1998 Ruling 9802483 - 21-YEAR RULE - ESTATE FREEZE MADE BY A TRUST

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Proposed reorganization to mitigate the tax consequences of the 21-year deemed disposition rule that would otherwise apply on January 1, 1999 to the Estate. The beneficiaries under the Estate are the Daughter, Grandchild #1 and Grandchild #2. The children (some of whom are minors) of Grandchild #1 and Grandchild #2 also have contingent capital interests in the Estate if their parents predecease the Daughter. Grandchild #1 and Grandchild #2 have XXXXXXXXXX vested interests in the Estate. The Estate will use 85(1) to exchange the existing property of the Estate for new classes of preferred and common shares of newly incorporated corporations and by using 85(1)(g), will isolate all the ACB of the transferred property into one class of preferred shares. The common shares will then be exchanged for a second class of preferred shares with all the accrued gains using 51(1). The first class of preferred shares with a FMV equal to the ACB will remain in the Estate. The second class of preferred shares with all the accrued gains will then be exchanged for non-voting non-participating common shares using 85(1) of newly incorporated corporations and these common shares will be distributed to Grandchild #1 and Grandchild #2 using 107(2). The Estate will continue to control the property by owning the voting common shares of the corporations. Nonvoting participating common shares with nominal value (with the future growth) wilt be issued to a new trust (Newtrust). The beneficiaries under Newtrust are the same as under the Estate except that Grandchild #1 will only have a XXXXXXXXXX % interest in Newtrust and the other XXXXXXXXXX % interest will be held by a new family trust (Family Trust) which will be created for the benefit of Grandchild #1, his children and grandchildren only if Grandchild #1 survives the Daughter. There is in effect a partial estate freeze in favour of new persons (Family Trust for the benefit of Grandchild #1's children and grandchildren). The main issues are as follows:

1. Will the exchange of the existing property of the Estate for shares of newly incorporated corporations result in the transfer of the Estate's ACB of the transferred property to the first class of preferred shares pursuant to 85(1)(g)?

2. Will the distribution of the non-voting non-participating common shares with all the accrued gains to Grandchild #1 and Grandchild #2 be deemed to occur at the cost amount pursuant to 107(2)?

3. Will Grandchild #1 be deemed to have disposed of a portion of his capital interest in the Estate as a result of the proposed transactions?

4. Will 74.4(2) apply to the Estate, Grandchild #1, Grandchild #2 or the Daughter with respect to the exchanges described above?

5. Will 75(2) apply to attribute income, losses, taxable capital gains or allowable capital losses of Family Trust to Grandchild #1?

6. Will GAAR apply?

Position: 1. Yes 2. Yes. 3. No, provided that Grandchild #1 does not transfer property directly or indirectly by means of a trust or by any other means whatever to Family Trust. 4. No. 5. No, provided that Grandchild #1 does not transfer property directly or indirectly by means of a trust or by any other means whatever to Family Trust. 6. No.

Reasons: 1. 85(1)(g) specifically provides that the cost is allocated first to any preferred shares. 2. Distribution by the trust in satisfaction of the beneficiary's capital interest in the Estate. 3. No, transfer subject to the discussion below.

4. Conditions in 74.4(4) are satisfied. 5. No, transfer subject to the discussion below. 6. 85(1)(g) specifically provides that the cost is allocated first to any preferred shares. Distribution of the non-voting non-participating common shares with all the accrued gains to the beneficiaries not offensive given that any gain would be realized when the beneficiaires subsequently disposed of or are deemed to dispose of the shares. This result was contemplated when the 21 year rule was re-enacted in 1995. Estate freezes are acceptable in policy terms.

XXXXXXXXXX
XXXXXXXXXX 980248
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the abovenoted trust and beneficiaries under the trust in respect of the income tax consequences arising out of the proposed transactions described below. We also acknowledge your correspondence of XXXXXXXXXX.

To the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:

(a) in an earlier return of the taxpayers or related persons;

(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;

(c) under objection by the taxpayers or related persons;

(d) before the courts; or

(e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons.

