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
Attention: XXXXXXXXXX
Dear Sirs:
This is in reply to your letter dated May 11, 1993 with respect to the definition of connected corporations in subsection 186(4) of the Income Tax Act (the "Act").
Under subsection 186(1) of the Act, dividends from taxable Canadian corporations which are connected with the recipient corporation are not subject to Part IV tax, provided that the payor corporation did not receive a dividend refund as a result of the payment of the dividend.
Pursuant to paragraph 186(4)(b) of the Act, two corporations are connected at any time in a taxation year if the recipient corporation owned, at the time the dividend is received, more than 10% of the issued share capital (having full voting rights under all circumstances) of the payor corporation and shares of the payor corporation having a fair market value ("FMV") of more than 10% of the FMV of all the issued shares of the capital stock of the payor corporation.
Whether two corporations are connected pursuant to the requirements of paragraph 186(4)(b) of the Act is a question of fact that can only be determined at the time a dividend is paid. In the situation where the recipient corporation satisfies the requirements of subparagraph 186(4)(b)(ii) of the Act and owns more than 10% of the issued share capital of the payor corporation having full voting rights under all circumstances, it is our view that the existence of a shareholders' agreement or a voting trust which dictates the manner in which the shares are to be voted will not disqualify the shares from satisfying the "full voting rights" requirement of subparagraph 186(4)(b)(i) of the Act. Although the shareholder may have entered into an arrangement which dictates how the votes attached to his or her shares are to be voted, this does not alter the fact that the shares have full voting rights.
These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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© Her Majesty the Queen in Right of Canada, 1993
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© Sa Majesté la Reine du Chef du Canada, 1993
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