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: Acquisition of Control
Position: Acquisition of control may occur if shares are issued to unrelated persons even if the corporation is controlled after the issuance by a related group
Reasons: See subsection 256(7)
XXXXXXXXXX 981836
D. Boychuk
Attention: XXXXXXXXXX
September 18, 1998
Dear Sirs:
Re: Acquisition of Control
We are writing in response to your letter of July 17, 1998 wherein you requested our views on the application of subsection 256(7) of the Income Tax Act (the “Act”) to the fact situation described below.
1. An individual (“A”) owns 51% of the voting shares of a corporation (“Opco”), such that A has the right to a majority of votes in the election of the Board of Directors.
2. A is a member of a “related group” as defined in subsection 251(4) of the Act, which together owns 60% of the voting shares of Opco.
3. All of the shares owned by the members of the related group are subject to a voting rights agreement which entitles A to vote the shares owned by any person in the group.
4. Opco issues additional voting shares (the “additional shares”) to persons who are not part of the related group (the “unrelated purchasers”) and who deal with each other at arm’s length. The issuance of the additional shares results in a decrease in A’s proportional shareholding such that, following the issuance, A owns less than 50% of the voting shares, however, the related group together owns more than 50% of the voting shares of Opco.
5. At a later date, A acquires voting shares of Opco, such that immediately following the acquisition, A again owns more than 50% of the voting shares of Opco.
Issue
Based on the foregoing facts, you have asked us:
1. Is there an acquisition of control of Opco by the related group as a consequence of the issuance of the additional shares to the unrelated purchasers?
2. Is there an acquisition of control of Opco by A as a consequence of A’s acquisition of shares which give A more than 50% of the voting shares of Opco?
3. Is there an acquisition of control of Opco by the related group if A transfers shares of Opco to a related person, such that, following the transfer, A no longer owns a majority of the voting shares but the related group, of which A is a member, collectively controls Opco?
4. Is there an acquisition of control of Opco by a group of persons if A (who owns a majority of the voting shares of Opco) transfers shares to an arm’s length person (“B”) and A retains the right to vote B’s shares under the terms of the voting rights agreement? (In this case, the aggregate number of voting shares owned by the related group falls below 50%).
Written confirmation of the tax implications of a particular proposed transaction or series of proposed transactions is given only in the context of an advance ruling request. We are, however, in a position to make the following comments.
1. The issuance of the additional shares to the unrelated purchasers would result in an acquisition of control of Opco by the related group. A controls Opco prior to the issuance of the additional shares and, under the principle established in Southside Car Market Ltd. v. The Queen, 82 DTC 6179, [1982] CTC 214 (FCTD), control of Opco by A effectively precludes control of Opco by the related group. Following the issuance of the additional shares, it is our view that the members of the related group will constitute a “group of persons” who acquired control of Opco since, in addition to any common link based on their relationship, they will act together under the voting rights agreement to control Opco. In this situation, subparagraph 256(7)(a)(i) of the Act does not apply to deem the acquisition of control by the related group not to occur even though all of the persons in the group are related to Opco immediately before the acquisition of control. This provision would only apply if control of Opco by the related group were acquired by virtue of the acquisition of shares by one or more persons in the related group. Subparagraph 256(7)(a)(i) does not apply since control of Opco is acquired by the related group as a result of the issuance of the additional shares to the unrelated purchasers and not because of the acquisition of shares by one or more members of the related group.
We confirm that A will not be considered to have maintained de jure control of Opco by virtue of the voting rights agreement. In International Iron & Metal Co. Ltd. v. M.N.R., 72 DTC 6205, [1972] CTC 242 and more recently in Duha Printers (Western) Ltd. v. The Queen, 98 DTC 6334, the Supreme Court of Canada confirmed that, for the purposes of determining de jure control of a corporation, a person who owns a voting share is considered to have the voting power attached to that share even if the person has a contractual obligation to exercise that vote in a particular manner.
2. Since A is related to Opco immediately before the acquisition of shares giving A sole control of Opco, clause 256(7)(a)(i)(B) of the Act would apply with the result that A would be deemed not to acquire control of Opco solely by virtue of such acquisition.
3. Since the persons who acquire the shares of Opco from A are related to A and to Opco immediately before the acquisition, clauses 256(7)(a)(i)(A) and (B) of the Act would apply with the result that the related group would be deemed not to have acquired control of Opco solely because of such acquisition.
4. Whether or not there is an acquisition of control in the circumstances will depend, as a factual matter, on whether a group of persons acts in concert to control Opco. Generally speaking, a group of persons is comprised of two or more persons who have a common link or interest or who act together to control a corporation. In Interpretation Bulletin IT-302R3, Losses of a Corporation, dated February 28, 1994 at paragraph 3, the Department states that a group of persons who owns a majority of the voting shares of a corporation will be considered to have collectively acquired control of the corporation where there is an agreement among the members of the group to vote their shares jointly.
We trust that our comments will be of assistance.
The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with paragraph 22 of Information Circular 70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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