In this letter, the following terms have the meanings specified:

(a) Unless otherwise indicated, all statute references are to the Canadian Income Tax Act and Regulations (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act");

(b) "Adjusted cost base" has the meaning assigned by section 54 of the Act;

(c) "Agreed amount" has the meaning assigned by subsection 85(1) of the Act;

(d) XXXXXXXXXX;

(e) "Capital property" has the meaning assigned by section 54 of the Act;

(f) "Cost amount" has the meaning assigned by subsection 248(1) of the Act unless otherwise specified;

(g) "Daughter" means XXXXXXXXXx;

(h) "Estate" means the trust created by the terms of XXXXXXXXXX will;

(i) "Foundation" means the XXXXXXXXXX;

(j) "Grandchild" currently means XXXXXXXXXX individually;

(k) "Grandchild #1" means XXXXXXXXXX;

(l) "Grandchild #2" means XXXXXXXXXX;

(m) "Grandchildren" currently means XXXXXXXXXX collectively;

(n) "Great-grandchildren" currently means XXXXXXXXXX collectively;

(o) "ITAR" refers to the Income Tax Application Rules;

(p) "Mr. A" means XXXXXXXXXX;

(q) "Opcol" and "Holdcol" mean XXXXXXXXXX respectively;

(r) "Opco2" and "Holdco2" mean XXXXXXXXXX respectively;

(s) "Paid-up capital" has the meaning assigned by subsection 89(1) of the Act;

(t) "Proceeds of disposition" has the meaning assigned by section 54 of the Act;

(u) "Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(v) "Trustees" means XXXXXXXXXX; and

(w) "V-day" means the expression "valuation day" and has the meaning assigned by section 24 of the ITAR.

The names and addresses of the taxpayers who are parties to this ruling request, as well as the tax services office or tax centre where their returns are filed, are listed in Schedule A.

Our understanding of the relevant facts, proposed transactions and purposes thereof is as follows:

FACTS

1. The Estate is a "testamentary trust" (other than a spousal trust) as defined in subsection 108(1) of the Act, and a "personal trust" as defined in subsection 248(1) of the Act.

2. The Estate was created in Mr. A's will and as a consequence of his death. No property has been received by the Estate from any person other than Mr. A. Mr. A died on XXXXXXXXXX.

3. The Estate has a taxation year of XXXXXXXXXX.

4. The Estate is resident in XXXXXXXXXX. It files its tax returns at the XXXXXXXXXX Taxation Centre.

5. Mr. A is survived by his Daughter, his Grandchildren and Great-grandchildren. The Daughter is currently XXXXXXXXXX years of age. There are currently XXXXXXXXXX Grandchildren who are age XXXXXXXXXX or more. There are currently XXXXXXXXXX Great-grandchildren, XXXXXXXXXX of whom (both children of Grandchild #1) are less than XXXXXXXXXX years of age. The Daughter, the Grandchildren and the Greatgrandchildren are all Canadian residents.

6. Pursuant to the terms of the Estate:

(a) The Daughter is entitled to receive all of the income of the Estate during her lifetime; the Trustees have the discretion to encroach on capital of the Estate at any time in favour of the Daughter and the Grandchildren;

(b) Upon the death of the Daughter, the Estate property will be divided into two shares, one for each Grandchild; such share will be paid to the Grandchildren at that time;

(c) The Great-grandchildren have contingent interests in the Estate; if one of the Grandchildren predeceases the Daughter, his or her share will be held for his or her children in equal shares and paid to them at age 21. If one of the Grandchildren predeceases the Daughter leaving no children, his or her share will go to other Grandchild, unless he or she has died, in which case it will be divided equally amongst his or her children and distributed to them at age 21; and

(d) If the Daughter dies leaving no children or grandchildren her surviving, the residue of the Estate shall be paid to the Foundation.

7. The Estate's assets consist of publicly traded securities that are held as capital property. Some of the securities were held on V-day. The Estate has not made an election pursuant to subsection 26(7) of the ITAR.

8. The Estate will be deemed to have disposed of its assets on January 1, 1999. An election was made pursuant to subsection 104(5.3) of the Act to defer the XXXXXXXXXX deemed disposition with the filing of its XXXXXXXXXX tax return. Such election was filed before March, 1995.

PROPOSED TRANSACTIONS

9. The Estate will make a capital encroachment to each Grandchild consisting of securities having a fair market value (“FMV") of approximately $XXXXXXXXXX (i.e., $XXXXXXXXXX in the aggregate) and a nominal adjusted cost base ("ACB") in satisfaction of part of their capital interests in the Estate.

