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: Whether specific situations would constitute a "similar agreement or arrangement" for the purposes of subsection 256(5.1) and whether such arrangements have to be in writing.
Position TAKEN: It is a question of fact whether de facto control exists. There is no provision in the Act requiring that an agreement or arrangement for the purposes of subsection 256(5.1) be in writing.
Reasons FOR POSITION TAKEN: All of the facts have to reviewed before such a determination could be made.
XXXXXXXXXX M.P. Sarazin
March 20, 1995
Re: Subsection 256(5.1) of the Income Tax Act
This is in reply to your letter dated September 12, 1994 wherein you requested our comments regarding the Department's views on what would constitute an agreement or arrangement for the purposes of the general application of subsection 256(5.1) of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, consolidated to June 23, 1994 (the "Act").
You have indicated that there are a number of circumstances where an incorporated professional or quasi-professional may be required to carry on its business under the supervision and control of an unrelated third party (someone who happens to control another corporation). Examples of where supervision of the carrying on of a business by an arm's length person may be required are as follows:
(a)under an order issued by a governing body as a result of disciplinary action, or
(b)where a quasi-professional has not achieved a certain level of expertise in his professional field.
You have asked whether the term "or other similar ... arrangement" has to arise contractually between the "controller" and the "corporation" motivated by business reasons they mutually share or whether it can arise as the result of something required by a third party, such as a governing body or other public authority. You have also asked whether the arrangement must be evidenced in writing.
The determination of whether de facto control exists in any particular situation is a question of fact which can only be determined subsequent to a review of all of the facts. The Department's general views on de facto control are found in paragraphs 15 to 19 of Interpretation Bulletin IT-64R3.
Subsection 256(5.1) provides that where a "controller" has de facto control over a corporation, it will not be considered to have de facto control for purposes of the Act provided that the corporation and the "controller" deal at arm's length and the control results from "a franchise, licence, lease, distribution, supply or management agreement or other similar agreement or arrangement, the main purpose of which is to govern the relationship between the corporation and the controller regarding the manner in which a business carried on by the corporation is to be conducted."
We are of the view that the principle of ejusdem generis would require that the expression "or other similar agreement or arrangement" be interpreted to include only agreements and arrangements which are of the same general nature as those which are enunciated. Since a franchise, licence, lease, distribution, supply or management agreement generally is motivated by business relationships which the parties share, we would expect that such would also be the case for any "other similar agreement or arrangement".
With respect to your query as to whether a "similar agreement or arrangement" must be evidenced in writing, there is no such condition stipulated in the provision. We believe that in a particular situation the professional association by-laws, minutes of meetings held by the appropriate discipline committee, and the order or requirements of a private or public supervisory or governing body may be sufficient to constitute an arrangement.
These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.
Reorganizations and Foreign Division
Policy and Legislation Branch
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