31 December 1992 Income Tax Severed Letter 9106955 - 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.

5-910695
XXXXXXXXXX D.A. Palamar
(613) 957-8953

Attention: XXXXXXXXXX

December 31, 1992

Dear Sirs:

Re: Request for Technical Interpretation
Subsection 256(1.4) of the Income Tax Act (the "Act")

We are writing in response to your letter, dated March 8, 1991. We apologize for the delay in our response.

In your letter you describe recent changes to the Quebec Civil Code which permit an individual (the "Individual") to execute a "Mandate in Case of Disability" (a "Mandate") pursuant to which the Individual appoints a person to act as mandatary generally in the event of disability of the individual. The mandatary has extensive powers under the mandate with respect to both the property and the person of the Individual.

XXXXXXXXXX

You have asked for our views on the application of subsection 256(1.4) of the Act in the hypothetical situations described below:

Situation 1

• 1. Mr. A is the sole shareholder of A Co.
• 2. Mr. B is the sole shareholder of B Co.
• 3. Mr. A executes a Mandate and appoints Mr. B to act as his mandatary in the event of a disability.

Situation 2

The facts are the same as above, except that Mr. A appoints Mr. B, Mr. C, and Mr. D jointly as mandataries. Mr. C and Mr. D own no shares of A Co. or B Co.

You have asked if A Co. and B Co. would be associated by virtue of the application of subsection 256(1.4) of the Act in each of the above situations if Mr. A were to execute either the long or short form Mandate.

Our comments

We are unable, in the context of a request for a technical interpretation, to offer specific comments on how the execution of either the long or short form mandates would affect the application of subsection 256(1.4). Confirmation as to the income tax consequences of specific proposed transactions can only be given in the context of an advance income tax ruling. We can, however, offer you the following general comments.

If the powers of a mandatary include the power to control the voting rights of shares owned by the Individual, subject to the exception discussed below, subsection 256(1.4) would deem the mandatary to own such shares for the purposes of determining whether two corporations are associated.

An exception to this general rule arises where the power to control the voting rights of shares is contingent on the death, bankruptcy or permanent disability of an individual. The question which then arises is whether a particular Mandate fits this exception.

In our view, a permanent disability, in the context of subsection 256(1.4), refers to a disability which has incapacitated an individual from performing functions, formerly performed before the event which caused the disability, and there is no reason to believe that such incapacity will not continue throughout the lifetime of the person. Moreover, the disability, even if permanent, must prevent the individual from exercising proper control over his shares.

Accordingly, if a particular Mandate gave a mandatary control of the voting rights of an Individual's shares on the happening of an event which would not be considered a permanent disability (or death or bankruptcy), within the meaning of subsection 256(1.4), it is our view that the afore-mentioned exception would not apply and the mandatary would be deemed to own those shares.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch