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 "affiliated persons" in a situation where one of the corporations is the general partner of a limited partnership and has absolute control thereof, and the limited partnership owns all of the shares of the other corporation.
Position:
We did not express an opinion because the scenario was too specific.
Reasons:
Conceptually, the principle enunciated in the Vineland Quarries decision should apply equally where the intermediary (or direct controller) is a partnership.
XXXXXXXXXX 971006
Attention: XXXXXXXXXX
September 4, 1997
Dear Sirs:
Re: Proposed Subsection 251.1(1) of the Income Tax Act (the "Act")
We are writing in response to your letter of April 9, 1997 wherein you requested a technical interpretation with respect to the definition of "affiliated persons" in proposed section 251.1 of the Act to the following situation:
Facts
1.Mr. X owns 100% of the issued share capital of Xco.
2.Mr. Y owns 100% of the issued share capital of Yco.
3.Mr. X and Mr. Y are unrelated.
4.Xco and Yco each beneficially own 50% of the limited partnership units of Partnership No. 1. Their limited partnership interest allows each to share in the earnings of Partnership No. 1 and the right to receive a full return of capital on a priority basis should Partnership No. 1 cease to exist.
5.Mr. X owns 65% of the issued shares of Zco while Mr. Y owns the remaining 35%.
6.Zco holds 100% of the general partnership units of Partnership No. 1. As the general partner, Zco holds 100% of the votes at partnership meetings while the limited partners have no right to vote. As general partner, however, Zco is entitled to share in the earnings of Partnership No. 1 only after Xco and Yco have fully been satisfied as to their earnings share based on a formula. Furthermore, Zco only has the ability to participate in the distribution of the assets of Partnership No. 1 once the limited partners have fully received a return of their full capital and undistributed earnings.
The partnership agreement in respect of Partnership No. 1 does not contain any provision that would limit the ability of the general partner (i.e. Zco), by reason of its voting entitlement, to decide any question put to the partnership.
7.Partnership No. 1 holds an investment in a wholly owned corporation, Aco.
8.Partnership No. 1 holds 92.5% of the limited partnership units of Partnership No. 2. The remaining 7.5% of the limited partnership units are equally held by Xco and Yco. The limited partnership units of Partnership No. 2 have the same features as the limited partnership units of Partnership No. 1.
9.Zco also holds 100% of the general partnership units of Partnership No. 2. As the general partner, Zco holds 100% of the votes at partnership meetings while the limited partners have no such right to vote. Zco's participation in Partnership No. 2 is the same as its participation in Partnership No. 1.
The partnership agreement in respect of Partnership No. 2 does not contain any provision that would limit the ability of the general partner (i.e. Zco), by reason of its voting entitlement, to decide any question put to the partnership.
10.Partnership No. 2 holds, inter alia, an investment in a wholly owned corporation, Bco.
Specifically, you have requested our opinion as to whether Xco, Aco and Bco are "affiliated persons" within the meaning assigned to that term by section 251.1 of the Act.
Since the interpretation you seek appears to relate to completed transactions undertaken by specific taxpayers, we bring to your attention Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada, Taxation. Confirmation with respect to completed transactions involving specific taxpayers will only be provided by a tax services office. However, we can provide the following general comments.
In Vineland Quarries and Crushed Stone Limited v. MNR (1966) CTC 69 (Exch), 66 DTC 5092, aff'd (1967) CTC vii, 67 DTC 5283 (SCC), the court held that the word "controlled" "contemplates and includes such a relationship as, in fact, brings about a control by virtue of majority voting power, no matter how that result is effected, that is, either directly or indirectly." The court also indicated that Company 1 may control Company 3 by owning all the shares of Company 2 which in turn owns all the shares of Company 3. In our view, the principle enunciated in Vineland Quarries applies where the intermediate shareholder is either a corporation or 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.
We also wish to point out that, pursuant to proposed subsection 251.1(3) of the Act, for the purpose of determining whether a corporation and another person or partnership are "affiliated persons", the term "controlled" means controlled directly or indirectly in any manner whatever. This expression is defined in subsection 256(5.1) of the Act and is generally referred to as de facto control. As noted in paragraph 17 of Interpretation Bulletin IT-64R3, de facto control may exist without the ownership of any shares of a corporation.
We trust that our comments will be of assistance.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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