25 February 1999 External T.I. 9900025 - ACQUISITION OF CONTROL - 50:50 GROUP OF SH

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 ‚mis,

peut ne pas repr‚senter la position actuelle du ministŠre.

Principal Issues: Whether a person or group of persons
has acquired control of a corporation when a shareholder in
a 50:50 group of owners sells his or her shares to another

person who then becomes part of a new group of 50:50 owners.

Position: Likely yes.

Reasons: We are of the view that it is appropriate to
presume that a group of 50:50 shareholders controls a

corporation. In order to rebut this presumption of control

by a group, it would be necessary to show that no one is
controlling the corporation and that the decision-making

process in the corporation is effectively deadlocked.

XXXXXXXXXX 5-990002
J. Gibbons
Attention: XXXXXXXXXX

February 25, 1999

Dear XXXXXXXXXX:

We are replying to your letter of December 21, 1998, in which you requested our views on the application of subsection 111(5) of the Income Tax Act in the hypothetical situation described below.

1. A corporation was started by two parties, X and Y, each of whom owned 50% of the shares. The corporation had a year-end creating taxation year 1.

2. In taxation year 2, Mr. A, who is unrelated to either X or Y, acquired X's interest. In your view, since Mr. A and Y were not acting in concert, there was no acquisition of control and no deemed taxation year-end pursuant to subsection 249(4) of the Act.

3. Later in taxation year 2, Mrs. A, who is unrelated to either X or Y, acquired Y's interest. Since Mr. A and Mrs. A are a related group that has acquired control, there was a deemed taxation year-end and a new taxation year 2 created pursuant to subsection 249(4).

4. In taxation year 3, an unrelated party acquires Mrs. A's interest. In your view, since Mr. A and this unrelated third party are not acting in concert, there is no acquisition of control and no deemed year-end pursuant to subsection 249(4).

5. Later in taxation year 3, the shares of the third party are redeemed. At this point, Mr. A would be considered to have acquired control of the corporation, resulting in a deemed year-end (taxation year 3) pursuant to subsection 249(4).

Issues

Based on the foregoing, you ask the following questions (which were clarified in our telephone conversation (Gibbons/XXXXXXXXXX) on February 1, 1999:

1. Would any of the losses in years 1 and 2 be available for the corporation in years subsequent to year 3 since Mr. A held a 50% interest both before the changes of control in step 1 and step 3?

2. Are losses from all prior years available for carry-forward based (for the same reasons as in question)?

Written confirmation of the tax implications inherent inparticular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only.

Our comments

The restriction in subsection 111(5) concerning the deduction of non-capital and farm losses of a corporation applies whenever control of a corporation has been acquired by a person or group of persons. When dealing with a group of persons, it is always a question of fact as to whether any particular group who owns the majority of the voting shares in a corporation controls the corporation. However, in Technical News #7, we indicated that certain presumptions are appropriate in the case of closely-held corporations (such as outlined in the above situation). For example, in a closely-held situation, the fact that shareholders jointly adopt mutually advantageous measures is an important indicator of acting in concert. Furthermore, it is our view that, in almost all cases where the voting power in a corporation is equally divided between two shareholders, the corporation will be controlled by the group consisting of the two shareholders. In order to rebut this presumption of control by the group, it would be necessary to show that no one is controlling the corporation and that the decision-aking process in the corporation is effectively deadlocked.

In our view, this would be very unusual. However, an example might be where the two shareholders cannot agree on how to run the corporation and have consequently applied to
a court for an order authorizing the dissolution of the company.

Based on the foregoing , there would be an acquisition of control by a new group of 50:50 owners when a shareholder in a 50:50 group that owns a corporation sells his or her shares to another person who then becomes part of a new group of 50:50 owners. This is so, notwithstanding that one of the shareholders in the new 50:50 group was a shareholder in the old 50:50 group. Accordingly, we are of the view that control would be "acquired by a person or group of persons" pursuant to subsection 111(5) in each transaction outlined above. In this regard, we also considered the provisions of subsection 256(7), which deems there not to be an acquisition of control in some situations, and determined that they did apply to any of your hypothetical transactions.

We trust that these comments will be of assistance.

Yours truly,

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate