19 November 1990 Ruling 903243 F - Election not to be Associated with Another Corporation and Small Business Deduction

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.

19(1)

November 19, 1990

Dear Sirs:

Re:  Subsection 256(2) of the Income Tax Act (Canada) (the "Act")

This letter is further to our letter to you dated November 13, 1990 (on your file 900750) and our telephone conversation of November 16, 1990 Harms 19(1) in which you requested us to consider which corporations in the following hypothetical situation would be eligible to elect under subsection 256(2) of the Act not to be associated with another corporation for the purposes of section 125 of the Act.

The provisions of subsections 256(1) and 256(2) of the Act as they read prior to the amendments contained in S.C. 1988, c. 55 (formerly Bill C-139) will be referred to herein as the "Old Rules" and the provisions of subsections 256(1), 256(1.2) and 256(2) of the Act as amended or added by S.C. 1988, c. 55, will be referred to herein as the "New Rules".

Assumptions

1.     Two brothers ("Brother A" and "Brother B") each hold a 50% beneficial interest in an estate ("the Estate").

2.     The Estate owns 100% of the voting shares of a holding corporation ("Holdings") which has a December 31 year end.

3.     Holdings owns 100% of the shares of an operating corporation ("Opco A") which has a December 31 year end.

4.     Brother A owns 100% of the shares of a second operating corporation ("Opco B") which has a December 31 year end.

5.     Brother B owns 100% of the shares of a third operating corporation ("Opco C") which has a December 31 year end.

6.     Opco C owns 100% of the shares of two subsidiary corporations ("Sub 1" and "Sub 2") neither of which has a December 31 year end.

7.     All of the corporations referred to are Canadian-controlled private corporations within the meaning assigned by paragraph 125(7)(b) of the Act.

8.     None of the above corporations:

a)     was incorporated, or was formed as a result of an amalgamation, after February 10, 1988; or

b)        acquired after February 10, 1988 from a person with whom it did not deal at arm's length all or substantially all of the assets used by it in its business.

9.     The 1989 taxation year of each of the above corporations ended on the same calendar date in 1989 as the calendar date in 1987 on which the 1987 taxation year of that corporation ended.

You have advised that we are to assume that none of the provisions of subsections 256(1.4), (2.1) and (5.1) of the Act would be applicable to any of the above corporations.

Corporations Associated

We concluded in our letter to you of November 13, 1990 that:

(a)     the New Rules would apply to the 1989 taxation year of Holdings, Opco A, Opco B and Opco C, in order to determine whether or not those corporations were associated with each other in that year, and that, therefore:

(i)     Opco A would be associated, by virtue of paragraph 256(1)(a) of the Act, with Holdings in their 1989 taxation years;

(ii)     by virtue of paragraphs 256(1)(d) and 256(1.2)(f) of the Act, each of Opco A and Holdings would be associated with Opco B and Opco C in the 1989 taxation years of those corporations; and

(iii)     Opco B and Opco C, each being associated with Opco A in their 1989 taxation years, would be deemed by subsection 256(2) to be associated with each other in that year; and

(b)     the Old Rules would continue to apply to the 1989 taxation year of any grouping of the above corporations that includes Sub 1 or Sub 2 because the 1989 taxation years of all such corporations would not have commenced after 1988, and that, therefore:

(i)     Sub 1 and Sub 2 would, by virtue of paragraph 256(1)(b) of the Act, be associated with each other for their 1989 taxation years and, by virtue of paragraph 256(1)(a) of the Act, with Opco C; and

(ii)     given their common association with Opco C in each of their 1989 taxation years, each of Holdings, Opco A and Opco B would, by virtue of subsection 256(2) (under the Old Rules), be associated with Sub 1 and Sub 2 for their respective 1989 taxation years.

Your views concerning election under subsection 256(2)

In your view, each of Holdings and Opco A would be able to elect under subsection 256(2) not to be associated with Opco B and Opco C for their 1989 taxation years, with the result that Opco B and Opco C would not be deemed by subsection 256(2) to be associated with each other for that year. You are concerned, however, that Opco C might not be eligible to elect under subsection 256(2) not to be associated with Sub 1, Sub 2, Opco A, Opco B and Holdings.

Our Comments

We agree that Holdings and Opco A would be able to elect under subsection 256(2) not to be associated with Opco B and Opco C for their 1989 taxation years.

As the Old Rules apply to the 1989 taxation year of any grouping of corporations that includes Sub 1 and Sub 2, and as subsection 256(2) under the Old Rules does not provide for any election no to be associated, Opco C would not be able to elect not to be associated with Sub 1, Sub 2, Holdings, Opco A and Opco B.

As the association of Opco B and Opco C depends on their being associated under subsection 256(2) of the New Rules, if Holdings and Opco A were to elect under subsection 256(2) of the New Rules not to be associated with Opco B and Opco C, then Opco B would not be associated with Sub 1 and Sub 2 under subsection 256(2) of the Old Rules.

The foregoing expressions of opinion are not rulings, and in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on Revenue Canada, Taxation.

Yours truly,

for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch