21 February 1990 Ministerial Correspondence 5-9054 F - Application of Losses upon the Acquisition of Control

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.

February 21, 1990

Dear Sirs:

Re: Application of losses upon the acquisition of control.

We are writing in response to your letter of November 10, 1989 requesting our interpretation of whether there is an acquisition of control for the purposes of subsection 249(4) and section 111 of the Income Tax Act (the "Act") in seven hypothetical situations.

Situation I:

X and Y, two unrelated individuals, each own fifty per cent of the common shares of Opco and therefore control Opco. Each of X and Y transfer all of their shares of Opco to their respective holding companies.

Comments on I:

The word "control" is not defined in the Act but the Courts have ruled that the word "controlled" contemplates the right of control that rests in ownership of such a number of shares as to give a majority of the voting power in the corporation. In this instance neither individual controls Opco through a majority shareholding. It is assumed that there are no agreements, options, or similar arrangements which gives one shareholder defacto control of Opco.

The transfer of the Opco shares to each of the holding companies does not constitute an acquisition of control. There is no identifiable person or related group which controls Opco. Neither subsection 249(4) nor 111(4) of the Act apply in this case.

Situation II:

The coin shares of Opco are owned by four persons. Individual h holds thirty percent of the shares and B, her son, owns twenty-five percent. C, an unrelated person, owns thirty percent of the colon shares. D, an unrelated person, owns fifteen percent of the colon shares.

These four constitute a group of persons acting in concert to control Opco. Three shareholders, A, C and D, transfer their Opco shares to their respective holding companies.

Situation III:

This situation is the same as II above except that A and 8, the related group, constitute a group of persons acting in concert to control Opco.

Situation IV:

This situation is the same as II above except that A, 8 and C constitute a group of persons acting in concert to control Opco.

Comments on II - IV:

Prior to any share transfer, A and 8 constitute a related group as defined in paragraph 251(4)(a) of the Act. This related group owns the majority of Opco shares and is therefor deemed to control Opco pursuant to paragraph 251(5)(a) of the Act. 8 Holdco and Opco are related pursuant to subparagraph 251(2)(c)(iii).

Upon the share transfers to the various holding companies a new related group, A and 8 Holdco, controls Opco. Since 8 Holdco received its Opco shares from 8, a related party, neither subsection 249(4) nor 111(5) of the Act apply in these instances. Subparagraph 256(7)(a)(i) deems control not to have been acquired.

Situation V:

This situation is the same as II above except that A transfers her Opco shares to a corporation controlled by E, her husband and father of 8. Persons 8, C, D and E, through their respective holding companies, act in concert to control Opco after the share transfers.

Situation VI:

This situation is the same as V above except that A and 8, the related group, constitute a group of persons acting in concert to control Opco prior to the share transfers. Individuals 8 and E, through their respective holding companies, act in concert to control Opco after the share transfers.

Situation VII:

This situation is the same as V above except that A, B and C constitute a group of persons acting in concert to control Opco prior to the share transfers. Subsequent to the transfers 8, C and E through their respective holding corporations act in concert to control Opco.

Our Comments on V - VII:

Prior to any share transfers A and 8 constitute the related group controlling Opco. Upon the share transfers to the various holding companies a new related group, 8 Holdco and E Holdco, controls Opco. Since the Opco shares owned by each member of the new related group were acquired from related persons neither subsection 249(4) nor 111(5) of the Act apply in these three instances. Subparagraph 256(7)(a)(i) of the Act deems control not to have been acquired.

The comments set out in this letter are of a purely general nature and do not take into account considerations that might arise in the context of specific transactions. In accordance with paragraph 24 of Information Circular 70-6R, the comments expressed herein do not constitute advance income tax rulings and are not binding on the Department.

Yours truly,

for DirectorReorganizations and Non Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch