25 February 2004 External T.I. 2004-0061851E5 - connected corporation

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 corporations described in a corporate organization chart are connected to their corporate shareholders

Position: general comments provided

Reasons: appears to relate to actual situation

2004-006185
XXXXXXXXXX T. Harris
(613) 957-2114
February 25, 2004

Dear XXXXXXXXXX:

Re: Connected Corporation - Subsection 186(4)

We are writing in response to your letter of February 4, 2004 wherein you requested our opinion as to whether each of the corporations described in the organization chart attached to your letter would be connected, by virtue of paragraph 186(4)(b) of the Income Tax Act (the "Act"), to the corporations which owned shares in such corporation.

You have described a situation where the common shares of Opco are owned equally by two holding corporations, HoldcoA and HoldcoB. The common shares of HoldcoA are owned equally (i.e. XXXXXXXXXX% each) by XXXXXXXXXX unrelated holding corporations while the common shares of HoldcoB are owned equally (i.e. XXXXXXXXXX% each) by another XXXXXXXXXX unrelated holding corporations. The common shares of each of the XXXXXXXXXX unrelated holding corporations are owned by a Canadian resident individual who deals at arm's length with all of the individuals who own shares of the other holding corporations. The common shares are the only issued and outstanding shares of each of the corporations.

It is your view that each corporation is connected, pursuant to paragraph 186(4)(b) of the Act, to the corporation in which it owns shares. Consequently, provided that a corporation that pays a dividend to its shareholder corporation is not entitled to a dividend refund, such dividend will not be subject to Part IV tax in the hands of the recipient.

Our Comments

The situation described in your letter appears to involve either actual proposed transactions relating to specific taxpayers or an actual fact situation related to transactions and events that have already taken place. 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 70-6R5 dated May 17, 2002 ("IC 70-6R5"). However, if the situation relates to a completed transaction, the review of such situations is generally the responsibility of the local taxation services offices and it is not our practice to provide specific opinions on such factual situations. We can, however, provide the following general comments.

Pursuant to paragraph 186(4)(b) of the Act a corporation which pays a dividend is connected with a recipient corporation at any particular time where the recipient corporation owns:

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

(b) shares of the payer corporation having a fair market value greater than 10% of the fair market value of all the issued shares of the payer corporation.

In addition, pursuant to paragraph 186(1)(b), a taxable dividend received by a taxable Canadian corporation from a connected corporation is subject to Part IV tax only when the payer corporation is entitled to a dividend refund for the taxation year in which such dividend is paid. The Part IV tax rate is 33 1/3%.

Although you have not specifically requested our comments on the application of the General Anti-Avoidance Rule ("GAAR") found in subsection 245(2) of the Act, it is the opinion of the Canada Revenue Agency that GAAR would generally be applicable where a holding corporation is inserted into a corporate chain primarily to ensure that a payer corporation is connected to its shareholder corporations to avoid the Part IV tax which would otherwise be applicable. See, by analogy, the arrangement described in paragraph 14 of Information Circular 88-2 dated October 21, 1988.

We trust that our comments will be of assistance to you. These comments are provided in accordance with the practice described in paragraph 22 of IC 70-6R5.

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

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