24 November 1989 Internal T.I. 58677 F - Association

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.

November 24, 1989

Dear Sirs:

Re:  Subsection 256(1) of the Income Tax Act (Canada) (the "Act")

We are writing in response to your letter dated September 7, 1989 in which you requested our opinion concerning the application of subsections 256(1) to 256(1.3) of the Act, as amended or added by S.C. 1988, c.55 (formerly Bill C-139) ("Bill C-139"), and subsection 192(6) c.55 of Bill C-139, to two hypothetical situations described in your letter. The provisions of subsections 256(1) to 256(1.3) of the Act as they read prior to the amendments contained in Bill C-139 becoming effective will be referred to herein as the "old rules" and the provisions of subsections 256(1) to (1.3) of the Act, as amended or added by Bill C-139, will be referred to herein as the "New Rules". The relevant facts concerning the first of the two hypothetical situations that you have described are as follows:

Situation - (1)

1)     Mr. A is the sole shareholder of Holdco A and also owns 75% of the shares of Opco A.

2)     Son A owns 25% of the shares of Opco A and also owns 25% of the shares of Opco B.

3)     Mrs. A owns 75% of the shares of Opco B.

4)     The taxation years of Holdco A, Opco A and Opco B are June 30, December 31 and December 31, respectively.

5)     All of the companies referred to are Canadian-controlled private corporations within the meaning assigned by paragraph 125(7)(b) of the Act.

6)     All of the above corporations were in existence prior to February 10, 1988 and none of these corporations:

a)     was incorporated;

b)        was formed as a result of an amalgamation; or

c)        acquired from a person with whom it did not deal at arm's length all or substantially all of the assets used by it in its business;

after February 10, 1988.

7)     The 1989 taxation year of each of these corporations will end on the same calendar date in 1989 as the calendar date, in 1987 on which the 1987 taxation year of that corporation ended.

Our Comments

Subsection 192(6) of Bill C-139 provides, in part, that subsection 256(1) "is applicable, for the purposes of determining whether two or more corporations are associated with each other,

(a)      to the 1989 and subsequent taxation years where

i)     the taxation years of all such corporations commenced after 1988,

...

(b)       in any other case, to the 1990 and subsequent taxation years".

It is our opinion that the New Rules will apply to the 1989 taxation year of any two or more corporations if the 1989 taxation year of each such corporation will commence after 1988. In light of the above and given the hypothetical situation outlined earlier, the New Rules would apply to the 1989 taxation year of Opco A and Opco B, in order to determine whether or not these companies are associated with each other in their 1989 taxation year.

The old rules would apply to the 1989 taxation year of any grouping of the above companies that includes Holdco A because the 1989 taxation year of all these companies did not commence after 1988. As such, Holdco A and Opco A will continue to be associated under the old rules in each of their 1989 taxation years. The New Rules will apply to the 1990 and subsequent taxation years of any grouping of companies that includes Holdco A.

In light of the above and given their common association with Opco A in each of their 1989 taxation years, it would appear that Holdco A and Opco B may be associated in 1989 by virtue of subsection 256(2) of the Act. Given this somewhat unusual outcome in the application of the New Rules, this matter will be brought to the attention of the Department of Finance for their consideration.

In summary, it is our view that, firstly, Opco A and Holdco A were associated under the old rules and would continue to be associated under the New Rules. Secondly, Opco A and Opco B would first become associated in their 1989 taxation year. Thirdly, Opco B and Holdco A would first become associated in 1989 by virtue of subsection 256(2).

The relevant facts concerning the second hypothetical situation that you have described are as follows:

Situation (2)

1)     Mr. A owns 50% of the shares of Opco A.

2)     Holdco A owns 50% of the shares of Opco A.

3)     Mrs. A is the shareholder of Holdco A and Opco B.

4)     The taxation years of Holdco A, Opco A and Opco B are June 30, December 31 and December 31, respectively.

5)     All of the companies referred to are Canadian-controlled private corporations within the meaning assigned by paragraph 125(7)(b) of the Act.

6)     All of the above corporations were in existence prior to February 10, 1988 and none of these corporations:

A)        was incorporated;

B)       was formed as a result of an amalgamation; or

C)        acquired from a person with whom it did not deal at arm's length all or substantially all of the assets used by it in its business;

after February 10, 1988.

7)     The 1989 taxation year of each of these corporations will end on the same calendar date in 1989 as the calendar date in 1987 on which the 1987 taxation year of that corporation ended.

Our comments

As in the first situation outlined above, the provisions of subsection 192(6) of Bill C-139 must be considered in so far as determining in which taxation year the New Rules will apply to the corporations in question.

We agree with the comments outlined in your earlier mentioned letter in so far as Opco A was not associated with Holdco A or Opco B under the old rules unless a direction was made under former subsection 247(2) of the Act.

We further agree that Opco A will be associated with Holdco A and Opco B under the New Rules by virtue of the application of the new "look-through" rules contained in subsection 256(1.2).

It is our opinion that the old rules will apply to the 1989 taxation year of Opco A and Holdco A because the taxation year of both these companies did not commence after 1988 as required by subsection 192(6) of Bill C-139. The New Rules will apply to the 1990 taxation year of Opco A and Holdco A at which time they will become associated.

As outlined above, the New Rules will apply to Holdco A in the 1990 taxation year and accordingly, Opco A and Opco B will, under the New Rules, become associated in their 1990 taxation year. Opco A and Opco B will become associated by virtue of the application of the new "look-through" rules contained in subsection 256(1.2) as they apply, inter alia, to Holdco A.

The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978, are not binding on the Department.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch