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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
5-940501
XXXXXXXXXX Tim Bryant
Attention: XXXXXXXXXX
April 13, 1994
Dear Sir:
Re: Request for Technical Interpretation of Paragraphs 84.1(2)(b) and (e)
We are writing in response to your letter dated February 17, 1994 in which you have requested a technical interpretation on the application of the above provisions of the Income Tax Act (the "Act") in the following circumstances:
A Canadian-controlled private corporation (the "subject corporation") has two classes of authorized shares. The shares of the first class are voting common shares and the shares of the second class are non-voting fully participating special shares. One person owns all of the voting common shares and owns some of the non-voting participating special shares and a number (approximately 20) of arm's-length employees own the balance of the non-voting participating special shares. The person who owns all of the voting common shares owns approximately 65% of the equity in the company through the combination of his common shares and his special shares.
All of the shareholders as a group wish to carry out some creditor-proofing restructuring and are considering transferring their shares to a new holding company (the "purchaser corporation") the share structure of which would mirror the existing share structure of the company they own. The present company would become a wholly-owned subsidiary of the new holding company and the share structure of the new company will duplicate the share structure of the existing company.
The issue is whether paragraphs 84.1(2)(b) and (e) would apply to cause all of the shareholders to be deemed not to be dealing at arm's length with the purchaser corporation for purposes of subsection 84.1(1). It is your view that because all of the voting shares rest in the hands of one shareholder and since one person cannot constitute a group for purposes of section 84.1, subsection 84.1(1) would not apply to this restructuring. You consider that this situation is distinguishable, for purposes of section 84.1, from circumstances where there is more than one shareholder who has voting rights.
Our Views
It is our view that since subparagraph 84.1(2)(e)(i) simply refers to "shares" (rather than just voting shares), any employee (or any group of employees) holding the non-voting shares of the corporation in combination with the person that holds all the voting common shares will constitute a group of persons in respect of that corporation under subparagraph 84.1(2)(e)(i). If there are 20 employees holding the non-voting shares, there could conceivably be 20 groups of persons in respect of the corporation (i.e. each employee in combination with the voting shareholder). Since all of these groups will have one member that controls the corporation, each group of persons will be considered, by virtue of subparagraphs 84.1(2)(e)(ii) and (iii), to control the corporation. Therefore, each shareholder employee will be deemed under paragraph 84.1(2)(b) not to deal at arm's length with the purchaser corporation as each group would constitute a group of less than 6 persons that immediately before the disposition controlled the subject corporation and immediately after the disposition controlled the purchaser corporation.
The foregoing comments are given in accordance with the practice of providing non-binding opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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