3 March 1989 Income Tax Severed Letter 5-6999 - [Subsections 249(4) and 256(9)]

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

M. Vallée (613) 957-2093

XXXX

MAR 3 1989

Dear Sirs:

Re: Subsections 249(4) and 256(9) of the Income Tax Act ("the Act")

This is in reply to your letter, dated October 28, 1988, whereby you request a technical interpretation in connection with subsections 249(4) and 256(9) of the Act in the following situation.

Six individuals who deal at arm's length with each other own the shares of Investco equally. Investco rents land and a building to a professional partnership. The six shareholders of Investco are all members of the partnership that rents the land and building. Other individuals are also members of the partnership, but not shareholders of Investco. The shareholders of Investco decide that it is appropriate for a seventh arm's length member of the partnership to become an equal shareholder in Investco. Investco's taxation year ends on December 31 of year 1. On January 3 of year 2, a seventh member of the Professional partnership becomes an equal shareholder in Investco.

You are asking whether the provisions of subsection 249(4) of the Act will apply to deem Investco to have its taxation year end on January 3 of year 2, on the basis that there has been an acquisition of control by a group of persons.

Your concern relates to a situation where a taxpayer might take the position that there was no acquisition of control upon the addition of a new shareholder, on the basis that no new group of shareholders acquires de jure control of the corporation. If Revenue Canada subsequently determines that there has been an acquisition of control, the taxpayer would be exposed to late filing penalties and interest for the period ended on January 3 of year 2.

If on the contrary, the corporation takes the position that there has been an acquisition of control, makes an election under subsection 249(4) of the Act and files its return accordingly, it could be subject to penalties and interest in respect of its tax return for year 1 ended on December 31. It might also incur penalties and interest in respect of income earned from January 1 of year 1 to January 3 of year 2.

Assurance as to the tax consequences of proposed transactions will only be provided in respect to a request for an advance income tax ruling. The procedures for requesting a ruling are as stated in Information Circular 70-6R, and Special Release thereto. We can, however, provide some comments, as set out below.

Our Comments

Whether control has been acquired by a group of persons is a question of fact. It is our view that a group of persons will be considered as having collectively acquired control where there is evidence that they have a common link or interest or that they act together to control the corporation.

We agree with your interpretation to the effect that subsection 256(5.1) of the Act applies only where the expression ". . . controlled, directly or indirectly in any manner whatever . . ." is used in the Act, and consequently that this provision has no relevance to subsection 249(4) of the Act since it does not use that expression.

We acknowledge your concern regarding the possibility that the Act could operate so that the corporation may incur late filing penalties and interest, if the taxpayer's determination of an acquisition of control is subsequently found to be erroneous.

It is beyond our mandate to comment on matters of tax policy. Such issues are dealt with the Department of Finance. We would observe, nevertheless, that the imposition on the taxpayer of the responsibility of making this determination appears to be consistent with the general scheme of Canada's self-assessment income tax system and that, in any case, at the relevant time the taxpayer would have the best available information concerning the facts which would indicate whether an acquisition of control has occurred.

You also request our interpretation of paragraph 249(4)(c) of the Act if there is an acquisition of control of a corporation on January 9 of year 2, and the last taxation year of the corporation has ended on December 31 of year 1.

We agree with your interpretation to the effect that, unless a corporation makes an election to cause the provisions of subsection 256(9) of the Act not to apply, this subsection will deem the acquisition of control to take place at the commencement of January 7 of year 2. Under paragraph 249(4)(c), ". . . the seven day period ending immediately before that time . . ." would be considered to be the period from December 31 of year 1 to January 6 of year 2, inclusive. The corporation could consequently elect under paragraph 249(4)(c) of the Act to have its last taxation year, prior to the acquisition of control, deemed to end on January 6 of year 2. Since the provisions of this paragraph apply notwithstanding subsection (3), the corporation would not have a taxation year ending in year 1.

The foregoing comments are provided in accordance with paragraph 24 of Information Circular 70-6R, and are not binding upon Revenue Canada, Taxation in respect of any taxpayer.

Yours truly,

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