2025 Ruling 2024-1011351R3 - Multi-wing split-up gross asset 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 exception to the application of subsection 55(2) provided in paragraph 55(3)(b) will apply to the proposed transactions.

Position: Yes.

Reasons: Conditions for application have been met and the "butterfly denial rules" in subsection 55(3.1) do not apply.

XXXXXXXXXX 									2024-101135

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers described herein.

This letter is based solely on the facts, proposed transactions, additional information and purposes of the proposed transactions described below. Any documentation submitted in respect of your request does not form part of the facts, proposed transactions or additional information unless specifically reproduced therein and any references to documentation are provided solely for the convenience of the reader.

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 tax return of the taxpayer or a related person and:

i. being considered by the CRA in connection with such return;

ii. under objection by the taxpayer or a related person; or

iii. the subject of a current or completed court process involving the taxpayer or a related person; or

(b) the subject of an advance income tax ruling request previously considered by the Income Tax Rulings Directorate of the CRA in connection with the taxpayer or a person related to the taxpayer.

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

XXXXXXXXXX

Unless otherwise stated:

(a) each 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.) (the “Act”), as amended to the date of this letter;

(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 should be read as 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 (as defined below) will be referred to as follows:

“Act 1” means the XXXXXXXXXX Corporations Act XXXXXXXXXX;

“Act 2” means the XXXXXXXXXX Corporations XXXXXXXXXX;

“adjusted cost base” or “ACB” means “adjusted cost base” as defined in section 54;

“agreed amount” means the amount agreed to by the transferor and the transferee in respect of the transfer of eligible property in a joint election filed pursuant to subsection 85(1);

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

“Articles” means, in relation to a particular corporation, the constating documents of the corporation;

“Canco” means XXXXXXXXXX, a corporation resident in Canada and incorporated under Act 1;

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

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

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

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

“Child 1” means XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Child 1 is the child of Parent and is the sibling of Child 2;

“Child 2” means XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Child 2 is the child of Parent and is the sibling of Child 1;

“CRA” means Canada Revenue Agency;

“DC” means XXXXXXXXXX, a corporation existing under Act 1;

“DC Class A Shares” means the Class A preference shares of DC, as described in Paragraph 2(b);

“DC Class A Share Redemption Amount” means the per-share redemption amount of a DC Class A Share, as described in Paragraph 2(b);

“DC Class B Shares” means the Class B preference shares of DC, as described in Paragraph 2(c);

“DC Class B Share Redemption Amount” means the per-share redemption amount of a DC Class B Share, as described in Paragraph 2(c);

“DC Class C Shares” means the Class C preference shares of DC, as described in Paragraph 2(d);

“DC Class C Share Redemption Amount” means the per-share redemption amount of a DC Class C Share, as described in Paragraph 2(d);

“DC Class D Shares” means the Class D preference shares of DC, as described in Paragraph 2(e);

“DC Class D Share Redemption Amount” means the per-share redemption amount of a DC Class D Share, as described in Paragraph 2(e);

“DC Common Shares” means the common shares of DC, as described in Paragraph 2(a);

“DC Realco” means XXXXXXXXXX, a private corporation existing under Act 1 and a wholly owned subsidiary of DC;

“DC Special Shares” means the special shares of DC, as described in Paragraph 2(f);

“DC Special Share Redemption Amount” means the per-share redemption amount of a DC Special Share, as described in Paragraph 2(f);

“DC Transfer 1” refers to the transfer of property by DC to TC1 as described in Paragraph 57 to Paragraph 60;

“DC Transfer 2” refers to the transfer of property by DC to TC2 as described in Paragraph 61 to Paragraph 64;

“DC Transfers” means the DC Transfer 1 and DC Transfer 2, collectively;

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

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

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

“Effective Date” means the effective date of the Proposed Transactions;

“eligible dividend” has the meaning assigned by subsection 89(14);

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

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

“Exchange 1” means the XXXXXXXXXX;

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

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

“forgiven amount” has the meaning assigned by subsection 80(1) or 80.01(1);

“Fund 1” means XXXXXXXXXX;

“Fund 2” means XXXXXXXXXX;

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

“Investco A” means XXXXXXXXXX, a XXXXXXXXXX private holding corporation;

“Investco B” means XXXXXXXXXX, a Canadian private corporation offering XXXXXXXXXX services existing under Act 2. DC owns less than XXXXXXXXXX% of the issued common shares of Investco B. A corporation controlled by Child 2 also owns XXXXXXXXXX% of Investco B’s issued shares;

“Investco E” means XXXXXXXXXX, a non-share capital corporation continued under the federal laws of Canada and a registered charity under the Act. XXXXXXXXXX;

“Investco F” means XXXXXXXXXX, a Canadian private corporation. TC1 owns less than XXXXXXXXXX% of the issued shares of Investco F;

“ITAR” means the Income Tax Application Rules, R.S.C. 1985, c. 2 (5th Supp.) as amended to the date hereof;

“LP I” means XXXXXXXXXX, an XXXXXXXXXX limited partnership that provides XXXXXXXXXX in Canada;

“LP II” means XXXXXXXXXX, an XXXXXXXXXX limited partnership;

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

“Newco 1” means a corporation to be incorporated by TC1 under Act 1, as provided in Paragraph 40;

“Newco 1 Common Shares” means the common shares of Newco 1, as described in Paragraph 42(a);

“Newco 1 Preferred Shares” means the preferred shares of Newco 1, as described in Paragraph 42(b);

“Newco 1 Redemption Note” means the non-interest bearing demand promissory note to be issued by Newco 1 to DC on the redemption of the Newco 1 Preferred Shares owned by DC, as described in Paragraph 65;

“Newco 2” means a corporation to be incorporated by TC2 under Act 1, as provided in Paragraph 41;

“Newco 2 Common Shares” means the common shares of Newco 2, as described in Paragraph 42(a);

“Newco 2 Preferred Shares” means the preferred shares of Newco 2, as described in Paragraph 42(b);

“Newco 2 Redemption Note” means the non-interest bearing demand promissory note to be issued by Newco 2 to DC on the redemption of the Newco 2 Preferred Shares owned by DC, as described in Paragraph 66;

“Newcos” means Newco 1 and Newco 2, collectively;

“NRPubco” means XXXXXXXXXX, a XXXXXXXXXX public company, the ordinary shares of the capital stock of which are traded on the XXXXXXXXXX, controlled by Investco A;

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

“Paragraph” means a numbered paragraph in this letter;

“Parent” refers to XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Parent is the parent of Child 1 and Child 2;

“Parent Loan” means the non-interest bearing loan, payable on demand and owing from DC to Parent, as described in Paragraph 8;

“Parent Loan 1” means the non-interest bearing loan, payable on demand and owing from DC to Parent, as described in Paragraph 49(a);

“Parent Loan 2” means the non-interest bearing loan, payable on demand and owing from DC to Parent, as described in Paragraph 49(b);

“Parent Loan 3” means the non-interest bearing loan, payable on demand and owing from DC to Parent, as described in Paragraph 49(c);

“Parent New Loan” means the non-interest bearing loan, payable on demand and owing from DC to Parent in the amount of $XXXXXXXXXX, as described in Paragraph 43;

“Post V-day” means properties that are not “pre V-day” properties;

“Pre-1972 CSOH” means “pre-1972 capital surplus on hand” and has the meaning assigned by subsection 88(2.1);

“Pre V-day” means properties owned or deemed to be owned prior to V-day;

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

“proceeds of disposition” or “POD” means “proceeds of disposition” as defined in section 54;

“Proposed Transactions” means the proposed transactions described in Paragraph 38 to Paragraph 77;

“Pubco1” means XXXXXXXXXX, a Canadian public corporation, the common shares of the capital stock of which are traded on Exchange 1;

“Pubco1 Post V-day Shares” has the meaning assigned by Paragraph 7(c)ii;

“Pubco1 Pre V-day Pool 1 Shares” has the meaning assigned by Paragraph 7(c)i;

“Pubco1 Pre V-day Pool 2 Shares’ has the meaning assigned by Paragraph 7(c)i;

“Pubco2” means XXXXXXXXXX, a Canadian public corporation, the common shares of the capital stock of which are traded on Exchange 1;

“REIT” means XXXXXXXXXX;

“related person” has the meaning assigned by subsection 251(2);

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

“safe income dividend” means a taxable dividend or that portion of a taxable dividend received by a corporation (as part of a transaction or event or a series of transactions or events) on a share of the capital stock of another corporation that does not exceed the income earned or realized (as determined for purposes of section 55) by any corporation after 1971 and before the safe-income determination time that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at FMV, immediately before the dividend, of that share;

“safe-income determination time” has the meaning assigned by subsection 55(1);

“series of transactions or events” has the meaning assigned by subsection 248(10);

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

“stated capital” in respect of the share capital of a corporation, has the meaning assigned by the statute by which the corporation is governed;

“Subco1A” means XXXXXXXXXX, a corporation incorporated under Act 1 and a wholly owned subsidiary of DC;

“Subco1A receivable” means the non-interesting bearing, due on demand amount receivable by Subco1A and owing from TC1 in the amount of approximately $XXXXXXXXXX;

“Subco1A Shares” has the meaning assigned by Paragraph 6;

“Subco1B” means XXXXXXXXXX, a corporation incorporated by DC under Act 1 as described in Paragraph 36;

“Subco1B Common Shares” has meaning assigned by Paragraph 36;

“Subco2A” means XXXXXXXXXX, a corporation incorporated under Act 1 and a wholly owned subsidiary of DC;

“Subco2A receivable” means the non-interesting bearing, due on demand amount receivable by Subco2A and owing from TC2 in the amount of approximately $XXXXXXXXXX;

“Subco2A Shares” has the meaning assigned by Paragraph 6;

“Subco2B” means XXXXXXXXXX, a corporation incorporated by DC under Act 1 as described in Paragraph 37;

“Subco2B Common Shares” has meaning assigned by Paragraph 37;

“Subcos” means collectively, Subco1A, Subco1B, Subco2A and Subco2B;

“Subsidiary Advances” means the non-interest bearing receivable, payable on demand and owing from DC to each of Subco1A and Subco2A, as described in Paragraph 8;

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

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

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

“TCs” means TC1 and TC2, collectively;

“TC1” means XXXXXXXXXX, a corporation existing under Act 1;

“TC1 Advance” means the non-interesting bearing, due on demand amount receivable by DC and owing from TC1, as described in Paragraph 7(j);

“TC1 New Preferred Shares” means the new class of preferred shares of TC1 described in Paragraph 39;

“TC2” means XXXXXXXXXX, a corporation existing under Act 1;

“TC2 Advance” means the non-interesting bearing, due on demand amount receivable by DC and owing from TC2, as described in Paragraph 7(j);

“Trust 1” means the XXXXXXXXXX as described in Paragraph 20;

“Trust 2” means the XXXXXXXXXX as described in Paragraph 26;

XXXXXXXXXX;

“V-day” means “valuation day” and has the meaning assigned by section 24 of the ITAR;

“wholly owned corporation” of a taxpayer means a corporation all of the issued and outstanding shares of the capital stock of which belong to the taxpayer;

“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 71.

FACTS

DC

1. DC is and will be, at any relevant time and for all purposes of the Act, a CCPC and a taxable Canadian corporation. DC is a private holding corporation that carries on a specified investment business. DC’s taxation year and fiscal period ends on XXXXXXXXXX of each year.

2. DC’s authorized share capital consists of:

(a) an unlimited number of common shares (the “DC Common Shares”),

(b) XXXXXXXXXX Class A preference shares (the “DC Class A Shares”) redeemable and retractable for $XXXXXXXXXX per share (the “DC Class A Share Redemption Amount”),

(c) XXXXXXXXXX Class B preference shares (the “DC Class B Shares”) that are redeemable and retractable for $XXXXXXXXXX per share (the “DC Class B Share Redemption Amount”),

(d) XXXXXXXXXX Class C preference shares (the “DC Class C Shares”) that are redeemable and retractable for $XXXXXXXXXX per share (the “DC Class C Share Redemption Amount”),

(e) XXXXXXXXXX Class D preference shares (the “DC Class D Shares”) that are redeemable and retractable for $XXXXXXXXXX per share (the “DC Class D Share Redemption Amount”) and

(f) an unlimited number of special shares (the “DC Special Shares”) that are redeemable and retractable for $XXXXXXXXXX per share (the “DC Special Share Redemption Amount”).

The DC Common Shares and DC Class B Shares are voting (each entitled to XXXXXXXXXX vote per share) and entitle the holder to discretionary dividends, except that the dividends paid on the DC Class A Shares are limited to a maximum of $XXXXXXXXXX per share, the dividends paid on the DC Class B Shares are limited to a maximum of XXXXXXXXXX% of the aggregate DC Class B Share Redemption Amount, the dividends paid on the DC Class C Shares and the DC Class D Shares are limited to a maximum of XXXXXXXXXX% of the aggregate DC Class C Share Redemption Amount and the aggregate DC Class D Share Redemption Amount, as the case may be, and the dividends paid on the DC Special Shares are limited to a maximum of $XXXXXXXXXX per share per year.

3. The current issued and outstanding share capital of DC consists of:

(a) XXXXXXXXXX DC Common Shares with an aggregate stated capital and PUC of $XXXXXXXXXX. TC1 owns XXXXXXXXXX DC Common Shares, which have an ACB to TC1 of $XXXXXXXXXX. TC2 owns XXXXXXXXXX DC Common Shares, which have an ACB to TC2 of $XXXXXXXXXX.

(b) XXXXXXXXXX DC Class B Shares, with an aggregate stated capital and PUC of $XXXXXXXXXX. Parent owns all of the XXXXXXXXXX DC Class B Shares, which have an ACB to Parent of $XXXXXXXXXX.

(c) XXXXXXXXXX DC Class D Shares, with an aggregate stated capital and PUC of $XXXXXXXXXX. Parent owns all of the XXXXXXXXXX DC Class D Shares, which have an ACB to Parent of $XXXXXXXXXX.

4. The shareholders of DC hold their shares of DC as capital property.

5. TC1, TC2 and Parent are resident in Canada for the purposes of the Act.

Assets, liabilities and tax accounts of DC

6. Prior to the Proposed Transactions, the majority of the FMV of DC’s properties consist of shares of Subco1A (the “Subco1A Shares”) and shares of Subco2A (the “Subco2A Shares”). Both Subco1A and Subco2A are wholly owned subsidiaries of DC. The majority of the FMV of Subco1A and Subco2A are derived from the ownership of shares of Investco A and NRPubco.

7. The other properties of DC consist of the following prior to the Proposed Transactions:

(a) Cash, guaranteed investment certificates, high interest savings accounts and term deposits;

(b) interest receivable;

(c) shares of Pubco1 including:

i. XXXXXXXXXX pre V-day common shares (the “Pubco1 Pre V-day Pool 1 Shares”) and XXXXXXXXXX pre V-day common shares (the “Pubco1 Pre V-day Pool 2 Shares”) of Pubco1. The Pubco1 Pre V-day Pool 1 Shares and the Pubco1 Pre V-day Pool 2 Shares were acquired in separate non-arm’s length transactions that were subject to subsection 26(5) of the ITAR. The ACB of each of the Pubco1 Pre V-Day Pool 1 Shares and the Pubco1 Pre V-Day Pool 2 Shares was maintained separately by DC for purposes of computing any capital gains or losses on the disposition of these shares.

ii. XXXXXXXXXX post V-day common shares (the “Pubco1 Post V-day Shares”) of Pubco1.

iii. XXXXXXXXXX Series I preferred shares, XXXXXXXXXX Series III preferred shares, XXXXXXXXXX Series IV preferred shares and XXXXXXXXXX Series V preferred shares.

(d) XXXXXXXXXX common shares of Pubco2;

(e) XXXXXXXXXX common shares of DC Realco;

(f) XXXXXXXXXX common shares of Investco B;

(g) XXXXXXXXXX units of LP I and XXXXXXXXXX units of LP II;

(h) various marketable securities consisting of shares and mutual fund units;

(i) approximately XXXXXXXXXX units of Fund 1 and XXXXXXXXXX units of Fund 2;

(j) amounts receivable of $XXXXXXXXXX owing from each of TC1 and TC2 (the “TC1 Advance” and the “TC2 Advance”);

(k) non-interest bearing, due on demand, amount receivable of $XXXXXXXXXX, owing from DC Realco;

(l) interest-bearing, fixed term note receivable from Investco E;

(m) interest-bearing, fixed term note receivable from Investco F; and

(n) recoverable amounts in respect of income taxes and government remittances.

8. The liabilities of DC consist of accounts payable and accrued liabilities, amounts owing to each of Subco1A and Subco1B (collectively the “Subsidiary Advances”) of approximately $XXXXXXXXXX, and approximately $XXXXXXXXXX owing to Parent (the “Parent Loan”).

9. DC makes regular repayments on the Parent Loan to fund Parent’s living expenses.

10. There has not been a material change in the composition of DC’s assets or liabilities described herein since XXXXXXXXXX (except as herein). Moreover, there will not be any material change in the composition of DC’s assets or liabilities (except as contemplated in the Proposed Transactions) from the date of this letter until the date the Proposed Transactions described herein are completed.

11. The estimated FMV of DC is estimated to be approximately $XXXXXXXXXX.

12. As at XXXXXXXXXX, DC had the following tax balances:

(a) ERDTOH – $XXXXXXXXXX;
(b) NERDTOH – $XXXXXXXXXX;
(c) GRIP – $XXXXXXXXXX; and
(d) CDA – $XXXXXXXXXX.

DC Realco

13. DC Realco is a taxable Canadian corporation and a CCPC. It is a wholly owned subsidiary of DC.

14. DC Realco owned and operated a XXXXXXXXXX, DC Realco sold its XXXXXXXXXX to Parent for consideration that consisted only of cash. A capital gain of $XXXXXXXXXX was realized on this disposition. Consequently, $XXXXXXXXXX was added to the DC Realco’s CDA.

15. DC Realco’s assets consist of cash of approximately $XXXXXXXXXX and other miscellaneous receivables and payables, including the amount of $XXXXXXXXXX due on demand to DC.

TC1

16. TC1 is and will be, at any relevant time and for all purposes of the Act, a CCPC and a taxable Canadian corporation. TC1 was incorporated under Act 1 on XXXXXXXXXX.

17. The issued and outstanding share capital of TC1 consists of the following:

(a) Class A common shares that are non-voting shares and are entitled to dividends when declared by the board of directors, subject to the limitation that a dividend cannot be paid if after the payment of the dividend the net FMV of TC1's assets would be reduced to an amount below the aggregate redemption amounts of all of TC1's issued and outstanding Class A and Class B Preference Shares.

(b) Class A Preference Shares that are voting shares (XXXXXXXXXX vote per share) and are entitled to a non-preferential, non-cumulative dividend not to exceed XXXXXXXXXX% per annum of the Redemption Amount of the issued Class A Preference Shares outstanding at the time the dividend is paid, subject to the limitation that a dividend cannot be paid if after the payment of the dividend the net FMV of TC1's assets would be reduced to an amount below the aggregate redemption amounts of all of TC1's issued and outstanding Class A and Class B Preference Shares. These shares are redeemable and retractable for the redemption amount of $XXXXXXXXXX per share (Redemption Amount). In the event of the liquidation, dissolution, wind-up, or other distribution of the assets of TC1, the Class A Preference Shares are entitled to receive their Redemption Amount pari passu with the holders of the Class B Preference Shares and in priority to any amount paid or distributed to the holders of any other class of shares.

(c) Class B Preference Shares that are voting (XXXXXXXXXX vote per share) and are entitled to a non-preferential, non-cumulative dividend not to exceed XXXXXXXXXX% per annum of the Redemption Amount of the issued Class B Preference Shares outstanding at the time the dividend is paid, subject to the limitation that a dividend cannot be paid if after the payment of the dividend the net FMV of TC1's assets would be reduced to an amount below the aggregate redemption amounts of all of TC1's issued and outstanding Class A and Class B Preference Shares. These shares are redeemable and retractable for the redemption amount equal to: (i) the FMV of the Class B common shares on the date of the articles of amendment (XXXXXXXXXX) in respect of which the Class B Preference Shares were issued less $XXXXXXXXXX, divided by (ii) XXXXXXXXXX, and subject to a price adjustment clause (Redemption Amount). In the event of the liquidation, dissolution, wind-up, or other distribution of the assets of TC1, the Class A Preference Shares are entitled to receive their Redemption Amount pari passu with the holders of the Class B Preference Shares and in priority to any amount paid or distributed to the holders of any other class of shares.

18. The current issued and outstanding shares of TC1 are XXXXXXXXXX Class A common shares owned by Trust 1, XXXXXXXXXX Class A Preference Shares owned by Child 1 and XXXXXXXXXX Class B Preference Shares owned by Child 1.

19. Child 1 has had de jure control of TC1 since its incorporation. The common shares of TC1 were issued to Trust 1 in XXXXXXXXXX as part of an estate freeze of Child 1’s shareholdings in TC1.

Trust 1

20. Trust 1 is resident in Canada and is a “personal trust” as defined in subsection 248(1). Trust 1 was settled by Parent in XXXXXXXXXX.

21. The trustee of Trust 1 is XXXXXXXXXX, a taxable Canadian corporation that is controlled by Child 1. The beneficiaries are Child 1, the issue of Child 1 and any corporations incorporated after the creation of Trust 1 that were wholly owned by XXXXXXXXXX or more of the individual beneficiaries, and trusts created after the creation of Trust 1 for the benefit of these persons.

TC2

22. TC2 is and will be, at any relevant time and for all purposes of the Act, a CCPC and a taxable Canadian corporation. TC1 was incorporated under Act 1 on XXXXXXXXXX.

23. The issued and outstanding share capital of TC2 consists of the following:

(a) Class A common shares that are non-voting shares and are entitled to dividends when declared by the board of directors, subject to the limitation that a dividend cannot be paid if after the payment of the dividend the net FMV of TC2's assets would be reduced to an amount below the aggregate redemption amounts of all of TC2's issued and outstanding Class A and Class B Preference Shares.

(b) Class A Preference Shares that are voting shares (XXXXXXXXXX vote per share) and are entitled to a non-preferential, non-cumulative dividend not to exceed XXXXXXXXXX% per annum of the Redemption Amount of the issued Class A Preference Shares outstanding at the time the dividend is paid, subject to the limitation that a dividend cannot be paid if after the payment of the dividend the net FMV of TC2's assets would be reduced to an amount below the aggregate redemption amounts of all of TC2's issued and outstanding Class A and Class B Preference Shares. These shares are redeemable and retractable for the redemption amount of $XXXXXXXXXX per share (Redemption Amount). In the event of the liquidation, dissolution, wind-up, or other distribution of the assets of TC2, the Class A Preference Shares are entitled to receive their Redemption Amount pari passu with the holders of the Class B Preference Shares and in priority to any amount paid or distributed to the holders of any other class of shares.

(c) Class B Preference Shares that are voting (XXXXXXXXXX vote per share) and are entitled to a non-preferential, non-cumulative dividend not to exceed XXXXXXXXXX% per annum of the Redemption Amount of the issued Class B Preference Shares outstanding at the time the dividend is paid, subject to the limitation that a dividend cannot be paid if after the payment of the dividend the net FMV of TC2's assets would be reduced to an amount below the aggregate redemption amounts of all of TC2's issued and outstanding Class A and Class B Preference Shares. These shares are redeemable and retractable for the redemption amount equal to: (i) the FMV of the Class B common shares on the date of the articles of amendment (XXXXXXXXXX) in respect of which the Class B Preference Shares were issued less $XXXXXXXXXX, divided by (ii) XXXXXXXXXX, and subject to a price adjustment clause (Redemption Amount). In the event of the liquidation, dissolution, wind-up, or other distribution of the assets of TC2, the Class A Preference Shares are entitled to receive their Redemption Amount pari passu with the holders of the Class B Preference Shares and in priority to any amount paid or distributed to the holders of any other class of shares.

24. The current issued and outstanding shares of TC2 are XXXXXXXXXX Class A common shares owned by Trust 2, XXXXXXXXXX Class A Preference Shares owned by Child 2 and XXXXXXXXXX Class B Preference Shares owned by Child 2.

25. Child 2 has had de jure control of TC2 since its incorporation. The common shares of TC2 were issued to Trust 2 in XXXXXXXXXX as part of an estate freeze of Child 2’s shareholdings in TC2.

Trust 2

26. Trust 2 is resident in Canada and is a “personal trust” as defined in subsection 248(1). Trust 2 was settled by Parent in XXXXXXXXXX.

27. The trustee of Trust 2 is XXXXXXXXXX, a taxable Canadian corporation that is controlled by Child 2. The beneficiaries are Child 2, the issue of Child 2 and any corporations incorporated after the creation of Trust 2 that were wholly owned by XXXXXXXXXX or more of the individual beneficiaries, and trusts created after the creation of Trust 2 for the benefit of these persons.

COMPLETED TRANSACTIONS

28. On XXXXXXXXXX, DC made a cash repayment of $XXXXXXXXXX to each of Subco1A and Subco2A in respect of the Subsidiary Advances. Subco1A and Subco2A used the cash received on this repayment to advance $XXXXXXXXXX of cash to each of TC1 and TC2, respectively. These advances by Subco1A and Subco2A to TC1 and TC2 are non-interest-bearing, payable on demand, and not convertible into other property.

29. On XXXXXXXXXX was loaned by Subco2A to TC2 and, on XXXXXXXXXX was loaned by Subco1A to TC1.

30. On XXXXXXXXXX, each of Subco1A and Subco2A increased the stated capital of the Subco1A Shares and the Subco2A Shares, held by DC, by $XXXXXXXXXX respectively. Each of Subco1A and Subco2A were deemed to pay a dividend on the Subco1A Shares and the Subco2A Shares, equal to the amount of the stated capital increase, pursuant to subsection 84(1). DC was deemed to receive dividends on its Subco1A Shares and Subco2A Shares in the aggregate amount of $XXXXXXXXXX. Subco1A and Subco2A each elected under subsection 83(2) for their respective dividends to be a capital dividend. Each of Subco1A and Subco2A filed the election and paid the appropriate late filing penalty computed under subsection 83(4).

31. On XXXXXXXXXX, DC increased the stated capital of the DC Common Shares, held by TC1 and TC2, by $XXXXXXXXXX. DC was deemed to pay a dividend on the DC Common Shares, equal to the amount of the stated capital increase, pursuant to subsection 84(1). TC1 and TC2 were each deemed to receive XXXXXXXXXX% of the total dividend. DC designated $XXXXXXXXXX of this dividend to be an eligible dividend in accordance with subsection 89(14). The remaining portion of the dividend was a non-eligible dividend. DC has applied for a dividend refund in the manner specified in paragraph 129(1)(b), equal to DC’s combined ERDTOH and NERDTOH balances of approximately $XXXXXXXXXX.

32. On XXXXXXXXXX, DC increased the stated capital of the DC Class D Shares, held by Parent, from $XXXXXXXXXX in aggregate to $XXXXXXXXXX in aggregate. DC was deemed to pay a dividend to Parent, equal to the amount of the stated capital increase of $XXXXXXXXXX, pursuant to subsection 84(1). DC elected under subsection 83(2) for this dividend to be a capital dividend. DC filed the election and paid the appropriate late filing penalty computed under subsection 83(4).

33. On XXXXXXXXXX, DC made a cash repayment of $XXXXXXXXXX on the Parent Loan. Parent used the cash to acquire the rental property from DC Realco, described in Paragraph 14.

34. On XXXXXXXXXX, DC made a cash repayment of $XXXXXXXXXX on the Subsidiary Advances ($XXXXXXXXXX on each Subsidiary Advance).

35. On XXXXXXXXXX, DC made a donation of Pubco1 Pre-V-day Pool 1 Shares to each of the XXXXXXXXXX in the amount of $XXXXXXXXXX. These donations were pursuant to agreements entered into with each of these registered charities between XXXXXXXXXX. For greater certainty, each of these registered charities deal at arm’s length with DC and persons related to DC.

36. On XXXXXXXXXX, Subco1B was incorporated under Act 1. Subco1B is a taxable Canadian corporation and a CCPC. The authorized share capital of Subco1B consists of the Subco1B Common Shares that are voting, participating shares, and include the right to receive dividends as and when declared by the board of directors, and to receive the remaining property of Subco1B on a liquidation, dissolution or on the winding-up of Subco1B. DC subscribed for XXXXXXXXXX Subco1B Common Shares for $XXXXXXXXXX.

37. On XXXXXXXXXX, Subco2B was incorporated under Act 1. Subco2B is a taxable Canadian corporation and a CCPC. The authorized share capital of Subco2B consists of the Subco2B Common Shares that are voting, participating shares, and include the right to receive dividends as and when declared by the board of directors, and to receive the remaining property of Subco2B on a liquidation, dissolution or on the winding-up of Subco2B. DC subscribed for XXXXXXXXXX Subco2B Common Shares for $XXXXXXXXXX.

PROPOSED TRANSACTIONS

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

Pre-Butterfly Transactions

38. DC will amend its Articles to provide that any distribution on the DC Class D Shares that reduces the stated capital of those shares will also reduce the redemption of those shares by an equivalent amount.

