31 July 1990 Ministerial Letter 59818 F - Associated 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.

Attention: 19(1)

July 31, 1990

Dear Sirs:

Re:  Section 256 of the Income Tax Act

We are writing in response to your letter of March 19, 1990 in which you asked our opinion as to the application of subsection 256(1) of the Income Tax Act (the "Act") to the hypothetical situation described  below.  Your concerns are with the application of section 192 of Chapter 55 of the Statutes of Canada ("SC"), formerly Bill C-139, which amended or added to section 256 of the Act.  In our comments the "old rules" refer to the provisions of subsections 256(1) to 256(2.1) of the Act as they read before the amendments and additions in Bill C-139 became effective.  The "new rules" refer to those same provisions of the Act upon the coming into force of Bill C-139.

Situation

1.     Aco is a Canadian controlled private corporation ("CCPC") as defined in paragraph 125(7)(b) of the Act.  Mr. X is an individual who owns all of its issued and outstanding shares.

2.     Bco is a CCPC.  Aco owns 60 percent of the issued voting shares of Bco. "Mr. Y, an individual, unrelated to either Aco or Mr. X, owns the remaining 40 percent of the shares in Bco.

3.     Cco is a CCPC.  Mrs. X, the spouse of Mr. X, owns all of the issued and outstanding shares of Cco.

4.     Dco is a CCPC.  From the available information we made the following assumptions.  It has issued two classes of shares.  The first class are voting shares with no other rights.  Mrs. X and Mr. Z, an individual unrelated to any person herein, each owns fifty percent of them.  The second class of shares are non-voting and are owned by an inter-vivos trust defined at paragraph 108(1)(f) of the Act. Mr. X is its trustee. The trust is one described under subsection 75(2) of the Act.  The beneficiaries are the three children of Mr. X and Mrs. X.  The children each have a one-third interest in the trust.  One of the beneficiaries is under the age of eighteen.  The non-voting shares entitle the trust to all income or loss, taxable capital gain or allowable capital loss of Dco.  These non-voting shares have a fair market value in excess of one half of the fair market value of all the issued shares of Dco.

5.     Bco was incorporated on September 1, 1989.

6.     The fiscal periods of Aco, Bco and Cco end September 30.  The year-end of Dco is March 31.

7.     There has been no change to the year-ends of Aco, Cco and Dco.

8.     Subsection 256(2.1) of the Act (new rules) is not applicable as the separate existence of each corporation is necessary for business purposes.

9.     The various shareholdings are diagrammed below:

In our view, the "new rules" will apply and associate the four corporations in your example in 1989 because Bco was incorporated after February 10, 1988. Based on the information provided and our assumptions the four corporations are associated for their 1989 taxation years for the following reasons.

(1)     Aco and Bco are associated by virtue of paragraph 256(1)(a) of the Act,

(2)     Aco and Dco are associated by paragraph 256(1)(b) by virtue of subparagraphs 256(1.2)(f)(iv) and 256(1.2)(c)(i) of the Act.

(3)     Dco and Cco are associated by the provisions of paragraph 256(1)(c) of the Act.  Mr. X is deemed to control Dco and Mrs. X controls Cco and owns more than 25% of the issued shares of a class of shares of Dco.

(4)     Cco is thus associated with Aco and Bco by virtue of subsection 256(2) of the Act.

As explained in paragraph 24 of Information Circular 70-6R, any written or verbal opinions are not rulings and are not binding upon Revenue Canada, Taxation, in respect of any taxpayer.

Yours truly,

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