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.
XXXXXXXXXX
DISTRICT OFFICERulings Directorate XXXXXXXXXX A/Chief of Audit
Section 256 of the Income Tax Act (the "Act")
This is in reply to your memorandum of December 16, 1992 wherein you requested that we provide you with our comments regarding the application of section 256 of the Act to the situation presented in a letter from XXXXXXXXXX dated December 8, 1992, addressed to the Director of Taxation, XXXXXXXXXX District Office. We apologize for the delay in responding.
XXXXXXXXXX is seeking confirmation with respect to a factual situation relating to specific taxpayers. As stated in paragraph 21 of Information Circular 70-6R2, written opinions on completed transactions can only be provided by district offices. In any case, such opinions are not advance rulings and are not binding on the Department. We would suggest that your response to him should be of a general nature.
Facts
1. H and W are two individuals who are not related to one another within the meaning of section 251 of the Act. Each of H and W owns 50% of A Ltd. and 40% of B Ltd., each of which is a Canadian- controlled private corporation ("CCPC") within the meaning of paragraph 125(7)(b) of the Act. The remaining 20% of B Ltd is owned by R, who became a brother-in-law of H in XXXXXXXXXX
2. H also owns 100% of the issued and outstanding shares of J Ltd., and W owns 100% of the issued and outstanding shares of D Ltd. Each of J Ltd. and D Ltd. is a CCPC, and is a 50% general partner in a Canadian partnership, within the meaning of section 102 of the Act, known as the H & W Partnership ("H&W"). J Ltd. and D Ltd. carry on no activity other than as a general partner in H&W. The income earned by H&W represents income from an active business, within the meaning of paragraph 125(7)(c) of the Act, to each of J Ltd. and D Ltd.
B Ltd. also carries on an active business, and operates under the same trading name as H&W, though in a different city than the one in which H&W operates. The sole business activity of A Ltd. consists of renting equipment to H&W.
3. It is anticipated that the aggregate taxable income of J Ltd., D Ltd., A Ltd. and B Ltd. will exceed $200,000 in 1993. This was not the case in prior years.
Our Comments:
It would appear that the taxpayers are concerned that the application of section 256 in the 1993 taxation year to the corporate structure described above would, pursuant to subsection 125(3) of the Act, require two or more of A Ltd., B Ltd., J Ltd., and D Ltd. to allocate the business limit of $200,000 referred to in subsection 125(2) of the Act between them in order to claim a small business deduction under subsection 125(1) of the Act. Since the allocation would only appear to be required in the 1993 taxation year of each of the corporations referred to herein, our comments are restricted to the association rules as they would apply in that year.
As we understand the situation, the provisions of section 256 of the Act would apply to the corporate structure described above in the following manner:
(a) By virtue of paragraph 256(1)(d) and subsection 256(1.5) of the Act, J Ltd. is associated with B Ltd., since J Ltd. is controlled by H, and H and R are, by virtue of paragraph 256(1.2)(a) of the Act, a related group that controls B Ltd.
(b) By virtue of paragraph 256(1)(b), paragraph 256(1.2)(a) and subparagraph 256(1.2)(b)(i) of the Act, A Ltd. is associated with B Ltd., since both A Ltd. and B Ltd. are controlled by the same group of persons, i.e. H and W. Here, it may be noted that subparagraph 256(1.2)(b)(ii) provides that this is so notwithstanding that B Ltd. is also controlled by the related group of H and R.
(c) By virtue of subsection 256(2) of the Act, J Ltd. is associated with A Ltd., since each of J Ltd. and A Ltd. is associated with the same corporation, i.e. B Ltd.
Consequently, each of J Ltd., A Ltd. and B Ltd. constitute a group of associated corporations that will be subject to the provisions of subsection 125(3) of the Act. However, pursuant to the provisions of subsection 256(2) of the Act, B Ltd. may elect, in prescribed form, not to be associated, for the purposes of section 125 of the Act, with either of J Ltd. or A Ltd. in which case the business limit of B Ltd. would be deemed to be nil.
It would appear that the provisions of section 256 do not operate to include D Ltd. in the group of associated corporations referred to above. However, this conclusion is subject to the provisions of subsection 256(2.1) of the Act, which would only apply if it could reasonably be considered that one of the main reasons for the separate existence of D Ltd. was to reduce the amount of taxes payable under the Act, as would be the case if one of the reasons for the separate existence of D Ltd. was to obtain a deduction under subsection 125(1) of the Act to which it would not otherwise have been entitled.
In addition, the provisions of paragraph 125(7)(f) will be relevant in determining the portion of the income of J Ltd. and D Ltd. from H&W which will be eligible for the small business deduction pursuant to subparagraph 125(1)(a)(ii) of the Act.
We hope that the foregoing comments will assist you in advising XXXXXXXXXX of the tax consequences arising from the corporate structure described above, as they apply to the associated corporation rules of section 256.
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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