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: Can two corporations which have no direct ownership in each other but are controlled by the same person be considered connected corporations for purposes of the definition of "small business corporation" as that term is defined in subsection 248(1) of the Act?
Position: Yes
Reasons: Subsection 186(7), which is generally applicable on and after March 16, 2001, provides that, for greater certainty, where a provision of the Act or the regulations indicates that the term "connected" has the meaning assigned by subsection 186(4), one must take into account the extended meaning of that term as provided in subsection 186(2) unless the provision expressly provides otherwise.
XXXXXXXXXX 2002-017366
Karen Power, CA
(613) 957-8953
January 8, 2003
Dear XXXXXXXXXX:
Re: "Small Business Corporation"
We are writing in response to your letter to the XXXXXXXXXX Tax Services Office, which was forwarded to us on November 15, 2002. On behalf of the Canada Customs & Revenue Agency ("CCRA"), we apologize for the delay in responding to your inquiry.
In your June 5, 2002 letter you request our comments on whether two corporations which have no direct ownership in each other but are controlled by the same person, who owns more than 50% of the voting shares of both corporations, may be considered connected corporations for purposes of the definition of "small business corporation" as that term is defined in subsection 248(1) of the Income Tax Act (the "Act").
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 an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry, including all relevant facts and documentation, should be addressed to the appropriate tax services office. The following comments are, therefore, of a general nature only and are not binding on the CCRA.
In general terms, a "small business corporation" is defined in subsection 248(1) of the Act, at any particular time to mean, subject to subsection 110.6(15) of the Act, a Canadian-controlled private corporation where all or substantially all of the fair market value of the corporation's assets is at that time attributable to assets that are:
a) used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
b) shares of the capital stock or indebtedness of one or more small business corporations that are at that time connected with the particular corporation, or
c) assets described in a and b above.
For purposes of paragraph b) of the definition, a small business corporation must be connected with the particular corporation within the meaning of subsection 186(4) of the Act on the assumption that the small business corporation is at that time a "payer corporation" within the meaning of that subsection.
Subsections 186(4) and 186(2) of the Act set out the circumstances in which corporations are connected. Paragraph 186(4)(a) of the Act provides that a payer corporation is connected with a particular corporation if the payer corporation is controlled (otherwise that by virtue of a right referred to in paragraph 251(5)(b)) by the particular corporation at that time. Pursuant to subsection 186(2) of the Act, for the purpose of Part IV (other than in determining whether a corporation is a subject corporation), one corporation is considered to be controlled by another corporation if more than 50% of the issued share capital of the corporation having full voting rights under all circumstances belongs to:
(a) the other corporation,
(b) persons not dealing at arms' length with the other corporation, or
(c) the other corporation and persons not dealing at arms' length with the other corporation.
Subsection 186(7) of the Act, which is generally applicable on and after March 16, 2001, provides, for greater certainty, that where a provision of the Act or the regulations indicates that the term "connected" has the meaning assigned by subsection 186(4), one must take into account the extended meaning of that term as provided in subsection 186(2) unless the provision expressly provides otherwise. Consequently, in determining whether two corporations are connected for purposes of the definition of "small business corporation" in subsection 248(1) of the Act, subsection 186(2) must be taken into account.
In the example you provide, the two corporations which have no direct ownership in each other but are controlled by the same person would be "connected" corporations for purposes of the definition of "small business corporation" by virtue of subsections 186(2) and 186(4) of the Act. It should also be noted that if any of the two corporations has an indirect interest in the shares of the other corporation, the implications of paragraph 110.6(15)(b) of the Act should also be considered.
You have also requested clarification of the phrase "a bond, debenture, bill, note or similar obligation". Paragraph (b) of the definition of "small business corporation" in subsection 248(1) of the Act formerly read:
"shares of the capital stock of one or more small business corporations that were at that time connected with the particular corporation (within the meaning of subsection 186(4) on the assumption that the small business corporation was at that time a "payer corporation" within the meaning of that subsection) or a bond, debenture, bill, note, mortgage or similar obligation issued by such a connected corporation, or".
However, paragraph (b) above was broadened applicable to the 1988 and subsequent taxation years to include property of the corporation that is any indebtedness, (whether issued or not), of connected small business corporations. The change was consistent with amendments made to the definition of "qualified small business corporation share" and provides flexibility to corporations whose assets include receivables or other indebtedness of, for example, a subsidiary corporation that are not bonds, debentures, bills, notes, mortgages, hypothec or similar obligations issued by the subsidiary.
We trust our comments will be of assistance to you.
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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