6 February 1990 Ministerial Letter 59398 F - Associated Corporations - 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 6, 1990

Dear Sirs:

Re:  Acquisition of Control Subsections 111(5), 249(4) and Section 256 of the Income Tax Act (Canada) (the "Act")

We are writing in response to your letter of January 12, 1990 in which you requested our comments regarding the application of subsections 111(5), 249(4) and section 256 of the Act in the following situation.

1.     Mr. A owns all 300 of the issued and outstanding common shares of Holdco.  Holdco's assets consist of shares in other companies, including a wholly-owned subsidiary with accumulated losses.

2.     Mr. A also owns 1,759,000 preference shares of Holdco which are redeemable by the company and retractable by the holder at a price of $1,759,000.  This amount would represent a substantial claim against the company's asset.

3.     Mr. A and Mr. B are not related persons as defined in subsection 251(2) of the Act.

4.     Mr. B subscribes for 300 common shares of Holdco.

5.     Upon the wind-up or dissolution of Holdco and after the settlement of the claim on net assets by the preference shareholders, the common shareholders will share equally in the remaining net assets.

6.     There are no agreements between Mr. A and Mr. B which provide either party with control of Holdco.

You have enquired whether the issuance of 300 common shares by Holdco to Mr. B would result in the acquisition of control of Holdco and its subsidiaries by a group consisting of Mr. A and Mr. B for the purposes of subsections 111(5) and 249(4) and section 256 of the Act.

You have provided the following comments:

1.     Upon the issuance of the 300 common shares of Holdco to Mr. B, Mr. A and Mr. B will each own 50% of the voting shares of Holdco.  It is your view that no acquisition of control has occurred for the purposes of subsection 111(5) and 249(4) of the Act since neither Mr. A nor Mr. B have acquired the necessary number of shares to control Holdco.

2.     The rules relating to de facto control as described in subsection 256(5.1) of the Act are not applicable for the purposes of subsections 111(5) and 249(4) of the Act.

3.     An acquisition of control has not occurred for the purposes of section 256 of the Act because neither shareholder has sufficient voting shares of Holdco to control the company.

4.     As a result of owning retractable preference shares, Mr. A is in a position to exert direct or indirect influence on Holdco. Under subsection 256(5.1) of the Act, Holdco may be considered to be "controlled, directly or indirectly in any manner whatever" by Mr. A.

To the extent that the above facts represent actual proposed transactions, your enquiry should be the subject of a request for an advance income tax ruling.  However, based on the above facts,we will provide the following general comments.

It is the Department's view that persons will be considered as having collectively acquired control of a corporation where there is evidence that they have a common link or interest or they act together to control the corporation.  Whether control has been acquired by a person or persons is a question of fact which must be determined after a review of the circumstances of each particular case.

It is also the Department's position that control refers to direct and indirect control.  Therefore, the acquisition of control of a parent company also results in the acquisition of control of any subsidiary companies.

Subsection 256(5.1) of the Act is applicable only where the expression "controlled, directly or indirectly in any manner whatever" is used in the Act.  Whether a person can be said to have de facto control of a corporation notwithstanding that he does not legally control more than 50 percent of its voting shares, will depend on all the circumstances of the particular situation.

The comments expressed are not advance income tax rulings and are not considered binding on the Department in respect of any taxpayers, in accordance with paragraph 24 of Information Circular 70-6R dated December 18, 1978.

Yours truly,

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