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: Interpretation of the provisions of paragraph 149(1)(d.3) of the Act..
Position: General Comments.
Reasons: Question of fact and not enough information provided.
XXXXXXXXXX 2000-000502
B. Kerr
Attention: XXXXXXXXXX
May 11, 2000
Dear Sirs:
Re: Meaning of Capital in Subparagraph 149(1)(d.3)
This is in response to your letter of January 27, 2000, wherein you requested our views on the interpretation of subparagraph 149(1)(d.3) of the Income Tax Act (the "Act").
You have described a situation where a taxable corporation owns all of the Class B shares of a particular corporation and the federal or provincial government owns all of the Class A shares. You have stated that the Class A shares represent at least 90% of both the total shares and the paid-up capital of the particular corporation.
You have asked that we confirm that the word "capital" does not include indebtedness and that the particular corporation would be exempt under paragraph 149(1)(d.3) of the Act.
The situation outlined in your letter involves an actual fact situation relating to a proposed transaction. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular IC-70-6R3 dated December 30, 1996, issued by Revenue Canada. However, we can offer the following general comments.
Generally the provisions of paragraphs 149(1)(d) through 149(1)(d.6) exempt from Part I tax the taxable income of any corporation, commission or association at least 90% of the shares or capital of which was owned by the federal government, a provincial government or a Canadian municipality. The exemption also applies to any corporation which was a wholly-owned subsidiary of such a corporation, commission or association. However, the exemption from Part I tax does not apply during a period in which a person other than the federal government, a provincial government or a municipality, has a right under a contract or otherwise, in equity or otherwise, either immediately or in the future and either absolutely or contingently to, or to acquire, shares or capital of the corporation, commission or association by virtue of the provisions of subsection 149(1.1) of the Act.
More specifically paragraph 149(1)(d.3) of the Act provides that no tax is payable under this Part on the taxable income of a person for a period when that person was a corporation, commission or association not less than 90% of the shares (except director's qualifying shares) or of the capital of which was owned by
(i) Her Majesty in right of Canada or a province or a person to which paragraph (d) or (d.2) applies for the period, or
(ii) one or more municipalities in Canada in combination with one or more persons each of which is Her Majesty in right of Canada or a province or a person to which paragraph (d) or (d.2) applies for the period.
In our view, the word capital as used in paragraph 149(1)(d.3) does not include indebtedness. It is also our view that a taxable corporation may own up to 10% of the shares or capital of a corporation that is otherwise exempt under paragraph 149(1)(d.3) provided that they were not acquired by virtue of a right described in subsection 149(1.1) of the Act. However, it is a question of fact whether or not a person other than a federal, provincial or municipal government has or had such a right. In order to make that determination the attributes of the shares and other pertinent agreements relating thereto would have to be reviewed. For example, if the corporation has preferred shares outstanding that are redeemable and retractable the corporation may not be exempt.
We trust that these comments will be of assistance.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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