16 May 1994 ICAA Roundtable, 9409550 - 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.

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.

Principal Issues:

-effect of Harvard International Resources 93 DTC 5254
-associated corporations prior to 1988
-de jure control

Position TAKEN:

-case is not relevant for the small business deduction

Reasons FOR POSITION TAKEN:

-amendments to the associated corporation rules in 1988

DRAFT

Revenue Canada Round Table
Institute of Chartered Accountants of Alberta
Calgary, Alberta
May, 1994

Question No. 19

ASSOCIATED CORPORATIONS

In 1993, the Alberta Court of Queen's Bench decided the case of Harvard International Resources Ltd. (93 DTC 5254). The issue was whether two corporations were associated and the results of that decision affected the taxpayer's claim for the royalty tax credit.

The decision turned on whether the taxpayer in fact controlled a second corporation. At no time in the year did the taxpayer own a majority of the voting shares of the second corporation. A third corporation owned a majority of the voting shares of the second corporation, however, in an ancillary agreement the third corporation gave up its right to vote its shares while it provided management services to the second corporation. If the third corporation terminated its management agreement, the second corporation was entitled to redeem the shares held by the third corporation. Therefore, the third corporation may never have been in a position to exercise control of the second corporation by virtue of its holdings of voting shares. The court held that the taxpayer was not associated with the second corporation since it did not control the second corporation.

Has Revenue Canada accepted the results of this case and does it agree that the taxpayer did not control the second corporation? This issue could be important in claiming the small business deduction where a non-resident corporation was in a position similar to that of the taxpayer in the above-noted case.

Department's Position

This case was decided on the facts that were unique to it, and the decision was based on the fact that de jure control of the second corporation rested with the third corporation which owned a majority of its voting shares. Since the de facto control test found in subsection 256(5.1) was added effective for taxation years commencing after 1988 and this de facto control test is applicable for purposes of the association rules and the determination of whether a corporation is a Canadian-controlled private corporation, we do not believe this case is relevant for purposes of the small business deduction as described above.

Author:V. Plant
File:940955
Date:April 26, 1994