20 November 1990 Ministerial Correspondence 902764 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.

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November 20, 1990

Dear Sirs:

We are writing in response to your letter dated October 1, 1990 in which you requested our opinion concerning the application of subsections 249(4) and 245(2) of the Income Tax Act (the "Act") to the hypothetical situation described below. We also acknowledge our related telephone conversation of October 11, 1990 19(1) Woolley.

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Our Comments

The situation outlined in your letter appears to involve actual contemplated transactions and identifiable taxpayers. Assurance as to the tax consequences of contemplated transactions can only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular IC-70-6R2, dated September 28, 1990. However, we can offer the following general comments.

Acquisition of Control

It is Revenue Canada's view, as outlined in paragraph 13 of Interpretation Bulletin IT-64R2, that the word "control" as expressed in subsections 111(4) to (5.1) and 249(4) of the Act generally means the right of control that rests in ownership of such number of shares of a corporation as to give a majority of the voting power in the corporation (de jure control).

Where a person acquires all the voting shares of a corporation which itself has a wholly-owned subsidiary there will have been an acquisition of control of both the parent company and its wholly-owned subsidiary. However where the person which acquires control of the company is related thereto subparagraph 256(7)(a)(i) of the Act, will deem, for purposes of section 111 and subsection 249(4) of the Act, that person not to have acquired control of the company. Subsection 251(2) of the Act defines when two persons are related for the purposes of the Act.

Where subparagraph 256(7)(a)(i) of the Act applies to deem that no acquisition of control will have occurred in respect of the parent company, the Department also considers that there has been no acquisition in the ultimate control of its subsidiary. However, subclause 187(4) of the Draft Legislation to Amend the Income Tax Act and Related Statutes issued by the Department of Finance on July 13, 1990 proposes to amend paragraph 256(7)(a) of the current Act to ensure that, effective for redemptions, acquisitions and cancellations of shares occurring after 1989, the exception provided in paragraph 256(7)(a) of the Act will apply not only to a particular corporation upon the acquisition of its shares, but also to any corporations that may be controlled by the particular corporation.

General Anti-Avoidance Rule (Subsection 245(2))

Whether subsection 245(2) will apply to a specific situation can only be determined following a review of all the relevant facts related to that situation. However, Revenue Canada's general position with respect to the application of Subsection 245(2) of the Act to "estate freezes" and to the consolidation of profits and losses in a related corporate group is outlined in paragraphs 10 and 8 of Information Circular IC 88-2, respectively. Also the Explanatory Notes to Legislation Relating to Income Tax issued by the Department of Finance in June 1988 contains commentary at pages 465 and 466 thereof which indicates that "estate freezing" and the utilization of losses within a related corporate group will not generally result in a misuse or abuse of the provision of the Act with the result that subsection 245(2) of the Act will not normally apply to such transactions.

The foregoing comments are not rulings and in accordance with the guidelines explained in Information Circular IC 70-6R2 dated September 28, 1990 are no binding on the Department.

Yours truly,

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