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:
Are two corporations associated where one is controlled by a trust, the beneficiaries being children under the age of 18 and their father. The other corporation is owned 100% by the mother of the children who is divorced and living apart from their father ?
Position TAKEN:
YES
Reasons FOR POSITION TAKEN:
256(1.3) deems a parent to own the shares owned by a child under the age of 18 and 256(1.2)(f)(ii) deems that shares owned by a trust are deemed owned by the beneficiaries. Where shares of a corporation are deemed by a provision of the Act to be owned they are treated by all purposes to be owned It 334R2 paragraph 3 "windfall" and 12(1)(x) requires an outlay or expense
XXXXXXXXXX 992312
C. Tremblay
Attention: XXXXXXXXXX
December 23, 1999
Dear Sir:
Re: Associated Corporations
This is in reply to your letter of August 17, 1999, wherein you asked us whether two corporations resident in Canada would be considered associated in the following circumstances.
In the situation given, the facts are as follows:
1. The first corporation ("Dadco") has capital that consists of 100 Class A voting shares with an aggregate adjusted cost base, paid-up capital and fair market value of $10 and 100 Class B non-voting shares with an aggregate adjusted cost base and paid-up capital of $10 and a fair market value of $15,000.
2. Both the Class A and Class B shares constitute "common shares" as defined in subsection 248(1) of the Income Tax Act (the "Act").
3. Mr. A owns all 100 Class A voting shares of Dadco.
4. A family trust owns all 100 Class B shares of Dadco. Mr. A is the trustee of the trust. The beneficiaries of the trust are Mr. A and his two children, both of whom are under 18 years of age.
5. Mr. A and Mrs. A, the children's mother, divorced some years ago and do not cohabit in a conjugal relationship.
6. Mrs. A is the sole shareholder of the second corporation ("Momco"), a company which carries on an active business.
From your review, you conclude that Dadco and Momco are associated. The reasoning for this is as follows:
1. Pursuant to subparagraph 256(1.2)(f)(ii) of the Act, if a person is a beneficiary of a discretionary trust, all shares owned by the trust in the capital of a company are deemed to be owned by the beneficiary unless subparagraph 256(1.2)(f)(i) of the Act applies. Subparagraph 256(1.2)(f)(i) of the Act does not apply in these circumstances.
2. Subparagraph 256(1.2)(f)(ii) of the Act deems each of Mr. A and his two children to own all the Class B shares of Dadco owned by the trust.
3. Pursuant to subsection 256(1.3) of the Act, each parent is deemed to own any shares of the capital stock of a corporation owned by a child who is under the age of 18. Accordingly, Mrs. A is deemed to own all the Class B shares of Dadco owned by her children who are under the age of 18.
4. Pursuant to subparagraph 256(1.2)(c)(ii), a person is deemed to control a corporation if that person owns common shares of the capital stock of the corporation having a fair market value of more than 50% of the fair market value of all the issued and outstanding common shares of the capital stock of the corporation.
5. Based on the foregoing, it appears that Mrs. A controls, for purposes of subsection 256(1) of the Act, both Momco and Dadco.
We have not been provided any information with respect to the trust. Accordingly, on the assumption the trust is a trust described in subparagraph 256(1.2)(f)(ii) of the Act and that, for purposes of subsection 256(1.3) of the Act, it cannot be reasonably considered that the children manage the business and affairs of Dadco, then, generally, we agree with your analysis. In your situation Mrs. A is deemed to own all the Class B shares of Dadco. Such shares have a fair market value of more than 50% of the fair market value of all the issued and outstanding common shares of Dadco. Accordingly, it is our view that pursuant to paragraph 256(1)(b) of the Act, and the interaction of the various provisions mentioned above, Momco and Dadco are associated.
We trust our comments are of assistance.
Yours truly,
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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