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.
Dear Sirs:
RE: Paragraph 95(1)(a) of the Income Tax Act (the "Act")
We are writing in response to your letter of December 16, 1985 in which you requested our interpretation of the above-noted provision of the Act in the following two hypothetical examples:
1. Corporation A is a non-resident of Canada. All of the issued shares of Corporation A are owed equally by four related persons all of whom are Canadian residents. Is Corporation A a controlled foreign affiliate of each of the four Canadian residents?
2. Corporation A is a non-resident of Canada. Corporation A has outstanding one class of shares. Corporation B, a resident of Canada, owns 49 per cent of the issued shares of Corporation A. Corporation C, a non-resident of Canada owns 100 per cent of Corporation B and 51 per cent of Corporation A. Is Corporation A a controlled foreign affiliate of Corporation B?
In the first hypothetical situation out lined above each of the four Canadian resident shareholders could have an equity percentage in Corporation A which was not less than 10% and therefore, assuming none of these shareholders was a non-resident-owned investment corporation, Corporation A would be considered a foreign affiliate of each of these shareholders. Corporation A would also be considered to be a controlled foreign affiliate of each of these shareholders pursuant to either of subparagraphs 95(1)(a)(ii) or (iii) of the Act.
In the second hypothetical situation outlined above, Corporation B would have an equity percentage of 49% in Corporation A and therefore, assuming Corporation B was not a non-resident-owned investment corporation, Corporation A would be considered a foreign affiliate of Corporation B.
In our opinion, provided in this situation Corporation A is controlled solely by Corporation C and not by the related group consisting of Corporations B and C, Corporation A would not be a controlled foreign affiliate of Corporation B. It would be necessary however to review all the background factors in a particular situation to determine whether any other provisions of the Act, e.g. paragraph 95(6)(b), would apply.
We hope these comments are of assistance to you.
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© Her Majesty the Queen in Right of Canada, 1986
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© Sa Majesté la Reine du Chef du Canada, 1986
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