22 August 1991 External T.I. 9018205 F - 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.

5-901820

Dear Sirs:

Re:  Acquisition of Control

This is in response to your letter dated July 31, l990, in which you requested our view as to whether there would be an acquisition of control of three particular corporations in the circumstances described in your letter.

The fact situation described in your letter appears to relate to contemplated transactions involving identifiable taxpayers. Accordingly, as stated in paragraph 21 of Information Circular 706R2, we are unable to comment specifically in respect of these transactions, other than in the form of an advance ruling.  However, we have extracted from your fact situation three issues, which we have worded in a hypothetical manner, and in respect of which we will provide our general comments.

In this letter, unless otherwise stated, all statutory references are to the Income Tax Act (Canada) the "Act").

The comments in this letter are in the context of a Canadian partnership (as defined in paragraph 102(a)) (the "Partnership"), which is comprised of two or more partners.  One such partner (the "Majority Partner") is entitled:

a)        to receive more than 50% of the income of the Partnership,

b)        to receive more than 50% of the capital of the Partnership in the event of the termination of the Partnership, and

c)        to exercise more than 50% of the votes that may be cast at meeting of the Partnership.

The partnership agreement in respect of the Partnership does not contain any provision that would limit the ability of the Majority Partner, by reason of his voting entitlement, to decide any question put to the Partnership.

The issues which we have considered and our comments in respect thereof are set out below.

Issue 1

    Where:

     a)   50% of the issued voting shares of a predecessor corporation (within the meaning contemplated by subsection 87(1)) ("Corporation A") are owned by the Partnership and the other 50% are owned by an unrelated, arm's-length party,

     b)   Corporation A, together with other predecessor corporation, participates in an amalgamation (the "Amalgamation") to form an amalgamated corporation "Amalco"), and

     c)   immediately after the Amalgamation the Partnership owns more than 50% of the issued voting shares of Amalco, is control of Corporation A acquired by a person or group of persons

Comment

In Vineland Quarries and Crushed Stone limited v. MNR [1966] CTC 69 (Exch), 66 DTC 5092, aff'd [1967] CTC vii, 67 DTC 5283 (SCC), the court held that the word "controlled" "contemplates and includes such a relationship as, in fact, brings about a control by virtue of majority voting power, no matter how that result is effected, that is, either directly or indirectly." The court also indicated that Company 1 may control Company 3 by owning all the shares of Company 2 which in turn owns all the shares of Company 3.  In our view, the principle enunciated in Vineland Quarries applies where the intermediate shareholder is either a corporation or a partnership.  In other words, where a partnership owns more than 50% of the issued voting shares of a corporation and where a particular partner is entitled, without restriction, to exercise more than 50% of the votes that may be cast at a meeting of the partnership, it is our view that the particular partner controls the corporation.

In the above hypothetical situation the Majority Partner controls Amalco immediately after the Amalgamation (see Vineland Quarries) and does not control Corporation A immediately before the Amalgamation, with the result that the Majority Partner is deemed by paragraph 256(7)(b) to acquire control of Corporation A immediately before the Amalgamation (for the purposes of the statutory provisions enumerated in the portion of subsection 256(7) that precedes paragraph 256(7)(a)).

Issue 2

Where:

     a)     more than 50% of the issued voting shares of another predecessor corporation ("Corporation B") are owned by the Partnership,

     b)     Corporation B, together with other predecessor corporations, participates in the Amalgamation to form Amalco, and

     c)     immediately after the Amalgamation the Partnership owns more than 50% of the issued voting shares of Amalco,

    is control of Corporation B acquired by a person or group of persons?

Comment

Since the Majority Partner controls both Amalco immediately after the Amalgamation and Corporation B immediately before the Amalgamation (see Vineland Quarries), paragraph 256(7)(b) does not apply to deem control of Corporation B to be acquired by a person or group of persons.

Issue 3

Where, after the Amalgamation:

     (a)  the Partnership (which, immediately after the Amalgamation, owns more than 50% of the issued voting shares of Amalco) acquires from the other shareholders all the shares of Amalco which it does not already own,

     b)   the Partnership is dissolved pursuant to subsection 98(3), such that each former partner (including the Majority Partner) receives a proportionate undivided interest in all the property of the Partnership (including all the shares of Amalco (the "Old Shares")),

     (c)  each former partner transfers to Amalco, pursuant to subsection 85(1), his undivided interest in the Old Shares in exchange for new voting shares of Amalco of a different class (the "New Shares"), and

     (d)  the number of New Shares received by each former partner is proportionate to the fair market value of his undivided interest in the Old Shares immediately before the above exchange, is control of Amalco acquired by a person or group of persons?

Comment

In the above hypothetical situation, before the Partnership is dissolved, the Majority Partner, by reason of his voting entitlement, controls the Partnership, which in turn controls Amalco, with the result that the Majority Partner is also considered to control Amalco (see Vineland Quarries).  After the Partnership is dissolved, the Majority Partner owns more than 50% of the New Shares, such that he continues to control Amalco. Therefore, it is our view that, in this situation, control of Amalco has not been acquired by a person or group of persons.

Conclusion

The foregoing comments represent our general views in respect of the three issues extracted from your letter.  These views may require qualification when applied to specific transactions. Furthermore, the comments in this letter have addressed only the three issues set forth above; we make no comment in respect of any other issues that may be relevant.  As explained in paragraph 21 of Information Circular 70-6R2, the above comments are not advance rulings and are not binding on the Department.

Yours truly,

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