1 September 1998 CTF Roundtable, 9822600 - PARTHENON INVESTMENTS

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.

Recent Cases
Revenue Canada Review
Canadian Tax Foundation Conference
October, 1998

Parthenon Investments Limited v. MNR

Federal Court of Appeal
May 30, 1997

In Interpretation Bulletin IT-458R Revenue Canada sets out its position regarding a corporation's status as a Canadian-controlled private corporation ("CCPC") where that corporation is part of a multi-tiered corporate structure. For example, consider the situation where Aco owns all the shares of Bco which owns all the shares of Cco. The Department's position is that if either Aco or Bco is a non-resident then Cco would not be considered to be a CCPC.

In light of the decision in Parthenon Investments Limited v. M.N.R 97 DTC 5343, we are reconsidering our position. In Parthenon, all the voting shares of the appellant were owned by a Canadian corporation all the voting shares of which were owned by an American corporation ("Pacific U.S.”) which in turn was controlled by Canadian corporations. The Court concluded that despite being indirectly controlled by Pacific U.S., a non-resident, the appellant was a CCPC. In coming to this conclusion the court stated that "... the concept of control has necessarily latent within it the notion of ultimate control."

The decision in Parthenon has implications for the interpretation of provisions of the Act other than the CCPC definition. For example, in paragraph 55(3.1)(a), a disposition of property by a corporation controlled by the distributing corporation, to the distributing corporation in contemplation of a distribution (as defined in subsection 55(1)), will not cause the "butterfly exemption" in paragraph 55(3)(b) not to have application. In applying this provision, using the example of Aco, Bco and Cco described above, if Bco were a distributing corporation, transfers of property from Cco to Bco would not qualify for the subparagraph 55(3.1)(a)(iv) exemption because, applying the Parthenon case, Bco would not control Cco.

Similarly, under paragraph 88(1)(d) property acquired by a parent corporation on a wind up of its subsidiary can only be "bumped" if the property was owned by the subsidiary at the time the parent last acquired control of the subsidiary. Again assume Bco was a wholly-owned subsidiary of Aco. If Bco acquired all the shares of Cco, on a wind-up of Cco, Bco could not bump the property that it acquired on the wind-up because, based on Parthenon, only Aco and not Bco acquired control of Cco at that time.

Author: D.A. Palamar
File: 982260
Date: September 1998