10. Each of Opco1, Opco2, Holdco1 and Holdco2 will be taxable Canadian corporations which will be incorporated pursuant to the XXXXXXXXXX by the solicitors for the Estate subscribing for XXXXXXXXXX class A voting non-participating common shares (as described below) for an aggregate subscription price of $XXXXXXXXXX following which these shares will be sold to the Estate for their subscription price (thereby giving the Estate voting control)

11. Opco1 and Opco2 will have the following authorized capital:

(a) XXXXXXXXXX class A voting non-participating common shares having a par value of $XXXXXXXXXX per share. The class A common shares will be entitled to receive only their par value on a wind-up or liquidation, after the issued class A preferred and class B preferred shares have received their redemption amounts;

(b) XXXXXXXXXX class B non-voting participating common shares, entitled to such non-cumulative dividends as the directors shall declare, provided that no dividends may be declared on the class B common shares if doing so would reduce the value of the net assets of the company to an amount which is less than the aggregate of the redemption amounts of the issued class A preferred and class B preferred shares. The class B common shares will be entitled to receive, on a liquidation or wind-up, the residual value of the company after the class A preferred and class B preferred have received their redemption amounts and the class A common shares have received their par value;

(c) XXXXXXXXXX class A non-voting redeemable retractable preferred shares having a par value and redemption amount of $XXXXXXXXXX per share, entitled to such noncumulative dividends as the directors may declare, but not exceeding XXXXXXXXXX% of their aggregate redemption amount. The class A preferred shares will be entitled to receive, on liquidation or wind-up, in priority to the liquidation entitlement of the class A and class B common shares, an amount equal to the lesser of:

i) their redemption amount; and

ii) the amount obtained by dividing the total redemption amount of the issued class A preferred shares by the total redemption amounts of the issued class A and class B preferred shares and multiplying this amount by the total value of the company available for distribution on the liquidation, dissolution or wind-up; and

(d) XXXXXXXXXX class B non-voting redeemable retractable preferred shares having a par value of $XXXXXXXXXX per share, a redemption amount (subject to a price adjustment clause) equal to the fair market value of the property received in return for their issuance, entitled to such non-cumulative dividends as the directors shall declare, but not exceeding XXXXXXXXXX% of their aggregate redemption amount and entitled to receive, on liquidation or wind-up, in priority to the liquidation entitlement of the class A and class B common shares an amount equal to the lesser of:

i) their redemption amount; and

ii) the amount obtained by dividing the total redemption amount of the issued class B preferred shares by the total redemption amounts of the issued class A and class B preferred shares and multiplying this amount by the total value of the company available for distribution on the liquidation, dissolution or wind-up.

12. Holdcol and Holdco2 will have the following authorized capital:

(a) XXXXXXXXXX class A voting non-participating common shares having a par value of $XXXXXXXXXX per share. The class A common shares will be entitled to receive only their par value on a liquidation or wind-up, after the preferred shares have received their redemption amount;

(b) XXXXXXXXXX class B non-voting participating common shares having a par value of $XXXXXXXXXX per share. These shares will be convertible at the option of the holder to preferred shares at the death of the Daughter. They will be entitled to receive, on a liquidation or wind-up, the residual value of the company after the issued preferred shares have received their redemption amount and the class A common shares have received their par value; and

(c) XXXXXXXXXX non-voting redeemable retractable preferred shares having a par value of $XXXXXXXXXX per share, a redemption amount (subject to a price adjustment clause) equal to the fair market value of the property received in return for their issuance, entitled to such non-cumulative dividends as the directors shall declare, but not exceeding XXXXXXXXXX% of their aggregate redemption amount. The preferred shares will be entitled to receive their redemption amount on a liquidation or wind-up in priority to the liquidation entitlement of the class A and class B common shares.

13.

XXXXXXXXXX

14. An inter vivos trust ("Newtrust") will be settled by a third party with $XXXXXXXXXX. The beneficiaries under Newtrust will be the Daughter, the two Grandchildren and a new family trust ("Family Trust") created for the benefit of Grandchild #1 and his or her family. The Grandchildren will not transfer property either directly or indirectly, by means of a trust or by any other means whatever, to Newtrust. Newtrust and Family Trust will be inter vivos trusts as defined in subsection 108(1) of the Act and personal trusts as defined in subsection 248(1) of the Act. Newtrust and Family Trust will be resident in Canada. The terms of Newtrust will be as follows:

(a) The Daughter will be entitled to receive all of the income of Newtrust during her lifetime; and

(b) Upon the death of the Daughter, Newtrust property will be divided into equal shares ("Share #1" and "Share #2", respectively) and paid as follows:

i) If Grandchild #1 is alive at the death of the Daughter, XXXXXXXXXX% of Share #1 will be paid to Grandchild #1 and XXXXXXXXXX % of Share #1 will be paid to the trustees of Family Trust (described below);

ii) If Grandchild #1 is not alive at the death the Daughter, but there are one or more children of Grandchild #1 alive at the death of the Daughter, Share #1 will be paid equally to the children of Grandchild #1;

iii) If none of Grandchild #1, or his or her children are alive at the death of the Daughter, but Grandchild #2 is alive at the death of the Daughter, Share #1 will be paid to Grandchild #2;

iv) If none of Grandchild #1, any child of Grandchild #1 or Grandchild #2 is alive at the death of the Daughter, Share #1 will be paid equally to the children of Grandchild #2;

v) If none of Grandchild #1, his or her children, Grandchild #2 or his or her children are alive at the death of the Daughter, Share #1 will be paid to the Foundation;

vi) If Grandchild #2 is alive at the death of the Daughter, Share #2 will be paid to Grandchild #2;

vii) If Grandchild #2 is not alive at the death of the Daughter, Share #2 will be paid equally to his or her children;

viii) If none of Grandchild #2, or his or her children are alive at the death of the Daughter, but Grandchild #1 is alive at the death of the Daughter, XXXXXXXXXX% of Share #2 will be paid to Grandchild #1 and XXXXXXXXXX% of Share #2 will be paid to the trustees of Family Trust;

ix) If none of Grandchild #2, his or her children or Grandchild #1 is alive at the death of the Daughter, Share # 2 will be paid equally to the children of Grandchild #1; and

x) If none of Grandchild #1, his or her children, Grandchild #2, or his or her children is alive at the death of the Daughter, Share #2 will be paid to the Foundation.

15. Family Trust will pe created upon the death of the Daughter only if, as stated in paragraph 14 above, Grandchild #1 survives the Daughter. The terms of Family Trust will be as follows:

(a) Family Trust will have a minimum of two trustees at all times;

(b) One of the initial trustees of Family Trust will be Grandchild #1;

(c) Grandchild #1 will have the power to appoint or dismiss trustees;

(d) At any time that there are more than two trustees of Family Trust, trustee decisions must be made by a majority of trustees;

(e) At Grandchild #1's death, his or her executors (or such other person or persons as he or she may appoint in his or her will) will become trustees of Family Trust;

(f) The discretionary beneficiaries of Family Trust will be Grandchild #1, his or her children and grandchildren;

(g) All payments of income or capital from Family Trust will be within the discretion of the trustees except that:

i) By the terms of Family Trust, no beneficiary under the age of 18 may receive or otherwise obtain the use of any of the income or capital of Family Trust during the period that the Estate is in existence; and

ii) No beneficiary who is under the age of 18 will receive or otherwise obtain the use of any of the income or capital of Family Trust, and no deduction will be taken by Family Trust in computing its income under subsection 104(6) or 104(12) of the Act in respect of amounts paid or payable to, or included in the income of, any such beneficiary while the Estate is in existence; and

(h) Family Trust will be wound up at the later of the death of Grandchild #1 and the death of Grandchild #1's spouse (the "later time") and the capital will be distributed to Grandchild #1's children alive at the later time, provided that the share of any child who has predeceased Grandchild #1 will go to that child's children (i.e., Grandchild #1's grandchild) and also provided that the share of any child or grandchild who has not reached age XXXXXXXXXX at the later time will be held and invested by the trustees of Family Trust for that child or grandchild until the child or grandchild reaches age XXXXXXXXXX.

16. The Estate will transfer, on a tax-deferred basis pursuant to subsection 85(1) of the Act, one half of each of the Estate's securities whose FMV exceeds its ACB to Opcol and one-half of each of its securities whose FMV exceeds its ACB to Opco2 (the "Transferred Securities"). In each case, the Estate and the transferee will jointly elect pursuant to subsection 85(1) of the Act. In each case, the agreed amount will be equal to the ACB to the Estate of the Transferred Securities. Opcol and Opco2 will each pay the Estate by issuing to the Estate:

(a) class A non-voting redeemable retractable preferred shares having an aggregate par value and redemption amount equal to the agreed amount; and

(b) class B non-voting participating common shares having a FMV equal to the difference between the FMV of the Transferred Securities and the aggregate redemption amount of the class A preferred shares issued.

17. The Estate will "freeze" its interest in Opco1 and Opco2 by exchanging, pursuant to section 51 of the Act, all of its class B non-voting participating common shares for class B non-voting redeemable retractable preferred shares at the exchange rate of one class B preferred share for each $XXXXXXXXXX value of class B common share exchanged. As a result of the above transactions, the class A Opco1 and class A Opco2 preferred shares will contain no capital gain, all of the accrued capital gain will be segregated in the class B Opco1 and class B Opco2 preferred shares and the Estate will have "frozen" its interest in Opco1 and Opco2.

18. Newtrust will subscribe for XXXXXXXXXX class B non-voting participating common shares in each of Opco1 and Opco2 for an aggregate subscription price of $XXXXXXXXXX (thereby ensuring that all future growth in the value of Opcol and Opco2 will accrue to Newtrust).

19. The Estate will transfer its class B non-voting redeemable retractable preferred shares in each of Opco1 and Opco2 to Holdco1 and Holdco2 (respectively) on a tax-deferred basis pursuant to subsection 85(1) of the Act. The agreed amount will be equal to the ACB of the Opco1 and Opco2 class B nonvoting redeemable retractable preferred shares. Holdco1 and Holdco2 will each issue to the Estate that number of class B non-voting participating common shares of Holdco1 and Holdco2 as is equal to the number of transferred Opco1 and Opco2 class B non-voting redeemable retractable preferred shares.

20. No person other than the initial incorporators as described in paragraph 10 above and the Estate will transfer, either directly or indirectly, by means of a trust or by any other means whatever, any property to Opcol, Opco2, Holdcol and Holdco2.

21. Each of the Grandchildren will settle an inter vivos trust ("Insurance Trust") whose purpose will be to hold an insurance policy. The trustees of each Grandchild's Insurance Trust will be the same as those of the Estate. The terms of each Grandchild's Insurance Trust will be as follows:

(a) The Insurance Trust will be authorized to invest in one or more insurance policies on the Grandchild's life (the "Grandchild's Insurance Policies");

(b) Any death benefits on the Grandchild's Insurance Policies received by the Grandchild's Insurance Trust will be held and invested by the trustees until the death of the Daughter, at which time the capital of the Grandchild's Insurance Trust will be divided into that number of shares as there are children of the Grandchild then alive. The trustees will hold and invest the share of each child and use such amount of the income or capital as the trustees in their absolute discretion shall consider necessary or advisable for the education, maintenance or advancement in life of such child until he or she reaches 21 years of age, at which time the trustees will pay the child his or her share;

(c) If at the date of the Daughter's death the Grandchild has no children alive, the trustees will pay the capital of the Grandchild's Insurance Trust to the other Grandchild, unless he or she has died, in which case the capital will be divided into as many equal shares as he or she has children then alive and held and invested for each such child with discretionary payments of income and capital for the education, maintenance or advancement in life of such child until the child reaches age 21; and

(d) If, at the date of the Daughter's death, all of Grandchildren and their children have died, the trustees will pay the capital of the Grandchild's Insurance Trust fund to the Foundation.

22. Each of the Grandchildren will make a gift to their respective Insurance Trust in an amount sufficient to enable the Grandchild's Insurance Trust to purchase a single premium life insurance policy (the “Grandchild's Insurance Policy"). The death benefit on the Grandchild's Insurance Policy will only be payable if the Grandchild predeceases the Daughter. The death benefit will be an amount not less than 60.46 % of the total FMV of the securities and class B Holdcol or Holdco2 shares received by the Grandchild as capital encroachments from the Estate. This value represents that portion of the value of the assets in the Estate (net of federal and provincial taxes) had the trustees not made any capital encroachment to the Grandchildren (as set out in paragraphs 9 above and 24 below) and had the 21-year rule applied.

23. Each Grandchild's Insurance Trust will purchase the Grandchild's Insurance Policy.

24. The Estate will make a capital encroachment to the Grandchildren of all of its Holdcol and Iioldco2 class B nonvoting participating common shares in satisfaction of part of their capital interests in the Estate.

25. The class A non-voting non-participating dividend paying preferred shares of Opcol and Opco2 issued to the Estate will remain in the Estate. The class A voting nonparticipating common shares of the four corporations will also remain in the Estate. The class B non-voting participating common shares of Opcol and Opco2 issued to Newtrust will remain in Newtrust.

PURPOSE OF THE PROPOSED TRANSACTIONS

26. The general objectives of the proposed transactions are to ensure that (1) the Daughter receives an income stream equivalent to what she had before the series of transactions, (2) the tax effect of the 21-year rule is avoided by distributing shares representing the accrued gains to the Grandchildren under subsection 107(2) of the Act, (3) the Trustees continue to manage and control the existing portfolio, (4) the Grandchildren do not receive the right to participate directly in the future growth of the company before the death of the Daughter, and (5) on the death of the Daughter, the Grandchildren receive the remaining assets of the Estate in accordance with the terms of the deceased's will.

27. The purpose of each Grandchild's Insurance Policies and each Grandchild's Insurance Trust is to protect the Trustees of the Estate against possible claims by the Estate's contingent capital beneficiaries in the unlikely event that the Grandchildren should predecease the Daughter after having received the capital encroachments.

28. The purpose of Newtrust is to implement estate planning objectives for one of the Grandchildren and to segregate future appreciation in the value of Opcol and Opco2 in a separate trust.

RULINGS GIVEN

Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purposes thereof and the proposed transactions are carried out as described herein, our advance income tax rulings are as follows:

A. Subsection 107(2) of the Act will apply to the distribution described in paragraph 9 above such that:

(i) Pursuant to paragraph 107(2)(a) of the Act, the Estate will be deemed to have disposed of the securities for proceeds of disposition equal to the cost amount to the Estate of the securities immediately before the distribution;

(ii) Pursuant to paragraph 107(2)(b) of the Act, each Grandchild will be deemed to have acquired his or her portion of the securities so distributed at a cost to him or her equal to the cost amount to the Estate of his or her portion of the securities immediately before the distribution;

(iii) Pursuant to paragraph 107(2)(c) of the Act, each Grandchild will be deemed to have disposed of part of his or her capital interest in the Estate for proceeds of disposition equal to the cost at which he or she is deemed by (ii) above to have acquired the securities; and

(iv) Pursuant to subsection 107(1.1), paragraph 107(1)(a) and the definition of the cost amount in subsection 108(1) of the Act, the ACB of that part of the capital interest in the Estate of each Grandchild immediately before the disposition of such part of his or her capital interest referred to in (iii) above, will be deemed to be equal to his or her respective portion of the cost amount to the Estate of the securities distributed immediately before the distribution.

B. Provided that joint elections are filed in prescribed form within the time set forth in subsection 85(6) of the Act and subject to the application of the provisions in 26(5) of the ITAR, the provisions of subsection 85(1) of the Act will apply to the transfer of the Estate's securities to Opcol and Opco2 as described in paragraph 16 above with the result that the amount agreed upon by the Estate and each transferee in their joint election will be deemed pursuant to paragraph 85(1)(a) of the Act to be the proceeds of disposition thereof to the Estate and cost thereof to the transferee.

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

C. The cost to the Estate of the Class A non-voting redeemable retractable preferred shares of Opcol and Opco2, as the case may be, received as partial consideration for the transfer of the securities to Opcol and Opco2 as described in paragraph 16 above will be deemed by paragraph 85(1)(g) of the Act to be equal to the deemed proceeds of disposition to the Estate of the transferred securities as referred to in ruling B above.

D. The cost to the Estate of the Class B non-voting common shares of Opcol and Opco2, as the case may be, received as partial consideration for the transfer of the securities to Opcol and Opco2 as described in paragraph 16 above will be deemed by paragraph 85(1)(h) of the Act to be equal to the deemed proceeds of disposition to the Estate of the transferred securities less the cost to the Estate of the Class A non-voting redeemable, retractable preferred shares of Opcol or Opco2, as the case may be, as referred to in rulings B and C above.

E. The provisions of subsection 51(1) of the Act will apply to the exchange by the Estate of its class B non-voting common shares in each of Opcol and Opco2 as described in paragraph 17 above, with the. result that:

(i) The Estate will be deemed not to have disposed of its class B non-voting common shares in each of Opcol and Opco2; and

(ii) The cost to the Estate of the class B non-voting preferred shares in Opcol and Opco2 received will be equal to the ACB of its class B non-voting common shares in Opcol and Opco2 immediately before the exchange.

For greater certainty, subsection 51(2) of the Act will not apply to the exchange.

F. The Estate will not lose its status as a "testamentary trust" as defined in subsection 108(1) of the Act as a result of the completion of the proposed transactions.

G. Subsections 15(1), 56(2), 105(1) and 246(1) of the Act will not be applied to the Estate, Newtrust or any of the beneficiaries of the Estate as a result of the completion of the proposed transactions.

H. Pursuant to subsection 104(4) of the Act, Newtrust will be deemed to have its first deemed disposition of each of its properties that is a capital property on the day that is 21 years after the day on which Newtrust is created.

I. Provided Grandchild #1 does not transfer property either directly or indirectly by means of a trust or by any other means whatever to Family Trust, the provisions of subsection 75(2) of the Act will not apply to attribute income, losses, taxable capital gains or allowable capital losses of Family Trust to Grandchild #1.

J. The provisions of subsection 74.4(2) of the Act will not apply to the Estate, the Daughter, Grandchild #1 or Grandchild #2 with, respect to the transfer by the Estate of its securities as described in paragraphs 16 and 19 above or to the exchange by the Estate of its shares as described in paragraph 17 above.

K. Provided Grandchild #1 does not transfer property directly or indirectly by means of a trust or by any other means whatever to Family Trust, Grandchild #1 will not be deemed to have disposed of his or her capital interest in the Estate pursuant to paragraph 69(1)(b) or 107(2)(c) of the Act as a result of the completion of the proposed transactions otherwise than as a result of the distributions as described in paragraphs 9 and 24 above.

L. Grandchild #2 will. not be deemed to have disposed of his or her capital interest in the Estate pursuant to paragraph 69(1)(b) or 107(2)(c) of the Act as a result of the completion of the proposed transactions otherwise than as a result of the distributions as described in paragraphs 9 and 24 above.

M. The Daughter will not be deemed to have disposed of all or a part of her income or capital interest in the Estate pursuant to paragraph 69(1)(b) or 107(2)(c), or subsection 106(2) or (3) of the Act as a result of the completion of the proposed transactions.

N. Subsection 104(2) of the Act will not apply to the Estate and Newtrust as a result of the completion of the proposed transactions.

0. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences of rulings A to N above as a result of the completion of the proposed transactions.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3, Advance Income Tax Rulings, and is based on our understanding that the trust indentures of Newtrust and Family Trust (the “Documents") will, when finalized, be in accordance with the facts and proposed transactions set out in paragraphs 14 and 15 above. Any material difference between the final wording of any one of the Documents and the facts and proposed transactions as set out above will affect the ruling given. The above rulings are binding on Revenue Canada provided that copies of the Documents referred to above are submitted in final form as soon as they become available, but no later than XXXXXXXXXX, and that the proposed transactions are completed before XXXXXXXXXX.

OPINION

Provided that Holdcol has a substantial interest in Opcol at the time Opcol would pay a dividend on its class B non-voting redeemable retractable preferred shares to Holdcol, Holdco2 has a substantial interest in Opco2 at the time Opco2 would pay a dividend on its class B non-voting redeemable retractable preferred shares to Holdco2, and further provided that Opcol and Opco2 are taxable Canadian corporations at the time the dividend would be paid, it is our opinion that the dividend would be an excluded dividend, and accordingly, Opcol and Opco2 would not be subject to subsection 191.1(1) of the Act in respect to the dividend. "Substantial interest" and "excluded dividend" have the meanings assigned under subsection 191(2) of the Act and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act, respectively.

COMMENTS

1. Nothing in this letter should be construed as implying that Revenue Canada has agreed to or reviewed:

(a) The determination of the FMV, ACB, or V-day value of any property referred to herein or the PUC of any shares referred to herein; or

(b) Any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.

2. Nothing in this letter should be interpreted as confirming for purposes of the Act that,

(a) Any adjustment made pursuant to any such price adjustment clause in respect of a transaction subsequent to the time of such transaction will be effective, retroactively, to the time of such transaction, or

(b) Any amount paid pursuant to any such price adjustment clause, in respect of a transaction subsequent to the time of such transaction will be an additional payment of the redemption or purchase price of any shares redeemed or repurchased.

The operation of a price adjustment clause is not a proposed transaction and, consequently, advance rulings are not given by the Department in respect thereof.

The Department's general position with respect to price adjustment clauses in agreements is set out in Interpretation Bulletin IT-169 dated August 6, 1974.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch