7 June 1990 Income Tax Severed Letter RRRR365 - Several unrelated Roundtable questions relating to some of association rules, control, and capital gains reserves

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.

Frank Fontaine
June 8, 1990
VANCOUVER DISTRICT OFFICE

June 1990

900937
M. Vallee

Question 12

An individual sells capital property taking back, as conditional payment of the unpaid balance of the purchase price, a five-year promissory note from the purchaser enabling the individual to claim a reasonable note from the purchaser enabling the individual to claim a reasonable capital gain reserve under subparagraph 40(1)(a)(iii) of the Act. The individual subsequently transfers the promissory note to his wholly-owned corporation, taking back a five- year promissory note from the corporation. Is the individual still entitled to claim a reserve under subparagraph 40(1)(a)(iii)?

Department's Position

As indicated in paragraph 7 of Interpretation Bulletin IT- 436R, it is generally our view that where a vendor disposes of a note receivable from a purchaser of a capital property to a third party in consideration for a promissory note of that third party, a capital gains reserve under subparagraph 40(1)9a)(iii) is no longer available because there is no longer anything due to the vendor from the purchaser in the original transaction.

Question 2

Pursuant to paragraph 251(5)(a) of the Act, where a related group is in a position to control a corporation, it shall be deemed to be a related group that controls the corporation, whether or not it is part of a larger group by whom the corporation is in fact controlled. Does this preclude other groups from also controlling the corporation? Consider the following example:

Corporation X                Corporation Y
Father    40 shares     Son       50 shares
Son       40 shares     Stranger  50 shares
Stranger  20 shares               100 shares

100 shares

On the assumption that Son and Stranger act in concert to vote their shares of Corporation X and Corporation Y, they would exercise actual control of these corporations. However, since paragraph 251(5)(a) deems Father and Son to control Corporation X, would this preclude Son and Stranger from also controlling Corporation X, with the result that Corporation X and Corporation Y would not be related corporations?

Department's Position

In the Department's view, the rule in paragraph 251(5)(a) of the Act, which would result in Father and Son being deemed to control Corporation X, does not negate actual control of Corporation X from being exercised by Son and Stranger. This principle is set out in Yardley, Plastics of Canada Limited v. M.N.R. [[1966] C.T.C. 215] [66 DTC 5183 at 5187 - Ex. Ct]. In that case, it was found that although a deeming provision, such as paragraph 251(5)(a) extends the meaning of control, it does not restrict its meaning, and neither excludes nor precludes an unrelated group from controlling two corporations when such a group does so control such corporations. In our opinion, this statement still represents good law notwithstanding the amendments to subsections 251(5) and 256(1) of the Act by Bill C-139, to which Royal Assent was given on September 13, 1988.

An additional result that flows from the above interpretation of the law is that Corporation X and Corporation Y would be associated corporations fro the purposes of subsection 256(1) of the Act. Thus, paragraph 251(5)(a) does not negate the results flowing from paragraphs 256(1.2)(a) and (b) of the Act, which clearly apply to associate Corporations X and Y in the circumstances described above.

Question 6

For the purposes of subsection 256(1) of the Act, a person may own 25% or more of the issued shares of a "specified class" of a corporation without causing any two corporations to be associated for the purposes of the Act. Shares of a "specified class" are defined under subsection 256(1.1) of the Act. Is it the position of Revenue Canada, Taxation, that dividends on shares of a specified class must be cumulative or would dividends payable on a non-cumulative basis be acceptable?

Department's Position

A class of shares would not be considered to be shares that are not shares of a "specified class" by reason only of the fact that dividends payable thereon were not cumulative.