19 November 1998 Internal T.I. 9824666 - PENSION PLAN EMPLOYERS - SECTION 251

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: Would a municipality be dealing at arm’s length with a corporation that is owned jointly by the municipality and other municipalities for purposes of 8503(3)(b).

Position: Possibly.

Reasons: Analysis of legislation and statutory documentation.

November 19, 1998

HEADQUARTERS HEADQUARTERS
Registered Plans Division Fouad Daaboul
Robert D’Aurelio 957-2060
Director
982466
Section 251 of the Act - Status of employers

This is in reply to your memorandum of September 18, 1998, wherein you requested our opinion on the relationship between XXXXXXXXXX in their status as employers.

FACTS

XXXXXXXXXX

OUR COMMENTS

Your concern is whether or not XXXXXXXXXX deal at arm’s length as employers of the employee from XXXXXXXXXX for purposes of paragraph 8503(3)(b) of the Regulations.

For purposes of the of the Income Tax Act (the "Act"), the term “arm’s length” is defined under subsection 251(1) of the Act. Two related persons are deemed not to deal with each other at arm’s length pursuant to paragraph 251(1)(a) of the Act.

For purposes of paragraph 251(1)(a) of the Act, “related persons” are defined under subsection 251(2) of the Act. In determining whether the two employers are related in this particular situation, the representative from XXXXXXXXXX has questioned the application of paragraph 251(2)(b) of the Act as to whether XXXXXXXXXX controlled XXXXXXXXXX.

The term “control” is not defined in the Act, but the courts have ruled that the word “controlled” contemplates the right of control that rests in ownership of such a number of shares as to give a majority of the voting power in the corporation. Although the courts have generally discussed the notion of control de jure and the voting right of shares in situations involved taxable Canadian corporations, the same interpretation principle would apply in respect of any corporation.

If we assume that the voting right at the XXXXXXXXXX board is similar to voting right of shares, we agree that based on the voting power basis XXXXXXXXXX does not control XXXXXXXXXX as it holds three of the twelve votes available which does not represent the majority of the board. However, in our view other facts, such as the incorporation acts under which the corporations involved have been incorporated, have to be analysed before reaching the conclusion that XXXXXXXXXX does not control XXXXXXXXXX. Furthermore, the same analysis has to take into consideration the possible application of any of provisions in paragraphs 251(2)(b) and (c) of the Act.

If the result of such an analysis shows that the two employers are not related under subsection 251(2) of the Act, they may not dealing at arm’s length by virtue of paragraph 251(1)(b) of the Act. This paragraph provides that “it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length". Paragraph 16 of Interpretation Bulletin IT-419R states that the following criteria have generally been used by the courts in determining whether a transaction has occurred at "arm's length":

1st criteria was there a common mind which directs the bargaining for both parties to a transaction;

2nd criteria were the parties to a transaction acting in concert without separate interests; and

3rd criteria was there "de facto" control.

From our understanding of the XXXXXXXXXX, we are of the view that the said Act is the conclusion of an agreement between the municipalities enumerated in Fact no 4 above under which the raison d’être of the XXXXXXXXXX This may lead to conclude that the agreement has been the result of the municipalities’ efforts to act in concert for a common interest and the 2nd criteria above applies. However, there is nothing to indicate that XXXXXXXXXX are acting in concert with regard to pension plan matter.

It is not possible to provide you with definitive comments on the basis of the information provided to us. On balance, however, we would tend to view the XXXXXXXXXX as dealing at arm’s length for purposes of paragraph 8503(3)(b) of the Regulations.

We trust our comments will be of assistance to you. Should you wish to discuss our comments further do not hesitate to call us.

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