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.
5-960746
XXXXXXXXXX M. Séguin
Attention: XXXXXXXXXX
July 19, 1996
Dear Sirs,
This is in reply to your letter dated February 21, 1996 wherein you requested technical interpretations regarding the definition of "Canadian-controlled private corporation" ("CCPC") in subsection 125(7) of the Income Tax Act (Canada) (the "Act"), in the context of five hypothetical fact scenarios.
In each scenario, Pubco is a public corporation as defined in subsection 89(1) of the Act and X Co is both a Canadian corporation and a private corporation as those terms are defined in subsection 89(1) of the Act.
Scenario #1
Pubco owns 40% of the shares of Middleco. Middleco is a CCPC. Middleco owns 20% of the shares of X Co. You would like a confirmation that in determining whether X Co is a CCPC, the fact that Pubco owns shares in Middleco is not relevant because Middleco is a CCPC.
The expression CCPC as defined in subsection 125(7) of the Act excludes a corporation controlled directly or indirectly in any manner whatever, by one or more public corporation. The expression "controlled, directly or indirectly in any manner whatever," includes de facto control by virtue of subsection 256(5.1) of the Act. Consequently, control of a particular corporation may be direct, indirect de jure or de facto and as such, it would be necessary to review all the facts of a particular case in determining who ultimately controls X Co.
We assume that if Middleco is a CPCC, Pubco does not have any direct or indirect influence that, if exercised, would result in control in fact of Middleco. To this extent, it would appear that the fact that Pubco owns shares in Middleco is not in and by itself relevant in determining whether X Co is a CPCC.
We are not prepared, however, to confirm that the fact that a public corporation owns shares in an intermediary such as Middleco, over which it does not have control, could not somehow be relevant in determining X Co's status. Such a confirmation would ignore the fact that the definition of CPCC refers to de facto control and that Pubco could have an influence on X Co as a consequence of its relationship or of its holding shares in Middleco. As mentioned in paragraph 17 of the Interpretation Bulletin IT-64R3, de facto control may exist without the ownership of any shares.
Scenario #2
Partnership A is a general partnership. Pubco is a partner in Partnership A and is entitled to:
- 40% of the income or loss of the partnership;
- 40% of the assets of the partnership in the event of a dissolution of the partnership; and
- 40% of the votes that may be cast at a meeting of the partners of the partnership.
Partnership A owns 20% of the shares of X Co. You would like a confirmation that, in determining whether X Co. is a CCPC, 8% of the shares of X Co. should be considered to be owned by a public corporation pursuant to paragraph 251(5)(b) of the Act.
As mentioned in the technical interpretation referred to in your letter (6-911242), the determination of whether or not a corporation is a CCPC requires knowledge of the "person" controlling the corporation in question. A partnership is not a person for the purposes of the definition of CCPC in subsection 125(7) of the Act. The Department is of the view however that a person in the context of that definition can include a reference to the partners of a partnership.
Moreover, in that same opinion, the Department indicated that the wording of paragraph 251(5)(b) of the Act is very broad and seems capable of including a partner's future right to the shares in a corporation upon the dissolution of the partnership. On that basis, we agree that a partner could be considered, depending on the circumstances, to own shares in a corporation in such a structure by virtue of paragraph 251(5)(b) of the Act for the purposes of the definition of CCPC. However, based on the limited facts provided in your example, we are not able to conclude that paragraph 251(5)(b) of the Act would apply because Pubco has a right in the assets of the partnership in the event of a dissolution and not a right to the shares of X Co. These shares, if still held at the time of dissolution, could be sold by the partnership in the course of the wind-up or could be given to another partner for his interest in the partnership. Consequently, the application of paragraph 251(5)(b) of the Act cannot be determined without a complete examination of all the relevant facts including the provisions of the partnership agreement.
Finally, the influence of Pubco over X Co would also have to be examined in order to evaluate a possible de facto control for the purpose of the definition of CCPC in subsection 125(7) of the Act.
Scenario #3
Partnership B is a limited partnership organized under the Limited Partnerships Act (Ontario). Pubco is a limited partner in Partnership B and is entitled to:
- 40% of the income or loss of the partnership; and
- 40% of the assets of the partnership in the event of a dissolution of the limited partnership.
In accordance with subsection 13(1) of the Limited Partnership Act (Ontario), Pubco takes no part in the control of the business of the partnership. All of the shares of the general partner of Partnership B are owned by a Canadian resident individual.
Partnership B owns 20% of the shares of X Co. The general partner makes decisions as to the manner in which the shares of X Co. that are owned by Partneship B is voted.
You would like a confirmation that, in determining whether X Co. is a CCPC, 8% of the shares of X Co. should be considered to be owned by a public corporation pursuant to paragraph 251(5)(b) of the Act.
Since the general partner is the only one having control over the business of the partnership, he will be in a position to control the votes attached to the 20% interest in X Co. shares. However, this fact would not prevent us from concluding that Pubco could be deemed to own shares in X Co. by virtue of paragraph 251(5)(b) of the Act, since a limited partner could have a right to certain specific assets of a partnership upon its dissolution. However, our comments regarding scenario #2 above would appear relevant here as well since the right of the limited partner is a right to share in the assets in case of a dissolution and not a right to specific property of the partnership.
The influence of Pubco on X Co would also have to be examined in order to evaluate a possible de facto control for the purposes of the definition of CCPC in subsection 125(7) of the Act.
Scenario #4
Partnership C is a limited partnership organized under the Limited Partnership Act (Ontario). Pubco is a limited partner in Partnership C and is entitled to:
- 40% of the income or loss of the partnership; and
- 40% of the assets of the partnership in the event of a dissolution of the limited partnership.
Genco is the general partner of Partnership C. Pubco owns 40% of the shares of Genco. Genco is a CCPC. Partnership C owns 20% of the shares of X Co. Genco makes decisions as to the manner in which the shares of X Co. that are owned by Partnership C ared voted.
You would like a confirmation that, in determining whether X Co. is a CCPC, the fact that Pubco owns shares in Genco is not relevant because Genco is a CPCC and that 8% of the shares of X Co. should be considered to be owned by a public corporation pursuant to paragraph 251(5)(b) of the Act.
Again, based on facts presented and assuming that Pubco does not have any direct or indirect influence that, if exercised, would result in control in fact of Genco, we agree that the fact that Pubco owns shares in Genco does not appear, in and of itself, to be relevant in determining whether X Co is a CPCC. The influence of Pubco over X Co. would, however, have to be examined in order to evaluate a possible de facto control for the purposes of the definition of CCPC in subsection 125(7) of the Act.
Finally, for the purposes of paragraph 251(5)(b) of the Act, the comments made in scenarios 2 and 3 above, are relevant here as well.
Scenario #5
Partnership D is a limited partnership organized under the Limited Partnership Act (Ontario). Pubco is a limited partner in Partnership D and is entitled to:
- 40% of the income or loss of the partnership; and
- 40% of the assets of the partnership in the event of a dissolution of the limited partnership.
Genco is the general partner of Partnership D. Pubco controls Genco.
Partnership D owns 20% of the shares of X Co. Genco makes decisions as to the manner in which the shares of X Co. that are owned by Partnership D are voted.
You would like a confirmation that, in determining whether X Co. is a CCPC, the shares of X Co. owned by Partnership D should be considered to be owned by a public corporation because Pubco controls Genco and thereby controls the voting rights attached to the X Co. shares.
We agree that, in determining whether X Co. is a CCPC, since Pubco controls Genco, the general partner, Pubco would be considered to have control over the voting rights attached to the X Co. shares owned by Partnership D.
As explained in paragraph 21 of Information Circular 70-6R2, the above comments are not advance rulings and are not binding on the Department.
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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