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:
1.Whether, where a corporation is granted an option to acquire its own shares and the shares are subsequently sold to a Crown agent or a Crown corporation, subsection 149(10) will apply.
2.Whether, where the 90% or 100%, as the case may be, share ownership test is met, but a corporation has outstanding redeemable and retractable preferred shares, the corporation would be tax-exempt under paragraph 149(1)(d) of the Act.
Position:
1.If 100% in the case of a Crown agent or 90% in the case of a Crown corporation of the corporation's shares are acquired, subsection 149(10) will apply.
No comments in respect of the option to acquire shares.
2.The corporation would not be tax-exempt.
Reasons:
1.The corporation will become tax-exempt. Cannot determine how option would operate.
2.It could be considered that "a person other than Her Majesty in right of Canada or a province or a Canadian municipality had during the period a right under a contract, in equity or otherwise either immediately or in the future and either absolutely or contingently, to, or to acquire shares or capital of" the corporation.
5-960219
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
April 24, 1996
Dear XXXXXXXXXX:
Re: Subsection 149(10) of the Income Tax Act
We are writing in reply to your letter of January 12, 1996, wherein you requested our comments regarding the application of subsection 149(10) of the Income Tax Act (the "Act") where the shares of a taxable corporation are acquired by a tax-exempt entity.
In the situation you describe, an individual owns all of the issued and outstanding shares of a corporation which is a small business corporation within the meaning of subsection 248(1) of the Act. The individual proposes to grant an option to the corporation to purchase all of his shares for their fair market value. The option can be exercised until January 31, 1997. On or before January 31, 1997, the individual sells his shares to a Crown corporation, commission or association or a Crown agent. You inquire whether, given the existence of the purchase option, subsection 149(10) of the Act would apply to deem the corporation to have disposed of all of its property at fair market value immediately before it becomes tax-exempt. You also ask whether our response would be different if a purchase option had not been granted but the individual owned, in addition to common shares of the corporation, redeemable and retractable preferred shares.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.
Subsection 149(10) of the Act applies where a corporation becomes or ceases to be tax-exempt. According to paragraph 149(10)(a) of the Act, the corporation's taxable year is deemed to have ended immediately before it becomes or ceases to be tax-exempt. Under paragraph 149(10)(b), where a corporation becomes tax-exempt, it is deemed to have disposed of all of its property immediately before the time that is immediately before the change in status, and reacquired the same property at fair market value.
The taxable income of a corporation, commission or association is exempt from tax under Part I of the Act during a period in which 90% or more of its shares or capital was owned by Her Majesty in right of Canada or a province. Since the expression "Her Majesty in right of Canada or a province" includes agents of Her Majesty, if a corporation that is an agent of the Crown acquires not less than 90% of the shares of another corporation, the latter corporation will be tax-exempt under paragraph 149(1)(d). On the other hand, if the shares of a corporation (the "subsidiary corporation") are acquired by a government corporation, commission or association that is not an agent of the Crown but is exempt from tax under paragraph 149(1)(d) of the Act, the subsidiary corporation will be exempt from tax only if it is wholly-owned by the tax-exempt government organization.
In the situation you describe, in our view, if a Crown corporation acquired all of the shares or if a Crown agent acquired not less than 90% of the shares of the small business corporation, the small business corporation would become tax-exempt pursuant to paragraph 149(1)(d) of the Act and would therefore be subject to subsection 149(10) of the Act. We cannot comment on the effect the option granted to the small business corporation would have on our response, since we fail to understand how such an option would operate, given that, if it were exercised, the small business corporation would not have any issued and outstanding shares.
In the Department's view, where a corporation has the right to redeem its shares pursuant to the rights attached to such shares, it is considered for purposes of paragraph 149(1)(d) of the Act, that "a person other than Her Majesty in right of Canada or a province or a Canadian municipality had during the period a right under a contract, in equity or otherwise either immediately or in the future and either absolutely or contingently, to, or to acquire shares or capital of" the corporation. Therefore, if the individual owned, in addition to common shares of the corporation, redeemable and retractable preferred shares, even if the 90% or 100% share ownership test were met, the small business corporation would not qualify for exempt status under paragraph 149(1)(d) of the Act. Therefore, subsection 149(10) of the Act would not apply.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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