27 October 1994 External T.I. 9424545 - PROFIT SHARING PLAN FOR CORPORATE PARTNER

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 a corporate partner can be considered not to deal at arm's length with a corporation that is controlled by the partnership.

Whether business profits of a partnership can be considered the business profits of the partners.

Position TAKEN:

Yes, if the corporate partner controls the partnership.

Yes.

Reasons FOR POSITION TAKEN:

Extrapolation from comments in IT-64R3, paras. 13 and 33 and previous position in 933312 on control.

Routine.

XXXXXXXXXX 942454

Attention: XXXXXXXXXX

October 27, 1994

Dear Sirs:

Re: Definition of "profit sharing plan" in
Subsection 147(1) of the Income Tax Act (the "Act")

This is in reply to your letter of September 21, 1994, in which you ask whether a corporate partner could be considered a corporation with which the employer does not deal at arm's length in described circumstances. Further, you ask whether the corporate partner's profits from the partnership business could form part of the base profits, a percentage of which the employer could pay to a plan for the benefit of the employer's employees. Both your queries relate to conditions which must be satisfied in order to have a plan qualify as a "profit sharing plan" as defined in subsection 147(1) of the Income Tax Act (the "Act"). The satisfaction of these conditions are prerequisites to registration of a plan as a deferred profit sharing plan under the Act.

The circumstances described by you appear to relate to actual taxpayers and to proposed transactions contemplated by them. The Department cannot, therefore, provide a specific response except in the context of an advance income tax ruling. We can, however, provide the following general comments which are not binding on the Department.

ISSUE 1

Does the employer not deal at arm's length with the controlling corporate partner of a partnership which owns all the employer's shares?

It is our view as outlined in paragraph 13 of Interpretation Bulletin IT-64R3 ("Corporations: Association and Control - After 1988"), that the word "control" as expressed in the Act generally means the right of control that rests in ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the Board of Directors. Such control is referred to as de jure control.

In addition, it is our view, as explained in paragraph 33 of IT-64R3, that a person may have de jure control over a corporation without owning any of its shares if that person controls one or more other corporations which, singly or between them, have voting control of the first-mentioned corporation.

This is also our view where the intermediary shareholder is a partnership. In other words, where a partnership owns more than 50% of the issued voting shares of a corporation and where a particular partner is entitled without restriction, to exercise more than 50% of the votes that may be cast at a meeting of the partnership, it is our view that the particular partner controls the corporation.

Therefore, the controlling partner of a partnership that controls the employer will be considered to control the employer and thus will be considered not to deal at arm's length with the employer.

ISSUE 2

Whether the controlling partner's share in the profits of the partnership are "profits from the business of the (partner) corporation".

Paragraph 96(1)(f) of the Act flows through the nature and source of a partnership's income to the partners who are individually taxed in accordance with paragraph 12(1)(l) of the Act. These provisions apply for the purpose of determining the income of a partner and result, in our view, in the business profits of the partnership being considered the business profits of the individual partners.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch