10 October 2014 October APFF Roundtable Q. 18, 2014-0538081C6 F - 2014 APFF Roundtable, Q. 18 - Connected corporations

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186(2) 186(4)

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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: Two corporations, Aco and Cco, hold the shares of the capital stock of another corporation, Bco. Aco holds one share of a class of shares of the capital stock of Bco that carries 1,000 votes per share (representing 1% of the issued and outstanding shares of the capital stock of Bco and 90.9% of the total votes). Cco holds 100 shares of another class of shares of the capital stock of Bco that carries one vote per share (representing 99% of the issued and outstanding shares of the capital stock of Bco and 9.1% of the votes). Aco and Cco are dealing at arm's length. No other shares of the capital stock of Bco (having full voting rights under all circumstances) are issued and outstanding. Pursuant to paragraph 186(4)(a) a payer corporation is connected with a particular corporation at any time in a taxation year of the particular corporation if the payer corporation is controlled (otherwise than by virtue of a right referred to in paragraph 251(5)(b)) by the particular corporation at that time. Subsection 186(2) states that for the purposes of Part IV tax, one corporation is controlled by another corporation if more than 50% of its issued share capital (having full voting rights under all circumstances) belongs to, inter alia, the other corporation. At the 1997 APFF Round Table and in document No. 2010-0359551I7, the CRA stated that the requirement provided in subparagraph 186(4)(b)(i) refers to a calculation of the number of shares issued and outstanding having full voting rights under all circumstances. The CRA added that the same position would apply for the purposes of subsection 186(2). Questions: a) whether Bco is controlled by Cco pursuant to subsection 186(2) since it holds more than 50% of Bco's issued shares having full voting rights under all circumstances (i.e. 100/101) and, consequently, Bco is connected with Cco pursuant to paragraph 186(4)(a); b) whether Bco is not controlled by Aco pursuant to subsection 186(2) since it does not hold more than 50% of Bco's issued shares having full voting rights under all circumstances (i.e. 1/101) and, consequently, Bco is not connected with Aco pursuant to paragraph 186(4)(a).

Position: General comments provided. The above-mentioned position is still valid.

Reasons: Wording of the Act.

APFF - 2014 CONFERENCE

Question 18

Number of shares vs. number of votes

Two corporations, Aco and Cco, hold the shares of another corporation, Bco. Aco holds 1 Bco share bearing 1,000 votes per share (i.e., 1% of the number of shares and 90.9% of the votes). Cco holds 100 Bco shares, carrying one (1) vote per share (i.e., 99% of the number of shares and 9.1% of the votes). Aco and Cco deal with each other at arm's length. No other shares with full voting rights under any circumstances have been issued.

Pursuant to paragraph 186(4)(a), a payer corporation is connected with a particular corporation if the payer corporation is controlled by the particular corporation at that time. Subsection 186(2) provides that, for the purposes of Part IV, one corporation is controlled by another corporation if more than 50% of its issued share capital stock (having full voting rights under all circumstances) belong to the other corporation.

At the 1997 APFF Roundtable and in Technical Interpretation 2010-0359551I7, the CRA indicated that the test provided in ITA subparagraph 186(4)(b)(i) refers to the number of share carrying a right to vote in all circumstances rather than simply the number of votes independent of the number of shares. The CRA further indicated that the test provided in ITA subsection 186(2) was interpreted in the same manner.

Questions to the CRA

a) Does the CRA consider that, by virtue of subsection 186(2), Bco is controlled by Cco because Cco holds more than 50% of Bco’s issued share capital stock with full voting rights under all circumstances (i.e., 100 out of 101 shares) and, therefore, Bco is connected to Cco under subparagraph 186(4)(a)?

b) On the other hand, does the CRA consider that, by virtue of subsection 186(2), Bco is not controlled by Aco since Aco does not hold more than 50% of Bco's issued share capital stock with full voting rights under all circumstances (i.e., 1 share out of 101 shares) and that, consequently, Bco is not connected with Aco under subparagraph 186(4)(a)?

CRA response

Given that the statement in this question only summarizes a hypothetical situation, including the value of the shares in the capital stock of Bco, we will limit ourselves to making the following general comments.

Paragraph 186(4)(a) provides that, for the purposes of Part IV, a payer corporation is connected with a particular corporation at any time in a particular taxation year of the corporation if the payer corporation is controlled (otherwise than by virtue of a right referred to in paragraph 251(5)(b)) by the particular corporation at that time.

Consistently with the longstanding position of the Directorate, we are of the view that the concept of control referred to in ITA subparagraph 186(4)(a) is as defined in subsection 186(2), which contemplates that a corporation is controlled by another corporation if more than 50% of the issued shares in its capital (having full voting rights under all circumstances) belong 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.

We also confirm that the position expressed at the 1997 APFF Conference Roundtable, as well as in document number 2010-0359551I7, is still the position of our Directorate respecting the share ownership test provided for under subparagraph 186(4)(b)(i).

However, we are also of the view that if it emerged that the utilization of a capital structure as unusual as that described in your question was part of a series of transactions effected with a view to avoiding the payment of Part IV tax, it would be necessary to consider the application of subsection 245(2).

Jean Lafrenière
(613) 941-2956
October 10, 2014
2014-053808

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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: General comments provided. The above-mentioned position is still valid.

Reasons: Wording of the Act.

APFF - CONGRÈS 2014

Question 18

Nombre d'actions par opposition au nombre de votes

Deux sociétés, Aco et Cco, détiennent les actions d'une autre société, Bco. Aco possède 1 action de Bco lui accordant 1 000 votes par action (soit 1 % du nombre d'actions et 90,9 % des votes). Cco possède 100 actions de Bco lui accordant un (1) vote par action (soit 99 % du nombre d'actions et 9,1 % des votes). Aco et Cco n'ont pas de lien de dépendance. Aucune autre action comportant plein droit de vote en toutes circonstances n'est émise.

En vertu de l'alinéa 186(4)a) L.I.R., une société payante est rattachée à une société donnée lorsque la société payante est contrôlée par la société donnée à ce moment. Le paragraphe 186(2) L.I.R. précise qu'aux fins de la Partie IV, une société est contrôlée par une autre société si plus de 50 % des actions émises de son capital-actions (comportant plein droit de vote en toutes circonstances) appartiennent à l'autre société.

Lors de la Table ronde de l'APFF en 1997 et dans l'interprétation technique 2010-0359551I7, l'ARC a indiqué que le test prévu au sous-alinéa 186(4)b)(i) L.I.R. réfère au nombre d'actions comportant un droit de vote en toutes circonstances plutôt qu'au simple nombre de votes indépendamment du nombre d'actions. L'ARC a également indiqué que le test prévu au paragraphe 186(2) L.I.R. serait interprété de la même façon.

Questions à l'ARC

a) Est-ce que l'ARC considère qu'en vertu du paragraphe 186(2) L.I.R., Bco est contrôlée par Cco puisque cette dernière détient plus de 50 % du nombre d'actions émises du capital-actions de Bco comportant plein droit de vote en toutes circonstances (soit 100 sur 101 actions), et par conséquent, Bco est rattachée à Cco en vertu du sous-alinéa 186(4)a) L.I.R.?

b) D'autre part, est-ce que l'ARC considère qu'en vertu du paragraphe 186(2) L.I.R., Bco n'est pas contrôlée par Aco puisque cette dernière ne détient pas plus de 50 % du nombre d'actions émises du capital-actions de Bco comportant plein droit de vote en toutes circonstances (soit 1 action sur 101 actions) et que, par conséquent, Bco n'est pas rattachée à Aco en vertu du sous-alinéa 186(4)a) L.I.R.?

Réponse de l'ARC

Compte tenu que l'énoncé de la présente question ne décrit que sommairement une situation donnée hypothétique, notamment en ce qui concerne la valeur des actions du capital-actions de Bco, nous nous contenterons de formuler les commentaires généraux suivants.

L'alinéa 186(4)a) L.I.R. édicte que, pour l'application de la Partie IV, une société payante est rattachée à une société donnée à un moment donné d'une année d'imposition de cette dernière lorsque la société payante est contrôlée (autrement qu'au moyen du droit visé à l'alinéa 251(5)b) L.I.R.) par la société donnée à ce moment.

Conformément à la position de longue date émise par notre Direction, nous sommes d'avis que la notion de contrôle à laquelle l'alinéa 186(4)a) L.I.R. réfère est spécifiquement définie au paragraphe 186(2) L.I.R., à savoir qu'une société est contrôlée par une autre société si plus de 50 % des actions émises de son capital-actions (comportant plein droit de vote en toutes circonstances) appartiennent à l'autre société, à des personnes avec lesquelles cette autre société a un lien de dépendance ou à la fois à l'autre société et à des personnes avec lesquelles l'autre société a un lien de dépendance.

Nous vous confirmons également que la position émise lors de la Table ronde de l'APFF du Congrès de 1997, de même que dans le document numéro 2010-0359551I7, représente toujours la position de notre Direction concernant le test relatif à la propriété d'actions prévu au sous-alinéa 186(4)b)(i) L.I.R.

Par ailleurs, nous sommes d'avis que s'il s'avérait que l'utilisation d'une structure de capital-actions aussi insolite que celle décrite dans votre question faisait partie d'une série d'opérations élaborées dans le but d'éviter qu'une société ait à payer un impôt de la Partie IV, il faudrait alors considérer l'application du paragraphe 245(2) L.I.R.

Jean Lafrenière
(613) 941-2956
Le 10 octobre 2014
2014-053808

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 186 - Subsection 186(2)

test contemplates relative number of voting shares

Aco holds one share of Cco bearing 1000 votes and Cco holds 100 share of Bco carrying one vote per share. Aco and Cco deal at arm's length. The questioner noted (TaxInterpretations translation) that at the 1997 APFF Roundtable in 2010-0359551I7 "CRA indicated that the test provided in ITA subparagraph 186(4)(b)(i) refers to the number of share carrying a right to vote in all circumstances rather than simply the number of votes independent of the number of shares. The CRA further indicated that the test provided in ITA subsection 186(2) was interpreted in the same manner." Is Bco controlled by Cco under s. 186(2)? CRA responded:

Consistently with the longstanding position of the Directorate, we are of the view that the concept of control referred to in ITA subparagraph 186(4)(a) is as defined in subsection 186(2), which contemplates that a corporation is controlled by another corporation if more than 50% of the issued shares in its capital (having full voting rights under all circumstances) belong 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.

We also confirm that the position in [the above documents] still represents the position of the Directorate respecting the share ownership test in ITA subparagraph 186(4)(b)(i).

However…if it emerged that the utilization of a capital structure as unusual as that described in your question was part of a series of transactions effected with a view to avoiding the payment of Part IV tax, it would be necessary to consider the application of ITA subsection 245(2).

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10 October 2014 October APFF Roundtable Q. 18, 2014-0538081C6 F - 2014 APFF Roundtable, Q. 18 - Connected corporations

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