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:
Whether de facto control exists in the situation where a corporation is economically dependent on another such that the two corporations are associated.
Position TAKEN:
Question of fact.
Reasons FOR POSITION TAKEN:
Economic dependence on a single supplier can result in de facto control of another corporation such that the two corporations would be associated. Subsection 256(2.1) may also apply to associate the two corporations.
951047
XXXXXXXXXX A. Seidel
Attention: XXXXXXXXXX
June 23, 1995
Dear Sirs:
This is in reply to your facsimile dated April 12, 1995 concerning the application of subsections 256(1) and 256(5.1) of the Income Tax Act (the "Act") in the situation where a corporation, Supplyco, owns 50% of the shares of another corporation, Distributorco, and where the majority of the products sold by Distributorco must be acquired from Supplyco. An individual unrelated to the shareholders of Supplyco owns the remaining 50% of the shares of Distributorco.
It appears that the interpretation you seek relates to specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. However, an advance income tax ruling will not generally be issued where the issue involved is primarily a question of fact. Nevertheless, we can offer the following general comments in response to your letter.
The determination of whether a person or group of persons has de facto control of a corporation or control over the business carried on by a corporation is a question of fact which can only be determined by reviewing the share ownership, the rights of shareholders as discussed in paragraph 17 of IT-64R3, the factors outlined in paragraph 19 of IT-64R3 and any agreements entered into between the corporation and its shareholders as to how the business of a corporation will be carried on.
It is possible in any given situation that a person or group of persons may have control of a corporation's business which may result in de facto control of the corporation but control of the corporation's business is not necessarily the same as control of the corporation.
As stated in paragraph 16 of IT-64R3, a franchise or similar agreement which provides one party, such as Supplyco, a measure of control over the business carried on by another corporation, such as Distributorco, would not in itself result in Supplyco having control over Distributorco provided that the parties otherwise deal at arm's length and the purpose test referred to therein is satisfied. However, in the situation where such control over the business carried on by Distributorco is combined with item (d) in paragraph 19 of IT-64R3, being economic dependence on Supplyco as its single supplier, it is our view that Supplyco could have de facto control over Distributorco and therefore the two corporations would be associated pursuant to paragraph 256(1)(a) of the Act.
In addition, subsection 256(2.1) of the Act may apply to deem two corporations to be associated where it is determined that one of the main reasons for their separate existence is to reduce the amount of taxes payable under the Act or to increase the amount of refundable investment tax credit under section 127.1 of the Act in a taxation year.
These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.
Yours truly,
for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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