11 October 2013 APFF Roundtable, 2013-0495751C6 F - Time of an Acquisition of Control

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256(9)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Issues: In the context of a sale of the shares of the capital stock of a corporation, whether subsection 256(9) could allow the vendor and purchaser of the shares (with a specific clause in their contract) to have an acquisition of control of the corporation at a particular time that is different than the point in time at which the purchaser acquires ownership of the shares of the capital stock of the corporation under the contract.

Position: No.

Reasons: Subsection 256(9) does not allow the parties (with a specific clause in their contract) to have an acquisition of control at a particular time that is different than the point in time at which the purchaser acquires ownership of the shares of the corporation.

APFF Federal Tax Roundtable 7 October 2013
APFF Conference 2013

Question 12

Agreement on the time of acquisition of control under subsection 256(9)

Subsection 256(9) provides that, for the purposes of the ITA, other than for the purposes of determining if a corporation is, at any time, a small business corporation or a Canadian-controlled private corporation, control of the corporation that is acquired at a particular time on a day will be deemed to have been acquired at the beginning of that day or, if the corporation so elects, at the time of the day on which the control is acquired. The election is made in the corporation's income tax return filed under Part I for the taxation year ending immediately before the acquisition of control.

It is generally accepted that the "particuar time on a day" when "control of a corporation is acquired" is the time at which the transaction documents are signed.

Question to the CRA

Can parties to a transaction choose by agreement a precise time of the day at which control is acquired that is other than the time at which the transaction documents are actually signed?

Take for example the following situation.

A shareholder ("Mr.A") sold all of his shares of ABC Inc. to a third party ("Mr.X"). The signature of all the documents necessary to effect the transfer of the shares by the parties (sales agreement, endorsement of share certificates, payment) took place at 13.30 hours on Friday, July 26, 2013.

In order for the cut-off for financial and accounting adjustments relating to the sale transaction to take place at the end of the day instead of in its middle, the following clause was provided in the share sale agreement entered into between Mr. A and Mr. X:

Notwithstanding the time of the signing of this agreement between the parties, the parties agree that for the purposes of subsection 256(9), the time when the control of ABC Inc. will be acquired by Mr. X will be at 0 hours on Saturday, July 27, 2013.

No other agreement was made between the parties respecting the transfer of ABC Inc. shares by Mr. A to Mr. X.

The purpose of this clause was to set a prospective and non-retroactive time for the acquisition of control.

CRA response

Subsection 256(9) does not allow a corporation to choose a time of acquisition of control that would be different from when the control of the corporation is actually acquired.

In the situation described above, ABC Inc. could not choose for the purposes of subsection 256(9) to have an acquisition of control by Mr. X occur at 0 hours on Saturday, July 27, 2013, if Mr. X actually became the owner of the shares of the capital stock of ABC Inc. at 13:30 hours on Friday, July 26, 2013 and acquired the control of ABC Inc. at that time.

Where the election under subsection 256(9) is effected by a corporation, the effect of the election is that the time of acquisition of control of the corporation is the time of the day the control of the corporation is acquired. In other words, the legal fiction in subsection 256(9) to the effect that “where control of a corporation is acquired … at a particular time on a day, control of the corporation shall be deemed to have been acquired … at the beginning of that day” does not apply.

Robert Gagnon
(613) 957-2108
2013-049575

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Text of Severed Letter

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.

Position: No.

TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE DU 11 OCTOBRE 2013
APFF - CONGRÈS 2013

Question 12

Choix conventionnel du moment de l'acquisition du contrôle en vertu du paragraphe 256(9) L.I.R.

Le paragraphe 256(9) L.I.R. prévoit que, pour l'application de la L.I.R., sauf lorsqu'il s'agit de déterminer si une société est une société exploitant une petite entreprise ou une société privée sous contrôle canadien à un moment quelconque, le contrôle d'une société qui est acquis à un moment donné est réputé l'être au début du jour où tombe ce moment ou, si la société en fait le choix, au moment de ce jour où le contrôle est effectivement acquis. Le choix se fait dans la déclaration de revenu de la société produite en vertu de la partie I L.I.R. pour l'année d'imposition se terminant immédiatement avant l'acquisition de contrôle.

Il est généralement acquis que le « moment de ce jour où le contrôle est effectivement acquis » est l'heure à laquelle les documents de la transaction sont signés.

Question à l'ARC

Est-ce que les parties à une transaction peuvent choisir conventionnellement (i.e. par convention) un moment exact comme « moment de ce jour où le contrôle est effectivement acquis » autre que l'heure à laquelle les documents de la transaction sont effectivement signés?

Prenez par exemple la situation suivante.

Un actionnaire (« M.A ») procède à la vente de la totalité de ses actions de la société ABC inc. en faveur d'un tiers (« M.X »). La signature de tous les documents nécessaires au transfert effectif des actions par les parties (convention de vente, endossement de certificats d'actions, paiement) a lieu à 13h30 le vendredi 26 juillet 2013.

Afin que la coupure pour les ajustements financiers et comptables relatifs à la transaction de vente ait lieu à la fin de la journée au lieu d'au milieu, la clause suivante se retrouve dans la convention de vente d'actions intervenue entre M. A et M. X :

Nonobstant le moment de la signature de la présente convention entre les parties, celles-ci conviennent qu'aux fins du paragraphe 256(9) L.I.R., le moment où le contrôle d'ABC inc. sera acquis par M. X sera à 0 h, le samedi 27 juillet 2013.

Aucune autre entente n'a été conclue entre les parties relativement au transfert des actions d'ABC inc. par M. A en faveur de M. X.

L'objectif de cette clause est de fixer un moment prospectif et non rétroactif à l'acquisition de contrôle.

Réponse de l'ARC

Le paragraphe 256(9) L.I.R. ne permet pas à une société de choisir un moment de l'acquisition de son contrôle qui serait différent du moment où le contrôle de la société est réellement acquis.

Dans la situation décrite ci-dessus, ABC inc. ne pourrait choisir aux fins du paragraphe 256(9) L.I.R. d'avoir une acquisition de contrôle par M.X à 0 h, le samedi 27 juillet 2013, si M.X devient effectivement propriétaire des actions du capital-actions d'ABC inc. à 13h30 le vendredi 26 juillet 2013 et acquiert le contrôle effectif d'ABC inc. à ce moment.

Lorsque le choix prévu au paragraphe 256(9) L.I.R. est effectué par une société, l'effet du choix est que le moment de l'acquisition du contrôle de la société correspond au moment du jour où le contrôle de la société est effectivement acquis. Autrement dit, la fiction légale au paragraphe 256(9) L.I.R. à l'effet que « le contrôle d'une société qui est acquis à un moment donné est réputé l'être au début du jour où tombe ce moment » ne s'applique alors pas.

Robert Gagnon
(613) 957-2108
2013-049575

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 256 - Subsection 256(9)

s. 256(9) does not permit the parties to elect as to the actual time of acquisition of control

The questioner asserted:

It is generally accepted that the "particuar time on a day" when "control of a corporation is acquired" is the time at which the transaction documents are signed.

The questioner then postulated that the control of ABC Inc. is acquired by Mr. X at 13:30 on July 26, 2013 when the signature of the sales agreement, endorsement of the share certificates and payment of the purchase price take place. However, given that the cut-off for financial purposes will be the end of the day, the following clause was inserted in the sale agreement:

Notwithstanding the time of the signing of this agreement between the parties, the parties agree that for the purposes of subsection 256(9), the time when the control of ABC Inc. will be acquired by Mr. X will be at 0 hours on Saturday, July 27, 2013.

CRA stated (TaxInterpretations translation):

Subsection 256(9) does not allow a corporation to choose a time of acquisition of control that would be different from when the control of the corporation is actually acquired.

... ABC Inc. could not choose for the purposes of subsection 256(9) to have an acquisition of control by Mr. X occur at 0 hours on Saturday, July 27, 2013, if Mr. X actually became the owner of the shares of the capital stock of ABC Inc. at 13:30 hours on Friday, July 26, 2013 and acquired the control of ABC Inc. at that time.

1990 Round Table, Q.39: Respecting where Corporations A and B are amalgamated on the same day in which control of Corporation B was acquired by Corporation A, and no election is made under s. 256(9).

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11 October 2013 APFF Roundtable, 2013-0495751C6 F - Time of an Acquisition of Control

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