14 February 2005 External T.I. 2004-0108311E5 - Associated Corporations

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: Application of subsection 256(2) in a situation where there are more than three corporations in a corporate group.

Position: Multiple elections

Reasons: The law.

XXXXXXXXXX 2004-010831
Michael Cooke
February 14, 2005

Dear XXXXXXXXXX:

Re: Multiple Elections under 256(2)

This is in reply to your letter dated December 16, 2004 wherein you requested our opinion on the application of subsection 256(2) of the Income Tax Act (the "Act") to the fact situation described in your letter.

The fact situation described in your letter appears to relate to either 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 dated May 17, 2002 ("IC 70-6R5"). However, if the situation relates to a completed transaction a request for the Canada Revenue Agency's ("CRA") views must be made to your local Tax Services Office.

Notwithstanding the above, we are prepared to offer our general comments on the application of subsection 256(2) based on the following example:

1. Four arm's-length individuals, Mr. A, Mr. B, Mr. C and Mr. D, respectively, own all the shares of two corporations (referred to as "Aco" and "Bco", respectively) in equal proportions (i.e. 25% each).

2. Mr. A, Mr. B, Mr. C and Mr. D each own 20% of the shares of another corporation (referred to as "Cco"). Other individuals (referred to as the "Other Shareholders") own the remaining 20% of the shares of Cco. The Other Shareholders deal at arm's-length with Mr. A, Mr. B, Mr. C and Mr. D.

3. Mr. A, Mr. B, Mr. C and Mr. D also each own 10% of the shares of another corporation (referred to as "Dco"). The Other Shareholders own the remaining 60% of the shares of Dco.

In the above example, Aco, Bco and Cco would be associated with each other under paragraph 256(1)(b) (i.e. by virtue of paragraph 256(1.2)(a) the controlling "group of persons" in this case is Mr. A, Mr. B, Mr. C and Mr. D). For similar reasons, Cco and Dco would also be associated with each other under paragraph 256(1)(b) (i.e. the controlling group of persons in this case is Mr. A, Mr. B, Mr. C, Mr. D and the Other Shareholders). However, but for the application of subsection 256(2), and ignoring the possible application of subsection 256(2.1), neither Aco or Bco would be associated with Dco.

In our view, Cco, being the third corporation, could make two separate elections under subsection 256(2) (i.e. one election with Aco and Dco and one election with Bco and Dco) in order that Aco and Bco would not be associated with Dco for the purposes of section 125. Provided both such elections under subsection 256(2) are properly made, for the purposes of section 125 Cco would be deemed to have a business limit of nil and Dco would have its own business limit. However, since Aco and Bco are still otherwise associated with each other, they would have to share their business limit.

We trust that our comments will be of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the CRA.

Yours truly,

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