24 November 2011 External T.I. 2011-0426081E5 - Connected corporations - paragraph 186(4)(b)

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: Whether shares described in 186(4)(b)(i) have to be the same shares described in 186(4)(b)(ii).

Position: No.

Reasons: Wording of paragraph 186(4)(b)

XXXXXXXXXX
									Jelena Pajkovic
									(613) 941-0782
									2011-042608
November 24, 2011

Dear XXXXXXXXXX ,

Re: Connected corporations - paragraph 186(4)(b) of the Income Tax Act

This is in response to your e-mail of October 28, 2011, wherein you requested our comments regarding paragraph 186(4)(b) of the Income Tax Act ("ITA").

Unless otherwise stated, every reference herein to a part, section, paragraph or subparagraph is a reference to the relevant provision of the ITA.

Specifically, you have described a hypothetical situation where one corporation ("Holdco") owns XXXXXXXXXX % of another corporation's ("Opco") non-voting common shares that have a fair market value of $XXXXXXXXXX (i.e. $XXXXXXXXXX in aggregate). Holdco also owns XXXXXXXXXX % of Opco's XXXXXXXXXX issued voting Class A preferred shares having a redemption value of $XXXXXXXXXX per share.

In your opinion, in this situation, the requirements set out in subparagraph 186(4)(b)(i) would be met since Opco owns 20% of the voting Class A preferred shares. Also, the requirements in subparagraph 186(4)(b)(ii) would be met as the fair market value of the common shares is equal to approximately XXXXXXXXXX % of the total fair market value of all issued share capital of Opco.

You have asked us to confirm if your understanding of paragraph 186(4)(b) of the ITA is correct . More specifically, you are asking us to confirm whether the shares described in subparagraph 186(4(b)(i) to determine the percentage of voting control have to be the same shares described in subparagraph 186(4(b)(ii) to determine the percentage of value.

Our Comments:

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 a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. We are, however, prepared to provide the following general comments.

Subparagraph 186(4)(b) of the ITA reads as follows:

(b) the particular corporation owned, at that time,

(i) more than 10% of the issued share capital (having full voting rights under all circumstances) of the payer corporation, and

(ii) shares of the capital stock of the payer corporation having a fair market value of more than 10% of the fair market value of all of the issued shares of the capital stock of the payer corporation.

We agree with your interpretation of the application of paragraph 186(4)(b) in the situation described above.

In our view, the issued share capital contemplated for the purposes of the subparagraph 186(4(b)(i) voting test and the shares of the capital stock contemplated for the purpose of the subparagraph 186(4(b)(ii) value test may correspond to shares of different categories of the issued capital stock of a corporation.

We trust the above comments will be of assistance.

Yours truly,

Maurice Bisson, CGA
for Director
Corporate Reorganizations and
Resources Industry Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch