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: A family trust with a corporate beneficiary (Holdco) owns 100% of the issued share capital of Opco. Husband and wife each own 50% of Holdco. Issue is whether Holdco and Opco are connected.
Position: General comments given. Wording of 186(2) indicates that one corporation controls another if that corporation, or taxpayers not at arm's length with that corporation, own more than 50% of the issued shares with full voting rights. As the family trust owns 100% of Opco, and Holdco and the family trust are not dealing at arm's length, Opco and Holdco are connected under 186(4).
Reasons: Wording of Legislation
XXXXXXXXXX 2007-025223
Katie Davis
(613) 957-2126
October 12, 2007
Dear XXXXXXXXXX,
Re: Subsection 186(2)
This is in response to your letter dated September 12, 2007, wherein you requested our opinion on the application of the above-mentioned provision of the Act.1
The assumed facts are as follows:
Husband and wife each own 50% of the issued shares of Holdco and a family trust owns 100% of Opco. The family trust is a personal trust under subsection 248(1). The income and capital beneficiaries of the family trust are husband, wife, their minor children, and Holdco.
You have asked us to confirm whether Opco and Holdco are connected pursuant to subsection 186(2).
In your letter you have outlined what appears to be an actual fact situation related to a particular group of taxpayers. The review of such situation is the responsibility of the local Tax Services Office that is responsible for administering the tax affairs of the taxpayers in question. Furthermore, it is the practice of the Canada Revenue Agency not to comment on such situation when the identities of the taxpayers are not known. We can, however, provide with the following general comments, which we hope will be of assistance.
Under paragraph 186(4)(a), a corporation paying a dividend ("payer corporation") is connected with the recipient corporation if the recipient corporation controls the payer corporation at that time. Under subsection 186(2), one corporation is controlled by another corporation if more than 50% of its issued share capital (having full voting rights) belongs to the other corporation, to persons with whom the other corporation does not deal at arm's length, or to the other corporation and persons with whom the other corporation does not deal at arm's length.
Under paragraph 251(1)(b), a taxpayer and a trust are deemed not to deal at arm's length if the taxpayer is beneficially interested in the trust. As Holdco is an income and capital beneficiary of the trust, it would be beneficially interested in the family trust and, therefore, does not deal at arm's length with the family trust.
As Holdco does not deal at arm's length with the family trust, which owns all of the issued shares of Opco, Holdco would be deemed to control Opco under subsection 186(2). Therefore, Holdco and Opco would be connected under subsection 186(4). This position is further confirmed in paragraph 16 of IT-269R4 "Part IV Tax on Taxable Dividends Received by a Private Corporation or a Subject Corporation" which states that a corporate beneficiary and the payer corporation are connected if the trust is a personal trust and the trust owns more than 50% of the issued shares of the payer corporation having full voting rights under all circumstances.
Our comments are provided in accordance with the practice outlined in paragraph 22 of the Information Circular IC70-6R5, dated May 17, 2002.
Yours truly,
David Palamar
Manager
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 The Act means the Income Tax Act R.S.C. 1985 (5th Supp.) c.1 as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.
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