2 March 1981 Income Tax Severed Letter RCT 89-136

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.

• 25. Meaning of Controlled as per Subsection 256(1)

In H.A. Fawcett & Son, Limited, [[1980] C.T.C. 293] 80 DTC 6195 (F.C.A.), it was held that the three companies therein mentioned were "associated" because they were controlled by the same person in the year. There was no question that two of the companies were controlled by the same person. The only question was whether the third company was also controlled by that same person? The question arose because, in respect of the third company, the person was the executor of the estate of a decedent who had held absolute control of the third company during his lifetime and the decedent's shares of the third company were included in the assets of the estate.

In the administration of the Income Tax Act, will it now be the policy of Revenue Canada to regard companies to be associated when, for example, an individual who controls one company becomes the executor of an estate that controls another company? Will it matter if there is more than one executor and what will the result be when there are two executors and if one of them is a corporate executor such as a trust company?

In addition, will the principle in the Fawcett case be applied to extinguish private corporation status of a Canadian-controlled company if, as a result of the death of the controlling shareholder, the private corporation becomes controlled by a corporate executor that is a public corporation? Subsection 256(5) of the Income Tax Act would prevent association of the private company and the corporate trustee but there does not appear to be a similar provision to prevent the loss of the small business deduction or the capital dividend account.

Department's Position

In subsection 256(1), 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 of the corporation. In this context "ownership" may be regarded as including the holding of shares by a trustee or executor as long as the voting rights are exercisable by him. Revenue Canada considers that a person who is registered owner, in his own name, of a majority of shares of one company, is the "same person", for the purposes of paragraph 256(1)(b) of the Income Tax Act, where he also holds a majority of the shares of another company as trustee or executor. (This concept was accepted in Consolidated Holding Co. Limited's case (S.C.C.) which was reference in the Fawcett's case).

Accordingly, the two corporations referred to in the first part of your question would be considered as controlled by the same person if the voting rights of the shares held by the executor are exercisable by him and therefore, would be associated by virtue of paragraph 256(1)(b).

If there is more than one executor, the result may be different. It will be necessary to look to the trust agreement to determine if one or more executors control the other executors and in effect the corporation.

If there is no such control by one or more executors, the coexecutors would be considered as a group of persons that control the corporation. Depending on the facts, the cross-ownership required in paragraph 256(1)(d) or (e) may not be met.

A private corporation which becomes controlled by a corporate executor that is a public corporation, will no longer be a "private corporation" within the meaning of paragraph 89(1)(f) of the Act and will no longer be eligible to the small business deduction under section 125 of the Act and for tax refunds under section 129 of the Act.