2025 Ruling 2024-1011001R3 - Double wing Split-Up Butterfly

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

Principal Issues: 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								2024-101100

XXXXXXXXXX, 2025

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your request dated XXXXXXXXXX, for an advance income tax 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;

(b) being considered by the Canada Revenue Agency in connection with such return;

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

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

(e) the subject of a ruling previously considered by the Income Tax Rulings Directorate.

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

XXXXXXXXXX

Unless otherwise stated:

(a) 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”);

(b) all terms and conditions used in this letter that are defined in the Act have the meaning given in such definition;

(c) all references to monetary amounts are in Canadian dollars; and

(d) the singular is to be read as the plural and vice versa where the circumstances so require.

Definitions

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions will be referred to as follows:

“ACB” means “adjusted cost base” and has the meaning assigned by section 54;

“Act2” means the XXXXXXXXXX;

“agreed amount” means the amount that a transferor and a transferee have agreed on in a joint election under subsection 85(1) in respect of the transfer of an eligible property;

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

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

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

“Child 1” means XXXXXXXXXX, a Canadian resident and a child of Principal 1 and Spouse 1.

“Child 2” means XXXXXXXXXX, a Canadian resident and a child of Principal 1 and Spouse 1.

“Child 3” means XXXXXXXXXX, a Canadian resident and a child of Principal 1 and Spouse 1.

“CRA” refers to the Canada Revenue Agency;

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

“DC” means XXXXXXXXXX;

“DC Class A Common Shares” means the Class A common shares in the capital stock of DC, described in Paragraph 12;

“DC Class B Common Shares” means the Class B common shares in the capital stock of DC, described in Paragraph 12;

“DC Transfer” means the transfer of properties described in Paragraph 28;

“DC Winding-up Dividend” means the dividend arising on the winding-up of DC by virtue of subsection 84(2) and paragraph 88(2)(b), as described in Paragraph 40 and Ruling C.

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

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

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

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

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

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

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

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

“TC1” means XXXXXXXXXX;

“TC2” means XXXXXXXXXX;

“Principal 1” means XXXXXXXXXX, a Canadian resident individual;

“Principal 2” means XXXXXXXXXX, a Canadian resident individual;

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

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

“Proposed Transactions” means the transactions described in Paragraphs 23 to 42;

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

“related persons” has the meaning assigned by subsection 251(1), as modified by subsection 55(5), where applicable;

XXXXXXXXXX;

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

“specified shareholder” has the meaning assigned by subsection 248(1), as modified for specific purposes by subsections 55(3.3) and 55(3.4);

“Spouse 1” means XXXXXXXXXX, a Canadian resident individual;

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

“stated capital account” refers to an account that a corporation is required to maintain for each class and series of its share capital, issued in accordance with the Act2;

“Taxpayers” refers collectively to XXXXXXXXXX, TC1, and TC2;

“TC1 Sub” means a wholly-owned subsidiary of TC1 incorporated under the Act2, as described in Paragraph 23;

“TC1 Sub Butterfly Shares” means the TC1 Sub Class B Preferred Shares in the capital stock of TC1 Sub, as described in Paragraph 23;

“TC2 Sub” means a wholly-owned subsidiary of TC2 incorporated under the Act2, as described in Paragraph 24;

“TC2 Sub Butterfly Shares” means the TC2 Class B Preferred Shares in the capital stock of TC2 Sub, as described in Paragraph 24;

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

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

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

“Trust 1” means the XXXXXXXXXX, that was settled in XXXXXXXXXX and is further described below;

“Trust 2” means the XXXXXXXXXX, that was settled in XXXXXXXXXX and is further described below.

