10 August 1990 Ruling 59681 F - Meaning of Canadian-controlled Private Corporation

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.

Dear Sirs:

Re:  Subsection 251(2) and paragraph 125(7)(b) of the Income Tax Act (the "Act")

We are writing in response to your letter of February 24, 1990 wherein you requested our opinion on subsection 251(2) and paragraph 125(7)(b) of the Act in the following hypothetical situation outlined in your letter.

Situation

1.     Opco is a taxable Canadian corporation carrying on a wholesaling business in Ontario.  "Taxable Canadian corporation", as used here and subsequently, has the meaning assigned by paragraph 89(1)(i) of the Act.

2.     The issued common shares and voting special shares of Opco are owned in such a manner as to give the shareholder the following percentage of votes:

     Can-Res B is an individual resident in Canada, Holdco is a taxable Canadian corporation and Non-Resco is a corporation resident in the United States.

3.     The issued share capital of Holdco consists of common shares only.  Holdco is owned 35.7% by Non-Res, 35% by Can-Res A and by 28.6% by Can-Res B.  Holdco's only assets are the shares of Opco.

     Non-Res is a resident of the United States.  Can-Res A is an individual resident in Canada.  Non-Res, Can-Res A and Can-Res B are not related to one another for the purposes of subsection 251(2) of the Act.

4.     The issued share capital of Non-Resco consists of common shares only.  Non-Resco is owned 50% by Non-Res and 50% by Can-Res A.  Non-Res has an option to acquire an additional one percent of Non-Resco upon the death of Can-Res A. Non-Resco provides certain accounting and managerial services to Opco.

Your Requests

1.     You requested our opinion as to whether Non-Resco and Opco would be considered to be related to each other for the purposes of subsection 251(2) of the Act

(a)     if Non-Res and Can-Res A are acting in concert to control Non-Resco and Holdco,

     or

(b)     if Non-Res and Can-Res A are not so acting in concert.

2.     You also requested our opinion as to whether Opco, assuming that the provisions of subsection 256(5.1) are not applicable, would be considered to be a Canadian-controlled private corporation ("CCPC") within the meaning assigned by paragraph 125(7)(b) of the Act

(a)     if Non-Res and Can-Res A are acting in concert in the manner described above,

          or

(b)     if Non-Res and Can-Res A are not so acting in concert.

Our Comments

Your request appears to involve an actual situation with identifiable taxpayers.  As such, it should be directed to the appropriate District Taxation Office in your area.  The responsibility for determining the tax consequences arising from actual completed transactions rests with the District Taxation Office, which may be able to assist you.  However, we can offer the following general comments.

1. (a)     If Non-Res and Can-Res A are acting in concert to control both Non-Resco and Holdco, the latter companies would be considered to be controlled by the same group of persons with the result that they would be related to each other pursuant to subparagraph 251(2)(c)(i) of the Act.  As Opco is owned 30.91% by Non-Resco and 49.35% by Holdco, Opco would, therefore, be considered to be controlled by a related group of persons. Consequently, Non-Resco and Opco would be related to each other by virtue of subparagraph 251(2)(b)(ii) of the Act.  "Related group" has the meaning assigned by paragraph 251(4)(a) of the Act.

   (b)     Provided that Non-Res and Can-Res A are not acting in concert and subsection 256(5.1) of the Act does not apply to result in both Non-Resco and Holdco being considered to be controlled directly or indirectly in any manner whatever by either Non-Res, Can-Res A or Non-Res and Can-Res A as a group, and provided also that subsection 256(5.1) of the Act does not apply to result in Opco being considered to be controlled directly or indirectly in any manner whatever by Non-Resco, it is our view that Non-Resco and Opco would not be considered to be related to each other under the  Act.  It is, of course, a question of fact whether or not subsection 256(5.1) of the Act would apply in a particular situation.

2.     Assuming that the provisions of subsection 256(5.1) of the Act are not applicable and that neither Non-Res nor Non-Resco separately, nor Non-Res and Non-Resco acting jointly, has legal or effective control over the Board of Directors of Opco in a manner similar to that described in the case of International Mercantile Factors Ltd. v. Her Majesty the Queen (90 DTC 6390), it is our view that Opco would be a CCPC regardless of whether or not Non-Res and Can-Res A are acting in concert to control Non-Resco and Holdco.  Based on the hypothetical facts presented above, it cannot be said that Opco is controlled by one or more non-resident persons, by one or more public corporations or by any combination thereof.

The above comments represent our general views, are not rulings and, in accordance with paragraph 24 of Information Circular 70-6R dated December 18, 1978, are not binding on the Department.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch