3 August 1989 Income Tax Severed Letter 5-8139 - [Subsection 256(5.1) of the Income Tax Act]

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.

Dear Sirs:

We are writing in response to your letter dated May 18, 1989 in which you asked for our opinion regarding the meaning of the expression "controlled, directly or indirectly in any manner whatever", as defined by subsection 256(5.1) of the Income Tax Act (the "Act"), in the context of a hypothetical situation described in your letter.

Whether or not a corporation is controlled, directly or indirectly in any manner whatever, within the meaning of subsection 256(5.1) of the Act, is a question of fact that can only be determined by reference to all of the relevant facts and circumstances of a partictular situation. The Department is not prepared to express an opinion with respect to whether or not a corporation is so controlled in the context of a hypothetical situation. Nevertheless, we are prepared to offer the following comments in response to the views you expressed in your letter regarding the construction of subsection 256(5.1) of the Act that may be of some assistance to you.

It is your view that, because control of a corporation, as generally defined by the courts for the purposes of the Act, means " ... the right of control that rests in ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the Board of Directors ...", a corporation should only be considered to be controlled, directly or indirectly in any manner whatever, within the meaning of subsection 256(5.1) of the Act, by a person who does not otherwise control the corporation where that person hasw any direct or indirect influence that, if exercised, would give that person the ability to cast, or cause to be cast, in such manner as that person may determine, a majority of the votes in the election of the Board of Directors of the corporation. Any more fundamental departure in the meaning of control of a corporation, as generally defined by the courts for the purposes of the Act, to include, for example, mere control over the corporation's business operations by a person who does not otherwise control the corporation and who does not have any influence over the manner in which the majority of the votes in the election of the Board of Directors of the corporation are cast, should, in your view, require more explicit language than that used in subsection 256(5.1) of the Act.

Such a construction of subsection 256(5.1) of the Act is, in your view, supported by the ordinary rules of construction of statutes. You have presented the following comments in support of your position:

• 1. Subsection 256(5.1) of the Act refers to the result of any influence that a person has, if such influence were to be exercised, being control in fact of the corporation and that the words "in fact" qualify the word "control". Subsection 256(5.1) of the Act was enacted to counter techniques whereby a person otherwise controlled a corporation but without owning such a number of shares as would give that person the right to a majority of votes in the election of the Board of Directors of the corporation. Hence, the expression "controlled, directly or indirectly in any manner whatever" should only be interpreted as extending the circumstances in which a corporation will be considered to be controlled by a person for the purposes of the Act to include circumstances where the person has the ability to control the corporation but not solely pursuant to any legal rights that the person may have through actual ownership of shares of the corporation.
• 2. Subsection 256(1.3) of the Act provides that, for the purposes of determining whether a corporation of' which a child owns shares is associated with another corporation that is controlled, directly or indirectly in any manner whatever, within the meaning of subsection 256(5.1) of the Act, by a parent of the child, the shares owned by the child will be deemed to be owned by the parent unless the child manages the business and affairs of the corporation without a significant degree of influence by the parent. The inference to be drawn from the reference in subsection 256(1.3) of the Act to the parent exercising a significant degree of control over the business and affairs of the corporation is that control, directly or indirectly in any manner whatever, as defined by subsection 256(5.1) of the Act, of a corporation was not intended to include such influence. The deeming rule in subsection 256(1.3) of the Act would not be necessary for the purposes of determining whether the corporation is associated with the other corporation if the parent had such influence because, in that case, the corporation would be controlled, directly or indirectly in any manner whatever, within the meaning of subsection 256(5.1) of the Act, by the parent who has such influence and, hence, be associated with the other corporation, even without the deeming rule, pursuant to paragraph 256(1)(b) of the Act.
• 3. Such a narrow interpretation of the expression "controlled, directly or indirectly in any manner whatever" would not be inconsistent with the exception contained in subsection 256(5.1) of the Act for a franchise, licence, lease, distribution, supply or management agreement or other similar agreement or arrangement between the corporation and a person who deals at arm's length with the corporation, the main purpose of which is to govern the relationship between the corporation and that person regarding the manner in which a business carried on by the corporation is to be conducted, because such an agreement or arrangement could confer upon that person the right to control the corporation even though that person did not own the requisite number of' shares of the corporation.

While there can be a distinction between control of the corporation and control over the business and affairs of the corporation, it is the Department's view that, where control over the business and affairs of the corporation by a person confers upon that person the ability to control the corporation and the requirements of the exception in subsection 256(5.1) of the Act are not met, the corporation may be controlled, directly or indirectly in any manner whatever, within the meaning of subsection 256(5.1) of the Act, by that person.

Whether or not control over the business and affairs of a corporation by a, person confers upon that person the ability to control the corporation is a question of fact that can only be determined by reference to the facts and circumstances of a particular case. Whether or not any influence that a person has is such that it would, if exercised, result in control of the corporation by that person is also a question of fact that can only be determined by reference to the facts and circumstances of a particular case.

Such an interpretation of the expression "controlled, directly or indirectly in any manner whatever", as defined by subsection 256(5.1) of the Act, is not inconsistent with the exception contained in that subsection.

We do not agree with your views regarding the inference to be drawn from subsection 256(1.3) of the Act. The deeming rule in subsection 256(1.3) of the Act is necessary in determining whether a child's corporation is associated with another corporation where the child manages the business and affairs of his corporation, but where a significant degree of influence is being exercised by a parent of the child and the parent controls, directly or indirectly in any manner whatever, the other corporation. The influence that the parent has over the business and affairs of the child's corporation may result, pursuant to subsection 256(1.3) of the Act, in the parent being deemed to own the child's shares for the purposes of determining if the child's corporation is associated with the other corporation. Even where the parent is so deemed to own the child's shares, the influence exercised by the parent will not, for the purposes of determining if the child's corporation is associated with the other corporation, result in the parent being deemed to control the child's corporation if the number of shares of the child's corporation so deemed to be owned by the parent does not, pursuant to paragraph 256(1.2)(c) of the Act, result in the parent being deemed to control the child's corporation for such purposes. Nevertheless, the influence exercised by the parent may be such as would result in the child's corporation being controlled, directly or indirectly in any manner whatever, within the meaning of subsection 256(5.1) of the Act, by the parent for the purposes of the Act and, hence, being associated with the other corporation pursuant to paragraph 256(1)(b) of the Act. Both subsection 256(1.3) and subsection 256(5.1) of the Act may be applicable in a particular situation. It is the Department's view that subsection 256(1.3) of the Act does not imply that control over the business and affairs of a corporation by a person could not result in the corporation being controlled, directly or indirectly in any manner whatever, within the meaning of subsection 256(5.1) of the Act, by such person.

These comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. The foregoing comments are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978, are not binding on the Department.