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: Application of subsection 256(7) to particular fact situation.
Karen Cooper, LL.B.
March 22, 2005
Re: Acquisition of Control - Subsection 256(7)
This is in reply to your letter dated January 17, 2005 in which you requested our comments with respect to the application of subsection 256(7) of the Income Tax Act (the "Act") to a particular situation.
X and Y are married and they have two children, C and D. X owns 100% of the common shares of Opco. X's will provides that upon X's death 60% of the common shares of Opco will be transferred to a trust established for the benefit of C (Trust 1) and 40% of the common shares of Opco will be transferred to a trust established for the benefit of D (Trust 2). Y, C, and D are the three executors named in the will and the trustees of both Trust 1 and Trust 2. Decisions for X's estate and both trusts require the agreement of the majority of the executors/trustees. X dies and the common shares of Opco are transferred from X's estate to the two trusts described above. You have asked us for our views on the questions set out below.
The situation outlined in your letter appears to be a factual one, involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following comments which may be of assistance.
Question 1 - Will there be an acquisition of control when the common shares of Opco are transferred to Trust 1 and Trust 2, or would one of the exceptions in subsection 256(7) apply to deem that no acquisition of control has occurred?
Pursuant to the decision of the Supreme Court of Canada in M.N.R. v. Consolidated Holding Company Limited, 72 DTC 6007, and a number of subsequent cases, where the majority of the voting shares of a corporation are held by a trust, it is the trustees of the trust who have the legal ownership of the shares, who have the right to vote those shares (subject to any restrictions on such right in the trust instrument) and who, therefore, control the corporation. In the situation described above, it is Y, C and D, in their capacity as trustees of both trusts, who acquire the common shares of Opco and control Opco following the transfer of the common shares of Opco by X's estate to each of the trusts. Since Y, C and D were each related to X and they are acquiring the shares from the estate that arose upon the death of X, no acquisition of control will occur by virtue of the exception in clause 256(7)(a)(i)(D).
Question 2 - Would the proposed amendment and addition of subparagraph 257(7)(a)(iii) apply in this situation?
In view of our comments above, we do not believe that proposed subsection 256(7)(a)(iii) would apply in this situation since the acquisition of the shares by Y, C and D, would not "otherwise result in the acquisition of control of the particular corporation."
Question 3 - Would our response be the same if the shares were left 50% to Trust 1 and 50% to Trust 2?
Yes, our comments would be the same if the shares were left 50% to Trust 1 and 50% to Trust 2.
Question 4 - Would our responses to the above questions change if the executors of the estate were the same persons as the Trustees of Trust 1 and Trust 2, however, each person was unrelated to the other person?
With respect to whether our comments would change if the executors of the estate were the same persons as the trustees of Trust 1 and Trust 2 but unrelated to each other, we note that the principle basis for determining that no acquisition of control has occurred in the hypothetical situation is the relationship between the trustees and the deceased. We are not prepared to speculate on whether an acquisition of control has occurred without any information with respect to the relationship between the executors/trustees and the deceased.
We trust that these comments are helpful.
Corporate Reorganizations Section III
Income Tax Rulings Directorate
Policy and Planning Branch
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