1 February 2000 External T.I. 1999-0010985 - MEANING OF CONTROL - PARAGRAPH 186(4)(A)

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 Department.

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

Principal Issues: Where no class of shares have full voting rights under all circumstances will the corporation (along with non arm's length persons) that has legal control of the payer corporation be connected for the purpose of paragraph 186(4) of the Act?

Position: No.

Reasons: The wording of subsection 186(2) requires consideration of shares with full voting rights under all circumstances only.

XXXXXXXXXX 		1999-001098

Attention: XXXXXXXXXX

February 1, 2000

Dear Sir:

Re: Meaning of Control Under Paragraph 186(4)(a) of the Act

This is in reply to your letter of February 10, 1999, wherein you requested our views under the Income Tax Act (the "Act") in the following situation.

In your letter you describe a situation where a corporation ("Opco") has two classes of common shares issued and outstanding. The first class of common shares of Opco ("Class A") are non-voting, except as described below. All the Class A shares are owned by one corporation ("Aco"). The other class of common shares of Opco ("Class B") carry full voting rights, except as described below. All the Class B shares are held by a different corporate shareholder ("Bco"). Aco and Bco are not related to each other and are otherwise dealing with each other at arm's length.

You indicate that according to Opco's articles where, Opco is to be dissolved, or where substantially all the property owned by it is to be sold, only the holders of the Class A shares have the right to vote on such matters (i.e., the holders of the Class B shares have no voting rights on these matters). As a result you conclude that the Class B shares do not have full voting rights under all circumstances for the purpose of subsection 186(2) of the Act notwithstanding the fact that Bco may legally control Opco.

You question, however, whether Bco would be connected to Opco pursuant to subparagraph 186(4)(a) by virtue of Bco's legal control of Opco. It is your view that Bco would be connected to Opco because the reference in paragraph 186(4)(a) to exclude control that arises by virtue of a right referred to in paragraph 251(5)(b) of the Act implies that a corporation could be controlled otherwise than by virtue of the definition in subsection 186(2) for the purpose of paragraph 186(4)(a).

Your request 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 6R3 (IC-70-6R3) dated December 30, 1996. 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. Although we are not able to comment specifically on the situation described in your letter we can offer the following comments.

We do not concur with your views. Subsection 186(2) applies for the purpose of Part IV, except for the purpose of determining whether the corporation is a subject corporation. The concept of control under subsection 186(2) requires the corporation (including persons not dealing at arm's length with the corporation) to own more than 50% of the issued shares of the corporation that have full voting rights under all circumstances. Where no issued shares of a payer corporation have full voting rights under all circumstances it would not be possible for any corporation to be connected to the payer corporation notwithstanding the fact that a particular corporation owning more than 50% of all the issued shares of the payer corporation may otherwise legally control the payer corporation.

With respect to your comments concerning the reference in paragraph 186(4)(a) to the exclusion of rights referred to in paragraph 251(5)(b) of the Act we note that subsection 251(5) applies for the purpose of determining whether two or more persons are "related persons" as defined in subsection 251(2). If the existence of such rights causes two or more persons to be related persons such persons are deemed not to deal with each other at arm's length for the purposes of the Act. This can affect whether a corporation is considered to be controlled by a person for the purpose of subsection 186(2). However, for the purpose of 186(4)(a) where the payer corporation is controlled under subsection 186(2) by the particular corporation solely because of the existence of rights described in paragraph 251(5)(b) such rights should be ignored.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.

Yours truly,

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

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