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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Whether, in a particular situation, corporations would be associated with others in a taxation year.
Position: Some corporations would be associated with others. However, in the given situation, one particular corporation would not be associated with another in a taxation year under paragraph 256(1)(b) because both corporations would not be, at some common point in time in the same taxation year, controlled directly or indirectly by the same person.
Reasons: Wording of the Act and past positions.
2004-006620
XXXXXXXXXX S. Prud'Homme
(613) 957-8975
April 28, 2004
Dear Sir,
Subject: Request for a technical interpretation of section 256 of the Income Tax Act
This is in response to your letter of February 10, 2004, in which you requested our opinion regarding the application of section 256 of the Income Tax Act (the "Act") in a particular situation.
Unless otherwise indicated, all references to a statutory section or included provision in this letter are to a section of the Act or one of its provisions.
It appears to us that the situation described in your letter and summarized below may be an actual situation involving taxpayers. As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is not the practice this Directorate to issue a written opinion regarding proposed transactions otherwise than by an advance ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that may be helpful. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. Accordingly, and given that your letter only briefly describes a hypothetical situation, the comments we provide below may not be fully applicable in a particular situation.
1) Particular Situation
You have presented us with the situation described below (the "Particular Situation") as part of your request for a technical interpretation.
(a) Two individuals resident in Canada ("A" and "B") were "common-law partners" as defined in subsection 248(1).
b) A held all of the issued and outstanding shares of the capital stock of a corporation ("Aco"). The fiscal period of Aco ended on December 31 of each year. A controlled Aco. No other person or group of persons controlled Aco, directly or indirectly, in any manner whatever. We understand that at all relevant times, Aco was a Canadian-controlled private corporation ("CCPC") within the meaning of the definition in subsection 125(7).
c) A held 90% of the issued and outstanding voting and participating shares of the capital stock of a corporation ("Bco"). B held 10% of the issued and outstanding voting and participating shares of the capital stock of Bco. Bco's fiscal period ended on June 30 of each year. A controlled Bco. No other person or group of persons controlled Bco, directly or indirectly, in any manner whatever. We understand that at all relevant times, Bco was a CCPC.
d) B held all of the issued and outstanding shares of the capital stock of a corporation ("Cco"). The fiscal period of Cco ended on December 31 of each year. B controlled Cco. No other person or group of persons controlled Cco, directly or indirectly, in any manner whatever. We understand that at all relevant times, Cco was a CCPC.
(e) B held all of the issued and outstanding shares of the capital stock of a corporation ("Dco"). Dco's fiscal period ended on June 30 each year. B controlled Dco. No other person or group of persons controlled Dco, directly or indirectly, in any manner whatever. We understand that at all relevant times, Dco was a CCPC.
f) On December 30, 2004, A transferred all of the shares in the capital stock of Bco that A then held to B. Subsection 73(1) applied to that transfer.
Simultaneously with this transfer, B transferred all of the shares of the capital stock of Cco that B then held to A. Subsection 73(1) applied to that transfer.
The term "Transfers" will be used hereafter to refer to the two share transfers described above.
We understand that under clause 256(7)(a)(i)(A) and for the purposes of applying the provisions referred to in the preamble to subsection 256(7) (including section 256 and subsection 249(4)), control of Aco and Bco would be deemed not to have been acquired solely as a result of the Transfers. Indeed, at all relevant times, A and B were related persons under paragraphs 251(2)(a) and 251(6)(b.1).
You are of the view that:
Aco and Bco were associated with each other in the 2004 taxation year;
Cco and Dco were associated with each other in the 2004 taxation year;
Aco and Cco were associated with each other in the 2004 taxation year;
Aco and Dco were not associated with each other in the 2004 taxation year; and
Bco and Cco were not associated with each other in the 2004 taxation year.
You are also of the view that, under subsection 256(2), Aco could elect, in prescribed form and for the 2004 taxation year, not to be associated with either Bco or Cco. As a result of this election, you are of the view that Aco would have a nil business limit for its 2004 taxation year, that Bco would have a business limit for itself alone, and that Cco and Dco would be able to share a further business limit between them.
3) Your questions regarding the Particular Situation
You wish to know our opinion on your analysis in 2) above. You also wish to know whether, if the Transfers took place on the same day but not simultaneously, that would have any bearing on such analysis.
We are of the view that, in the Particular Situation, Aco and Bco were associated with each other during the 2004 taxation year, by virtue of paragraph 256(1)(b). In particular, at a particular point in the 2004 taxation year (i.e., from January 1, 2004 to June 30, 2004), A controlled Aco and Bco.
Similarly, Cco and Dco were associated with each other during the 2004 taxation year by virtue of paragraph 256(1)(b). In particular, at a particular point in the 2004 taxation year (i.e., from January 1, 2004 to June 30, 2004), B controlled Cco and Dco.
We are of the view that, in the Particular Situation, Aco and Cco were associated with each other in the 2004 taxation year by virtue of paragraph 256(1)(b). In particular, at a particular point in the 2004 taxation year (i.e., from the time of the Transfers to December 31, 2004), A controlled Aco and Cco.
With respect to Aco and Dco, but for subsection 256(2), these corporations would not be associated with each other in the 2004 taxation year. In particular, Aco was controlled by A in the 2004 taxation year while Dco was controlled by B in the 2004 taxation year.
We are also of the view that, but for subsection 256(2), Bco and Cco were not associated with each other in the 2004 taxation year. In particular, those corporations were not controlled by the same person at the same time in the 2004 taxation year of each of the corporations concerned. Thus, although Bco and Cco were both controlled by A at some point in their respective 2004 taxation years, those corporations were not controlled by A at the same time in their 2004 taxation years. Bco was controlled by A from July 1 2003 to June 30 2004, while Cco was controlled by A only from the time of the Transfers (after June 30, 2004) until December 31 2004.
Furthermore, but for subsection 256(2), we are of the view that Bco and Dco were not associated with each other in the 2004 taxation year. In particular, Bco was controlled by A during the 2004 taxation year while Dco was controlled by B during the 2004 taxation year.
In light of the above, Bco and Cco would be deemed to be associated with each other in the 2004 taxation year by virtue of subsection 256(2). Indeed, as indicated above, Bco and Cco would not be associated with each other but for subsection 256(2) and would be associated with the same third corporation, namely Aco.
Similarly, Aco and Dco were deemed to be associated with each other in the 2004 taxation year by virtue of subsection 256(2). In particular, as indicated above, Aco and Dco would not be associated with each other but for subsection 256(2) and would be associated with the same third corporation, Cco.
In addition, Bco and Dco would be deemed to be associated with each other in the 2004 taxation year by virtue of subsection 256(2). In particular, as indicated above, Bco and Dco would not be associated with each other but for subsection 256(2), and would be associated or deemed to be associated under subsection 256(2) with the same third corporation, namely Cco.
However, we are of the view that, under subsection 256(2), Aco could elect in prescribed form for the 2004 taxation year not to be associated with either Bco or Cco. As a result of this election, Aco would be deemed not to be associated with either Bco or Cco during the 2004 taxation year and to have a nil business limit for that year. Consequently, Bco would have a business limit for itself, and Cco and Dco would be able to share a further business limit between them.
We are also of the view that, in the context of the Particular Situation, the fact that the Transfers took place on December 30, 2004 but not simultaneously would not affect our analysis above.
In closing, it should be noted that consideration should be given to the potential application of subsection 256(2.1) in respect of a particular situation of the type described in the Particular Situation. To the extent that that provision is applicable, corporations that are not otherwise associated with each other would be deemed to be associated with each other in the year.
We hope that our comments are of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
For the Director
Corporate Reorganizations and Industrial Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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