39. TC1 will amend its Articles to authorize the TC1 New Preferred Shares. The terms of the TC1 New Preferred Shares will include the following:

(a) non-voting;

(b) each share is redeemable and retractable at the time of redemption equal to the FMV of the property received by TC1 on the issuance of the TC1 New Preferred Shares (Redemption Amount), dividend by XXXXXXXXXX and subject to a price adjustment clause, plus any accrued and unpaid dividends;

(c) any distribution that reduces the stated capital will reduce the Redemption Amount by the amount distributed; and

(d) entitled to a non-cumulative dividend at the discretion of the directors, but not to exceed XXXXXXXXXX% of their Redemption Amount per annum.

40. TC1 will incorporate Newco 1 under Act 1 and subscribe for XXXXXXXXXX Newco 1 Common Shares for $XXXXXXXXXX. Newco 1 will be a taxable Canadian corporation and a CCPC.XXXXXXXXXX41. TC2 will incorporate Newco 2 under Act 1 and subscribe for XXXXXXXXXX Newco 2 Common Shares for $XXXXXXXXXX. Newco 2 will be a taxable Canadian corporation and a CCPC.XXXXXXXXXX42. The authorized share capital of each of the Newcos will consist of an unlimited number of:

(a) Newco Common Shares that carry XXXXXXXXXX vote per share. These shares will include the right to participate in and receive the remaining property on a liquidation, dissolution or on the winding-up of the corporation.

(b) Newco Preferred Shares that are non-voting, non-participating, and redeemable and retractable for the FMV amount of the property received on the issuance of all of the shares of that class that exceeds any liabilities assumed (Redemption Amount) dividend by XXXXXXXXXX. These shares are entitled to a non-cumulative dividend at the discretion of the board of directors, but not to exceed XXXXXXXXXX% per annum of the Redemption Amount.

43. DC will reduce the stated capital of its DC Class D Shares by an amount of $XXXXXXXXXX and will pay this amount in the form of the Parent New Loan, to Parent as the sole holder of the DC Class D Shares. Immediately following this transaction, the aggregate redemption amount, ACB and PUC of the DC Class D Shares, owned by Parent, will be $XXXXXXXXXX.

44. DC Realco will increase the stated capital of the common shares, held by DC, by an amount not greater than its CDA, immediately prior to the time of such increase in stated capital. DC Realco will be deemed to pay a dividend to DC, equal to the amount of the stated capital increase, pursuant to subsection 84(1). DC Realco will elect, pursuant to subsection 83(2), for this dividend to be a capital dividend.

45. DC will resolve to wind-up and dissolve DC Realco under the applicable provisions of Act 1. In connection with this dissolution:

(a) DC Realco will distribute all of its property to DC, and DC will assume all of DC Realco’s obligations which will consist of income taxes payable in relation to the disposition of the rental property, described in Paragraph 14;

(b) The amount, due on demand and owing from DC Realco to DC, described in Paragraph 15, will be settled by way of payment;

(c) Articles of dissolution will be filed and DC Realco will be formally dissolved after the filing and assessment of DC Realco’s XXXXXXXXXX T2 corporate income tax return.

46. DC will make a cash repayment of approximately $XXXXXXXXXX on the Parent Loan.

47. DC will make a cash repayment of approximately $XXXXXXXXXX to each of Subco1A and Subco1B to settle the Subsidiary Advances.

48. Parent will transfer all of their XXXXXXXXXX DC Class B Shares and all of their XXXXXXXXXX DC Class D Shares to TC1 for consideration consisting solely of XXXXXXXXXX TC1 New Preferred Shares, with an aggregate FMV equal to the aggregate FMV of the DC Class B Shares and DC Class D Shares transferred to TC1 by Parent at that time. In connection with this transfer:

(a) Parent and TC1 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 of the DC Class B Shares and DC Class D Shares to TC1.

(b) The agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

(c) The amount added to the stated capital account of the XXXXXXXXXX TC1 New Preferred Shares issued to Parent, will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, of the respective shares transferred to TC1, as the case may be; and (ii) the aggregate ACB to Parent immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

49. Parent will exchange the Parent Loan for three separate loans, the aggregate principal of which will be equal to the principal of the Parent Loan. Each of the three loans will be non-interest bearing and due on demand with a principal as follows:

(a) Parent Loan 1 – principal equal to the principal of the TC1 Advance at the time of the transaction referred to in Paragraph 57;

(b) Parent Loan 2 – principal equal to the principal of the TC2 Advance at the time of the transaction referred to in Paragraph 61;

(c) Parent Loan 3 – principal equal to the principal of the Parent Loan less the aggregate amount of the principal of the Parent Loan 1 and the Parent Loan 2.

50. DC will transfer the following properties to Subco1B:

(a) XXXXXXXXXX common shares of Investco B;
(b) XXXXXXXXXX units of LP I;
(c) XXXXXXXXXX units of LP II;
(d) XXXXXXXXXX common shares of Pubco2;
(e) approximately XXXXXXXXXX units of Fund 1;
(f) approximately XXXXXXXXXX units of Fund 2;
(g) XXXXXXXXXX Series I preferred shares of Pubco1;
(h) XXXXXXXXXX Series III preferred shares of Pubco1;
(i) XXXXXXXXXX Series IV preferred shares of Pubco1;
(j) XXXXXXXXXX Series V preferred shares of Pubco1;
(k) $XXXXXXXXXX note receivables from Investco E;
(l) $XXXXXXXXXX note receivable from Investco F;
(m) XXXXXXXXXX units of REIT;
(n) XXXXXXXXXX of the Pubco1 Pre V-day Pool 1 Shares;
(o) XXXXXXXXXX of the Pubco1 Pre V-day Pool 2 Shares; and
(p) XXXXXXXXXX% of the marketable securities described in Paragraph 7h).

DC will receive FMV consideration from Subco1B in the form of XXXXXXXXXX Subco1B Common Shares. In connection with this transfer:

(a) DC and Subco1B will jointly elect in prescribed form and manner within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the above properties.

(b) The agreed amount in respect of the disposition of the properties will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

(c) The amount added by Subco1B to the stated capital of the Subco1B Common Shares so issued will be equal to such agreed amount. For greater certainty, the amount added to the stated capital of the of the Subco1B Common Shares issued by Subco1B, as consideration for the properties it will receive, will not exceed the maximum amount that could be added to the aggregate PUC of such shares without a reduction taking place pursuant to subsection 85(2.1).

51. At the same time as the transfer referred to in Paragraph 50, DC will transfer the following properties to Subco2B:

(a) XXXXXXXXXX common shares of Investco B;
(b) XXXXXXXXXX units of LP I;
(c) XXXXXXXXXX units of LP II;
(d) XXXXXXXXXX common shares of Pubco2;
(e) approximately XXXXXXXXXX units of Fund 1;
(f) approximately XXXXXXXXXX units of Fund 2;
(g) XXXXXXXXXX Series I preferred shares of Pubco1;
(h) XXXXXXXXXX Series III preferred shares of Pubco1;
(i) XXXXXXXXXX Series IV preferred shares of Pubco1;
(j) XXXXXXXXXX Series V preferred shares of Pubco1;
(k) $XXXXXXXXXX note receivables from Investco E;
(l) $XXXXXXXXXX note receivable from Investco F;
(m) XXXXXXXXXX units of REIT;
(n) XXXXXXXXXX of the Pubco1 Pre V-day Pool 1 Shares
(o) XXXXXXXXXX of the Pubco1 Pre V-day Pool 2 Shares; and
(p) XXXXXXXXXX% of the marketable securities described in Paragraph 7h).

