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.
Is there a change of control in a situation ?
There will be a change of control in the situation.
Reasons FOR POSITION TAKEN:
256(9) deems a change of control to occur but does not deem the share acquisition to occur at the beginning of the day so 256(7) will not apply.
XXXXXXXXXX D. Yuen
August 12, 1994
Re: Subparagraph 256(7)(a)(i) of the Income Tax Act1
We are writing in response to your letter of May 10, 1994 wherein you requested our comments on certain provisions of the Act which apply upon a change of control.
On day 1, Aco is the sole shareholder of Bco, holding one common share of Bco, and is also the sole shareholder of Cco.
At 10:00 A.M. on day 2, Bco issues one common share to Dco such that, thereafter, Bco is owned equally by Aco and Dco. Dco is not related to, and deals at arm's length with, Aco, Bco and Cco.
At 10:30 on day 2, Aco transfers the shares of Cco to Bco such that Cco becomes a wholly-owned subsidiary of Bco.
No election is filed by Cco under subsection 256(9) in respect of the acquisition of its shares by Bco.
It is your view that, by virtue of subsection 256(7), control of Cco is deemed not to have been acquired by Bco for the following reasons:
Prior to the issuance of the share of Bco to Dco, Aco and Bco are related by virtue of subparagraph 251(2)(c)(ii).
Subsection 256(9) deems that, for purposes of the Act, unless an election is made under that subsection, an event which causes an acquisition of control is deemed to have occurred at the commencement of the particular day when it actually occurred.
In the case of Aco and Bco, at the commencement of day 2, they were related (since the share of Bco issued to Dco was not issued at the commencement of day 2) such that subparagraph 256(7)(a)(i) deems that control of Cco had not been acquired, notwithstanding the issuance of the share to Dco.
As subsection 256(9) applies for all purposes of the Act and subsection 256(7) applies to certain enumerated provisions of the Act but specifically excludes subsection 256(9), it appears that the former provision takes precedence over the latter.
Aco and Bco, and, Aco and Cco, are related to each other by virtue of subparagraph 251(2)(b)(i). Bco and Cco are related to each other by virtue of subparagraph 251(2)(c)(i).
Upon the issuance of the one common share of Bco to Dco, Bco ceases to be controlled by Aco. Thus, immediately before the acquisition by Bco of the shares of Cco, Bco will no longer be related to Cco by virtue of subparagraph 251(2)(c)(i) or any other provision of subsection 251(2).
If no election under subsection 256(9) is filed, control of Cco will be deemed to be acquired by Bco for purposes of the Act, including subsection 256(7), at the commencement of day 2.
The provisions of subsection 256(9) deem control to be acquired at the commencement of day 2 but do not deem the shares of Cco to be acquired at the commencement of day 2. It is therefore our view that, immediately before the acquisition by Bco of the shares of Cco (being the time at which the test in subparagraph 256(7)(a)(i) is to be applied), Bco and Cco are not related to each other for the reasons described in paragraph B above and the provisions of subparagraph 256(7)(a)(i) will not apply to deem that control of Cco will not be acquired by Bco for purposes of the provisions of the Act described in subsection 256(7).
The comments referred to above do not address the possible application of other provisions of the Act in respect of the transactions described above.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada.
Reorganizations and Foreign Division
Policy and Legislation Branch
1 All statutory references in this letter are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the "Act").
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