23 October 2001 External T.I. 2001-0104745 - 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

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

Principal Issues:

Are two corporations associated pursuant to section 256 in specific fact situations?

Position: Question of Fact.

Reasons:

May be associated under paragraphs 256(1)(b), (c), (d) & (e) where de facto control exists.

		2001-010474
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953
October 25, 2001

Dear XXXXXXXXXX:

Re: Section 256 - Associated Corporations

This is in reply to your letter dated October 4, 2001, wherein you requested our views concerning the application of subsection 256(1) of the Income Tax Act (the "Act") in the circumstances described below.

Situation A

Mom and Dad are husband and wife who have four children. Dad owns 100 common voting shares of Aco, while 50,000 preferred non-voting shares of Aco are held by each of the four children. Mom owns 100 common voting shares of Bco, while 100 common non-voting shares of Bco are held by a discretionary inter vivos trust of which the children are beneficiaries.

Situation B

Mom and Dad are husband and wife who have four children. Dad owns 100% of the preferred voting shares of Aco. Each child holds 25% of the non-voting preferred shares of Aco and 100 common shares of Aco are held by a discretionary inter vivos trust of which Dad and the children are beneficiaries. Mom owns 100 common voting shares of Bco, while the children hold non-voting preferred shares of Bco. The preferred shares of Bco do not meet the definition of a "specified class" of shares as defined in subsection 256(1.1) of the Act.

For situations A & B you have asked for our comments on whether Aco and Bco are associated pursuant to subsection 256(1) of the Act.

Situation C

A discretionary inter vivos trust holds 100 common voting shares of Aco. Dad and four children are beneficiaries of the trust. The terms of the trust are such that the capital of the trust may be distributed in either of the following two manners:

1. Dad may receive all of the common shares; or

2. Dad and each of the four children will receive an equal portion of the shares.

You have asked that we comment on which of the look-though rules contained in subsection 256(1.2) would apply to the above situation.

Our Comments

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 70-6R4 dated January 29, 2001. 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. We can, however, provide the following general comments.

Under subsection 256(1) of the Act, one corporation is associated with another corporation in a taxation year if, at any time in the year, any one of paragraphs 256(1)(a) through (e) apply. The expression "controlled, directly or indirectly in any manner whatever" is defined in subsection 256(5.1) of the Act and the Agency's views as to when this expression applies to a specific situation are discussed in paragraphs 19-23 of Interpretation Bulletin IT-64R4, Corporations: Association and Control. The words "directly or indirectly in any manner whatever" encompass both dejure and de facto control. Subject to certain specific exceptions, a corporation will be considered to be "controlled, directly or indirectly in any manner whatever" pursuant to subsection 256(5.1) of the Act where another corporation, person or group of persons has any direct or indirect influence that, if exercised, would result in control in fact of the corporation.

Whether or not a person or group of persons has any direct or indirect influence that, if exercised, would result in control of a corporation can only be determined after reviewing all of the facts in a particular situation. Paragraph 23 of IT-64R4 provides some general factors that may be relevant in determining whether de facto control exists.

One such factor is the influence that a family member, who is a shareholder of a corporation, may have over another family member who is a shareholder of the corporation. Close family ties between parents and children who are both shareholders may be indicative of significant influence.

Where it is determined, in situations A and B, that one or more of the children, or Dad/Mom and one or more of the children, are groups of persons which have de facto control over Aco or Bco, the two corporations could be associated under any of paragraphs 256(1)(b), (c), (d) or (e) of the Act. For purposes of paragraphs 256(1)(c), (d) and (e), shares of a "specified class" are not included in the 25 per cent cross-ownership test. Shares of a "specified class" are defined in subsection 256(1.1) of the Act.

Where de facto control does not exist, it is unlikely that Aco and Bco would be associated unless they are deemed to be associated with each other by means of the "fair market value test" in paragraph 256(1.2)(c) or the anti-avoidance provision in subsection 256(2.1) of the Act. Subparagraph 256(1.2)(c)(i) of the Act provides that a person or group of persons will be treated as controlling a corporation where the person or group of persons owns shares representing more than 50% of the fair market value of all of the issued and outstanding shares of the corporation. Pursuant to subparagraph 256(1.2)(c)(ii), a person is deemed to control a corporation if that person owns common shares of the capital stock of the corporation having a fair market value of more than 50% of the fair market value of all of the issued and outstanding common shares of the capital stock of the corporation. For purposes of making these valuations, paragraph 256(1.2)(g) provides that voting rights shall be ignored. Subsection 256(2.1) of the Act may apply to deem two corporations to be associated where it may reasonably be considered that one of the main reasons for the separate existence of those corporations in a taxation year is to reduce the amount of taxes that would otherwise be payable under the Act or to increase the amount of refundable investment tax credit under section 127.1.

Subparagraph 256(1.2)(f)(ii) of the Act provides for a "look through" whereby shares of a corporation that are held by a trust are deemed to be owned by the beneficiaries of the trust. The result of the application of subparagraph 256(1.2)(f)(ii) of the Act is that more than one person can be deemed to own the same shares at the same time.

In our view, subparagraph 256(1.2)(f)(ii) of the Act will apply to the trust described in situation C (and situations A and B) since a person has discretionary power as to the distribution of the capital of the trust to one or more beneficiaries.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.

Yours truly,

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