21 October 2002 External T.I. 2002-0141295 - Ownership of Shares

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 CCRA.

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

Principal Issues: Is the "ownership" referred to in paragraph 186(4)(b) only "direct" ownership?

Position: Yes.

Reasons: The law - Subject to deeming provisions, such as paragraph 251(5)(b) which apply for specific purposes, there is no extension of the "ownership" referred to in paragraph 186(4)(b) to include "indirect" ownership (such as may be found in the definition of "specified shareholder" in subsection 248(1)).

XXXXXXXXXX 2002-014129

October 21, 2002

Dear XXXXXXXXXX:

Re: Subsection 186(4)(b) of the Income Tax Act (the "Act")

We are writing in reply to your letter of May 10, 2002 wherein you requested our opinion regarding the meaning of "ownership" in paragraph 186(4)(b) of the Act and, particularly, whether such ownership contemplates any form of "indirect ownership".

In your letter you provided an illustration as follows:

Pubco is a public corporation that has a single class of shares issued and outstanding. Holdco, a private corporation, owns directly 9% of the issued shares of Pubco. Holdco also owns all of the issued shares of Subco, another private corporation, and Subco, itself, owns directly 2% of the issued shares of Pubco. Your question is whether, for the purposes of paragraph 186(4)(b), Holdco owns more than 10% of the issued shares of Pubco?

Your request appears to relate to a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 ("IC-70-6R5") dated May 17, 2002. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. We can, however, provide the following general comments.

It is our view that the type of "ownership" described in paragraph 186(4)(b) of the Act is "direct" ownership and does not include what you refer to as "indirect ownership". Accordingly, in the situation you described, for the purposes of paragraph 186(4)(b) of the Act Holdco would be regarded as owning less than 10% of the shares of Pubco. However, depending upon all of the facts and circumstances, the consequences of being regarded as owning not more than 10% of the shares of Pubco may be altered by other provisions of the Act (ie. subsection 245(2) ITA).

Our comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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