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: (1) Whether subsection 249(3.1) applies at the time a corporation files an election under subsection 89(11), thereby triggering a deemed year-end. (2) Whether the revocation of the election provided for under subsection 89(12) triggers a deemed year-end under subsection 249(3.1).
Position: (1) No. (2) No.
Reasons: Wording of the Act.
Mr. David Horan-Hutt
Programs Officer
Assessment and Benefit Services Branch 2014-055019
Canada Revenue Agency U. Chalupa
Government of Canada (613) 957-2124
October 22, 2014
Dear Mr. Horan-Hutt,
Re: Interpretation of Subsections 89(11) and 249(3.1) of the Income Tax Act
This is in reply to your e-mail dated October 9, 2014 in which you requested our comments on the interaction between subsections 89(11) and 249(3.1) of the Income Tax Act (hereinafter the "Act").
Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.
Your questions arise from comments made by a taxpayer's representative regarding technical interpretation 2014-0523171E5 issued by our Directorate on March 27, 2014. Based on the following paragraphs of the technical interpretation, the taxpayer's representative wishes to use the election provided for in subsection 89(11) in order to trigger a deemed year-end for a Canadian-controlled private corporation (hereinafter "CCPC") under subsection 249(3.1):
Where a corporation files an election under subsection 89(11) of the Act on or before its filing due date for a taxation year, the corporation is deemed, for the purposes mentioned in paragraph (d) of the definition of CCPC in subsection 125(7) of the Act, not to be a CCPC at any time in or after the particular taxation year.
Consequently and according to paragraph (d) of the definition of CCPC in subsection 125(7) of the Act, such a corporation would cease to be a CCPC for the purpose of subsection 249(3.1) of the Act.
Your questions are:
1) Whether subsection 249(3.1) applies at the time a corporation files an election under subsection 89(11), thereby triggering a deemed year-end.
2) Whether the revocation of the election provided for under subsection 89(12) triggers a deemed year-end under subsection 249(3.1).
Our comments
In technical interpretation 2014-0523171E5, a corporation (hereinafter the "Corporation"), which was a CCPC as defined in subsection 125(7), made an election under subsection 89(11). A few years after the election was made by the Corporation, two public corporations became the owners of more than 50% of the voting common shares of the capital stock of the Corporation. The question examined in technical interpretation 2014-0523171E5 was whether subsection 249(3.1) would apply to deem the Corporation to have a taxation year that ends immediately before the time the two public corporations became the owners of more than 50% of the voting common shares of the capital stock of the Corporation.
Our Directorate stated that at the time the two public corporations became the owners of more than 50% of the voting common shares of the capital stock of the Corporation, the Corporation was already deemed not to be a CCPC for the purposes of subsection 249(3.1) because of the election previously made under subsection 89(11). Therefore, as the conditions to apply the subsection 249(3.1) were not met (the Corporation did not become or cease to be a CCPC at that time), no deemed year-end would arise under that subsection as a result of the two public corporations becoming the owner of more than 50% of the voting common shares of the capital stock of the Corporation. However, our Directorate noted that subsection 249(4) could apply in these circumstances. Therefore, the Corporation had to determine whether or not its control was acquired at the time the two public corporations became the owners of more than 50% of the voting common shares of its capital stock.
Subsection 89(11) provides that, subject to subsection 89(12), a corporation that files with the Minister on or before its filing-due date for a particular taxation year an election in prescribed form to have this subsection apply is deemed for the purposes described in paragraph (d) of the definition CCPC in subsection 125(7) not to be a CCPC at any time in or after the particular taxation year. One of the provisions described in paragraph (d) of the definition of CCPC in subsection 125(7) is subsection 249(3.1). Under subsection 249(3.1), if at any time a corporation becomes or ceases to be a CCPC, otherwise than because of an acquisition of control to which subsection 249(4) would apply, the corporation is deemed to have a taxation year-end immediately before that time.
In order to determine under subsection 249(3.1) if a corporation becomes or ceases to be a CCPC, an election previously made by a corporation under subsection 89(11) must be considered. The hypothetical situation described in technical interpretation 2014-0523171E5 illustrates this interaction between subsections 89(11) and 249(3.1). In this document, our Directorate states that because of the election made under subsection 89(11), the Corporation was already deemed not to be a CCPC for the purposes of subsection 249(3.1) at the time the two public corporations became the owners of more than 50% of the voting common shares of the capital stock of the Corporation. Consequently, subsection 249(3.1) would not apply to trigger a deemed year-end, as the Corporation was already considered a non-CCPC for the purposes of this provision at the time the two public corporations became the owner of more than 50% of the voting common shares of the capital stock of the Corporation.
That being said, and in response to your question, subsection 249(3.1) will not apply at the time a corporation files an election under subsection 89(11). The election under subsection 89(11) must be filed by a corporation on or prior to its filing-due date for a particular taxation year and will apply at any time in or after the particular taxation year. Thus, the corporation becomes a non-CCPC at the beginning of this particular taxation year and after. Consequently, the fact that the corporation files a subsection 89(11) election will not, in and by itself, trigger a deemed year-end under subsection 249(3.1).
The election made under subsection 89(11) may be revoked under subsection 89(12). Subsection 89(12) states that if a corporation files with the Minister on or before its filing-due date for a particular taxation year a notice in prescribed form revoking, as of the end of the particular taxation year, an election described in subsection 89(11), the election ceases to apply to the corporation at the end of the particular taxation year. Thus, a corporation that revokes its subsection 89(11) election will not be deemed not to be a CCPC at the beginning of the taxation year following the particular taxation year. Consequently, the revocation of the subsection 89(11) election under subsection 89(12) will not, in and by itself, trigger a deemed year-end under subsection 249(3.1).
We trust that the foregoing will be of assistance to you.
Yours truly,
Stéphane Prud'Homme, LL.B, M. Fisc.
Manager
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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