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: Will subsection 149.1(12) deem a charitable foundation not to have acquired control of a corporation where the corporation is controlled by the foundation and other non-arm's length persons, the foundation acquired shares of a corporation for consideration and subsequently, as a consequence of the redemption of shares, the foundation holds more than 5% of the issued shares of a class of a corporation.
Position: No.
Reasons: The 5% "safe harbour" must be satisfied at all times.
2003-005196
XXXXXXXXXX Luisa A. Majerus
(613) 946-3558
February 20, 2004
Dear XXXXXXXXXX:
Re: Application of paragraph 149.1(12)(a) of the Income Tax Act (the "Act")
This is in reply to your letter of December 5, 2003 concerning the application of paragraph 149.1(12)(a) of the Act. Specifically, you have asked for our interpretation of the paragraph following subparagraph 149.1(12)(a)(ii).
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
Where a charitable foundation acquires control of any corporation after June 1, 1950 the Minister may revoke the charitable registration of the foundation pursuant to paragraphs 149.1(3)(c) or 149.1(4)(c) of the Act. However, paragraph 149.1(12)(a) provides a relieving provision to deem control of a corporation not to be acquired by a charitable foundation under certain circumstances.
149. 1(12) For the purposes of this section,
(a) a corporation is controlled by a charitable foundation if more than 50% of the corporation's issued share capital, having full voting rights under all circumstances, belongs to
(i) the foundation, or
(ii) the foundation and persons with whom the foundation does not deal at arm's length,
but, for the purpose of paragraph (3)(c) or (4)(c), as the case may be, a charitable foundation shall be deemed not to have acquired control of a corporation if it has not purchased or otherwise acquired for consideration more than 5% of the issued shares of any class of the capital stock of that corporation;
Under the legislation, where a foundation (itself or together with other non-arm's length persons) controls a corporation, the foundation will be deemed not to have "acquired" control if it did not purchase for consideration more than 5% of the issued shares of any class of the capital stock of that corporation.
It is our view that the 5% limitation must be satisfied at all times for a foundation to be deemed not to have acquired control of a corporation. For example, assume in Year 1 a foundation and persons with whom the foundation does not deal at arm's length control a corporation and the foundation purchased or otherwise acquired for consideration less than 5% of the issued shares of a class of the capital stock of a corporation. In Year 2 certain shares of that class are redeemed resulting in the foundation owning greater than 5% of the issued shares of that class of the capital stock of the corporation. In this example, in Year 1 the foundation is deemed not to have acquired control of the corporation. However, in Year 2, since the percentage ownership is greater than 5% of the issued stock of that class due to the redemption and since the shares were acquired for consideration in Year 1, subsection 149.1(12) does not deem the foundation not to have acquired control of the corporation for the purposes of paragraphs 149.1(3)(c) or 149.1(4)(c).
We trust these comments will be helpful.
Yours truly,
Manager
Financial Institutions Team
Income Tax Rulings Directorate
Policy and Planning Branch
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