Facts

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

1. TC1 is a CCPC and a taxable Canadian corporation incorporated under Act2.

2. The authorized share capital of TC1 consists of:

(a) XXXXXXXXXX Class A common non-voting, participating shares;

(b) XXXXXXXXXX Class B common non-voting, participating shares;

(c) XXXXXXXXXX Class C common non-voting, participating shares;

(d) XXXXXXXXXX Class D common non-voting, participating shares;

(e) XXXXXXXXXX Class E common non-voting, participating shares;

(f) XXXXXXXXXX Class F common non-voting, participating shares;

(g) XXXXXXXXXX Class G common voting, participating shares;

(h) XXXXXXXXXX Class H preferred non-voting, participating shares;

(i) XXXXXXXXXX Class I preferred non-voting, participating shares;

(j) XXXXXXXXXX Class J preferred non-voting, participating shares;

(k) XXXXXXXXXX Class K preferred non-voting, participating shares;

(l) XXXXXXXXXX Class L preferred non-voting, participating shares;

(m) XXXXXXXXXX Class M preferred non-voting, participating shares;

(n) XXXXXXXXXX Class N preferred voting, participating shares.

3. The issued and outstanding shares of TC1’s capital stock are as follows:

(a) XXXXXXXXXX Class A common shares held by Trust 1

(b) XXXXXXXXXX Class B common shares held by Principal 1

(c) XXXXXXXXXX Class C common shares issued held by Spouse 1

(d) XXXXXXXXXX Class D common shares issued, held by Trust 1

(e) XXXXXXXXXX Class E common shares issued, held by Trust 1

(f) XXXXXXXXXX Class F common shares issued, held by Trust 1

(g) XXXXXXXXXX Class G common shares issued, held by Principal 1

(h) XXXXXXXXXX Class H common shares held by Principal 1

(i) XXXXXXXXXX Class H common shares held by Spouse 1

(j) XXXXXXXXXX Class I common shares held by Principal 1

(k) XXXXXXXXXX Class I common shares held by Spouse 1

(l) XXXXXXXXXX Class J common shares held by Child 1

(m) XXXXXXXXXX Class J common shares held by Child 2

(n) XXXXXXXXXX Class J common shares held by Child 3

4. TC2 is a CCPC and a taxable Canadian corporation. Trust 2 is the sole shareholder of TC2.

5. Each of Trust 1 and Trust 2 is resident in Canada for purposes of the Act.

6. Principal 1 and Spouse1 are the trustees of Trust 1.

7. Principal 2 is the sole trustee of Trust 2.

8. Principal 1 and Principal 2 are not related persons within the meaning of subsection 251(2) and (6) and deal with each other at arm’s length for the purposes of the Act.

9. DC was incorporated on XXXXXXXXXX under Act2.

10. DC is a CCPC and a taxable Canadian corporation. DC has a taxation year end for purposes of the Act of XXXXXXXXXX.

11. The authorized share capital of DC consists of:

(a) XXXXXXXXXX Class A common voting, participating shares;

(b) XXXXXXXXXX Class B common voting, participating shares;

(c) XXXXXXXXXX Class C common voting, participating shares;

(d) XXXXXXXXXX Class D common non-voting, participating shares.

12. The Class A, B, and C common shares are voting and participating shares with the right to receive dividends as and when declared by the board of directors, and to receive the remaining property of DC on a liquidation, dissolution or on the winding-up of DC.

The Class D common shares are non-voting shares with the right to receive dividends as and when declared by the board of directors, and to receive the amount paid to acquire the shares from the corporation, on a liquidation, dissolution or on the winding-up of DC. In the case of a liquidation, dissolution or winding-up, the holders of Class D common shares have the right to receive the amount paid up and all declared and unpaid cash dividends on the shares in priority to the rights of other shareholders.

13. The issued and outstanding shares of DC’s capital stock are as follows:

	Shareholder		Share			PUC		ACB		FMV
	TC2			XXXXX DC 		XXXXX		XXXXX		XXXXX
       			Class A
       			Common Shares
	TC1			XXXXX DC		XXXXX		XXXXX		XXXXX
				Class B
				Common Shares

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

15. DC does not have a unanimous shareholders agreement. None of DC, TC1 and TC2 are related to each other for the purposes of the Act.

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

17. DC is in the business of XXXXXXXXXX.

18. DC does not exercise significant influence over any corporation.

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

(a) ERDTOH balance of $XXXXXXXXXX;

(b) NERDTOH balance of $ XXXXXXXXXX;

(c) CDA balance of $XXXXXXXXXX; and

(d) GRIP balance of $ XXXXXXXXXX;

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

(a) Current assets including cash and term deposits, trade account receivable, prepaid expenses and income taxes receivable;

(b) Non-interest bearing note receivable;

(c) Land and buildings used in its operations;

(d) XXXXXXXXXX; and

(e) Equipment.

The land owned by DC is held as capital property. A particular portion of the land (the “Subject Land”) was previously held as inventory and some or all of the accrued gain on that particular portion relates to the period during which it was held as inventory of DC.

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

(a) Current liabilities, which include accounts payable and accrued liabilities; and

(b) Long term debt which includes an interest bearing loan payable secured by land and buildings;

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

PROPOSED TRANSACTIONS

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

Incorporation of TC1 Sub and TC2 Sub

23. TC1 Sub will be incorporated pursuant to Act2. The authorized share capital of TC1 Sub will consist of:

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

(b) unlimited Class B preferred shares without par value.

The Class A common shares will have the following rights and restrictions:

(a) voting;

(b) participating with the right to receive dividends as and when declared by the board of directors;

(c) entitled to receive the remaining property of TC1 upon any liquidation, dissolution or winding-up of the company, subject to the rights of the Class B preferred shareholders.

The Class B preferred shares (“TC1 Sub Butterfly Shares”) will have the following rights and restrictions:

(a) voting;

(b) redeemable by the company and retractable by the shareholder;

(c) entitled to receive a non-cumulative dividend calculated on their redemption price if and when declared by the board of directors;

(d) in the case of a liquidation, dissolution or winding-up, the holders of Class B Preference Shares have the right to receive the redemption price of such shares in priority to the rights of other shareholders.

Upon incorporation, TC1 will subscribe for Class A common shares in the capital stock of TC1 Sub for an aggregate subscription price of a $XXXXXXXXXX. Subsequent to incorporation, TC1 Sub will be wholly owned by TC1. TC1 Sub will be a CCPC and a taxable Canadian corporation.

24. TC2 Sub will be incorporated pursuant to Act2. The authorized share capital of TC2 Sub will consists of:

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

(b) unlimited Class B preferred shares without par value.

The Class A common shares will have the following rights and restrictions:

(a) voting;

(b) participating with the right to receive dividends as and when declared by the board of directors; and

(c) entitled to receive the remaining property of TC2 upon any liquidation, dissolution or winding-up of the company, subject to the rights of the Class B preferred shareholders.

The Class B preferred shares (“TC2 Sub Butterfly Shares”) will have the following rights and restrictions:

(a) voting;

(b) redeemable by the company and retractable by the shareholder;

(c) entitled to receive a non-cumulative dividend calculated on their redemption price if and when declared by the board of directors;

(d) in the case of a liquidation, dissolution or winding-up, the holders of Class B Preference Shares have the right to receive the redemption price of such shares in priority to the rights of other shareholders.

Upon incorporation, TC2 will subscribe for Class A common shares in the capital stock of TC2 Sub for an aggregate subscription price of a $XXXXXXXXXX. Subsequent to incorporation, TC2 Sub will be wholly owned by TC2. TC2 Sub will be a CCPC and a taxable Canadian corporation.

Types of Property

25. Immediately before the transfers of property described in Paragraph 28 (the “DC Transfer”), the property owned by DC will be classified into the following three types of property for the purpose of the definition “distribution” in subsection 55(1):

(a) cash or near-cash property, comprised of all the current assets of DC, including cash, short-term deposits, accounts receivable, inventory, income taxes receivable, and prepaid expenses;

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

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

26. For the purposes of the DC Transfer:

(a) DC will not have any investment property at the time of the DC Transfer;

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

(c) amounts owing to DC, including amounts payable on demand, amounts owing by shareholders and any amounts that have a term of less than 12 months, will be considered cash or near-cash property;

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

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

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

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

(a) all current liabilities, including demand debts XXXXXXXXXX will be allocated to each cash or near-cash property of DC in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property of DC;

(b) liabilities of DC, other than those described in Paragraph 27(a), that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property, if any, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein, and;

(c) if any liabilities remain after the allocations described in Paragraphs 27(a) and 27(b) are made, such remaining liabilities will then be allocated to the cash or near-cash property and business property of DC, on the basis of the relative net FMV of each type of property immediately prior to the allocation of such remaining liabilities, but after the allocation of the liabilities as described in Paragraphs 27(a) and 27(b).

DC Transfer

28. Immediately following the determination of the net FMV of each type of property of DC, as described in Paragraphs 25 through 27, DC will contemporaneously transfer to each of TC1 Sub and TC2 Sub, a pro rata share of the net FMV of each type of property owned by it at that time, such that immediately following the transfer of the properties and the assumption of DC’s liabilities as described in Paragraph 29, the aggregate net FMV of each type of property transferred by DC to TC1 Sub or TC2 Sub, as the case may be, will be equal to or approximate that proportion of each type of property determined by the formula: A × B/C, where:

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

B is the FMV, immediately before the DC Transfer, of all the shares of DC owned, at that time, by TC1 and TC2, as the case may be; and

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

For the purposes of this Paragraph, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of each type of property that TC1 Sub and TC2 Sub will receive on the DC Transfer as compared to what it would have received had it received its exact pro rata share of the net FMV of that type of property.

29. As consideration for the property transferred by DC to TC1 Sub and TC2 Sub, each of TC1 Sub and TC2 Sub, as the case may be, will:

(a) assume such liabilities of DC, as appropriate, so that each of TC1 Sub and TC2 Sub will receive a pro rata share of the net FMV of each type of property owned by DC; and

(b) issue to DC, TC1 Sub Butterfly Shares or TC2 Sub Butterfly Shares, respectively which will have an aggregate FMV and redemption amount equal to the amount by which the aggregate FMV of the DC Transfer, exceeds the aggregate amount of the liabilities of DC assumed by TC1 Sub and TC2 Sub, as the case may be, in connection with the DC Transfer, as described in Paragraph 29(a).

30. On the DC Transfer, DC will dispose of a one-half interest in the Subject Land at its fair market value to each of TC1 Sub and TC2 Sub. The amount by which the fair market value of the Subject Land exceeds its cost will be reported by DC as income.

31. DC will jointly elect with TC1 Sub and TC2 Sub, as the case may be, in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property by DC to TC1 Sub or TC2 Sub. The agreed amount in respect of each eligible property so transferred will not be greater than the FMV of such property nor will it be less than the FMV, at the time of disposition, of the consideration therefor other than shares of the capital stock of TC1 Sub or TC2 Sub, as the case may be. In addition, the amount of the liabilities of DC assumed by TC1 Sub or TC2 Sub, as the case may be, which are allocated to a particular eligible property that is subject to an election under subsection 85(1), will not exceed the agreed amount for that particular property.

32. For greater certainty, the agreed amount in respect of each such eligible property will not be:

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

(b) in the case of depreciable property of a prescribed class, an amount that is less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).

33. Each of TC1 Sub and TC2 Sub, as the case may be, will add to its respective stated capital account for the Butterfly Shares, an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to such TC Sub, less (b) the aggregate amount of DCs liabilities assumed by such TC Sub as described in Paragraph 29(a). For greater certainty, the amount to be added to the stated capital account of each of TC1 Sub and TC2 Sub for the Butterfly Shares issued as partial consideration for the property transferred to it on the DC Transfer will not exceed the maximum amount that could be added to the PUC (stated capital) of such shares without a reduction taking place pursuant to subsection 85(2.1).

Redemption of TC1 Sub Butterfly Shares and TC2 Sub Butterfly Shares

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

35. Simultaneously with the redemption described in Paragraph 34, TC2 Sub will redeem all of the issued TC2 Sub Butterfly Shares owned by DC for an amount equal to the aggregate redemption amount of such shares. As consideration therefor, TC2 Sub will issue the TC2 Sub Redemption Note to DC, which will have a principal amount and FMV equal to the aggregate redemption amount of the TC2 Sub Butterfly Shares so redeemed. DC will accept the TC2 Sub Redemption Note as payment in full for the TC2 Sub Butterfly Shares so redeemed.

Winding-up of TC1 Sub and TC2 Sub

36. Immediately following the share redemptions described in Paragraphs 34 and 35 above, TC1 Sub and TC2 Sub’s shareholders, as the case may be, will each pass a Special Resolution to wind-up and dissolve their respective TC Sub under the applicable provisions of Act1.

37. All properties of TC1 Sub and TC2 Sub will be distributed and all liabilities of TC1 Sub and TC2 Sub, if any, will be either discharged or assumed by its TC. In connection with the winding-up, the TC1 Sub Redemption Note will be assumed by TC1 and the TC2 Sub Redemption Note will be assumed by TC2.

38. Articles of Dissolution for each of TC1 Sub and TC2 Sub will be filed within a reasonable period of time in accordance with the provisions of Act2.

39. Any excess dividend refund or refund of overpayment of taxes for TC1 Sub and TC2 Sub current taxation year to which TC1 Sub and TC2 Sub becomes entitled in the course of the Proposed Transactions described herein or otherwise will be distributed, as part of the winding-up process.

Winding-up of DC

40. Immediately after the winding-up of the TC Subs, the shareholders of DC, being TC1 and TC2, will resolve to wind-up and dissolve DC in accordance with the provisions of Act2. In connection with the winding up:

(a) the TC1 Sub Redemption Note and the TC2 Sub Redemption Note will be assigned and distributed to TC1 and TC2, respectively. As a result of the assignment and distribution of the TC1 Sub Redemption Note and the TC2 Sub Redemption Note, the obligation of each of TC1 and TC2 under the respective notes will be extinguished and the notes will be cancelled.

(b) any residual assets of DC, including the rights to any tax refunds, will be assigned and distributed pro rata to each of TC1 and TC2; and

(c) any residual liabilities of DC will be assumed pro rata by each of TC1 and TC2.

41. To the extent that there is a positive balance in the CDA of DC immediately prior to the distribution of the TC1 Sub Redemption Note and the TC2 Sub Redemption Note described in Paragraph 40, DC will elect, in the prescribed manner and prescribed form required under subsection 83(2), to treat the portion of the DC Winding-up Dividend referred to in subparagraph 88(2)(b)(i) as a capital dividend.

42. To the extent that DC has GRIP at the time of the winding-up and immediately prior to the distribution of the TC1 Sub Redemption Note and TC2 Sub Redemption Note described in Paragraph 40, DC will designate a portion of the DC Winding-up Dividend referred to in subparagraph 88(2)(b)(iii) to be an eligible dividend by notifying each of TC1 and TC2 in writing within the time prescribed in subsection 89(14) that the portion of such dividend is an eligible dividend.

ADDITIONAL INFORMATION

43. There has not been an acquisition or disposition of shares of DC by a specified shareholder as part of the series of transactions or events that includes the dividends that arise in the course of the Proposed Transactions.

44. Except as described in this letter, no property has been or will be acquired by DC, in contemplation of, and before the DC Transfer, other than as described in subparagraphs 55(3.1)(a)(i) to (iv).

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

46. Except as described herein, no property transferred to any corporation in the course of the reorganization contemplated herein will, thereafter, be transferred directly or indirectly, to an unrelated person or a partnership in the circumstances described in paragraph 55(3.1)(c).

47. None of DC, TC1 and TC2 are, or will be at any time during the series of transactions or events that includes the Proposed Transactions, a specified financial institution, a restricted financial institution or a corporation described in any of paragraphs (a) to (f) of the definition of financial intermediary corporation in subsection 191(1).

48. None of the shares of the capital stock of DC, TC1 or TC2 will be, at any time prior to the completion of the Proposed Transactions:

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

(b) the subject of a dividend rental arrangement within the meaning of subsection 112(2.3);

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

(d) issued for consideration that is or includes:

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

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

(iii) a share that is issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

49. Immediately before the redemption of the TC1 Sub Butterfly Shares and the TC2 Sub Butterfly Shares held by DC as described in Paragraphs 34 and 35, TC1 Sub and TC2 will be connected with DC pursuant to paragraph 186(4)(b).

50. The dividends resulting from the redemption of the TC1 Sub Butterfly Shares and the TC2 Butterfly Shares held by DC, as the case may be, will be excluded dividends for the purposes of Part VI.1.

51. Immediately before the commencement of the winding-up of DC, as described in Paragraph 40, DC will be connected with each of TC1 and TC2, as the case may be, within the meaning of subsection 186(4).

52. Each of TC1 and TC2 will have a substantial interest in DC immediately before the winding-up of DC, such that the taxable dividends resulting from the winding-up of DC that are deemed to be received by TC1 and TC2, as the case may be, will be excluded dividends for the purposes of Part VI.1.

PURPOSE OF THE PROPOSED TRANSACTIONS

53. The purpose of the proposed transactions is to separate, on a tax-deferred basis, the assets owned by DC to allow the shareholders to independently manage their pro rata share of the assets of DC without requiring the consent of the other shareholder.

RULINGS GIVEN

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

A. Subject to the application of subsection 69(11), provided 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 the transfers of each eligible property owned by DC to each of TC1 Sub and TC2 Sub as part of the DC Transfers, as described in Paragraph 28, 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.

B. On the redemption by each of TC1 Sub and TC2 Sub of its TC1 Butterfly Shares or TC2 Butterfly Shares, as the case may be, owned by DC as described in Paragraphs 34 and 35, by virtue of paragraphs 84(3)(a) and (b), each of TC1 Sub and TC2 Sub will be deemed to have paid, and DC will be deemed to have received, a dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of such shares of that TC Sub exceeds the aggregate PUC in respect of the Butterfly Shares immediately before such redemption.

C. Subsection 84(2) and paragraph 88(2)(b) will apply to the distributions by DC described in Paragraphs 40 to 42 such that:

(a) subject to paragraphs (b), (c) and (d) below, DC will be deemed to have paid a dividend (the “Winding-Up Dividend”) on the particular class of shares held by each of TC1 and TC2, as the case may be, equal to the amount, if any, by which:

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

exceed

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

and each of TC1 and TC2 will be deemed to have received a dividend on such class equal to that proportion of the amount of the excess that the number of shares of that class held by each of TC1 and TC2, as the case may be, immediately before the distribution is of the number of shares of that class outstanding immediately before the distributions;

(b) to the extent that the CDA of DC has a positive balance immediately prior to its winding up, pursuant to subparagraph 88(2)(b)(i), such portion of the Winding-Up Dividend as does not, in aggregate, exceed DC’s CDA (if any) immediately before the payment of such dividend will be deemed, for purposes of the election under subsection 83(2), to be the full amount of a separate dividend;

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

(d) pursuant to subparagraph 88(2)(b)(iv), each of TC1 and TC2 will be deemed to have received its proportionate share of the dividends described in (b) and (c) above.

D. A dividend described in Rulings B and C that is a taxable dividend:

(a) will, pursuant to subsection 82(1) and paragraph 12(1)(j), be included in computing the income of the person 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 the shares so redeemed or purchased;

(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).

E. Provided that as part of the series of transactions or events that includes any of the Proposed Transactions, there is not an acquisition or disposition of property not disclosed herein that 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),

then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings B and C above.

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

G. Subsection 245(2) will not be applied as a result of the Proposed Transactions to re-determine the tax consequences confirmed in the rulings given above.

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 Proposed Transactions are completed no later than six (6) months after the date of this letter.

Other comments

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) the allocation of safe income attributable to any share of any corporation referred to herein (see generally, CRA documents 2020-0861031C6 and 2021-0889611E5 and the paper titled “CRA Update on Subsection 55(2) and Safe Income – Where Are We Now” delivered to the Canadian Tax Foundation on December 22, 2023, for guidance on the allocation of safe income on a corporate reorganization);

(d) 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;

(e) 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