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 the corporations in questions are associated for the purpose of the definition of Qualifying Corporations and for the purpose of calculating their expenditure limit under 127(10.2) of the Act.
Position: Associated
Reasons: The corporations would be associated under at least paragraph 256(1)(e).
XXXXXXXXXX 2005-013435
Shaun Harkin, CMA
October 3, 2005
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Scientific Research & Experimental Development ("SR&ED")
We are writing in response to your letter of May 25, 2005, wherein you asked whether, considering new legislation 127(10.22) and 127(10.23) of the Income Tax Act (the "Act"), the corporations would be considered associated, after the implementation of the employee stock option plan, for purposes of calculating eligibility for the SR&ED expenditure limit and refundable investment tax credit in the following hypothetical situation:
? Opco 1 ownership is Brother A 51%, Brother B 41%, Unrelated Person C 8%.
? Opco 2 ownership is Brother A 51%, Brother B 41%, Unrelated Person C 8%.
? The amount of Stock held by the three current shareholders will decrease proportionately as various employees become shareholders through an employee stock option ownership plan. Through this plan it is intended that employee ownership will increase to 10% through equal reduction in ownership by Brother A, Brother B and Unrelated Person C.
New subsections 127(10.22) and 127.1(2.2) of the Act provide special relieving rules where, the particular corporation is associated with another corporation, but, among other things, would not be so associated if the Act were read without reference to paragraph 256(1.2)(a) of the Act. In our view, notwithstanding this new legislation, after the implementation of the employee stock option plan, Opco 1 and Opco 2 would be controlled by a related group (Brothers A and B) and each of the members of the related groups would be related to all of the members of the other related group, and one or more persons (either Brother A or B) who were members of both related groups would own in respect of each corporation not less than 25% of the issued shares. Accordingly, under at least paragraph 256(1)(e) of the Act, Opco 1 and Opco 2 would be considered associated.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.
We trust the above comments are of assistance.
Yours truly,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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