27 November 1997 External T.I. 9719705 - CONNECTED PERSONS

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 2 corporations are connected for purposes of Part IV tax

Position:

yes

Reasons:

based on the expanded definition in subsection 186(2)

971970
XXXXXXXXXX F. Francis

Attention: XXXXXXXXXX

November 25, 1997

Dear Sirs:

Re: Subsection 186(2) of the Income Tax Act (the "Act")

This is in reply to your letter of July 10, 1997, wherein you requested a technical interpretation with respect to the applicability of subsection 186(2) of the Act to the following situation:

-Xco, a Canadian-controlled private corporation, has the following shareholdings:

	* 1,000,000 voting preferred shares are owned by 	Mr. X.

* 100 Common shares are owned by a trust of which the beneficiaries are Mr. X's two major children as well as Yco, a Canadian-controlled private corporation owned 100% by Mr. X.

	* the trustee of the trust is Mrs. X, the spouse of 	Mr. X.

- A dividend is paid by Xco to the trust which is then allocated to Yco.

You enquire as to whether Part IV tax would be applicable to the dividend. In particular, you enquire as to whether Xco and Yco are connected corporations within the meaning of section 186 of the Act.

Our Comments

The situation described in your letter would appear to involve a proposed transaction. Assurance as to the tax consequences of proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. However, we can offer the following general comments.

Under paragraph 186(4)(a) of the Act, a payor corporation is connected with a particular corporation if the payor corporation is controlled by the particular corporation at that time. Under subsection 186(2) of the Act, one corporation is controlled by another corporation if more than 50% of its issued share capital (having full voting rights under all circumstances ) belongs to the other corporation, to persons with whom the other corporation does not deal at arm's length, or to the other corporation and persons with whom the other corporation does not deal at arm's length.

We assume that the trust made the required designation under subsection 104(19) of the Act to deem the taxable dividend received by the trust to be a taxable dividend on a share received by Yco in the particular year from Xco.

In our view, provided that Mr. X owns more than 50% of the issued share capital of Xco (having full voting rights under all circumstances), Xco and Yco would be connected corporations within the meaning of section 186 of the Act. Accordingly, Part IV tax would not be applicable under paragraph 186(1)(a) of the Act. However, Part IV tax may be applicable under paragraph 186(1)(b) of the Act depending on the circumstances.

We trust our comments will be of assistance to you.

Yours truly,

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