12 January 1999 External T.I. 9832625 - 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: Are two corporations associated pursuant to section 256 in a specific fact situation described in the letter.

Position: The two corporations would be associated under paragraphs 256(1)(b)(c)(d)(e), and potentially also under the anti-avoidance provisions of subsection 256(2.1).

Reasons: See description of fact situation in the technical interpretation.

								983262
XXXXXXXXXX 							T. Lanzer
(613) 957-2129
Attention:  XXXXXXXXXX 

January 12, 1999

Dear Sirs:

Re: Associated corporations

We are writing in response to your letter of December 11, 1998 wherein you requested our opinion as to whether two corporations owned by a husband and wife would be associated or deemed to be associated pursuant to section 256 of the Income Tax Act ("the Act").

In your situation:

Corporation A is in existence with the following capital structure:

• husband owns 75 Class A special shares with one vote per share
• wife owns 23 Class C special shares that are non-voting
• children (under 18) own 2 Class B special shares that are non-voting
• no other shares outstanding

Corporation B has not yet issued shares. The contemplated capital structure is as follows:

• wife owns 75 Class A shares with one vote per share
• husband owns 23 Class B shares with one vote per share
• children (under 18) own 2 Class C shares that are non-voting.
• no other shares outstanding

The issue to be determined is whether Corporation A and Corporation B would be associated or deemed to be associated under section 256 of the Act.

Our Comments

Under subsection 256(1), one corporation is associated with another corporation in a taxation year if, at any time in the year, any one of paragraphs 256(1)(a) through (e) apply.

Corporation A would not be associated with Corporation B under paragraph 256(1)(a) because neither corporation would control the other, directly or indirectly in any manner whatever.

Corporation A would be associated with Corporation B under paragraph 256(1)(b) because both corporations would be controlled by the same group of persons (the group composed of husband and wife). Husband and wife are a group of persons pursuant to paragraph 256(1.2)(a) because each would own shares of the capital stock of Corporation A and Corporation B. Because Corporation A is controlled by husband who is a member of the husband and wife group, under subparagraph 256(1.2)(b)(i) Corporation A is considered to be controlled by the husband and wife group. Because Corporation B would be controlled by wife who is a member of the husband and wife group, under subparagraph 256(1.2)(b)(i) Corporation B would also be considered to be controlled by the husband and wife group.

Corporation A would be associated with Corporation B under paragraph 256(1)(c) because the person who controls Corporation A (husband) is related by marriage to the person who would control Corporation B (wife), and husband would own more than 25% of the issued shares of any class, other than a specified class, of the capital stock of each corporation (husband owns 100% of the Class A voting shares of Corporation A and would own 100% of the Class B voting shares of Corporation B).

Corporation A would be associated with Corporation B under paragraph 256(1)(d) because the person who controls Corporation A (husband) is related to each member of a group of persons that would control Corporation B (husband and wife), and husband would own more than 25% of the issued shares of any class, other than a specified class, of the capital stock of Corporation B (husband would own 100% of the Class B voting shares of Corporation B). Husband is deemed to be related to himself pursuant to subsection 256(1.5), and husband is related to wife by marriage pursuant to paragraph 251(2)(a).

Corporation A would be associated with Corporation B under paragraph 256(1)(e) because Corporation A and Corporation B would each be controlled by a related group (husband and wife) and each member of one of the related groups is related to all of the members of the other related group (husband and wife are each related to themselves pursuant to subsection 256(1.5), and to each other by marriage pursuant to paragraph 251(2)(a)), and husband, who is a member of both related groups, would own more than 25% of the issued shares of any class, other than a specified class, of the capital stock of each corporation (husband owns 100% of the Class A voting shares of Corporation A and would own 100% of the Class B voting shares of Corporation B). Husband and wife are a related group pursuant to the definition in subsection 251(4).

Corporation A and Corporation B may also be deemed to be associated with each other under the anti-avoidance provisions of subsection 256(2.1) where it may reasonably be considered that one of the main reasons for the separate existence of those corporations in a taxation year is to reduce the amount of taxes that would otherwise be payable under the Act or to increase the amount of refundable investment tax credit under section 127.1.

In accordance with paragraph 22 of Information Circular 70-6R3, the opinions expressed in this letter are not income tax rulings and are, therefore, not binding on the Department.

Yours truly,

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