25 July 1986 Income Tax Severed Letter 5-1260 - []

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.

XXXX J.D. Brooks (613) 957-2118

XXXX

July 25, 1986

Dear Sirs:

This is in reply to your letter of March 18, 1986 in which you sought our interpretation of the words "where ... control of a corporation has been acquired by a person or persons" contained in subsections 111(5) and 66(11.1) of the Income Tax Act ("ITA").

You provided an example in which Corporation E, a taxable Canadian corporation which is a public corporation, acquires (in accordance with section 85.1) 65% of the shares of Corporation A, another taxable Canadian corporation which is a public corporation. Prior to the share exchange, Corporation A is controlled by two unrelated corporations, Corporation B and Corporation C. Corporation D has a significant minority interest (30%) in Corporation E and less than 1% of the voting shares of Corporation A. Upon the share exchange, Corporations B and C receive shares of Corporation E in exchange for their shares of Corporation A, and Corporation E acquires control of Corporation A through the acquisition of 65% of Corporation A's voting shares. Corporations B and C do not acquire sufficient shares of Corporation E to enable them to control Corporation E, and thus they do not control Corporation A indirectly. However, Corporations B, C and D own in aggregate more than 50% of the voting shares of Corporation E.

It is our opinion that control of Corporation A "...has been acquired by a person or persons..." for purposes of subsections 66(11.1) and 111(5) because 65% of Corporations A's voting shares have been acquired by Corporation E. On the basis of the concept of ultimate control, as illustrated in the examples in IT-302R2 , it would be our opinion that control of Corporation A had not been acquired by a person or persons, if the persons who in fact controlled Corporation A prior to the share for share exchange had indirect control of Corporation A after the exchange, by virtue of having direct control of Corporation E.

The facts of each situation will determine who has direct control of a corporation at a particular time. In your example it is our view that Corporations B and C were in a position to have direct control of Corporation A prior to the share for share exchange, whereas after the exchange Corporations B and C were not in a position to have direct control of Corporation E. Therefore the concept of ultimate control would not provide relief from the consequences of the fact that direct control of Corporation A has been acquired by Corporation E.

The opinions contained herein are not rulings and should not be regarded as binding on the Department, as explained in paragraph 24 of Information Circular 70-6R.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch