24 July 1998 External T.I. 9807875 - 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: application of paragraph 256(1.4)(b)

Position: generally not applicable where corporation required to purchase shares as a consequence of the occurrence of a specified triggering event

Reasons: No shareholder has the right to cause the corporation to redeem acquire or cancel the shares

XXXXXXXXXX 		980787
D. Boychuk

Attention:  XXXXXXXXXX 

July 24, 1998

Dear Sirs:

Re: Paragraph 256(1.4)(b)

We are writing in response to your letter of March 30, 1998 wherein you requested our views on the application of paragraph 256(1.4)(b) of the Income Tax Act (Canada) (the “Act”) in the circumstances described below.

1. A corporation has two shareholders each of whom owns 50% of the issued and outstanding shares and neither shareholder controls the corporation either directly or indirectly or in any manner whatever.

2. The shareholders and the corporation are parties to an agreement pursuant to which each shareholder is obligated to sell and the corporation is obligated to purchase all of the shares held by a shareholder in the event that shareholder ceases to be an employee of the corporation.

You have asked us whether paragraph 256(1.4)(b) would apply such that each shareholder would be in the same position in relation to control of the corporation as if the shares of the other shareholder were acquired by the corporation.

You have referred us to technical interpretation 5-9404 wherein the Department stated that, in general, paragraph 256(1.4)(b) would not apply in such a situation.

You have also asked whether our position would also apply in respect of other common default provisions under a shareholders agreement wherein a corporation becomes obligated to purchase a shareholder’s shares (e.g. the seizure of a shareholder’s shares by a creditor in a non-bankruptcy situation).

OUR COMMENTS

Paragraph 256(1.4)(b) applies for the purpose of determining whether a corporation is associated with another corporation. In general, it provides that where a person has a right at any time under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to cause a corporation to redeem, acquire or cancel any shares of its capital stock owned by other shareholders, the person shall (except in defined circumstances) be deemed at that time to be in the same position in relation to control of the corporation and ownership of the shares as if the shares were redeemed, acquired or canceled by the corporation.

In our view, paragraph 256(1.4)(b) would not generally apply where the occurrence of an event imposes an obligation on a corporation to acquire a shareholder’s shares provided that the occurrence of the event is not within the control of another shareholder. For example, paragraph 256(1.4)(b) may apply in circumstances where a particular shareholder is in a position to trigger the event so as to force the corporation to acquire shares owned by another shareholder.

Please note that the comments set out in this letter are of a purely general nature and do not take into account considerations that might arise in the context of a specific transaction. In accordance with paragraph 22 of Information Circular 70-6R3, the comments expressed herein are not binding on the Department.

Yours truly,

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

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