares so transferred, if any. The amount added to the stated capital account maintained for the Sibling1 TC Common Shares will be a nominal amount.
52. Sibling1’s children and Sibling1 TC will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers by Sibling1’s children described in Paragraph 50. The amount agreed upon in such election will be equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii). The amount added to the stated capital account maintained for the Sibling1 TC Class B Preferred Shares will not exceed the paid-up capital of the DC Amalco Class B Preferred Shares so transferred.
53. Sibling2 and Sibling2’s children will transfer all of their shares of DC Amalco to Sibling2 TC whereby:
i. in respect of the DC Amalco Common Shares and the DC Amalco Class A Preferred Shares owned by Sibling2, Sibling2 will receive Sibling2 TC Class A Preferred Shares and XXXXXXXXXX Sibling2 TC Common Shares;
ii. in respect of the DC Amalco Class B Preferred Shares owned by Sibling2, if any, Sibling2 will receive Sibling2 TC Class B Preferred Shares; and
iii. in respect of the DC Amalco Class B Preferred Shares owned by Sibling2’s children, Sibling2’s children will receive Sibling2 TC Class B Preferred Shares.
The fair market value of the shares received by each of Sibling2 and Sibling2’s children will be equal to the fair market value of the shares transferred to Sibling2 TC.
54. Sibling2 and Sibling2 TC will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers by Sibling2 described in Paragraph 53. The amount agreed upon in such election will be equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).The amount added to the stated capital account maintained for the Sibling2 TC Class A Preferred Shares will not exceed the aggregate of the paid-up capital of the DC Amalco Common Shares and the paid-up capital of the DC Amalco Class A Preferred Shares so transferred. The amount added to the stated capital account maintained for the Sibling2 TC Class B Preferred Shares will not exceed the aggregate of the paid-up capital of the DC Amalco Class B Preferred Shares so transferred, if any. The amount added to the stated capital account maintained for the Sibling2 TC Common Shares will be a nominal amount.
55. Sibling2’s children and Sibling2 TC will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers described in Paragraph 53. The amount agreed upon in such election will be equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii). The agreed amount will not exceed the fair market value of the property transferred. The amount added to the stated capital account maintained for the Sibling2 TC Class B Preferred Shares will not exceed the paid-up capital of the DC Amalco Class B Preferred Shares so transferred.
56. Sibling3 will transfer all of his shares of DC Amalco to Sibling3 TC whereby:
i. in respect of the DC Amalco Common Shares and DC Amalco Class A Preferred Shares owned by Sibling3, Sibling3 will receive Sibling3 TC Class A Preferred Shares and XXXXXXXXXX Sibling3 TC Common Shares; and
ii. in respect of the DC Amalco Class B Preferred Shares owned by Sibling3, Sibling3 will receive Sibling3 TC Class B Preferred Shares.
The fair market value of the shares received by Sibling3 will be equal to the fair market value of the shares transferred to Sibling3 TC.
57. Sibling3 and Sibling3 TC will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer described in Paragraph 56. The amount agreed upon in such election will be equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii). The agreed amount will not exceed the fair market value of the property transferred. The amount added to the stated capital account maintained for the Sibling3 TC Class A Preferred Shares will not exceed the aggregate of the paid-up capital of the DC Amalco Common Shares and the paid-up capital of the DC Amalco Class A Preferred Shares so transferred. The amount added to the stated capital account maintained for the Sibling3 TC Common Shares will be a nominal amount.
58. Sibling3 and Sibling3 TC will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer described in Paragraph 56. The amount agreed upon in such election will be equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii). The agreed amount will not exceed the fair market value of the property transferred. The amount added to the stated capital account maintained for the Sibling3 TC Class B Preferred Shares will not exceed the paid-up capital of the DC Amalco Class B Preferred Shares so transferred.
59. [Reserved]
Family Tax Planning
60. A non-arm’s length person to Sibling1 will settle a new discretionary trust (“New Sibling1 Trust”) for the benefit of Sibling1, his spouse, his children and grandchildren. Sibling1 will be the sole trustee of New Sibling1 Trust.
61. A non-arm’s length person to Sibling2 will settle a new discretionary trust (“New Sibling2 Trust”) for the benefit of Sibling2, his spouse, his children and grandchildren. Sibling2 will be the sole trustee of New Sibling2 Trust.
62. A non-arm’s length person to Sibling3 will settle a new discretionary trust (“New Sibling3 Trust”) for the benefit of Sibling3, his spouse, his children and grandchildren. Sibling3 will be the sole trustee of New Sibling3 Trust.
63. Sibling1 will sell his Sibling1 TC Common Shares to New Sibling1 Trust in exchange for nominal consideration.
64. Sibling2 will sell his Sibling2 TC Common Shares to New Sibling2 Trust in exchange for nominal consideration.
65. Sibling3 will sell his Sibling3 TC Commons Shares to New Sibling3 Trust in exchange for nominal consideration.
65.1 Canco2 will redeem the Class B preferred shares held by Parent (as described in Paragraph 25) for fair market value consideration, being a promissory note due on demand to be settled at some point in the future in cash, transfer of property, and/or set-off.
PROPOSED TRANSACTIONS
The following transactions will generally be implemented in the order presented below unless otherwise noted. The Proposed Transactions described in paragraphs 66 to 73 will occur before the other Proposed Transactions and in no particular order.
Stock Splits
66. Canco5 will split its stock on a XXXXXXXXXX basis such that DC Amalco will own XXXXXXXXXX Class A voting common shares.
67. Canco6 will split its stock on a XXXXXXXXXX basis such that DC Amalco will own XXXXXXXXXX Class A voting common shares.
68. DC Amalco will cause the incorporation of a new corporation pursuant to the Canada Business Corporations Act (“ReserveCo”). The authorized share capital of ReserveCo will include voting, participating common shares (“ReserveCo Common Shares”).
69. DC Amalco will subscribe for XXXXXXXXXX ReserveCo Common Share for nominal consideration.
70. DC Amalco will cause the incorporation of a new corporation pursuant to the Canada Business Corporations Act (“InsuranceCo”). The authorized share capital of InsuranceCo will include voting, participating common shares (“InsuranceCo Common Shares”).
71. DC Amalco will subscribe for XXXXXXXXXX InsuranceCo Common Share for nominal consideration.
Transfer to ReserveCo
72. DC Amalco will transfer cash and marketable securities to ReserveCo in exchange for ReserveCo Common Shares. DC Amalco and ReserveCo will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property. The amount agreed upon in such election in respect of each capital property so transferred will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) and in the case where the amount described in subparagraphs 85(1)(c.1)(i) exceeds the amount described in subparagraph 85(1)(c.1)(ii) for a particular property, the elected amount might exceed the amount described in subparagraph 85(1)(c.1)(ii). The agreed amount will not exceed the fair market value of the property transferred. The amount added to the stated capital account maintained for the ReserveCo Common Shares will not exceed the maximum amount that could be added to the PUC of those shares without a reduction in PUC pursuant to subsection 85(2.1).
Transfer to InsuranceCo
73. DC Amalco will make a capital contribution of the life insurance policies owned by DC Amalco to InsuranceCo.
DC Amalco Class C Preferred Share Distribution
73.1 DC Amalco will make a distribution on the DC Amalco Class C Preferred Shares by way of a return of capital, taxable dividend and/or capital dividend equal to the aggregate redemption amount of the DC Amalco Class C Preferred Shares less $XXXXXXXXXX (which distribution will, under the terms of the DC Amalco Class C Preferred Shares, reduce the aggregate redemption amount to $XXXXXXXXXX) either in cash or DC Amalco will issue three separate demand promissory notes each equal to XXXXXXXXXX of the aggregate distribution amount to be settled at some point in the future in cash, transfer of property and/or set-off. For greater certainty, if promissory ntoes are issued as consideration, each of Sibling1 TC, Sibling2 TC and Sibling3 TC will assume one of the promissory notes as part of the assumption of liabilities in Paragraph 78(a) related to the DC Amalco Transfer.
Sibling1 Capital Contribution to Sibling1 TC
73.2 Sibling1 will make a cash capital contribution to Sibling1 TC.
Sale of DC Amalco Class C Preferred Shares
73.3 Parent will sell her DC Amalco Class C Preferred Shares (as described in Paragraph 49(iv) and (vii)) to Sibling1 TC for an amount equal to the fair market value of the shares and receive cash consideration of $XXXXXXXXXX.
Types of Property
74. DC Amalco has significant influence over multiple corporations (including Pubco). Consequently, DC Amalco would normally be required to use the consolidated look-through method for determining the appropriate proportion of each of the three types of property that the shares of these corporations held by DC Amalco or debt owing by these corporations to DC Amalco represent. However, since DC Amalco will transfer to each of Sibling1 TC, Sibling2 TC and Sibling3 TC an equal number of shares of these corporations held by DC Amalco and an equal amount (within $XXXXXXXXXX) of any debt owing by any of these corporations to DC Amalco, the consolidated look-through method will not actually be undertaken for the purposes of determining the types of property represented by those shares or debts.
75. The property of DC Amalco, other than the shares and debts of corporations referred to in Paragraph 74, will be classified into the following three types of property for the purposes of the DC Amalco Transfer as follows:
(a) cash or near-cash property, including DC Amalco’s cash, marketable securities, accounts receivable, taxes receivable, advances to related parties, prepaid expenses and guaranteed investment certificates;
(b) investment property, comprising all of the assets of DC Amalco, 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.
(c) business property, comprising all of the assets of DC Amalco, other than cash or near-cash property, and investment property.
76. For greater certainty, for purposes of the DC Amalco Transfer:
(i) any tax accounts of DC Amalco, such as any non-capital loss, net capital loss, the balance of any ERDTOH, NERDTOH, GRIP or CDA, will not be considered property;
(ii) deferred expenses, if any, which are expenses that are deferred and amortized for accounting purposes, but fully deducted for tax purposes, and any deferred income tax or future income tax assets recorded in the financial statements of DC Amalco, if any, will not be considered property; and
(iii) 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, be ignored.
DC Amalco Transfer
77. DC Amalco will contemporaneously transfer to each of Sibling1 TC, Sibling2 TC and Sibling3 TC, a pro rata portion of the FMV of each type of property owned by it immediately before the transfer (including, for greater certainty, each type of property represented by the shares and debts referred to in Paragraph 74) such that, immediately following the transfer, the aggregate FMV of each type of property transferred by DC Amalco to each of Sibling1 TC, Sibling2 TC and Sibling3 TC respectively, 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 FMV, immediately before the DC Amalco Transfer, of all property of that type owned at that time by DC Amalco;
B is the FMV, immediately before the DC Amalco Transfer, of all the issued and outstanding shares of the capital stock of DC Amalco owned, at that time, by Sibling1 TC, Sibling1 TC and Sibling3 TC, as the case may be; and
C is the FMV, immediately before the DC Amalco Transfer, of all the issued and outstanding shares of the capital stock of DC Amalco.
For the purposes of this Paragraph, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed XXXXXXXXXX, determined as a percentage of the FMV of each type of property each of Sibling 1 TC, Sibling2 TC and Sibling3 TC, as the case may be, has received on such transfer as compared to what each would have received had it received its exact pro rata share of the FMV of that type of property.
78. As consideration for DC Amalco’s properties so transferred as described in Paragraph 77, each of Sibling1 TC, Sibling2 TC and Sibling3 TC will:
(a) assume a pro rata portion of any liabilities owing by DC Amalco; and
(b) issue to DC one Class C Preferred Share having a redemption amount and FMV equal to the FMV of the property received by Sibling1 TC, Sibling2 TC or Sibling3 TC, as the case may be, less the amount of liabilities of DC Amalco assumed, as described in (a).
79. DC Amalco and Sibling1 TC will elect, jointly, and in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer, as described in paragraph 77, of all eligible property of DC Amalco. The amount agreed upon in such elections in respect of each capital property so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act. The agreed amount will not exceed the fair market value of the property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b). For purposes of the election described in this paragraph, no portion of DC Amalco liabilities assumed by Sibling1 TC shall be treated as being assumed in consideration for the transfer of a particular property, to the extent that the principal amount of the liabilities exceeds the agreed amount under subsection 85(1) in respect of that transfer. The amount added to the stated capital account maintained for the Sibling1 TC Class C Preferred Shares will equal the amount by which the aggregate cost to Sibling1 TC, and to be determined pursuant to subsection 85(1), where relevant, of the properties transferred by DC Amalco exceeds the aggregate amount of liabilities assumed by Sibling1 TC.
80. DC Amalco and Sibling2 TC will elect, jointly, and in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer, as described in paragraph 77, of all eligible property of DC Amalco. The amount agreed upon in such elections in respect of each capital property so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act. The agreed amount will not exceed the fair market value of the property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b). For purposes of the election described in this paragraph, no portion of DC liabilities assumed by Sibling2 TC shall be treated as being assumed in consideration for the transfer of a particular property, to the extent that the principal amount of the liabilities exceeds the agreed amount under subsection 85(1) in respect of that transfer. The amount added to the stated capital account maintained for the Sibling2 TC Class C Preferred Shares will equal the amount by which the aggregate cost to Sibling2 TC, and to be determined pursuant to subsection 85(1), where relevant, of the properties transferred by DC Amalco exceeds the aggregate amount of liabilities assumed by Sibling2 TC.
81. DC Amalco and Sibling3 TC will elect, jointly, and in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer, as described in paragraph 77, of all eligible property of DC Amalco. The amount agreed upon in such elections in respect of each capital property so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act. The agreed amount will not exceed the fair market value of the property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b). For purposes of the election described in this paragraph, no portion of DC Amalco liabilities assumed by Sibling3 TC shall be treated as being assumed in consideration for the transfer of a particular property, to the extent that the principal amount of the liabilities exceeds the agreed amount under subsection 85(1) in respect of that transfer. The amount added to the stated capital account maintained for the Sibling3 TC Class C Preferred Shares will equal the amount by which the aggregate cost to Sibling3 TC, and to be determined pursuant to subsection 85(1), where relevant, of the properties transferred by DC Amalco exceeds the aggregate amount of liabilities assumed by Sibling3 TC.
Permitted Redemptions
82. Sibling1 TC will redeem its Sibling1 TC Class C Preferred Shares held by DC Amalco. Sibling1 TC will satisfy the redemption price by issuing and delivering to DC Amalco a non-interest bearing promissory note (the “Sibling1 TC Note”) payable on demand having a principal amount and fair market value equal to the redemption price of the shares so redeemed. DC Amalco will accept the Sibling1 TC Note as payment in full of the aggregate redemption amount in respect of the shares so redeemed.
83. Sibling2 TC will redeem its Sibling2 TC Class C Preferred Shares held by DC Amalco. Sibling2 TC will satisfy the redemption price by issuing and delivering to DC Amalco a non-interest bearing promissory note (the “Sibling2 TC Note”) payable on demand having a principal amount and fair market value equal to the redemption price of the shares so redeemed. DC Amalco will accept the Sibling2 TC Note as payment in full of the aggregate redemption amount in respect of the shares so redeemed.
84. Sibling3 TC will redeem its Sibling3 TC Class C Preferred Shares held by DC Amalco. Sibling3 TC will satisfy the redemption price by issuing and delivering to DC Amalco a non-interest bearing promissory note (the “Sibling3 TC Note”) payable on demand having a principal amount and fair market value equal to the redemption price of the shares so redeemed. DC Amalco will accept the Sibling3 TC Note as payment in full of the aggregate redemption amount in respect of the shares so redeemed.
First Taxation Years of Sibling1 TC, Sibling2 TC and Sibling3 TC
85. The first taxation year for each of Sibling1 TC, Sibling2 TC and Sibling3 TC will end.
Wind-Up of DC Amalco
86. DC Amalco will resolve to voluntarily dissolve under the applicable provisions of the Corporations Act. In connection with the winding-up of DC Amalco:
(i) the Sibling1 TC Note, the Sibling2 TC Note and the Sibling3 TC3 Note will be assigned and distributed to Sibling1 TC, Sibling2 TC, and Sibling3 TC, respectively. As a result of the assignment and distribution of the Sibling1 TC Note, the Sibling2 TC Note and the Sibling3 TC3 Note, the obligation of Sibling1 TC, Sibling2 TC and Sibling3 TC under the respective notes will be extinguished and the notes will be cancelled;
(ii) any residual assets of DC Amalco, including the rights to any tax refunds, will be distributed pro rata to each of Sibling1 TC, Sibling2 TC and Sibling3 TC; and
(iii) any residual liabilities of DC Amalco will be assumed pro rata by each of Sibling1 TC, Sibling2 TC, and Sibling3 TC.
Upon the receipt of a dividend refund, or any other receipt or repayment to which DC Amalco will become entitled as a result of the Proposed Transactions, DC Amalco will transfer one-third of the amount thereof to each of Sibling1 TC, Sibling2 TC and Sibling3 TC.
For greater certainty, the articles of dissolution will be filed subsequent to the winding-up of DC Amalco at a later date.
87. To the extent that there is a positive balance in the CDA of DC Amalco immediately prior to the distributions of the Sibling1 TC Note, the Sibling2 TC Note and the Sibling3 TC3 Note, DC Amalco will elect, in the prescribed manner and prescribed form required under subsection 83(2), to treat the portion of the DC Amalco Winding-Up Dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend paid. Pursuant to subparagraph 88(2)(b)(iv), Sibling1 TC, Sibling2 TC and Sibling3 TC will each be deemed to have received a proportionate capital dividend from DC Amalco.
88. To the extent that DC Amalco has GRIP at the time of winding-up and immediately prior to the distributions of the Sibling1 TC Note, the Sibling2 TC Note and the Sibling3 TC3 Note described in Paragraph 86, DC Amalco will designate a portion of the DC Amalco Winding-Up Dividend referred to in subparagraph 88(2)(b)(iii) to be an eligible dividend by notifying each of Sibling1 TC, Sibling2 TC and Sibling3 TC in writing within the time prescribed in subsection 89(14) that the portion of such dividend is an eligible dividend. Pursuant to subparagraph 88(2)(b)(iv), Sibling1 TC, Sibling2 TC and Sibling3 TC, as the case may be, will each be deemed to have received a proportionate eligible dividend from DC Amalco.
89. No property has or will become property of DC Amalco or of a predecessor corporation of DC Amalco and no liabilities have been or will be incurred by DC Amalco or by a predecessor corporation of DC Amalco in contemplation of and before the distribution described in paragraph 77, otherwise than as described herein or in the ordinary course of business.
90. None of the shares of DC Amalco, Sibling1 TC, Sibling2 TC and Sibling3 TC have been or will be, at any time during the implementation of the Preliminary Transactions and Proposed Transactions
(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a “guarantee agreement”,
(b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5), or
(c) the subject of a “dividend rental arrangement” referred to in subsection 112(2.3), as that term is defined in subsection 248(1).
91. None of DC Amalco, Sibling1 TC, Sibling2 TC and Sibling3 TC will be a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1). None of DC Amalco, Sibling1 TC, Sibling2 TC and Sibling3 TC is or will be a specified financial institution prior to the completion of the Preliminary Transactions and Proposed Transactions.
PURPOSES OF THE PRELIMINARY TRANSACTIONS AND PROPOSED TRANSACTIONS
92. The general objectives of the Preliminary Transactions and Proposed Transactions are:
(a) as to the sale of the preferred shares of Canco1 held by Canco2, to transfer the nominal shareholding held by Canco2 in order to simplify the butterfly distribution.
(b) as to the amalgamation described in paragraph 49, to simplify the corporate structure in anticipation of the DC Amalco Transfer;
(c) as to the butterfly reorganization, the objective is to enable each Sibling to have greater control of their respective pro rata share of the property of DC Amalco so that each may act more independently from the others; and in particular so that each Sibling may pursue independent investment choices;
(d) as to the family tax planning transactions, to permit each Sibling to implement estate planning objectives for their children and to segregate future appreciation in the value of their Holdcos in the New Trusts.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, Preliminary Transactions and Proposed Transactions and purposes of the Preliminary Transactions and Proposed Transactions, and provided that the Preliminary Transactions and Proposed Transactions are completed in the manner described above, we confirm the following:
A. The amalgamation of Canco1, Canco3 and Canco4 described in Paragraph 49 will be considered to be an amalgamation under provisions of subsection 87(1), and accordingly:
(a) Subject to paragraph 87(4)(c), each shareholder (except any predecessor corporations) who, immediately before the amalgamation, owned shares of the capital stock of either Canco1 or Canco3 will be deemed, pursuant to paragraph 87(4)(a), to have disposed of the shares for proceeds equal to the ACB of these shares immediately before the amalgamation;
(b) subsection 87(7) will apply to a debt or other obligation of a predecessor corporation that was outstanding immediately before the amalgamation and became a debt or other obligation of the corporation formed on the amalgamation where the amount payable by the new corporation on the maturity of the debt or other obligation, as the case may be, is the same as the amount that would have been payable by the predecessor corporation on its maturity;
(c) The provisions of subsection 87(3) will not apply to the extent that the PUC in respect of all the shares of the capital stock of DC Amalco immediately after the amalgamation does not exceed the total of all amounts each of which is the PUC in respect of a share of the capital stock of Canco1 and Canco3, as the case may be.
B. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the prescribed time specified in subsection 85(6) and provided each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to:
(a) the transfers by each of Sibling1, Sibling1’s children, Sibling2, Sibling2’s Children and Sibling3 TC of their respective DC Amalco shares to Sibling1 TC, Sibling2 TC or Sibling3 TC, as the case may be, as described in Paragraphs 50, 53 and 56;
(b) the transfers of each eligible property owned by DC Amalco to ReserveCo, as described in Paragraph 72; and
(c) the transfers of each eligible property owned by DC Amalco to each of Sibling1 TC, Sibling2 TC and Sibling3 TC as part of the DC Amalco Transfers, as described in Paragraph 77,
such that the agreed amount in respect of each such transfer will be deemed pursuant to paragraph 85(1)(a) to be the transferor’s proceeds of disposition of the particular property and the transferee’s cost thereof.
For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.
C. On the redemption by each of Sibling1 TC, Sibling2 TC and Sibling3 TC of its Class C Preferred Shares owned by DC Amalco, as described in Paragraphs 82, 83 and 84, by virtue of paragraphs 84(3)(a) and (b), each of Sibling1 TC, Sibling2 TC and Sibling3 TC will be deemed to have paid, and DC Amalco will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of such shares exceeds the aggregate PUC in respect of the Class C Preferred Shares immediately before such redemption.
D. The taxable dividends described in Ruling C and E:
(a) will, pursuant to subsection 82(1) and paragraph 12(1)(j), be included in computing the income of the corporation deemed to have received such dividend;
(b) will, pursuant to subsection 112(1), be deductible by the recipient corporation in computing its taxable income in the year in which such dividend is deemed to have been received and, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) will, pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54, be excluded in determining the proceeds of disposition to the recipient corporation of that recipient corporation’s particular shares of the payer corporation on which the dividend is deemed to be received;
(d) will, pursuant to 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;
(e) will not be subject to tax under Parts IV.1 or VI.1; and
(f) will not be subject to tax under Part IV except to the extent of the amount, if any, determined under paragraph 186(1)(b).
For greater certainty, subsection 129(1.2) will not apply to deem any dividend described in Ruling C and E not to be a taxable dividend for the purposes of subsection 129(1).
E. As a result of the distribution of property by DC Amalco in the course of its winding-up as described in Paragraph 86 of the Proposed Transactions:
(a) by virtue of paragraph 88(2)(b) and subsection 84(2), but subject to subparagraphs (b) and (d) below, DC Amalco will be deemed to have paid, and each of Sibling1 TC, Sibling2 TC and Sibling3 TC will be deemed to have received a dividend (each referred to as the “DC Amalco Winding-Up Dividend”) on the DC Amalco Class A Preferred Shares, DC Amalco Class B Preferred Shares, DC Amalco Class C Preferred Shares and DC Amalco Common Shares held by such corporation equal to the proportion of the amount by which the aggregate net fair market value of the property of DC Amalco distributed to each of Sibling1 TC, Sibling2 TC and Sibling3 TC on the winding-up exceeds the amount, if any, by which the PUC thereof of such class of DC Amalco shares is reduced as a result of the distribution, that the number of shares of such class held by Sibling1 TC, Sibling2 TC and Sibling3 TC, as the case may be, is of the number of all such shares outstanding immediately before that time;
(b) pursuant to subparagraph 88(2)(b)(i), such portion of any DC Amalco Winding-Up Dividend referred to in subparagraph (a) above which does not exceed DC Amalco’s capital dividend account determined immediately before the payment of such DC Amalco Winding-Up Dividend shall be deemed, for the purposes of the subsection 83(2) election referred to in Paragraph 87 of the Proposed Transactions, to be the full amount of a separate dividend, and for greater certainty, subsection 83(2.1) will not apply;
(c) pursuant to subparagraph 88(2)(b)(ii), such portion of any Winding-Up Dividend referred to in subparagraph (a) above that is equal to the lesser of:
i. DC Amalco’s pre-1972 capital surplus on hand as determined immediately before the payment of the winding-up dividend; and
ii. The amount by which the aggregate DC Amalco Winding-Up Dividend exceeds the portion thereof in respect of which DC Amalco will elect under subsection 83(2)
will be deemed not to be a dividend; and
(d) pursuant to subparagraph 88(2)(b)(iii), any DC Amalco Winding-Up Dividend, to the extent that it exceeds the portion thereof referred to in subparagraph (b) above that is deemed to be separate dividend and the portion thereof referred to in subparagraph (c) above that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend.
(e) pursuant to subparagraph 88(2)(b)(iv), each of Sibling1 TC, Sibling2 TC and Sibling3 TC will be deemed to have received its proportional share of any capital dividend and taxable dividend referred to in Rulings E(b) and E(d) above.
F. Provided that as part of the series of transactions or events that includes any of the Preliminary and 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 shares in the circumstances described in subparagraph 55(3.1)(b)(iii);
(e) an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or
(f) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),
which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings C and E 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.
G. The extinguishments of the debt obligations as a result of the cancellation of the Sibling1 TC Note, the Sibling2 TC Note and the Sibling3 TC3 Note, as described in Paragraph 86 of the Proposed Transactions, will not give rise to a “forgiven amount” within the meaning thereof in subsections 80(1) or 80.01(1), and none of DC Amalco, Sibling1 TC, Sibling2 TC and Sibling3 TC will realize any gain or sustain any loss upon the extinguishment of the debt obligations as a result of the cancellation of the Sibling1 TC Note, the Sibling2 TC Note and the Sibling3 TC3 Note.
H. Canco1, Canco3, Canco4 and Pubco will not be subject to a loss restriction event under subparagraph 251.2(2) such that subsection 249(4) will not apply by virtue of any of the Preliminary Transactions or Proposed Transactions.
I. The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not apply to any of the Preliminary Transactions or Proposed Transactions, in and by themselves.
J. The provisions of subsection 245(2) will not be applied as a result of the Preliminary Transactions or Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given herein.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R12 issued on April 1, 2021, and are binding on the CRA, provided that the Preliminary Transactions and Proposed Transactions, other than the filing of certain tax elections and filing articles of dissolution for DC Amalco, are completed no later than six (6) 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.
Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:
(a) the PUC of any share or the ACB or FMV of any property referred to herein;
(b) the balance of the CDA, GRIP, ERDTOH or NERDTOH of any corporation;
(c) any other tax consequence relating to the facts, the transactions described in this letter, additional information, or any transaction or event taking place either prior to the transactions described in this letter or subsequent thereto;
(d) whether any of the transactions described in this letter 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. Furthermore, the operation of a price adjustment clause may invalidate one or more of the rulings provided. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1 Price Adjustment Clauses.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
For Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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