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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Opco is a CCPC. Opco's regular taxation year-end is July 31. On December 26, 20-A, a public company ("Pubco") and Opco's shareholders would enter into a binding agreement by which Pubco would acquire, provided that some conditions are met, all of the issued and outstanding shares of the capital stock of Opco on January 1st, 20-B. By virtue of paragraph 251(5)b), Pubco would be deemed to control Opco as at December 26, 20-A for purposes of, among other things, the definition of CCPC in subsection 125(7). Subsection 249(3.1) would trigger a deemed year-end for Opco on December 26, 20-A, as it would cease to be a CPCC. Opco would also have a deemed year-end on December 31, 20-A under subsection 256(9) and 249(4) as its control would be acquired by Pubco on January 1st, 20-B. A) Whether Opco may elect under paragraph 249(4)(c) to have its taxation year otherwise ending on December 26, 20-A, deemed to end on December 31, 20-A. B) If so, would Opco be allowed to claim a small business deduction under subsection 125(1) for its taxation year ended on December 31, 20-A?
Position: A) Yes; B) No.
Reasons: A) Meets the requirements of the law. B) Since Opco would not be a CCPC throughout the taxation year ended on December 31, 20-A.
XXXXXXXXXX
2010-038810
J. Lafrenière
(613) 941-2956
December 9, 2010
Subject: Request for Technical Interpretation - Subsections 249(3.1) and 249(4)
Dear Madam,
This is in response to your e-mail of November 24, 2010, in which you asked us for clarification regarding the application of subsections 249(3.1) and 249(4) of the Income Tax Act (the "Act") in a particular situation.
Unless otherwise indicated, any statutory reference herein is to a provision of the Act.
It appears to us that the situation described in your letter and hereinafter summarized could constitute an actual situation involving taxpayers. As stated in Information Circular 70-6R5, it is not the practice of the Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than through advance income tax rulings. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for their opinion. However, we can offer the following general comments that may be helpful to you. It should be noted that the application of one or more provisions of the Act generally requires the analysis of all facts relating to a particular situation. Accordingly, and in light of the fact that your e-mail only very briefly describes a hypothetical particular situation, our comments below may not be fully applicable in a particular situation.
1) The Particular Situation
You submitted the situation described below (the "Particular Situation") as part of your request for a technical interpretation:
(a) Opco Inc. ("Opco") is a Canadian-controlled private corporation ("CCPC") all of the issued and outstanding shares of which are held by Mr. A ("A"), an individual resident in Canada, and a discretionary family trust, of which A and his children are the beneficiaries (the "Trust") and all of the trustees of which are resident in Canada. Opco's regular fiscal period ends on July 31.
(b) A and the Trust entered into a formal share purchase offer (the "Offer") on December 26, 20-A with Pubco Inc. ("Pubco"), a public corporation whose shares are listed on the XXXXXXXXXX stock exchange, pursuant to which A and the Trust (the "Vendors") agreed to sell all of the shares of Opco to Pubco on January 1, 20-B, subject to the various conditions, all of which were required to be satisfied on January 1, 20-B, and Pubco agreed to acquire the shares on January 1, 20-B, subject to compliance with the various conditions on January 1, 20-B (e.g., the signing of certain supply agreements with a third party, the absence of material adverse changes, the entering into a lease or lease options by Opco, the signing of employment contracts by Opco, etc.) The purchase price of the shares and the terms of payment for the shares were already established in the Offer and the parties agreed that the transfer of ownership of the shares would occur on January 1, 20-B.
2) Your Comments and Questions about the Particular Situation
You are of the view that, as a result of the Offer, Pubco would have a conditional right to acquire the shares of Opco from the signing of the Offer, being December 26, 20-A. Consequently, Opco would then cease to qualify as a CCPC. By virtue of subsection 249(3.1), Opco would have a deemed taxation year-end immediately before the Offer was made on December 26, 20-A (subsection 256(9) would, in your view, be inapplicable since control of Opco would not have been acquired on December 26, 20-A).
You are also of the view that upon the acquisition of control of Opco that would occur on January 1, 20-B (i.e., the date ownership of the shares is transferred between the parties), there would be a deemed taxation year-end on December 31, 20-A at 11:59 p.m. due to the application of subsections 256(9) and 249(4).
In order to avoid two deemed taxation year ends, one on December 26 and the other on December 31, 20-A, could Opco make an election under paragraph 249(4)(c) [now s. 249(4)(b)] to have the deemed taxation year end of December 26, 20-A deferred to December 31, 20-A, so that Opco's last fiscal year before the acquisition of control by Pubco would be from August 1, 20-A to December 31, 20-A?
If so, would Opco be eligible for the small business deduction ("SBD") for the fiscal year beginning August 1, 20-A and ending on December 31, 20-A? If the answer to that question is no, would Opco be entitled to the SBD on its taxable income for the period beginning August 1, 20-A and ending December 26, 20-A?
3) Our Comments on the Particular Situation
We agree with your interpretation that Opco would cease to qualify as a CCPC at a particular time on December 26, 20-A, and that by virtue of subsection 249(3.1), its taxation year would be deemed to end immediately before that time. Paragraph 251(5)(b) is very broad in its application and would have the effect of causing Opco to lose its CCPC status.
Opco would have a second deemed taxation year-end that would end on December 31, 20-A by virtue of subsections 256(9) and 249(4) (assuming that no election pursuant to subsection 256(9) was made).
Where a corporation's taxation year would otherwise be its last taxation year that ended within the seven-day period that ended immediately before the acquisition of control, paragraph 249(4)(c) allows a corporation, in certain situations, to elect to extend that taxation year to end immediately before the time of the acquisition of control.
Thus, Opco could elect under paragraph 249(4)(c) to have its taxation year beginning August 1 and otherwise ending on December 26, 20-A be deemed to end immediately before the acquisition of control time, i.e., December 31, 20-A.
However, since at a time in its taxation year beginning August 1 and ending December 31, 20-A, Opco would not be a CCPC, it would not be eligible for the SBD at any time in its taxation year beginning on August 1 and ending on December 31, 20-A.
We hope that these general comments are of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
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