25 August 1992 Income Tax Severed Letter 9215865 - 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- 921586 24(1) B. Kerr 957-2092

Attention:19(1)

August 25, 1992

Dear Sirs:

Re: Subsection 249(4)

This is in response to your letter of May 21, 1992 wherein you requested confirmation and clarification of an item reported in the "Access to Canadian Income Tax" service.

According to the service, a technical interpretation dated November 24, 1989 issued by the Reorganizations and Non-resident Division discussed a situation in which a sole shareholder of a company transferred the shares of that company to a second corporation in return for a controlling interest in the second corporation. Apparently, the second corporation was unrelated to the first corporation prior to the transfer. The service reported that it was the Division's view that there would be no deemed year end of the first corporation by virtue of the application of subsection 249(4). The conclusion that there had been no acquisition of control of the first corporation was based upon the fact that the shareholder would continue to control the first corporation, albeit indirectly, and upon the decision in the case of Vineland Quarries & Crushed Stone Ltd. v M.N.R., [[1966] C.T.C. 69] 66 DTC 5092 (Ex. Ct.), affirmed by 67 DTC 5283 (S.C.C.).

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You have asked the Department to confirm that:

• 1) the above continues to be the Department's view;
• 2) this would be equally applicable where the first corporation was controlled by a group of persons and that it is this same group that controls the second corporation after the transfer;
• 3) this interpretation is not only for the purposes of subsection 249(4) but also for the purposes of subsections 111(4) and 111(5) and paragraphs 88(1.1)(e) and 88(1.2)(c);
• 4) there will be no acquisition of control of any of the first corporation's controlled subsidiaries.

Comments

All references to statutes in this letter are references to the Income Tax Act.

It is our view, as outlined in paragraph 13 of Interpretation Bulletin IT-64R3, that the word "control" as expressed in the Act generally means the right of control that rests in ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the Board of Directors. Such control is referred to as de jure control.

In addition, it is our view, as outlined in paragraph 33 of IT-64R3 that it is possible for a person to have de jure control over a corporation without ownership of any of its shares, provided that person controls one or more other corporations which, singly or between them, have voting control of the first mentioned corporation. This view is consistent with the reasoning adopted by the courts in the case referred to above.

Also, as outlined in paragraph 3 of Interpretation Bulletin IT-302R direct control of a corporation is the ownership of its controlling shares. Indirect control of a particular corporation includes ownership of the controlling shares of an intermediary corporation that, in turn, owns the controlling shares of the particular corporation.

In regards to your specific queries:

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• 1) In the situation described, the Department considers that there is generally no acquisition of control in regards to the first corporation. The reason being that the sole shareholder of the first corporation before the transaction had direct control of the first corporation. Upon completion of the transactions this same shareholder has direct control of the second corporation and indirect control of the first corporation. Since ultimate control of the first corporation has been retained by this shareholder there is no change in control.
• It is, however, our view that at the time of the acquisition of the shares of the second corporation by this shareholder there has been an acquisition of control of the second corporation. The reason being that control of the second corporation has been acquired by a person who did not previously control the second corporation. In addition, subparagraph 256(7)(a)(i) would not apply since this shareholder was not related to the second corporation immediately before the acquisition. 2) Our views would be the same where the first corporation is controlled by a group of persons and this same group of persons also controls the second corporation after the transfer. It is, however, a question of fact as to whether or not a corporation is controlled by a group. Generally, where the persons are not related, two or more persons will be considered to be a group which controls a corporation where there is evidence that they have a common link or interest or that they act together (ie. without independent interests) to control the corporation.
• 3) These comments are applicable to the term "control" for all purposes of the Act, other than where such term is specifically defined for purposes of a particular provision. For example, these comments do not necessarily apply for purposes of Part IV of the Act since subsection 186(2) sets out specific rules for purposes of determining when a corporation is controlled for purposes of that Part. Similarly, these comments are not applicable where the expression "controlled, directly or indirectly in any manner whatever" is used. 4) Where there has been no change in the control of a parent corporation, the Department also considers that there has been no change in the ultimate control of its subsidiary companies.

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The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. The foregoing opinions are not rulings and, in accordance with paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, are not binding on Revenue Canada Taxation.

Yours truly,

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

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