11 April 1995 External T.I. 9506205 - 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:

Whether two corporations are associated by virtue of the fact that they are controlled, directly or indirectly in any manner whatever, by the same person or group of persons.

Position TAKEN:

Question of fact, depends on the relationship between the shareholders of each corporation, the application of 256(2.1) and 256(1.2).

Reasons FOR POSITION TAKEN:

Subsections 256(1.2) and (2.1) are intended to prevent multiple access to the small business deduction and we will interpret the provision in a manner consistent with this intent.

		950620
XXXXXXXXXX	A. Seidel

Attention: XXXXXXXXXX

April 11, 1995

Dear Sirs:

This is in reply to your letter of February 18, 1995 concerning the application of subsection 256(1) of the Income Tax Act (the "Act"), We have checked our records and we have no record of ever receiving your original request of September 10, 1994.

Pursuant to paragraph 256(1)(b) of the Act, two corporations are associated if they are controlled, directly or indirectly in any manner whatever, by the same person or group of persons. The expression "controlled, directly or indirectly in any manner whatever" is defined in subsection 256(5.1) of the Act and the Department's views as to when this expression applies to a specific situation are discussed in paragraphs 15-19 and 21 of Interpretation Bulletin IT-64R3. Subject to certain specified exceptions, a corporation will be considered to be "controlled, directly or indirectly in any manner whatever" pursuant to subsection 256(5.1) of the Act if a person or group of persons "... has any direct or indirect influence that, if exercised, would result in control in fact of the corporation".

Whether or not a person or a group of persons has any direct or indirect influence that, if exercised, would result in control of a corporation is a question of fact that can only be determined after reviewing all of the facts in a particular situation. For example, the ability of an individual (in your example, either Mr. A or Mr. B) to control the day to day management and operation of two or more corporations may be an indication of such influence. In addition, other factors such as the relationship between the shareholders of the two corporations might indicate such influence. Such influence may exist without the ownership of any shares. In your example, if Mr. A or Mr. B have any influence over Opco Z that, if exercised, would result in control in fact of Opco Z, then Opco Z would be associated with Opco X and Holdco M or Opco Y and Holdco N, as the case may be, pursuant to paragraph 256(1)(b) of the Act.

Subsection 256(2.1) of the Act may also apply to deem two or more corporations to be associated where it is determined that one of the main reasons for their separate existence is to reduce the amount of taxes payable under the Act or to increase the amount of refundable investment tax credit under section 127.1 of the Act in a taxation year.

In response to Question #39 of the 1988 Canadian Tax Foundation Revenue Canada Round Table, we indicated that it was our understanding that the intent of subsection 256(1), as amended by SC 1988, c.55 and new subsection 256(1.2), as introduced therein, was primarily to prevent multiple access to the small business deduction which might otherwise have been available for the benefit of essentially the same group of persons. We also stated that we will interpret the provision in a manner that is consistent with this intent. Accordingly, for the purposes referred to in subsection 256(1.2), any group of persons, related or unrelated, may constitute a group of persons that control a group of corporations. Whether or not subsection 256(2.1) of the Act applies in any particular situation is a question of fact which can only be determined after a review of all the facts surrounding the existence of the separate corporations. Accordingly, we are unable to confirm that subsection 256(2.1) of the Act will not apply in your example.

These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch