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: Where a person controls a corporation in a particular situation, could paragraph 251(5)(a) apply in that situation?
Position: No, where there is no provision stating otherwise in the Act, a group is not in position to control or does not control a corporation when a single person controls the corporation.
Reasons: The comments of the Federal Court-Trial Division in Southside Car Market Ltd. v. The Queen with respect to that principle apply even in circumstances where the shareholders are related and apply also for purposes other than the association rules.
XXXXXXXXXX
2010-036334
Sylvie Labarre, CA
October 26, 2010
Dear Sir:
Re: Related corporations
This is in reply to your letter of March 23, 2010 in which you requested our views on whether two corporations are related in the following situation.
Unless otherwise stated, all statutory references in this letter are references to the provisions of the Income Tax Act (the "Act").
Facts
ACo and BCo are "Canadian-controlled private corporations" within the meaning of subsection 125(7).
A (the parent) owns 420 voting preference shares of the capital stock of ACo. A's adult child, X, owns 580 voting preferences shares of the capital stock of ACo. Each preference share is entitled to one vote per share.
All of the issued and outstanding common shares of the capital stock of ACo (being 100 common shares) are held by an inter vivos family trust. The ACo common shares are entitled to one vote per share. The beneficiaries are X and X's children. An arm's length person is the trustee of the trust.
All of the issued and outstanding common shares of the capital stock of BCo (being 100 common shares) are owned equally by each of Y and Z, two adult cousins. The Bco common shares are entitled to one vote per share. No other shares have been issued by BCo. Y and Z form an unrelated group that controls BCo. They are A's grandchildren and X's nephews.
Question
Your question is whether ACo is related to BCo considering the application of subparagraph 251(2)(c)(v) and paragraph 251(5)(a).
Our comments
The particular situation outlined in your letter appears to relate to a factual one, involving specific taxpayers. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular situation involves completed transactions, the inquiry should be addressed to the relevant tax services office. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.
In your view, ACo and BCo would be related pursuant to subparagraph 251(2)(c)(v) because paragraph 251(5)(a) would apply even if X controls ACo. Consequently, A and X would be considered to be a related group that controls ACo. Your opinion is based, inter alia, on the fact that the present situation is different from the one in Southside Car Market Ltd. v. The Queen, (FCTD), 82 DTC 6179. In your view, the Southside Car Market decision dealt with unrelated persons and was decided in the context of the association rules in subsection 256(1), while paragraph 251(5)(a) explicitly provides that a related group in a position to control a corporation shall be deemed to be a related group that controls the corporation. You also analysed the ordinary meaning of being "in a position" to control a corporation found in paragraph 251(5)(a).
We do not agree with your view for the following reasons.
There is no statutory definition of the expression "a group in position to control" a corporation in the Act. After the comments made by the Federal Court-Trial Division in the Southside Car Market decision, we have taken the position that, where there is no provision stating otherwise in the Act, a group is not in a position to control or does not control a corporation when a single person controls the corporation. This position is based on the following comments of the Federal Court-Trial Division in the Southside Car Market decision:
...Thus, if a single person owns sufficient shares to exercise control, resort to whether a group of persons holds control is precluded. The condition precedent to the consideration of control in a group is that no single person has control.
In the absence of a statutory definition, we relied on the judiciary comments with respect to the notion of control by a group. Our position is based on the understanding that the comments in the Southside Car Market decision apply even in situations where the shareholders of a corporation are related persons and should not be limited to the context of the association rules in subsection 256(1). The Federal Court-Trial Division did not make a distinction between "related" and "unrelated" situations in the Southside Car Market decision.
In Leslie Emory v. The Queen, 2010 DTC 1074, the Tax Court of Canada recently reiterated the principle established in the Southside Car Market decision: the fact the shareholder controlled a corporation would preclude the other shareholder from being part of a group that controlled such corporation. However, as the context of the Leslie Emory decision was the application of section 84.1 and as the principle established in the Southside Car Market decision has been statutorily overridden for purposes of section 84.1 pursuant to paragraph 84.1(2.2)(d), the decision of the Tax Court of Canada in Leslie Emory was based on the provisions of the Act.
In our view, paragraph 251(5)(a) is not a provision that overrides the principle established in the Southside Car Market decision, such as those found in paragraph 84.1(2.2)(d) and in subparagraph 256(1.2)(b)(ii) and 212.1(3)(d)(iii). Therefore, we do not think that paragraph 251(5)(a) should take precedence over the principle established in the Southside Car Market decision.
Consequently, we are of the opinion that, in your example, A and X would not form a related group in a position to control ACo since ACo would be effectively controlled by a single person, X.
For these reasons, we are of the opinion that ACo and BCo would not be related in the present situation because X, the person controlling ACo, would not be related to Y and Z.
We trust our comments will be of assistance to you.
Yours truly,
Stéphane Prud'Homme, LL.B., M. Fisc.
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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