22 September 1998 External T.I. 9810305 - PENSION COPORATIONS & TAX EXEMPT CORP

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Would a corporation, that is one of a series of vertically wholly-owned subsidiary corporations, fail to be exempt from Part I tax by the only reason that one corporation of the series is not exempt from Part I tax.

Position: No

Reasons: Every corporation is a prescribed person under 4802(1)(g) of Regulations for purposes of 149(1)(o.2)(iv)(D) of the Act

XXXXXXXXXX 								5-981030
	Fouad Daaboul
Attention:  XXXXXXXXXX 

September 22, 1998

Dear Sirs:

Re: Pension Corporations

We are writing in response to your letter of April 15, 1998, wherein you asked us to confirm whether or not any of a corporation and a series of vertically wholly-owned subsidiary corporations (i.e. Corporation A owns 100% of Corporation B which owns 100% of Corporation C, etc.) would fail to be exempt from Part I tax (as a corporation described in paragraph 149(1)(o.2) of the Income Tax Act (the "Act")) because of this corporate structure. All of the shares of the capital stock of the first corporation (Corporation A) in the series are owned by a registered pension plan. You also asked if our response would differ if one of the corporations in the series was not a tax exempt corporation.

As indicated in Information Circular 70-6R3, confirmation of the tax consequences flowing from completed transactions must be obtained from your local tax services office. This Directorate will provide a technical interpretation concerning the provisions of the Income Tax Act (the "Act") and Regulations but not with respect to specific factual or hypothetical transactions. We may, however, provide the following general comments concerning the provisions of the Act, in accordance with the above-mentioned Information Circular, which are not binding on the Department.

Each corporation must meet the relevant tests in order for its income to be exempt from Part I tax under paragraph 149(1)(o.2) of the Act. Assuming that one of the subparagraph 149(1)(o.2) (ii), (ii.1) or (iii) requirements is met then the corporation must also meet one of the subparagraph 149(1)(o.2)(iv) or (v) requirements at all times since the later of November 16, 1978, and the date on which it was incorporated.

The subparagraph 149(1)(o.2)(iv) requirement will be met if "all of the shares, and rights to acquire shares, of the capital stock of the corporation are owned by

(A) one or more registered pension plans,.. or

(D) one or more prescribed persons".

The prescribed persons are outlined in subsection 4802(1) of the Income Tax Regulations ("Regulations"). In particular, a prescribed person under paragraph 4802(1)(g) of the Regulations is "a corporation all of the shares of the capital stock of which are owned by one or more of the following:

(i) registered pension plans, ... and

(iii) persons described in this subsection" (i.e. subsection 4802(1) of the Regulations).

Paragraph 4802(1)(g) of the Regulations is applicable to the 1994 and subsequent taxation years.

In the situation you have described, the first corporation in the series is owned by a registered pension plan and thus clause 149(1)(o.2)(iv)(A) of the Act is applicable. The next corporation in the series (the second tier corporation) is owned by a prescribed person (i.e. the corporation described in the preceding sentence) and thus qualifies as a prescribed corporation by virtue of subparagraph 4802(1)(g)(i) of the Regulations. The third corporation in the series (the third tier corporation) is also owned by a prescribed person that is the second tier corporation by virtue of subparagraph 4801(1)(g)(iii) of the Regulations. Similarly, all wholly-owned subsidiary corporations continuing in the series would so qualify. If one of the corporations in the series was not exempt from Part I tax under paragraph 149(1)(o.2) of the Act by virtue of not meeting any of the subparagraph 149(1)(o.2)(ii), (ii.1) or (iii) requirements, that failure would not disqualify it from being a prescribed corporation described in subsection 4802(1) of the Regulations. In addition, if the first corporation in the series was incorporated before 1993 (i.e. prior to the time for which paragraph 4802(1)(g) of the Regulations is applicable) that corporation may still be a prescribed corporation in respect of a corporation incorporated after 1993.

We trust our comments will be of assistance to you.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate

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