DC will receive FMV consideration from Subco2B in the form of XXXXXXXXXX Subco2B Common Shares. In connection with this transfer:

(a) DC and Subco2B will jointly elect in prescribed form and manner within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the above properties.

(b) The agreed amount in respect of the disposition of the properties will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

(c) The amount added by Subco2B to the stated capital of the Subco2B Common Shares so issued will be equal to such agreed amount. For greater certainty, the amount added to the stated capital of the of the Subco2B Common Shares issued by Subco2B, as consideration for the properties it will receive, will not exceed the maximum amount that could be added to the aggregate PUC of such shares without a reduction taking place pursuant to subsection 85(2.1).

52. Immediately prior to the DC Transfers:

(a) DC will transfer to Subco1B, for XXXXXXXXXX Subco1B Common Share, a portion of the Pubco1 Post V-day Shares, such that immediately following the DC Transfers, the FMV of all investment property (as determined in Paragraph 56) so transferred directly or indirectly to TC1 will be equal to or approximate the proportion determined by the formula described in Paragraph 58; and

(b) DC will transfer to Subco2B for XXXXXXXXXX Subco2B Common Share, a portion of the Pubco1 Post V-day Shares, such that immediately following the DC Transfers, the FMV of all investment property (as determined in Paragraph 56) so transferred directly or indirectly to TC2 will be equal to or approximate the proportion determined by the formula described in Paragraph 62.

DC will make a joint election under subsection 85(1) with each of Subco1B and Subco2B, where applicable, in prescribed form and within the time limits prescribed by subsection 85(6) with respect to each property transferred. The agreed amount for the purposes of the election for each such property will be equal to the cost amount of the property. For greater certainty, the amount that will be added to the stated capital of the Subco1B Common Shares and Subco2B Common Shares issued to DC will not exceed the amount that could be added to the PUC of such shares having regard to subsection 85(2.1).

53. Following the transfers of property from DC to Subco1B and Subco2B in Paragraphs 50 to 52:

(a) the issued and outstanding Subco1B Common Shares will have an aggregate FMV equal to the aggregate FMV of the property transferred by DC to Subco1B in Paragraphs 50 and 52(a), and

(b) the issued and outstanding Subco2B Common Shares will have an aggregate FMV equal to the aggregate FMV of the property transferred by DC to Subco2B in Paragraphs 51 and 52(b).

54. Reserved.

Butterfly Transactions

55. DC has significant influence over the Subcos. Consequently, the consolidated look-through method will apply for determining the appropriate proportion of each of the three types of property that the shares of, or amounts receivable from any corporation over which DC exercises significant influence.

56. Immediately prior to the DC Transfers described in Paragraph 57 to 64, the property of DC and the Subcos will be classified into the following types of property for purposes of the definition of distribution, provided in subsection 55(1), as follows:

(a) cash or near-cash property, comprising all of the current assets of DC and the Subcos, including cash, accounts receivable, short term investments, interest receivable and income taxes receivable;

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

(c) business property, comprising property, other than cash or near cash or investment property.

For purposes of determining the types of property owned by DC immediately prior to the DC Transfers:

(d) it is anticipated that DC and the Subcos will not own any business property immediately prior to the DC Transfers;

(e) DC will not have significant influence over any corporations, partnerships or trusts other than the Subcos;

(f) tax accounts or other tax related amounts of DC and the Subcos, such as CDA, GRIP, Pre-1972 CSOH, capital losses, NERDTOH or ERDTOH, if any, will not be considered property;

(g) advances owing by DC to a Subco will be excluded as an asset of the particular Subco;

(h) advances that have a term of less than 12 months or are due on demand will be considered cash or near-cash property; and

(i) for the purposes of determining the FMV of each type of property of DC, the FMV of the shares held by DC in each of the Subcos will be allocated among the three types of property described above, by multiplying the FMV of the shares of the particular corporation by the proportion that the FMV of each type of property owned by the particular corporation (as determined in accordance with the methodologies described in this Paragraph) is of the aggregate FMV of all of the property owned by such corporation (as determined in accordance with the methodologies described in this Paragraph).

57. Immediately following the classification of DC’s types of property, DC will transfer the following properties to Newco 1 (the “DC Transfer 1”):

(a) the TC1 Advance;

(b) all of the Subco1A Shares;

(c) all of the Subco1B Shares; and

(d) a proportionate share of DC’s cash and near-cash property;

58. Immediately following the DC Transfer 1, the FMV of each type of property transferred to Newco 1 will be equal to or approximates that proportion of each type of property determined by the formula:

A x B / C

Where:

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

B is the aggregate FMV, immediately before the DC Transfers, of all of the shares of the capital stock of DC, owned at that time by TC1; and

C is the aggregate FMV, immediately before the DC Transfers, of all the issued and outstanding shares of the capital stock of DC.

For the purpose of this Paragraph, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed 1%, determined as a percentage of the FMV of each type of property that Newco 1 will receive as compared to what Newco 1 would have received (or DC would have retained) had it received (or retained) its appropriate proportion of the FMV of that type of property of DC.

59. As consideration for the property transferred on the DC Transfer 1:

(a) Newco 1 will assume its proportionate share of the liabilities of DC, its proportionate share of both the Parent Loan 3 and the Parent New Loan, as well as the entire Parent Loan 1. Consequently, the amount of the liabilities assumed by Newco 1 will equal the proportion of the aggregate amount of the liabilities of DC, determined immediately before the DC Transfers, that:

i. the aggregate FMV, immediately before the DC Transfers, of the shares of the capital stock of DC held by the Newcos, as applicable

is of

ii. the aggregate FMV, immediately before the DC Transfers, of all of the issued and outstanding shares of the capital stock of DC; and

(b) Newco 1 will issue to DC XXXXXXXXXX Newco 1 Preferred Shares with a FMV equal to the aggregate FMV of the property transferred under the DC Transfer 1, less the aggregate amount of liabilities assumed by Newco 1 in connection with the DC Transfer 1. For greater certainty, the Newco 1 Preferred Shares will be taxable preferred shares and short-term preferred shares, which will be held by DC as capital property.

60. In respect of the DC Transfer 1:

(a) DC will jointly elect with Newco 1 in the prescribed form and manner and within the time specified in subsection 85(6), to have subsection 85(1) apply in respect of the transfer of each eligible property of DC (other than the TC1 Advance) transferred by DC to Newco 1. The agreed amount in respect of each such capital property will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

(b) For greater certainty, the amount of liabilities that are allocated by DC to a particular property that is subject to an election under subsection 85(1), and that are assumed by Newco 1, will not exceed the agreed amount for that particular property in accordance with paragraph 85(1)(b). The amount of liabilities assumed by Newco 1, which are allocated by DC to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of any such property.

(c) Newco 1 will add an amount to the stated capital of the Newco 1 Preferred Shares equal to the amount by which the aggregate cost to Newco 1 of the properties transferred to Newco 1 (determined pursuant to subsection 85(1), where relevant) exceeds the aggregate amount of the liabilities assumed by Newco 1 on the DC Transfer 1. For greater certainty, the amount that will be added to the stated capital of the Newco 1 Preferred Shares will not exceed the amount that could have been added, having regard to subsection 85(2.1).

61. Immediately following the classification of DC’s types of property, DC will transfer the following properties to Newco 2 (the “DC Transfer 2”):

(a) the TC2 Advance;

(b) all of the Subco2A Shares;

(c) all of the Subco2B Shares; and

(d) a proportionate share of DC’s cash and near-cash property;

62. Immediately following the DC Transfer 2, the FMV of each type of property transferred to Newco 2 will be equal to or approximates that proportion of each type of property determined by the formula:

A x B / C

Where:

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

B is the aggregate FMV, immediately before the DC Transfers, of all of the shares of the capital stock of DC, owned at that time by TC2; and

C is the aggregate FMV, immediately before the DC Transfers, of all the issued and outstanding shares of the capital stock of DC.

For the purpose of this Paragraph, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed 1%, determined as a percentage of the FMV of each type of property that Newco 2 will receive as compared to what Newco 2 would have received (or DC would have retained) had it received (or retained) its appropriate proportion of the FMV of that type of property of DC.

63. As consideration for the property transferred on the DC Transfer 2:

(a) Newco 2 will assume its proportionate share of the liabilities of DC, its proportionate share of both the Parent Loan 3 and the Parent New Loan, as well as the entire Parent Loan 2. Consequently, the amount of the liabilities assumed by Newco 2 will equal the proportion of the aggregate amount of the liabilities of DC, determined immediately before the DC Transfers, that:

i. The aggregate FMV, immediately before the DC Transfers, of the shares of the capital stock of DC held by the Newcos, as applicable

is of

ii. the aggregate FMV, immediately before the DC Transfers, of all of the issued and outstanding shares of the capital stock of DC; and

(b) Newco 2 will issue to DC XXXXXXXXXX Newco 2 Preferred Shares with a FMV equal to the aggregate FMV of the property transferred under the DC Transfer 2, less the aggregate amount of liabilities assumed by Newco 2 in connection with the DC Transfer 2. For greater certainty, the Newco 1 Preferred Shares will be taxable preferred shares and short-term preferred shares, which will be held by DC as capital property.

64. In respect of the DC Transfer 2:

(a) DC will jointly elect with Newco 2 in the prescribed form and manner and within the time specified in subsection 85(6), to have subsection 85(1) apply in respect of the transfer of each eligible property of DC (other than the TC2 Advance) transferred by DC to Newco 2. The agreed amount in respect of each such capital property will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

(b) For greater certainty, the amount of liabilities that are allocated by DC to a particular property that is subject to an election under subsection 85(1), and that are assumed by Newco 2, will not exceed the agreed amount for that particular property in accordance with paragraph 85(1)(b). The amount of liabilities assumed by Newco 2, which are allocated by DC to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of any such property.

(c) Newco 2 will add an amount to the stated capital of the Newco 2 Preferred Shares equal to the amount by which the aggregate cost to Newco 2 of the properties transferred to Newco 2 (determined pursuant to subsection 85(1), where relevant) exceeds the aggregate amount of the liabilities assumed by Newco 2 on the DC Transfer 2. For greater certainty, the amount that will be added to the stated capital of the Newco 2 Preferred Shares will not exceed the amount that could have been added, having regard to subsection 85(2.1).

65. Newco 1 will redeem from DC, the XXXXXXXXXX Newco 1 Preferred Shares owned by DC for an amount equal to their aggregate Redemption Amount and FMV. As consideration therefor, Newco 1 will issue to DC the Newco 1 Redemption Note with a principal amount and FMV equal to the aggregate redemption amount of the shares so redeemed. DC will accept the Newco 1 Redemption Note as payment in full for the aggregate redemption amount of the Newco 1 Preferred Shares so redeemed.

66. Newco 2 will redeem from DC, the XXXXXXXXXX Newco 2 Preferred Shares owned by DC for an amount equal to their aggregate Redemption Amount and FMV. As consideration therefor, Newco 2 will issue to DC the Newco 2 Redemption Note with a principal amount and FMV equal to the aggregate redemption amount of the shares so redeemed. DC will accept the Newco 2 Redemption Note as payment in full for the aggregate redemption amount of the Newco 2 Preferred Shares so redeemed.

67. TC1 will resolve to wind-up and dissolve Newco 1 under the applicable provisions of Act 1. In the course of the winding-up, Newco 1 will distribute all of its property to TC1, and TC1 will assume all of Newco 1’s obligations, including the amount owing to DC under the Newco 1 Redemption Note, the amount owing on the Parent Loan 1, and its proportionate share of the Parent Loan 3 and the Parent New Loan assumed on the DC Transfer 1 referred to in Paragraph 59.

The TC1 Advance will be extinguished and cancelled. TC1 will elect, pursuant to subsection 80.01(4), for the amount paid on the settlement of the TC1 Advance to be deemed to equal Newco 1’s cost amount of the TC1 Advance. Articles of dissolution will then be filed and Newco 1 will be formally dissolved. The subsection 80.01(4) election will be filed in prescribed form on or before the filing due date for TC1’s T2 corporate income tax return for the year that includes the time the TC1 Advance is extinguished.

68. TC2 will resolve to wind-up and dissolve Newco 2 under the applicable provisions of Act 1. In the course of the winding-up, Newco 2 will distribute all of its property to TC2, and TC2 will assume all of Newco 2’s obligations, including the amount owing to DC under the Newco 2 Redemption Note, the amount owing on the Parent Loan 2, and its proportionate share of the Parent Loan 3 and the Parent New Loan assumed on the DC Transfer 2 referred to in Paragraph 63.

The TC2 Advance will be extinguished and cancelled. TC2 will elect, pursuant to subsection 80.01(4), for the amount paid on the settlement of the TC2 Advance to be deemed to equal Newco 2’s cost amount of the TC2 Advance. Articles of dissolution will then be filed and Newco 2 will be formally dissolved. The subsection 80.01(4) election will be filed in prescribed form on or before the filing due date for TC2’s T2 corporate income tax return for the year that includes the time the TC2 Advance is extinguished.

69. TC1 and TC2 will resolve to wind-up and dissolve DC in accordance with the provisions of Act 1. In the course of the winding-up of DC, DC will:

(a) assign and distribute the Newco 1 Redemption Note to TC1; and

(b) assign and distribute the Newco 2 Redemption Note to TC2,

which will represent all or substantially all of the property owned by DC and all of the liabilities of DC, immediately before the winding-up of DC. As a result of the assignment and distribution of these redemption notes, the obligation under such redemption notes will be extinguished and cancelled.

70. For the purposes of the Act, and in particular subsection 84(2), the FMV of the Newco 1 Redemption Note, received by TC1, and the Newco 2 Redemption Note, received by TC2, will be allocated among the classes of shares of DC held by TC1 or TC2, as the case may be, based on the relative aggregate FMV of the shares of each class of DC held by TC1 (i.e. the DC Class B Shares, DC Class D Shares, and DC Common Shares) and by TC2 (i.e. the DC Common Shares).

71. To the extent that there is a positive balance in the CDA of DC immediately prior to the winding-up of DC, DC will elect, in the manner and form required under subsection 83(2), to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend paid on the issued and outstanding DC Common Shares immediately before the winding-up. Pursuant to subparagraph 88(2)(b)(iv), TC1 and TC2 will each be deemed to have received a proportionate capital dividend from DC.

72. To the extent that there is a positive GRIP balance remaining in DC at the time of the winding-up of DC, DC will designate, pursuant to subsection 89(14), to treat a portion of the dividend referred to in subparagraph 88(2)(b)(iii) arising on the winding up of DC, which is deemed to be a separate taxable dividend, to be an eligible dividend by notifying each of the TCs in writing, in a timely manner, that the dividend is an eligible dividend.

73. Immediately after the distribution of the redemption notes described in Paragraph 69, but before the formal dissolution of DC, DC will not own or acquire any property or carry on any activity or undertaking.

74. Upon receipt of any dividend refund to which DC may become entitled as a result of the Proposed Transactions, DC will immediately transfer the cash received in the form of a dividend refund to each of the TCs. An agreement will be prepared whereby TC1 and TC2 will agree that such dividend refund and all other property or liabilities of DC, if any, not known by this time will be subsequently shared between TC1 and TC2 on the basis that each of TC1 and TC2 will receive, with respect to any property of a particular type, its proportionate share thereof, and with respect to any liability, its proportionate share thereof, determined as described in Paragraph 58 and Paragraph 62.

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

Post Butterfly Transactions

76. TC1 will redeem from Parent, all of the TC1 New Preferred Shares owned by Parent for an amount equal to the Redemption Amount of such shares. In consideration therefor, TC1 will issue to Parent cash and a non-interest bearing demand promissory note with a principal amount and FMV equal to the difference, if any, between the Redemption Amount and the cash received by Parent for the redemption of the TC1 New Preferred Shares.

77. Reserved.

ADDITIONAL INFORMATION

78. Parent will have de jure control of DC prior to the commencement of the Proposed Transactions.

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

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

81. None of the property received by the TCs on the winding-up of the Newcos, described in Paragraphs 67 and 68, will be acquired by a person unrelated to the TCs, or by a partnership, as part of a series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(c).

82. None of the corporations referred to herein is or will be, at any time during the series of transactions or events that includes the Proposed Transactions, a specified financial institution, a restricted financial institution or a corporation described in any of the paragraphs (a) to (f) of the definition of financial intermediary corporation.

83. During the implementation of the Proposed Transactions, none of the shares of the corporations referred to herein will be:

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

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

(c) the subject of a dividend rental arrangement;

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

(e) issued for consideration that is or includes:

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

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

84. DC’s CDA does not and will not, at any time, include any amount that is described in paragraphs 83(2.4)(a) through (e).

85. To the best of DC’s knowledge, DC does not have any Pre-1972 CSOH.

86. Each of the Newcos will have the financial capacity to honour, upon presentation for payment, the amount payable under the Newco 1 Redemption Note and the Newco 2 Redemption Note, as the case may be.

87. The dividend to be received by each of TC1 and TC2 on the DC Common Shares, as described in Paragraph 31, will be a safe income dividend.

88. The Proposed Transactions will not result in any of the taxpayers being unable to pay existing tax liabilities.

PURPOSE OF THE PROPOSED TRANSACTIONS

89. The purpose of the Proposed Transactions is to divide the assets of DC among its shareholders, being Parent, Child 1 and Child 2, so that each of these shareholders can independently pursue their investment and estate planning objectives. The transactions are intended to achieve this purpose in a tax-deferred manner.

RULINGS

Provided that the above statements of Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions are accurate and constitute a complete disclosure of all relevant information and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, subsection 85(1) will apply to:

(a) The transfer, by Parent, of the DC Class B Shares and DC Class D Shares, owned by Parent, to TC1, described in Paragraph 48;

(b) The transfer, by DC, of property to Newco 1, under the DC Transfer 1, described in Paragraphs 57 to 60; and

(c) The transfer, by DC, of property to Newco 2, under the DC Transfer 2, described in Paragraph 61 to 64,

such that the agreed amount in respect of each such transfer will be deemed to be the transferor’s proceeds of disposition of the particular property and the transferee’s cost thereof.

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

B. Subsection 84(3) will apply on the redemption of the:

(a) Newco 1 Preferred Shares held by DC, as described in Paragraph 65, to deem Newco 1 to have paid and DC to have received, a dividend on such shares equal to the amount, if any, by which the amount paid by Newco 1 on the redemption of the Newco 1 Preferred Shares exceeds the aggregate PUC in respect of such shares immediately before the redemption;

(b) Newco 2 Preferred Shares held by DC, as described in Paragraph 66, to deem Newco 2 to have paid and DC to have received, a dividend on such shares equal to the amount, if any, by which the amount paid by Newco 2 on the redemption of the Newco 2 Preferred Shares exceeds the aggregate PUC in respect of such shares immediately before the redemption;

C. Subsection 84(2) and paragraph 88(2)(b) will apply on the winding-up of DC such that:

(a) subject to (b) and (c) herein, DC will be deemed to have paid a dividend on each particular class of the outstanding shares of DC at the time property is distributed or appropriated by DC equal to the amount by which:

(i) the amount or value of the funds or property distributed or appropriated, as the case may be, on that particular class,

exceeds

(ii) the amount, if any, by which the PUC in respect of that class is reduced on the distribution or appropriation, and

each of the TCs will be deemed to have received a dividend at that time equal to that proportion of the amount of the excess that the number of the shares of that particular class held by each TC immediately before that time is of all the issued and outstanding shares of that particular class;

(b) such portion of the winding-up dividend that does not exceed the CDA of DC immediately before the payment of the winding-up dividend will, pursuant to subparagraph 88(2)(b)(i), be deemed for the purposes of an election in respect thereof under subsection 83(2), to be the full amount of a separate dividend; and

(c) pursuant to subparagraph 88(2)(b)(iii), the portion of the winding-up dividend that exceeds the amount of the separate capital dividend referred to in (b) for which DC makes an election under subsection 83(2) will be deemed to be a separate dividend that is a taxable dividend.

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

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

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

(c) will be excluded in determining the recipient corporation’s proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of proceeds of disposition in section 54;

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

(e) will not be subject to tax under Part IV except, as provided in paragraph 186(1)(b), to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid a taxable dividend described in Rulings B and C above.

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

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

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

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

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

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

(d) an acquisition of property in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(e) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or 55(3.1)(d),

which has not been described in this letter, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings B and C above, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

F. Provided the election referred to in subsection 80.01(4) is filed in a timely manner, the cancellation of the TC1 Advance as a result of the wind-up of Newco 1, as described in Paragraph 67, and to the cancellation of the TC2 Advance as a result of the wind-up of Newco 2, as described in Paragraph 68, will not give rise to a “forgiven amount” as defined in subsection 80(1).

G. The extinguishment of the Newco 1 Redemption Note and the Newco 2 Redemption Note, as described in Paragraph 69, will not, in and of itself, give rise to a forgiven amount. In addition, none of DC, or the TCs will otherwise realize a gain or incur any loss as a result of such extinguishment.

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

I. The provisions of subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R12 issued on April 1, 2022, and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter or within the time specified in this letter.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

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, pre-1972 CSOH, ERDTOH, and NERDTOH of a corporation referred to herein;

(c) the income earned or realized by a corporation as defined in subsection 55(5);

(d) the attribution of income earned or realized 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); and

(e) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

An advance income tax ruling, in and of itself, obtained from the CRA by a person for whom a tax benefit could result from an avoidance transaction or series of transactions that includes an avoidance transaction, is not to be considered contractual protection, as that term is defined in subsection 237.1(1), in respect of the avoidance transaction or series.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purposes of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, the operation of a price adjustment clause may invalidate one or more 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,

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Manager, Reorganizations Section II
For Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch