Translation disclaimer
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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