13 March 1990 Ministerial Letter 58898 F - Related Corporations

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.

March 13, 1990

Dear Sirs:

Re:  Subsection 251(3) of the Income Tax Act (Canada) (the "Act")

This is in response to your letter of October 12, 1989 in which you requested our views as to the interpretation of subsection 251(3) of the Act in the context of the situation described below.

Subsection 251(3) provides:

     Where two corporations are related to the same corporation  within the meaning of subsection (2), they shall, for the purposes of subsections (1) and (2), be deemed to be related to each other.

The specific issue which your have raised is whether a corporation which is deemed by subsection 251(3) to be related to a third corporation, is deemed by subsection 251(3) to be related to a third corporation, is deemed by subsection 251(3) to be related to a fourth corporation which is also related to the third corporation.

This issue is more clearly illustrated by the example described below.  Assume A and B are brothers and that each has a son, C and D, respectively.  Assume further that each of A, B, C and D owns all of the shares of a corporation, a Co, B Co, C Co, and D Co, respectively.

In this case, A Co and B Co are related to each other by virtue of subparagraph 251(2)(c)(ii).  Also, A Co and C Co are related to each other and B Co and D Co are related to each other by virtue of subparagraph 251(2)(c)(ii).  Thus A Co and D Co are related to each other by virtue of subsection 251(3) because each company is related to B Co.

The issue which arises is whether subsection 251(3) would deem C Co to be related to D Co since both are related to A Co (C Co directly by virtue of subparagraph 251(2)(c)(ii), and D Co indirectly by virtue of subsection 251(3)).

Opinion

In our view, subsection 251(3) would not apply to deem C Co to be related to D Co for the reasons discussed below.  Subsection 251(3) only deems two corporations to be related to each other for the purposes of subsections 251(1) and (2), i.e. it does not apply for the purposes of subsection 251(3).  Thus in this case, as D Co is only related to a Co by virtue of the deeming rule in subsection 251(3) it would not be considered to be related to A Co for purposes of applying subsection 251(3) to determine whether D Co and C Co are deemed to be related to each other by virtue of both such corporations being related to the same corporation, i.e. A Co. This view is supported by the reference in subsection 251(3) to "where two corporations are related to the same corporation, within the meaning of subsection 251(2)..." which suggests that each corporation must be related to the  "same corporation" by virtue of subsection 251(2), i.e. without reference to subsection 251(3).

The comments contained herein are only an expression of opinion and are not binding on Revenue Canada, Taxation in accordance with the policy expressed in paragraph 24 of Information Circular 70-6R.

Yours truly,

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