12 December 2013 External T.I. 2013-0484031E5 - Application of clause 256(7)(a)(i)(B)

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: The application of clause 256(7)(a)(i)(B) where the controlling interest in a corporation is acquired by a limited partnership.

Position: In applying clause 256(7)(a)(i)(B), it is necessary to consider whether the partner or partners that control the voting rights in respect of the shares of the corporation held by the limited partnership would be related to the corporation immediately before control of the corporation was acquired.

Reasons: See below

XXXXXXXXXX
2013-048403
Katie Campbell
(613) 957-2126

December 12, 2013

Dear XXXXXXXXXX:

We are writing in response to your letter of April 3, 2013 wherein you requested a technical interpretation regarding the application of clause 256(7)(a)(i)(B) of the Act (footnote 1) in the situation where a limited partnership which owns less than 50% of the voting shares of a corporation will, as a result of a reorganization of capital, own more than 50% of the voting shares of a corporation.

Specifically, you have asked who we would consider to be the "particular person", described in clause 256(7)(a)(i)(B), in a situation where a controlling interest in the corporation has been acquired by a limited partnership.

This technical interpretation provides general comments about the provisions of the Income Tax Act.  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

Clause 256(7)(a)(i)(B) applies to deem control of a particular corporation not to have been acquired where a particular person, that acquired control of corporation as a result of the acquisition of shares of the corporation, was related to the corporation (otherwise than because of a right referred to in paragraph 251(5)(b)) immediately before control of the corporation was acquired.

The partnership agreement of a partnership should be taken into account in determining who controls a corporation when a partnership owns shares in a corporation. The partnership agreement and the equity interest of the members must be examined to determine which member(s) of the partnership can exercise voting rights in respect of the shares of the corporation. In the case of a limited partnership, it is our understanding that it is usually the general partner that can exercise those rights.

Although subsection 251(2) does not include the word "partnership" in the definition of "related persons," it is the Canada Revenue Agency's practice, relying on the provisions of subsection 96(1), to consider a partnership to be a person for the purposes of computing the partnership income under Division B of Part I. In applying the provisions of the Act not involving the calculation of income of the partnership, the references to the word "person" in subsection 251(2) should be read as references to the partners of the partnership.

Consequently, for the purpose of determining whether clause 256(7)(a)(i)(B) would apply where the controlling interest in a corporation is acquired by a limited partnership, it is necessary to determine whether the partner or partners that control the voting rights in respect of the shares of the corporation held by the limited partnership would be related to the corporation immediately before control of the corporation was acquired.

Our comments are provided in accordance with the practice outlined in paragraph 22 of IC 70-6R5, dated May 17, 2002.

Yours truly,

David Palamar
Manager
Reorganizations Section I
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

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.