5 December 1990 External T.I. 90M12235 F - Employee Benefit Plans Existing Prior to December 31, 1987

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: J.C. Fitz-Clarke Section 148-13

SUBJECT:  Institute of Chartered Accountants of B.C./Revenue Canada Liaison Committee Meeting

We are enclosing our responses to questions number 29 and 30.

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

Institute of Chartered Accountants of B.C.Revenue Canada Liaison Committee MeetingNovember 1990Question 29

QUESTION

In your response to Question 39 at the 1988 Canadian Tax Foundation Revenue Canada Round table, you indicate that, "we understand that the intent of subsection 256(1)... and new subsection 256(1.2)... was primarily to prevent multiple access to the Small Business Deduction, which might otherwise have been available for the benefit of essentially the same group of persons. The Department will interpret the provision in a manner that is consistent with this intent and accordingly, for the purposes referred to in subsection 256(1.2), shall identify any group of persons, related or unrelated, without considering whether any group of persons acts in concert".

It has been mentioned that in using the above interpretation all shareholders of, for example, Bell Canada Limited would form a group. This appears to be an unreasonable interpretation of your comments. Especially, considering that in your response to Question 40 of the same Revenue Canada Round table you indicate that for purposes of acquiring control there must be evidence that a group of persons has a common link or interest or they act together to control the corporation.

We wonder, for example, if your intention in the response to Question 39 was possibly that the group of persons must have common interests or intentions. In any case it is possible that your response to Question 39 is contradictory to your response to Question 40.

It would be helpful if you could direct your comments to the following simple structures. In each case assume that the corporations have been created at different times, do not act in concert, but may at times participate in common investments.

Structure I

Is there a controlling group, and which corporations would be associated?

Structure II

Is there a controlling group, and which corporations would be associated?

RESPONSE

As the preamble to subsection 256(1.2) indicates, the rules contained in that provision apply only for purposes of the association rules contained in subsections 256(1) to 256(5). Therefore, for purposes of the association rules only, paragraph 256(1.2)(a) provides that any two or more persons who own shares in a corporation constitute a group in respect of that corporation. This is so whether the members of the group are related or not or whether the members of the group act in concert or not.

For other purposes of the Act, (that is for purposes other than the association rules), the rule in paragraph 256(1.2)(a) does not apply so that two or more persons, each of whom owns shares of the capital stock of a corporation, will only be considered to be a group if they have a common link or interest or act in concert.

Accordingly, our responses to questions 39 and 40 of the Revenue Canada Round Table at the 1988 Canadian Tax Conference are not contradictory; question 39 dealt with control by a group of persons for purposes of subsection 256(1), whereas question 40 dealt with acquisition of control by a group of persons for purposes of subsection 249(4).

We have been asked to determine if there is a controlling group and which corporations are associated in two structures. In both structures we have assumed that each of Son A, B, C and D is over 17 years of age, so that the deeming provisions in subsection 256(1.3) are not applicable. Since the question involves the determination of controlling groups for purposes of subsection 256(1), the rule in paragraph 256(1.2)(a) will apply.

Structure I:

There are many controlling groups for purposes of the association rules: e.g. any three of Corp A, B, C and D will constitute a controlling group, as will any two sons and both parents, or any three sons, or all four sons. However, since the 25% "cross-ownership" test in paragraph 256(1)(d) is not met, it is our view that none of the corporations are associated.

Structure II

Again, there are many controlling groups for purposes of the association rules, including those noted for Structure I, as well as certain other combinations: e.g. the group consisting of Son A, one of either Son C or D and one of either Father or Mother. This is so because the application of paragraph 256(1.2)(d) to the shares owned by Corp B results in Son A (or Corp A) being deemed to own 50% of the 20% of the shares of Corp XYZ that are owned by Corp B.

It is our view that Corp A, Corp B and Corp XYZ are associated. Corp A and Corp B are associated by virtue of paragraph 256(1)(d) read in conjunction with paragraphs 256(1.2)(a) and (d) and subsection 256(1.5). Corp A and Corp XYZ are associated by virtue of paragraph 256(1)(d) read in conjunction with paragraphs 256(1.2)(a) and (d). Corp B and Corp XYZ are associated by virtue of subsection 256(2).

Prepared by L.A. McCarron-McGuireNovember 1990File 903304

Institute of Chartered Accountants of B.C.Revenue Canada Liaison Committee MeetingDecember 1990Question 30

QUESTION

A CCPC derives its income from renting depreciable property and leasehold improvements (at a profit) to a related partnership. In addition, it holds the lease on the office space in which the partnership carries on its business.

For purposes of determining whether the CCPC meets the definition of a Small Business Corporation, does the existence of the operating lease for the office space represent an asset for determining whether 90% or more of the fair market value of the assets are used primarily in an active business?

In addition, does the rental of the leasehold improvements relating to the office space represent income from real property (i.e. "a specified investment business"), or does it represent active business income?

RESPONSE

It is our view that an operating lease for office space represents an asset for purposes of determining whether a corporation is a "small business corporation" as defined in subsection 248(1). The determination of the fair market value, if any, of such a lease will depend on a number of factors, such as the terms of the lease and market rental for similar space. Whether or not the lease is used in an active business carried on by the corporation will depend on whether the corporation carries on a business, and, if so, whether it carries on an active business or a "specified investment business" as defined in paragraph 125(7)(e).

If leasehold improvements form part of the leasehold interest, we are of the view that the leasehold improvements would be real property for purposes of the Act by virtue of subsection 248(4) of the Act. However, when leasehold improvements do not form part of the leasehold interest, it is a question of fact whether they represent real property. This question of fact is to be determined based on a review of all of the circumstances of the situation, including the nature of the leasehold improvements, the relevant provincial landlord and tenant legislation, and the terms of the lease itself. If it is determined that the business carried on by the corporation is not the business of leasing property other than real property, the income from the rental of the leasehold improvements would be income from a "specified investment business" unless the requirements of subparagraph (i) or (ii) of the definition of "specified investment business" were satisfied.

Prepared by: L.A. McCarron-McGuireNovember 1990File: 903251