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, in the circumstances where a sale of the shares of the capital stock of a Canadian-controlled private corporation ("CCPC") to a non-resident purchaser results in a change of CCPC status and a change of control on the same day, the hypothetical corporation would be considered to be a CCPC throughout the taxation year such that the small business deduction provisions of subsection 125(1) would apply?
Position: Clarifications provided.
Reasons: In accordance with the Act and our previous positions.
XXXXXXXXXX
2011-042444
S. Snell
(613) 946-3261
December 2, 2011
Dear XXXXXXXXXX :
RE: Potential Implications of the Application of Subsections 249(3.1) and 249(4) Where a Change in Status of a Canadian-controlled private corporation ("CCPC") and a Change in Control Occur on the Same Day
We are writing in response to your query in which you request our comments in respect of the potential application of subsections 249(3.1) and (4) in the circumstance where a sale of all of the shares of the capital stock of a CCPC to a non-resident purchaser results in a change of CCPC status and a change of control on the same day.
Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or a subparagraph is a reference to the relevant provision of the Income Tax Act (the "Act").
1) Facts and Assumptions
Our understanding of the facts and assumptions is as follows:
1. Corporation A ("Corp A") would be a CCPC within the meaning in subsection 125(7). Corp A's taxation year-end is December 31.
2. On November 30, 20xx, a non-resident purchaser and Corp A would enter into a legally binding agreement of purchase and sale (the "Agreement") for all of the issued and outstanding shares of the capital stock of Corp A.
3. The expected closing date for the sale of the shares of the capital stock of Corp A would also occur on November 30, 20xx.
4. Corp A would not elect in its return of income filed for its taxation year that ends immediately before the acquisition of control not to have the provisions of subsection 256(9) apply.
2) Your Views
Your views and analysis are based on the following provisions:
The preamble in subsection 125(1) provides that there may be deducted from the tax otherwise payable under Part I for a taxation year by a corporation that was, throughout the taxation year, a CCPC, an amount equal to the corporation's small business deduction rate for the taxation year calculated in accordance with the remainder of the provision.
Paragraph (a) of the definition of CCPC in subsection 125(7) states that a CCPC means a private corporation that is a Canadian corporation other than a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation), by one or more corporations described in paragraph (c), or by any combination of them.
Paragraph 249(3.1)(a) states that if at any time a corporation becomes or ceases to be a CCPC, otherwise than because of an acquisition of control to which subsection 249(4) would, if the Act were read without reference to subsection 249(3.1), apply, subject to paragraph 249(3.1)(c), the corporation's taxation year that would, if the Act were read without reference to subsection 249(3.1), include that time is deemed to end immediately before that time. Furthermore, paragraph 249(3.1)(b) states that a new taxation year of the corporation is deemed to begin at that time.
Paragraph 249(4)(a) states that where at any time control of a corporation (other than a corporation that is a foreign affiliate of a taxpayer as described in the preamble) is acquired by a person or group of persons, for the purposes of the Act, subject to paragraph 249(4)(c), the taxation year of the corporation that would, but for this paragraph, have included that time shall be deemed to have ended immediately before that time. Furthermore, paragraph 249(4)(b) states that a new taxation year of the corporation shall be deemed to have commenced at that time.
Subparagraph 251(5)(b)(i) provides that, for the purposes of subsection 251(2) and the definition of CCPC in subsection 125(7), where at any time a person has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to, or to acquire, shares of the capital stock of a corporation or to control the voting rights of such shares, the person shall, except where the right is not exercisable at that time because the exercise thereof is contingent on the death, bankruptcy or permanent disability of an individual, be deemed to have the same position in relation to the control of the corporation as if the person owned the shares at that time.
Subsection 256(9) provides that, for the purposes of the Act, other than for the purposes of determining if a corporation is, at any time, a small business corporation or a CCPC, where control of a corporation is acquired by a person or group of persons at a particular time on a day, control of the corporation shall be deemed to have been acquired by the person or group of persons, as the case may be, at the beginning of that day and not at the particular time unless the corporation elects in its return of income under Part I filed for its taxation year that ends immediately before the acquisition of control not to have subsection 256(9) apply.
You submit that subsection 256(9) would apply to deem that control of Corp A (other than for the purposes of determining if Corp A is, at any time, a small business corporation or a CCPC) would be acquired at the beginning of the day on which the shares of the capital stock of Corp A would be sold, namely November 30, 20xx, and not at the particular time of the sale of those shares on that day. Further, it is your view that the change of control provisions of subsection 249(4) would apply in this circumstance such that, among other things, the taxation year of the corporation that would, but for paragraph 249(4)(a), have included that time shall be deemed to have ended immediately before that time. Accordingly, you contend that Corp A would have a taxation year-end immediately before the earliest moment on November 30, 20xx, being the latest moment on November 29, 20xx.
You question whether or not paragraph 251(5)(b) would apply such that the non-resident purchaser would be deemed to have the same position in relation to the control of Corp A as if the non-resident purchaser owned the shares of the capital stock of Corp A at the time of the signing of the Agreement, resulting in Corp A ceasing to be a CCPC at that particular time. In that event, you suggest that Corp A's taxation year that would have included the signing of the Agreement would be deemed to end immediately before that specific time on the day of the signing, being November 30, 20xx. The foregoing interpretation would result in Corp A being deemed to have two taxation year ends - one at the latest moment on November 29, 20xx, followed by a second year-end that is deemed to end immediately before the time that is the signing of the Agreement on November 30, 20xx. In this situation, you submit that Corp A would continue to be a CCPC throughout the taxation years ending at the latest moment on November 29, 20xx, and subsequently, for the period from the earliest moment on November 30, 20xx to the moment immediately before the signing of the Agreement on November 30, 20xx, such that the small business deduction provisions of subsection 125(1) would apply in both cases.
In the alternative, you query whether or not subsection 249(4) would preclude the application of subsection 249(3.1) in the circumstance where the signing of the Agreement did not create a paragraph 251(5)(b) right resulting in the loss of CCPC status for Corp A on that event. In this circumstance, you suggest that subsections 256(9) and 249(4) would apply as previously described such that Corp A would be deemed to have a taxation year-end at the latest moment on November 29, 20xx as a result of the acquisition of control. The application of subsection 249(4) would, however, also preclude the application of subsection 249(3.1) where Corp A would not cease to be a CCPC on that particular day by virtue of the application of paragraph 251(5)(b). Accordingly, you contend that Corp A would continue to be a CCPC until the time of closing on November 30, 20xx such that Corp A would be a CCPC throughout the taxation year ending at the latest moment on November 29, 20xx for purposes of the application of the small business deduction provisions. Corp A would not, however, be a CCPC throughout the year for purposes of its taxation year ending on December 31, 20xx and, consequently, you state that the provisions of subsection 125(1) would not apply in respect of that particular taxation year.
3) Our Comments
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 an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The particular situation outlined in your letter appears to be a factual one, involving specific taxpayers and completed transactions. However, we offer the following general comments.
We are generally in agreement with your conclusions in respect of the application of subsections 256(9) and 249(4). More specifically, in the circumstances described above, but not for the purposes of determining if Corp A is a CCPC, the application of these provisions would result in an acquisition of control of Corp A being deemed to have occurred at the beginning of the day on November 30, 20xx, with a corresponding taxation year-end being deemed to have occurred immediately before that time, that is the latest moment on November 29, 20xx. Furthermore, a new taxation year for Corp A would be deemed to have commenced at the beginning of the day on November 30, 20xx.
With respect to your query regarding the potential application of paragraph 251(5)(b), it is our view that, if the Agreement entitles the non-resident purchaser to a right described in paragraph 251(5)(b), Corp A would cease to be a CCPC at the time of the signing of the Agreement as a result of the fact that the non-resident purchaser would be deemed to have the same position in relation to the control of Corp A as if the non-resident purchaser owned the shares of the capital stock of Corp A at that particular time. In accordance with subsection 249(3.1), where Corp A ceases to be a CCPC otherwise than because of an acquisition of control to which subsection (4) would apply, Corp A's taxation year that would include that time is deemed to end immediately before that time. Consequently, Corp A would have a second deemed taxation year-end that would occur immediately before the signing of the Agreement on November 30, 20xx. Accordingly, Corp A would continue to be a CCPC throughout the taxation years ending at the latest moment on November 29, 20xx and immediately before the signing of the Agreement on November 30, 20xx, such that the small business deduction provisions of subsection 125(1) would apply in respect of these taxation years.
Furthermore, it is worthwhile to note that Corp A could not avail itself of the benefits of paragraph 249(3.1)(c) on these particular facts and circumstances. More specifically, paragraph 249(3.1)(c) provides that a corporation's taxation year that would, if the Act were read without reference to subsection 249(3.1), have been its last taxation year (for example, the taxation year ending at the latest moment on November 29, 20xx) that ended before that time (for example, the time that is the signing of the Agreement) is deemed instead to end immediately before that time if, among other things, within that 7-day period no person or group of person would acquire control of the corporation, and the corporation would not become or cease to be a CCPC. In this particular case, there would be an acquisition of control of Corp A during the aforementioned 7-day period, being deemed to have occurred at the beginning of the day on November 30, 20xx pursuant to subsection 256(9), contrary to the requirements of subparagraph 249(3.1)(c)(ii).
In the circumstance where there would be no paragraph 251(5)(b) right created prior to the acquisition of control of Corp A, Corp A would cease to be a CCPC as a result of the acquisition of control. The preamble of subsection 249(3.1) precludes the application of the provisions of that subsection where a corporation would cease to be a CCPC because of an acquisition of control to which subsection 249(4) would apply. Consequently, Corp A would be a CCPC throughout the taxation year ending at the latest moment on November 29, 20xx for purposes of the application of the small business deduction provisions. We concur with your view that subsection 125(1) would not, however, apply in respect of Corp A's taxation year ending on December 31, 20xx (assuming that Corp A would choose a December 31st year-end) as a result of the fact that Corp A would cease to be a CCPC on November 30, 20xx at the time of the acquisition of control by the non-resident purchaser. Consequently, Corp A would not be a CCPC throughout its taxation year beginning at the earliest moment on November 30, 20xx and ending at the latest moment on December 31, 20xx.
The above comments represent our general view with respect to the subject matter and are not binding on the CRA, as explained in paragraph 22 of Information Circular 70-6R5.
We trust that the foregoing will be of assistance to you.
Yours truly,
Stéphane Prud'Homme, LL.B, M. Fisc.
Manager
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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