8 December 2015 External T.I. 2015-0610921E5 F - Associated corporations - child under 18 -- translation

Principal Issues: Whether subsection 256(1.3) applies when a child is 18 years old at the end of the taxation year of a corporation to determine whether that corporation is associated with another in a taxation year.

Position: Yes if the child was under 18 years of age at any time in the taxation year of the corporation.

Reasons: Wording of subsections 256(1) and 256(1.3).

XXXXXXXXXX 2015-061092
Sylvie Labarre, CPA, CA

December 8, 2015

Subject: Associated Corporations

This is in response to your email of September 25, 2015 in which you requested our views on the application of subsection 256(1.3) in the following hypothetical situation.

Unless otherwise stated, all statutory references herein are references to the provisions of the Income Tax Act.

Hypothetical Situation

As of January 1 of a particular year, a child (hereinafter, the "Child") becomes a shareholder of Opco. Child is 17 years old at that time.
Opco is a Canadian-controlled private corporation. Its taxation year ends on December 31 of each year.
Child's birthday is April 1 and Child becomes 18 years old during the particular year.
Child is not be involved in managing the business and affairs of Opco.

Question

Given that Child would turn 18 in the particular year, you wish to know how to interpret subsection 256(1.3) for purposes of applying the association rules in the particular year.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

The association rules are used inter alia for purposes of the small business deductions. To this end, section 125(3) sets out certain rules if Canadian-controlled private corporations are associated with each other in a taxation year.

Subsection 256(1) indicates that two corporations are associated with each other in a taxation year if, at any particular time in the year, one of the paragraphs of this subsection applies.

Consequently, if at any particular time in the year, one of the paragraphs of subsection 256(1) applies, the corporation is associated with another corporation in a taxation year, resulting in the application of subsection 125(3) for that taxation year.

Accordingly, it is necessary to determine whether one of the paragraphs of subsection 256(1) applies at a particular time in the taxation year.

Subsection 256(1.3) indicates that where at any time shares of the capital stock of a corporation are owned by a child who is under 18 years of age, for the purpose of determining whether the corporation is associated at that time with any other corporation that is controlled, directly or indirectly in any manner whatever, by a parent of the child or by a group of persons of which the parent is a member, the shares shall be deemed to be owned at that time by the parent unless, having regard to all the circumstances, it can reasonably be considered that the child manages the business and affairs of the corporation and does so without a significant degree of influence by the parent.

According to what you indicated in your assumptions, Child would not manage the business and affairs of Opco. In addition, Child would be under 18 year of age during the first three months of the Opco taxation year. At each moment in January, February and March, Child would be a child under 18 years of age who is the owner of the shares of the capital stock of Opco. Consequently, at any time during those three months, the shares in the capital stock of Opco held by Child would be deemed to be owned at that moment by the parent of Child for the purposes provided by subsection 256(1.3).

Given that the months of January, February and March in the particular year would fall in the course of the particular taxation year of Opco, it could be that Opco would be associated with another corporation during that taxation year by reason of one of the paragraphs of subsection 256(1) and of the presumption in subsection 256(1.3).

We trust that our comments will be of assistance.

Stéphane Charette, CPA, CMA, MBA
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Branch