5 July 1988 Income Tax Severed Letter 5-5682 - [880705]

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.

Revenue Canada Taxation

Head Office

XXXX

A. Seidel (613)957-8968

July 5, 1988

Dear Sir:

This is in reply to your letter of March 3, 1988 wherein you requested our views with respect to the application of subsection 249(4) and paragraph 251(5)(b) of the Income Tax Act (the "Act"). It is your concern that a corporation might have its small business deduction reduced, depending on the status of the purchaser, in a situation where an agreement to purchase the shares of a corporation is entered into well in advance of the actual closing of the transaction by virtue of the fact that paragraph 251(5)(b) of the Act would apply on the date the agreement is entered into but subsection 249(4) of the Act would not apply until the actual closing of the transaction.

It is our view that the documents relating to a future purchase and sale of shares of a Canadian-controlled private corporation will result in the application of paragraph 251(5)(b) of the Act if the documents establish that the purchaser has either an absolute or contingent right to acquire the shares. A conclusion as to whether such a right exists can only be made after a complete examination of all of the provisions of a particular document, letter or agreement.

It is our view that paragraph 251(5)(b) of the Act is not applicable for purposes of subsection 249(4) of the Act. Consequently, if the right to acquire the shares exists, the provisions of paragraph 251(5)(b) of the Act will deem a change of control prior to any deemed year end resulting from the application of subsection 249(4) of the Act. If the right is acquired by one or more non-resident persons or public corporations, it will result in the loss of the benefits of section 125 of the Act. If the right is acquired by one or more Canadian-controlled private corporations, the small business deduction will have to be allocated in accordance with subsection 125(3) of the Act.

We do note for your consideration that the Notice of Ways and Means Motion, tabled in the House of Commons on June 13, 1988 proposes to amend paragraph 251(5)(b) of the Act to delete the reference therein to section 256 of the Act. A number of changes are proposed to section 256 of the Act including the addition of subsection 256(1.4). These revisions do not appear to alter our general views as outlined above.

While we hope our comments are of assistance to you they do not constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.

Yours truly,

for Director Financial Industries Division Rulings Directorate