17 September 1998 External T.I. 9812255 - SBD, ACQUISITION OF CONTROL AND 251(5)(B)

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:

A corporation (the “Corporation”) which was a CCPC had a May 31 year end. An agreement is entered into on April 25, 1998, with a public corporation (“Pubco”), to sell all the issued shares of the Corporation to Pubco effective May 1, 1998. Is the Corporation entitled to the small business deduction (“SBD”) for its taxation year beginning June 1, 1997?

Position TAKEN:

Question of fact when control of a corporation has been acquired for purposes of subsection 249(4); however, one would generally expect control to be acquired on closing, when title to the shares passes (likely May 1, 1998 in the above circumstances). Also question of fact as to whether paragraph 251(5)(b) will apply to the agreement. However, if the right to acquire the Corporation’s shares exists in the April 25, 1998 agreement, the deeming provisions of paragraph 25l(5)(b) will apply, resulting in a loss of CCPC status on April 25, 1998, prior to the deemed year end resulting from the application of subsection 249(4). In these circumstances, the Corporation would therefore not qualify as a CCPC throughout its taxation year, as required under subsection 125(1), and, consequently, would not be entitled to the SBD for that year.

Reasons FOR POSITION TAKEN:

Position taken in other files. While paragraph 25l(5)(b) of the Act applies for purposes of the definition of CCPC in subsection 125(7) of the Act, it does not apply for purposes of subsection 249(4) of the Act.

XXXXXXXXXX 5-981225
M. Azzi
September 17, 1998

Dear Sir/Madam:

Re: Small Business Deduction

This is in reply to your letter of May 8, 1998, regarding a corporation’s entitlement to the small business deduction (the “SBD”) provided under subsection 125(1) of the Income Tax Act (the “Act”).

We understand that a corporation (the “Corporation”), which was Canadian-controlled private corporation (a “CCPC”), carried on an active business in Canada and had a May 31 year end. You indicate that on April 25, 1998, an agreement was entered into, with a public corporation (“Pubco”), to sell all the issued shares of the Corporation to Pubco effective May 1, 1998, resulting in a acquisition of control on May 1, 1998. You enquire whether the Corporation would be entitled to the SBD for any portion of its fiscal period from June 1, 1997 to April 30, 1998. You indicate that your concern is that Pubco would be deemed to control the Corporation, such that it would not be a CCPC throughout its taxation year (as required under subsection 125(1) of the Act). From the limited information provided, it appears that you are concerned that the Corporation would lose its CCPC status, by virtue of paragraph 251(5)(b) of the Act, on the date of the sale agreement with Pubco, April 25, 1998, which is prior to the actual acquisition of control (May 1, 1998) for purposes of subsection 249(4) of the Act.

Our Comments

The situation described in your letter appears to involve actual completed transactions with identifiable taxpayers. Written confirmation of the tax implications inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed, as in this case, the enquiry should be addressed to the relevant tax services office. However, we are prepared to offer the following general comments.

It is a question of fact as to when control of a corporation has been acquired for purposes of subsection 249(4) of the Act, and such a determination would normally be based on the agreement between the vendor and the purchaser. However, one would generally expect control to be acquired on closing, when title to the shares passes. Therefore, in the above circumstances, control would likely be acquired on May 1, 1998 such that the Corporation’s taxation year would, as a general rule, be deemed to end on April 30, 1998 by virtue of subsections 249(4) and 256(9) of the Act.

As regards the deeming rules of paragraph 251(5)(b) of the Act, it is our view that the documents relating to the future purchase and sale of shares of a corporation will result in the application of this provision if the documents establish that the purchaser has either an absolute or contingent right, immediately or in the future, to acquire the shares. A conclusion as to whether such a right exists can only be made after a complete examination of all of the provisions of a particular document, letter or agreement.

While paragraph 25l(5)(b) of the Act applies for purposes of the definition of CCPC in subsection 125(7) of the Act, it does not apply for purposes of subsection 249(4) of the Act. Consequently, in our view, in the above described circumstances, if the right to acquire the Corporation’s shares exists in the April 25, 1998 agreement, the deeming provisions of paragraph 25l(5)(b) of the Act will apply, resulting in a loss of CCPC status on April 25, 1998, prior to the deemed year end resulting from the application of subsection 249(4) of the Act (as explained above). In these circumstances, the Corporation would therefore not qualify as a CCPC throughout its taxation year ended April 30, 1998 and, consequently, would not be entitled to the SBD for that year.

We trust that these comments will be of assistance.

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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