14 March 2007 External T.I. 2006-0212801E5 - Meaning of "capital" for non-share 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: 1. Does the fact that all voting rights are exclusive to members that are municipalities constitute ownership of "capital" of a non-share corporation by the municipalities, for the purposes of paragraph 149(1)(d.5)?

2. What is the meaning of the expression "controlled directly or indirectly in any manner whatever" in subsection 149(1.3)?

Position: 1. No.

2. Same meaning as given to this expression in subsections 256(5.1) and (6).

Reasons: 1. The word "capital" is not defined in the Act or jurisprudence and we have to look to the degree of control over the non-share corporation to establish the ownership of its capital and to determine whether the 90% test is met. Since this is a factual determination, no single factor is determinative of who owns capital of a non-share corporation. For this reason, the voting rights are not by themselves, sufficient to conclude, in this particular case, that the municipalities own at all relevant times the capital of the corporation in accordance with paragraph 149(1)(d.5).

2. Wording of the Act.

XXXXXXXXXX 							2006-021280
								Adèle St-Amour, CA
March 14, 2006

Dear XXXXXXXXXX:

Re: Request for technical interpretation - Municipal Corporation

This is in reply to your letter of October 25, 2006, requesting our comments on the application of paragraph 149(1)(d.5) of the Income Tax Act (the "Act") and proposed paragraph 149(1.3)(b) in a particular case.

Your letter deals with the meaning of "capital" for the purpose of applying the 90% ownership test in paragraph 149(1)(d.5), to a corporation without share capital. In your particular situation, there are various categories of members including municipalities, private companies, organizations and individuals. You mention that voting rights, which are exclusive to members that are municipalities, constitute the only property rights in respect of the corporation. For this reason, you conclude that the municipalities own the capital of the corporation which is exempt from Part I tax pursuant to paragraph 149(1)(d.5) and furthermore, proposed paragraph 149(1.3)(b) does not apply to deny the exemption.

Unless otherwise stated, all references to a statute are to the Act.

The subject matter of your letter appears to pertain to a particular situation. Written confirmation of the tax implications inherent in particular transactions are 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, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, any inquiries should be addressed to the relevant tax service office. However, we are prepared to provide the following comments that may be of assistance to you. Please note that these comments are general in nature, may not apply in a particular situation and are not binding on the Canada Revenue Agency ("CRA").

Subject to subsections 149(1.2) and (1.3), paragraph 149(1)(d.5) exempts a corporation from Part I tax on its taxable income for a particular period if not less than 90% of its capital is owned by one or more municipalities in Canada and the income of the corporation from activities carried on outside the geographical boundaries of the municipalities does not exceed 10% of its income for the period. Legislative proposals tabled in November 2006 and applicable to taxation years that begin after May 8, 2000 would extend the application of paragraph 149(1)(d.5) of the Act to corporations owned by a municipal or public body performing a function of government.

In addition, subsection 149(1.1) provides that for the purpose of determining the 100% and 90% ownership tests in paragraphs (d) to (d.6) any right to acquire shares or capital of a corporation should be considered as though the right had been exercised.

The word "capital", as used in paragraph 149(1)(d.5), is not defined in the Act or jurisprudence. To establish the ownership of capital of a non-share corporation and to determine whether the 90% test is met, the CRA longstanding position has been to look to the degree of control over the corporation.

Therefore, in our opinion, the determination of the ownership of capital of a non-share corporation is a question of fact, which necessitates a review of all the relevant documents such as articles of incorporation, by-laws and agreements relating to control of the corporation and its assets. We consider that the following factors would be relevant in making such determination: the identity of the members, the structure of the corporation, who exercises control over the financing, operation and direction of the corporation, who has the right to elect or change the board of directors or to reverse its decision, who can contribute capital and receive a distribution of capital, details regarding asset distribution on winding-up or dissolution and whether a person other than her Majesty in right of Canada, a province or a Canadian municipality has any right to acquire any capital of the corporation.

Since the capital ownership test in paragraph 149(1)(d.5) is a factual determination, it is our opinion, that no single factor is determinative of who owns the capital of a corporation without share capital. Therefore, we are of the view that the voting rights that you describe in your letter are not, in themselves, sufficient to conclude that the municipalities own at all relevant times the capital of the corporation in accordance with paragraph 149(1)(d.5).

For the purposes of paragraphs 149(1)(d) to (d.6), proposed paragraph 149(1.3)(b) provides that a person is not exempt from tax on its taxable income for a period in a taxation year if at any time during the period the person is, or would be if the person were a corporation, controlled, directly or indirectly in any manner whatever, by a person (or by a group of persons that includes a person) other than:

• Her Majesty in right of Canada or of a province, a municipality in Canada,

• a municipal or public body performing a function of government in Canada, or

• a commission, an association or a corporation, to which any of paragraphs 149(1)(d) to (d.6) apply.

It is a question of fact whether or not a corporation is "controlled, directly or indirectly in any manner whatever" by a person or a group of persons, which can only be determined after a review of all relevant factors of a particular situation. In general, the expression refers to a controller, who has any direct or indirect influence that, if exercised, would result in control in fact of the person.

For further details about this expression, reference should be made to paragraphs 19 to 23 of Interpretation Bulletin IT-64R4, Corporations: Association and Control, which contains comments on the determination of de facto control for this purpose. We also refer you to the Income Tax Technical News No. 25 and No. 32, which provide comments on the relevant jurisprudence on this matter.

Consequently, if a corporation is controlled, directly or indirectly in any manner whatever by a person or a group of persons, other than those mentioned above, we are of the view that the corporation would not be exempted from tax on its taxable income for a period in a taxation year by the application of paragraph 149(1)(d.5), even if the corporation satisfies the conditions therein.

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 CRA.

Yours truly,

Ghislain Martineau
Section Manager
Section du secteur financier et des entités exonérées
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch