9 September 1999 External T.I. 9912235 - PARAGRAPH 149(1)(D.6) - COMB. OWNERSHIP TEST

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:

Whether the ownership test in paragraph 149(1)(d.6) is on the basis of a single holding of shares or capital or on the basis of two or more separate holdings.

Position:

It is our view that it may be a combination of holdings.

Reasons:

This is consistent with our position that the ownership test in former paragraph 149(1)(d) and in paragraph 149(1)(d.4) could be on the basis of two or more separate holdings. Also, subsections 33(2) and 3(1) of the Interpretation Act support this view.

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J. Leigh
Attention:	xxxxxxxxxx

September 9, 1999

Dear Sir:

Re: Municipal Corporations - Paragraph 149(1)(d.6)

This is in reply to your letter dated May 3, 1999 concerning the ownership test in paragraph 149(1)(d.6) of the Income Tax Act (the "Act") . You have asked for our views on whether a corporation would qualify for the exemption under paragraph 149(1)(d.6) of the Act if its shares were held by more than one corporation to which paragraph 149(1)(d.5) of the Act applies.

You note that many municipalities in Ontario are being required to transfer their electricity transmission assets to new subsidiaries under the Ontario Electricity Act and, in a number of cases, municipalities are considering merging the new electricity subsidiary. If the shares of the merged corporation were held directly by municipalities, the merged corporation would be exempt under paragraph 149(1)(d.5) of the Act. However, you advise that many municipalities would prefer to hold their shares of the merged corporation in a wholly-owned subsidiary. In your view, the merged corporation would be exempt under paragraph 149(1)(d.6) of the Act only if the ownership test in that provision could be read in the plural.

Generally, paragraph 149(1)(d.6) of the Act exempts from Part I tax a particular corporation if all of its shares or capital are owned by another corporation, commission or association to which paragraph 149(1)(d.5) of the Act applies or is itself exempt under paragraph 149(1)(d.6) of the Act and the 10% geographical boundary income test is met.

As noted in your letter, subsection 33(2) of the Interpretation Act provides that words in the singular include the plural and that words in the plural include the singular. Furthermore, subsection 3(1) of that Act provides that unless a contrary intention appears, its terms apply to every statute enacted by the Parliament of Canada.

Since a contrary intention to the plural applying to the ownership test in paragraph 149(1)(d.6) of the Act is not readily apparent, it is our view that this ownership test can arguably be met on the basis of a combination of holdings by qualifying entities. Therefore, in a situation where all the shares of a merged corporation are held by three separate corporations each of which is exempt under paragraph 149(1)(d.5) of the Act, the merged corporation would, in our view, qualify for the exemption under paragraph 149(1)(d.6) of the Act if the other requirements in that provision are met. This position is consistent with our stated position in paragraph 5 of IT-347R2 regarding the ownership test in former paragraph 149(1)(d) of the Act.

We note that even if the ownership test in paragraph 149(1)(d.6) of the Act is met, the corporation may not qualify for exempt status for a period by virtue of subsection 149(1.1) of the Act. That provision provides that paragraph 149(1)(d.6) of the Act will not apply to a corporation during a period in which a person other than Her Majesty in the right of Canada or a province or a municipality in Canada had a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently to, or to acquire, share or capital of the corporation.

Finally, we have brought your concern with respect to the interpretation of subsection 149(1)(d.6) of the Act to the attention of the Department of Finance to determine whether a clarifying amendment is warranted.

While we hope the foregoing comments are useful, they are given in accordance with the practice referred to paragraph 22 of Information Circular 70-6R3 dated December 30, 1996 and are not binding on the Department in respect of any particular situation.

Yours truly,

Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch