Section 251

Subsection 251(1) - Arm’s length

Paragraph 251(1)(a)

See Also

Kiperchuk v. The Queen, 2013 DTC 1088 [at 486], 2013 TCC 60

The taxpayer was the designated beneficiary of her husband's RRSP, and received the RRSP proceeds upon his death, and was assessed for his unpaid taxes under s. 160. Before going on to find that this transfer also was not a non-arm's length one under s. 251(1)(b) or (c), Lamarre J found that the taxpayer and her husband were not related persons under s. 251(1)(a) at the time of transfer because their marriage was dissolved on the husband's death, so that at the time of transfer they were not related by marriage under s. 251(2)(a). As the transfer to the taxpayer was an arm's length one, s. 160(1) did not apply.

Hickman v. The Queen, 2000 DTC 2584 (TCC)

An individual was found not to be dealing at arm's length with a corporation most of whose voting shares were owned by a trust of which he and his wife represented a voting majority of the trustees.

Wright Estate v. The Queen, 96 DTC 1509 (TCC)

A family trust was found not to be related to the three individual shareholders of a family corporation notwithstanding that those individuals also were beneficiaries of the trust and that two of those three shareholders were the trustees of the trust, because the trust was a separate person for purposes of the Act and, as such, could not be connected by blood relationship to a shareholder of the family corporation.

Paragraph 251(1)(b)

See Also

Kiperchuk v. The Queen, 2013 DTC 1088 [at 486], 2013 TCC 60

The taxpayer was the designated beneficiary of her husband's RRSP, and received the RRSP proceeds upon his death, and was assessed for his unpaid taxes under s. 160. Lamarre J found that the taxpayer and her husband were not related under s. 251(1)(b), because the RRSP devolved to the taxpayer directly by operation of Ontario's Succession Law Reform Act, rather than forming part of the husband's estate.

As the transfer to the taxpayer also was not a non-arm's length one under s. 251(1)(a) or (c), s. 160(1) did not apply.

Paragraph 251(1)(c)

Cases

Canada v. 9101-2310 Québec Inc., 2013 DTC 5172 [at 6455], 2013 FCA 241

accommodation party was acting in concert

In order to defeat a claim of a bank, a tax debtor ("Garneau") deposited $305,000 with a corporation ("2310") (whose shareholder, Mr. Pratte, was his friend) to hold on his behalf and disburse as directed.

The validity of the Minister's assessment of 2310 under s. 160(1) for Garneau's $63,000 tax debt rested, in part, on the transfer of funds to 2310 being a transaction betweeen persons not dealing at arm's length. Before finding that s. 160 applied, Noël JA stated (at para. 39):

[T]he evidence could not be any clearer. Mr. Pratte, by allowing the tax debtor to use 2310's bank account to conceal the fact that the tax debtor was the true owner of the deposited funds, worked in concert with the tax debtor, acting strictly as a front ... . A non-arm's length relationship may arise from the legal relationship between the parties or from the factual situation (Swiss Bank Corporation v. M.N.R., [1974] S.C.R. 1144). Based on the facts the tax debtor was not dealing at arm's length with Mr. Pratte and his company.

Labow v. Canada, 2012 DTC 5001 [at 6501], 2011 FCA 305

settlor with power to dismiss trustee

In finding that the taxpayer, who employed his wife in his medical practice, did not deal at arm's length with an employee health trust which he established solely for her benefit, Dawson J.A. stated (at para. 20):

In the context of a trust, this Court has held that where a settler has the power to demand the retirement of the trustee the settler, for practical and legal purposes, controls the trust. See, for example Robson Leather... .

Canada v. Remai, 2009 DTC 5188 [at 6257], 2009 FCA 340

providing a favour is consistent with arm's length dealing

In order to make promissory notes that he had donated to a charitable foundation cease to be non-qualifying securities, the taxpayer arranged for the Foundation to sell those promissory notes to a corporation ("Sweet") owned as to 90% by his nephew, with Sweet issuing notes with identical terms to the Foundation as consideration for the purchase. In finding that this purchase by Sweet represented a purchase by a person with whom the Foundation dealt at arm's length for purposes of s.118.1(18), Evans, J.A. stated (at para. 48) that "the fact that it may seem that a transaction has been entered into largely as a favour by one party to the other does not necessarily mean that it cannot be at arm's length" and noted that while the taxpayer exercised a degree of influence over the nephew by virtue of their family relationship and business connections, Sweet was not entirely dependant on the taxpayer for its business, so that the Trial Judge did not commit any reversible error in this regard.

Before reaching this conclusion, the Court noted that the Trial Judge had committed a reversible error when he interpreted s.251(1)(c) as in effect deeming all persons to be dealing at arm's length who were not deemed by paragraphs (a) and (b) to not be dealing at arm's length.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) no abuse in controlling funds established 155
Tax Topics - Statutory Interpretation - Redundancy/reading in words 38

Canada v. McLarty, 2008 DTC 6354, 2008 SCC 26, [2008] 2 S.C.R. 79

decision making not subordinated to the other/structured arrangement

In finding that an acquisition of seismic data by the taxpayer, acting through the vendor ("Compton") as his agent, was an arm's length transaction, Rothstein J. stated (at para. 72):

"Had the trial judge found that McLarty had subordinated his entire decision making power to Compton as his agent, his dealings with Compton as vendor would not have been at arm's length. He would not be making an independent decision about the purchase but would have left that completely to Compton. But these are not the facts found or inferences drawn by the trial judge."

Rothstein J. also cited with approval the adoption in Cundill of paragraph 29 of IT-419R2 as a list of factors that bear on whether a relationship is at arm's length.

Canada v. Livingston, 2008 DTC 6233, 2008 FCA 89

accommodation bank account

In order to help her friend (Davies) defeat efforts of CRA to collect unpaid taxes from Davies, the taxpayer opened up a bank account in the taxpayer's own name to which Davies deposited funds from time to time and from which Davies from time to time withdrew funds to pay Davies' expenses

Without discussion of the issue of factual arm's length dealing, the Court found that s.160(1), whose application to the taxpayer depended upon there having been a transfer to her from a person with whom she was not dealing at arm's length, so applied to the taxpayer.

Petro-Canada v. Canada, 2004 DTC 6329, 2004 FCA 158

joint purchase with no separate interests

Joint exploration corporations (the "JECs") acquired seismic data from one of the two shareholders of each JEC at a purchase price substantially in excess of fair market value and, later, renounced resulting alleged Canadian exploration expense to the other shareholder, namely, the taxpayer. Each JEC did not attempt to negotiate a volume discount and the JEC was indifferent to the purchase price as the purchase price was funded by the two shareholders. In finding that the purchase was not an arm's length transaction, Sharlow J.A. stated (at p. 6338) that the JECs "were captive to the common interests of their respective shareholders, who acted jointly in dictating the terms upon which the seismic data would be purchased".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (a) no plan to use purchased seismic data 142
Tax Topics - Income Tax Act - Section 67 107
Tax Topics - General Concepts - Purpose/Intention purpose test satisfied even if multiple purposes 71

Deptuck v. Canada, 2003 DTC 5273, 2003 FCA 177

common control at time of purchase by GP - LPs came in later

S.69(1)(a) applied to reduce the capital cost to a partnership of depreciable property purchased by it to the property's fair market value rather than the higher purchase price given that the same individual controlled both the vendor and the general partner of the partnership (as well as being the sole initial limited partner at the time of the purchase). It was not relevant that some of the limited partners, who dealt at arm's length with the controlling individual, subscribed for units in the partnership in the year of the purchase, but subsequent to the time of the purchase.

Brown v. Canada, 2003 DTC 5298, 2003 FCA 192 (FCA)

time of structuring is the relevant time

At the time a partnership, of which the taxpayer subsequently became a partner, negotiated an agreement for the acquisition of software, the same individual was both the sole director and shareholder of the general partner corporation, and counsel for the vendor. In finding that the taxpayer's income should be determined on the basis that the partnership in acquiring the software was not dealing at arm's length with the vendor, Rothstein J.A. stated (at p. 5302):

"Whether or not the partnership was at arm's length with the vendor is a question to be decided on the basis of the relationship of the directing minds of each at the time the transaction was structured. Once that determination is made, it applies to all the partners, even those, like the appellant, who subsequently joined the partnership."

Dixon v. Deputy Attorney General of Canada, 91 DTC 5584 (Ont HCJ.)

common directing mind

An alleged transaction in which a corporation sold land at a substantial undervalue to another corporation in which its president ("Dixon") had a beneficial interest was found to be a non-arm's length transaction given that the president "was the guiding mind, common to both vendor and purchaser, he had de facto control over both, and this gave to the vendor and purchaser a common purpose which must be imputed to both corporations" (p. 5590).

Peter Cundill & Associates Ltd. v. The Queen, 91 DTC 5085 (FCTD), aff'd 91 DTC 5543 (FCA)

dependency on name fund manager and 50% owner

The taxpayer, which was the portfolio manager for the Cundill Value Fund and the Cundill Security Fund was dependent upon Mr. F. Peter Cundill, who held 50% of its shares, in order to provide investment counselling services to the funds. Cullen J. found that because Mr. Cundill exercised "an influence and control over the affairs and future of the plaintiff that [was] disproportionate to his shareholding" and because it was "clear that in negotiating the terms of compensation between PCAB [a Bermuda corporation owned by Mr. Cundill and through which his services were provided] and the plaintiff, Peter Cundill was in a bargaining position of great strength because of the plaintiff's reliance upon him", the fees paid to PCAB were not paid to an arm's length person.

In the Court of Appeal, Mahoney J.A. noted that although "there is no authority for the proposition that economic or other dependence or interdependence results in a non-arm's length relationship" (p. 5544-5545), he indicated that such dependence may be relevant to the question whether an individual is the directing mind in a negotiation.

Millward v. The Queen, 86 DTC 6538, [1986] 2 CTC 423 (FCTD)

acting in concert where mutual back scratching

A company owned by the taxpayer mortgaged land in favour of an RRSP of the taxpayer's partner ("Coates") in his law firm and a company owned by Coates and his wife mortgaged land in favour of the taxpayer's RRSP. The mortgages were for the same term and amount, and bore less than a commercial rate of interest. The taxpayer in accepting the land of Coates' company as security relied on Coates' assertion that it constituted adequate security, without further investigation.

Due to their association and the reciprocal nature of the transaction, the transaction was not governed by market factors and was instead governed by the common interest of the taxpayer and Coates. They accordingly did not deal at arm's length and the mortgage was not a qualified investment.

Beaumont v. The Queen, 86 DTC 6264, [1986] 1 CTC 507 (FCTD), aff'd 88 DTC 6522, [1988] 2 CTC 365 (FCA)

JV company at arm's length with 50% shareholder

Since the taxpayer was held to be dealing at arm's length with a corporation ("Clarebeau") 1/2 of whose shares were owned by the taxpayer's family holding company and 1/2 of whose shares were owned by the family holding company of his business associate ("Claridge"), a sale by the taxpayer of share purchase options to Clarebeau for nominal consideration was governed by s. 7(1)(b) rather than s. 7(1)(c). In contrast with Windsor Plastic Products, "Clarebeau was not the gain-producing enterprise but was merely the vehicle of expression of the plaintiff's partnership with Mr. Claridge." Neither partner could exert control over the other respecting the distribution of Clarebeau's gains, as such distribution was predetermined by their agreement to share equally. The plaintiff and Claridge believed that they (with their respective wives) enjoyed precisely equal control of Clarebeau (although, as they discovered much later, Claridge as president had the right to cast deciding votes at meetings), they had equal rights to the assets and earnings of Clarebeau, and the share options represented a business opportunity that the plaintiff felt himself obliged to pool with Claridge through the medium of Clarebeau.

Special Risks Holdings Inc. v. The Queen, 86 DTC 6035, [1986] 1 CTC 201 (FCA)

relationship enabling one party to dictate terms

Before finding that a corporation in which the taxpayer held 50% of the voting shares was subject to de facto control by the taxpayer in light of an "informal understanding" that the taxpayer would shortly thereafter acquire an additional 1% of the shares from the other 50% shareholder, Pratte, J. stated: "Two persons are not dealing at arm's length when there exists between them a relationship that enables one of them to dictate the terms of the bargain to the other." He rejected the taxpayer's argument that in order for two unrelated persons not to be dealing at arm's length, it is necessary not only that their relationship be a non-arm's length one, but also that they be dealing with each other: "what Parliament had in mind ... was not persons who were actually dealing with each other but, rather, persons between whom existed a relationship of subordination."

Windsor Plastic Products Ltd. v. The Queen, 86 DTC 6171, [1986] 1 CTC 331 (FCTD)

shareholders acting in concert

The three shareholders of the taxpayer, each of whom was a minority shareholder and one of whom was related to a non-resident corporation ("Kenmar"), were the de facto directors of the taxpayer and from the beginning arrived at all their decisions through consensus, including decisions as to the level of management fees that should be paid to each of the three shareholders. Since the taxpayer was factually subordinate to a group which was acting in concert, the fees paid to Kenmar, being a member of that consortium, were found to have been paid to a person who was not dealing at arm's length with the taxpayer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(4) - Paragraph 212(4)(a) shareholders acting in concert 131

Robson Leather Co. Ltd. v. MNR, 74 DTC 6666, [1974] CTC 872 (FCTD), aff'd 77 DTC 5106, [1977] CTC 132 (FCA)

single mind directed negotiation

1/2 the shares of a company ("Appel Process") were held by a second company ("Robson Leather") 75% of whose shares were held by a trust whose beneficiaries were the wife and children of an individual ("Robson") who also was one of the three trustees. The accountant for Robson Leather ("Lorenzen") acquired the other 1/2 of the shares of Appel Process, ostensibly as trustee for a group of employees who knew little or nothing about the transactions, and Appel Process then sold patent rights to Robson Leather. The sale of the patent rights was not an arm's length transaction. Robson, in light of his right to replace the other trustees should they prove recalcitrant, controlled the trust and thus Robson Leather. After the acquisition of the remaining Appel Process shares by Lorenzen, Charles Robson was the mind that directed the "negotiation" between Appel Process and Robson Leather.

In the Court of Appeal (which appeared to misapprehend the corporate structure) it was stated that while

Robson did not have voting control, the financial plight of Dr. Appel and his company was such that Robson, who from a practical point of view could be perhaps the only possible purchaser, was in a position to exert the kind of pressure that enabled him to have his will prevail in the business of Appel Process.

Oryx Realty Corp. v. MNR, 74 DTC 6352, [1974] CTC 430 (FCA), aff'd in another respect in sub nom. MNR v. Shofar Investment Corp., 79 DTC 5347, [1979] CTC 433, [1980] 1 S.C.R. 350

On April 20, 1959, the taxpayer purchased land inventory, from a company ("Lanber") which was owned in the same proportions as itself, on deferred-payment terms. On the morning of July 21, 1960, a company ("Woolstock") which was owned by a family which had not controlled the taxpayer or Lanber, acquired control of Oryx, and that afternoon the land was sold by Oryx to a third-party purchaser. It was held that s.12(3), the predecessor of s. 78(1), did not apply to deny the deduction by Oryx of the deferred portion of the land purchase price because it "did not become 'otherwise deductible' until the land was sold by the appellant and, at that time, it was no longer payable to a person with whom the appellant was not dealing at arm's length."

Swiss Bank Corp. et al. v. Minister of National Revenue, 72 DTC 6470, [1972] CTC 614, [1974] S.C.R. 1144

investors exercising common control through a manager

The manager ("SIP") of a Swiss fund incorporated an Ontario company ("City Park") to serve as a vehicle for the investment of monies of the Fund in Canadian real estate. The two controlling shareholders of SIP made loans, in their capacity of trustees for the certificate holders in the fund, to City Park at commercial rates of interest.

Because City Park was "completely a captive to the interests of the certificate holders, acting through professional managers and fiduciaries," the certificate holders were not acting at arm's length with City Park, and the exemption under the predecessor to s.212(1)(b)(vii) was not available. The exemption in this provision was founded on the "assurance that the interest rate will reflect ordinary commercial dealings between parties acting in their separate interest," whereas, here, there were no such separate interests.

Pender Enterprises Ltd. v. MNR, 65 DTC 5202, [1965] CTC 343 (Ex Ct)

The sale by an individual of his business to a corporation owned equally by his brother-in-law and cousin (who also were senior employees of his companies) was found not to be an arm's length transaction (notwithstanding a finding that the brother-in-law did not by himself have control of the corporation) in light of "the intimate business and family relationships" among the individuals.

Rolka v. MNR, 62 DTC 1394, [1962] CTC 637 (Ex Ct)

The taxpayer was found to indirectly control, and therefore not to be dealing at arm's length with, a corporation ("Nelmar") for purposes of what now is s. 69(1)(b) when he sold lots for $29,500 to Nelmar which by the time of closing had sold the lots to a third party for $50,000. The taxpayer "planned its incorporation, selected the shareholders [and directors, who were Hamilton friends of the taxpayer], and knew of its incorporation from the beginning ... [T]he appellant planned before the incorporation of Nelmar to secure irrevocable options to purchase the shares." The principal asset of Nelmar was a country estate which it rented to the taxpayer at a loss, and the taxpayer directed the manner in which Nelmar conducted various transactions, including this one.

Cameron J. rested his finding of a non-arm's length relationship at least in part on s.139(5)(a), which provided that a corporation and a person by whom it is indirectly controlled are deemed not to deal with each other at arm's length.

Golden Arrow Sprayers Ltd. v. MNR, 61 DTC 1185 (Ex Ct)

The transfer of patent rights by an individual to a newly-incorporated corporation of which he was to be the controlling shareholder and the chairman of the board was a transfer to a corporation which he "directly or indirectly controlled" for purposes of s.127(5) of the pre-1972 Act given his ascendancy over the other four directors of the corporation.

Ancaster Development Co. Ltd. v. MNR, 61 DTC 1046, [1961] CTC 91 (Ex Ct)

one guiding hand

The taxpayer, whose three shareholders were Rolka, Young and Atkinson each holding 45%, 45% and 10% of its shares, respectively, sold land at its cost of $500 a lot (following the release by Rolka of his option to purchase the land for that amount) to Young, who sold it immediately to another company ("Nelmar") for $1200 a lot, which in turn sold it immediately to a company controlled by Rolka ("Rolmac") for $1500 a lot. Dumoulin J. found that "the guiding hand in all these transactions was that of Rolka and that throughout he was acting in concert with Young and according to a plan conceived by Rolka, by which all the lots would eventually become the property of his company." Young, therefore, was "one of several persons by whom [the taxpayer was] directly or indirectly controlled" for purposes of s.139(5), and the predecessor of s. 69(1)(b) accordingly applied to the sale of the lots to Young.

MNR v. Kirby Maurice Co. Ltd., 58 DTC 1033, [1958] CTC 41 (Ex Ct)

purchaser exercising no independent judgment

A proprietor of a business who wished to incorporate it, directed his solicitors to incorporate a corporation, and instructed them as to the terms of the asset sale agreement (including the sale price) between himself and the corporation pursuant to which he acquired shares of the corporation carrying substantially all of the voting rights. Although the incorporators' shares were held by three of his solicitors, who also remained as directors of the corporation until the day following the closing of the sale, the asset sale was a non-arm's length transaction.

"[I]n a vendor and purchaser matter, an arm's length transaction does not take place when the purchaser is merely carrying out the orders of the vendor, and exercising no independent judgment as to the fairness of the terms of the contract, or seeking to get the best possible terms for himself."

MNR v. Granite Bay Timber Co. Ltd., 58 DTC 1066 (Ex Ct), briefly aff'd 59 DTC 1262 (SCC)

the shareholders had a common purpose in determining to wind-up the company

The liquidator of a company, who was one of its three shareholders, distributed all the property of the company to the shareholders subject to the assumption by them of its liabilities, following which the shareholders sold the assets (subject to the assumption of the liabilities) to a newly-incorporated company whose shareholders were a solicitor and son who were acting on their instructions. The second sale transaction clearly was a non-arm's length transaction. In finding that the liquidating distribution also was a non-arm's length transaction (notwithstanding that the B.C. company statute "did not empower the shareholders, as a body, to dictate action to be taken by the liquidator" (p. 1072), Thurlow J. stated (p. 1072):

"The three shareholders, in determining to wind-up the company, had a common purpose to get rid of certain difficulties which were being encountered in connection with the company by winding it up and, at the same time, having a new company take over its undertaking. The transaction in question was but one step in the carrying out of that common purpose, and I see no reason to conclude that the liquidator's action in resolving to distribute the property in specie, subject to its liabilities, was dictated by anything but that common purpose or that he was acting otherwise than as agent of all three."

Minister of National Revenue v. Sheldon's Engineering Ltd., 55 DTC 1110, [1955] CTC 174, [1955] S.C.R. 637

no common control

When the minority shareholders of a company (the "Old Company") learned that the majority shareholders were going to sell their shares of the Old Company, they arranged a bank loan and at a time that 80% of the outstanding shares of the Old Company were pledged with the bank as security for the loan, a new company (the "New Company") that had been formed by the minority shareholders acquired the assets of the Old Company. This was an arm's length transaction. It was the bank, not the minority shareholders, who were in control of the Old Company at the relevant time.

See Also

Poulin v. The Queen, 2016 TCC 154

sale to the special-purpose Holdco of an independent employee was essentially a surplus-stripping transaction rather than an arm’s length sale

In the fall of 2007, the two equal individual shareholders (“Poulin” and “Turgeon”) of a Quebec construction corporation (“Amiante”) reached an agreement for the staged withdrawal over a five-year perioed of Poulin (who had been attending to the financial and administrative aspects of Amiante’s business, and had had a strained relationship with Turgeon) from Amiante. On November 1, 2007, Poulin sold 450,004 Class F preferred shares to a newly-incorporated corporation of Turgeon (“Turgeon Holdco”) for a purchase price of $450,004, which was satisfied by a cash payment of $45,000, and with the unpaid balance bearing interest at 5% and being payable in five annual payments equal to the greater of $81,000 and 90% of the income received by Turgeon Holdco from Amiante, and with Amiante covenanting to distribute 80% of its annual profits as dividends to its shareholders. The amount owing in fact was paid out of redemption proceeds received in 2008, 2009 and 2010 by Turgeon Holdco for its Class F preferred shares. Poulin sold the balance of his shares of Amiante to Turgeon Holdco for $1,370,000 in March 2012

At the same time as the incorporation of Turgeon Holdco, the controller of Amiante (“Hélie”) incorporated “Hélie Holdco.” Hélie Holdco purchased 10.5% of the common share of Amiante from Poulin for nominal consideration and purchased 388,861 Class D preferred shares from Turgeon for a purchase price of $388,861 in consideration for a note in that amount bearing interest at 4% and which was to be repaid out of 90% of the amounts received by Hélie Holdco from Amiante. The note was partly repaid out of redemption proceeds received in between 2008 and 2012 by Hélie Holdco for its Class D preferred shares. In January 2014, Hélie Holdco transferred the balance of its Class D preferred shares to what now was the parent corporation of Amiante, without there being any evidence of consideration having been received for this transfer, and with the balance of the note remaining unpaid.

D’Auray J found that the sale by Poulin to Turgeon Holdco was a transaction between persons dealing at arm’s length, so that s. 84.1 did not apply and Poulin enjoyed the capital gains deduction on the sale; whereas Hélie Holdco and Turgeon were acting in concert, so that s. 84.1 deemed Turgeon to receive a dividend of $388,861.

Respecting the Poulin sale, she stated (at para. 102, TI translation):

The objective of Mr. Turgeon was to acquire the control of Amiante; this was accomplished by the departure of Mr. Poulin and the purchase of his shares. Mr. Poulin for his part had the objective of receiving the best possible conditions for his departure from Amiante. The two parties had their own interests and benefits to advance, which was not the case for the sale of shares by Mr. Turgeon to Hélie Holdco.

Respecting the Turgeon sale, she noted that in light inter alia of the back to back terms of the Class D shares and the note payable of Hélie Holdco that “there were not, for Mr. Hélie, risks in participating in this transaction” (para. 96) and “there was no benefit for Hélie Holdco in purchasing such shares…whose value was frozen” (para. 97), and stated (at paras. 98, 101):

…Hélie Holdco had no interest other than to permit Mr. Turgeon to realize a capital gain so as to claim the capital gains deduction. …

Hélie Holdco served only to participate in the transaction for the benefit of Mr. Turgeon, thereby permitting him to strip the surplus of Amiante free of tax by virtue of utilizing the capital gains deduction.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) sale to employee's Holdco with not upside and no risk for employee was non-arm's length 253

Kiperchuk v. The Queen, 2013 DTC 1088 [at 486], 2013 TCC 60

transfer time was relevant time

The taxpayer was the designated beneficiary of her husband's RRSP, and received the RRSP proceeds upon his death, and was assessed for his unpaid taxes under s. 160. In response to a submission of the Crown that the taxpayer was factually not at arm's length with her deceased husband because the relevant time was that at which she was designated as his RRSP's beneficiary, Lamarre J stated (at para. 29) that there was nothing in the wording of s. 160(1):

...that relates the relationship between the transferor and the transferee to any moment other than that of the transfer of the property (or a moment after the transfer in a case where the transferee has since become the transferor's spouse. The subsection refers throughout to the act of transferring and the time of the transfer, without specifying that other moments in time, previous to the transfer, could be contemplated for the purpose of its application to the transferee.

As the transfer to the taxpayer also was not a non-arm's length one under s. 251(1)(a) or (b), s. 160(1) did not apply.

Wagner v. The Queen, 2012 DTC 1234 [at 3645], 2012 TCC 8

common interest in sharing tax saving

An agreement between the taxpayers and an unrelated purchaser of their shares to allocate a portion of the amounts paid by the purchaser to the taxpayers' non-compete covenant was found to be a transaction between persons who were not dealing at at arm's length given that the purchaser was being paid a portion of the anticipated tax benefit to the taxpayers of the restructured transaction. Favreau J stated (at para. 43):

[T]he parties were working together and had a common interest, that is, that of minimizing as much as possible the tax consequences of the transaction and to divide among them the tax saving on the projected income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 68 309

Alberta Printed Circuits Ltd. v. The Queen, 2011 DTC 1177 [at 967], 2011 TCC 232

common interests and implementation

The taxpayer was a Canadian-controlled private corporation in the business of printing customized circuits, held 75% by a holding company for Mr. Bamber and his wife and 25% by Mr. McMuldroch. Mr. McMuldroch left his employment with the taxpayer to incorporate a Barbados company ("ACPI"), of which he initially was the sole director, and the CEO and president, on the understanding that two thirds of the profits from ACPI would go to Mr. Bamber or his family. Mr. McMuldroch also sold his shares of the taxpayer to the Bamber holding company. ACPI sold set-up services and software to the taxpayer, who was its only customer. Mr. McMuldroch transferred his ACPI shares to a holding corporation in the Channel Islands ("Morville"), which initially was to be owned by two discretionary trusts for the two families, but which ultimately was held by an insurance company for two insurance plans whose beneficiaries could be designated to be members of the McGoldrick family (in the case of the plan for which 10 shares were held) and the Bamber famiy (in the case of the plan for which 20 shares were held).

Pizzitelli J. found that the taxpayer and ACPI were not dealing at arm's length. In finding that the two companies' principals (Messrs. Bamber and McMuldroch) were acting in concert, he stated (at para. 75):

[T]hey not only sought the same legal and accounting advice together, but directed the implementation of the tax planning jointly as well, corresponding with the same contacts in doing so.

He also stated (at para. 76) that they acted "without separate interests...their interest being the movement of money off-shore for their mutual benefit."

Furthermore, a party has de facto control of a company if it has "the clear right and ability... to influence in a very direct way the shareholders who would otherwise have the ability to elect the board of directors," (para. 91) and here, although the shares of ACPI were nominally owned by the insurance company, "the insurance company was no better than a trustee acting on their behalf" (para. 93).

The Queen v. Yelle, 2010 DTC 5128 [at 7083], 2010 ABPC 94

time of dealing is relevant time

The taxpayer, who was a member of a partnership, was accused tax evasion under s. 239(1)(a) in connection with capital cost allowance claims made by the partnership on software that it had purchased at an allegedly inflated price from a vendor who was alleged not to deal at arm's length with the partnership. In denying the taxpayer's motion for a directed verdict, Fradsham J. noted at para. 26 that the "taxpayer" referred to in s. 69(1)(a) can be a partnership, and at para. 35 that in the phrase "where a taxpayer has acquired anything from a person whom the taxpayer was not dealing at arm's length," the "when" refers to the time of the "dealing" rather than the subsequent time that the acquired property is transferred.

Brownco Inc. v. The Queen, 2008 DTC 2591, 2008 TCC 58

"free" terms indicative of non-arm's length

The taxpayer and its 50% shareholder were found not to be dealing with each other at arm's-length in light of the fact that the taxpayer agreed to guarantee obligations under a credit facility held by the shareholder without receiving any benefit for doing to.

McMullen v. The Queen, 2007 DTC 286, 2007 TCC 16

mutual benefit and same advisors insufficient to establish non-arm's length in structured sale transaction

The taxpayer and an unrelated individual ("DeBruyn") accomplished a split-up of the business of a corporation ("DEL") of which they were equal common shareholders by transactions under which (i) DeBruyn converted his (Class A) common shares into Class B common shares, (ii) the taxpayer sold his Class A common shares of DEL to a newly-incorporated holding company for DeBruyn's wife ("114") for a purchase price of $150,000, (iii) DEL issued a promissory note to 114 in satisfaction of a $150,000 dividend declared by it on the Class A shares, (iv) 114 as signed the promissory note to the taxpayer in satisfaction of the purchase price for the Class A shares, (v) the taxpayer transferred the promissory note owing to him by DEL to a holding company ("HHCI"), and HHCI purchased assets of the Kingston branch of the business of DEL in consideration for satisfaction of the promissory note.

In finding that the sale of the Class A shares of DEL by the taxpayer to 114 was a transaction between persons dealing with each other at arm's length (so that s. 84.1 did not apply), Lamarre J. noted (at pp. 292-293) that the actions of the taxpayer and the DeBruyns in negotiating the share sale transaction were governed by their respective perceptions of their own self interest, that "buyer and seller do not act in concert simply because the agreement which they seek to achieve can be expected to benefit both" and that "it cannot be concluded that parties have acted in concert simply because they have used the same financial advisors".

Baxter v. The Queen, 2006 DTC 2642, 2006 TCC 230

uncontrolled dealings

Before going on to find that the taxpayer had purchased a sublicence of software from a person with whom he was dealing at arm's length (and rejecting a submission of the Crown that the fact that the software was sold for a fixed price without negotiation by the taxpayer was evidence of non-arm's length dealing) Bell J. stated (at p. 2654):

"The fact that the parties considered that they had entered into a mutually beneficial relationship when, at the same time, they were pursuing their own individual interests and were free, without either of them being controlled by the other, to enter or not enter into that relationship means that they were dealing with each other at arm's length as a matter of fact."

Brouillette v. The Queen, 2005 DTC 1004, 2005 TCC 203

same advisors insufficient/adverse re price

The taxpayer facilitated a leveraged buy-out of him and his co-shareholder of a company ("Brouillette Automobiles") by incorporating a corporation ("9016") of which he controlled 51% of the voting shares with the balance of the shares being owned by the purchaser corporation ("9017") of which two unrelated individuals were equal shareholders, with 9016 using the proceeds of a loan to it by Brouillette Automobile to purchase for cash the shares of the co-shareholder of Brouillette Automobile, the taxpayer rolling his shares of Brouillette Automobile into 9016 for non-voting shares of 9016 (so that Brouillette Automobile was now a wholly-owned subsidiary of 9016) and then selling his shares of 9016 to 9017 for a promissory note.

In finding that the sale by the taxpayer of the shares of 9016 to 9017 was a transaction between persons dealing with each other at arm's length, so that s. 84.1 did not apply, Lamarre Proulx J. found that the interests of the taxpayer were totally separate from those of the individual shareholders of 9017 (the two parties were each trying to get the best price), and (at p. 1010) that:

"It cannot be determined that parties have acted in concert simply because they have used the same financial advisors."

McLarty v. The Queen, 2005 DTC 217, 2005 TCC 55, rev'd 2006 DTC 6340, 2006 FCA 152, aff'd supra.

freedom not to transact

The purchase by the taxpayer of an undivided interest in seismic data in a transaction whose terms were set by a promoter nonetheless was an arm's-length transaction given that the taxpayer freely chose as to whether or not to invest. There was no evidence that the promoter unilaterally imposed the purchase of the data on the taxpayer or had the power to do so.

Morley v. The Queen, 2004 DTC 2604, 2004 TCC 280, briefly aff'd 2006 DTC 6351, 2006 FCA 171

non-arm's length terms

An acquisition of software by a tax-shelter partnership was found not be an arm's length transaction in light of the very non-commercial nature of the terms of the notes that were issued to the vendor and the fact that the purchase price substantially exceeded the fair market value of the acquired software. Although Archambault J. agreed with counsel for the taxpayer that the existence of a discrepancy between the fair market value and the price paid should not in and of itself be conclusive as to the existence of a non-arm's length relationship, he indicated that such a discrepancy is a factor to be taken into account.

Siracusa v. The Queen, 2003 DTC 2106, 2003 TCC 941

no acting in concert if ignored

The taxpayer, who owned one-third of the shares of a corporation that paid a dividend to its shareholders, and was a director and bookkeeper of the corporation, was found not be acting in concert with the other two directors (who were the remaining shareholders) when the directors with her assent declared and paid a dividend given that the other two directors largely ignored her when they were not in conflict with her. Accordingly, there was no common mind amongst the three directors.

Martel v. The Queen, 2003 DTC 1187 (TCC)

The assets of a Canadian-controlled private corporation ("Gestion") consisted of the shares of two companies, the first of which ("2321") was leasing a building for use in the active business of the second corporation ("3104"). In finding that 3104 was related to 2321, Tardif T.C.J. noted that all the issued and outstanding shares of 2321 and 3104 were held equally by Gestion and an individual and, after indicating that the definition of related person in s.256(1.2) codified the rule in Buckerfield's as to what constituted a group, Tardif T.C.J. found that the two corporations were related.

As 2321 qualified as a small business corporation, Gestion itself qualified as a small business corporation, so that a loss realized by the taxpayer on an advance to Gestion qualified as a business investment loss.

Lanester Sales Ltd. v. The Queen, 2003 DTC 997 (TCC), aff'd 2004 DTC 6461, 2004 FCA 217

After finding that the taxpayer (a franchisee) and the franchisor were dealing with each other at arm's length, Bowman A.C.J. stated (at p. 1002):

"To say that every time two independent business persons in pursuit of their own business interests work together to achieve a mutually beneficial commercial objective means that they are 'acting in concert' and are, therefore, not at arm's length would mean that no business relationships would ever be at arm's length."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 256 - Subsection 256(5.1) no de facto control by franchisor 128

Petro-Canada v. The Queen, 2003 DTC 94 (TCC), aff'd supra.

In order that Canadian exploration expenses of another oil and gas company ("Phillips" could be transferred to the taxpayer for purposes of the Act, it and Phillips established a joint exploration company (the "JEC"), and the JEC purchased seismic data from Phillips and renounced CEE to the taxpayer. The taxpayer and Phillips each appointed two directors to the board of the JEC. (Similar transactions were entered into with another petroleum company.)

In finding that the JEC and Phillips were not dealing at arm's length, Bowie T.C.J. noted (at p. 109) that

"Notwithstanding the high purchase price $26.5 million no care was taken to see that the data was useful to the JEC, the price was not vigorously negotiated, that it was in the mutual interest of the two shareholder corporations that the price paid for the seismic data be as high as could be justified, and that JEC's in this and the other transaction "were, so far as the acquisition of seismic was concerned, simply pawns of their shareholders, the three acting in concert to achieve a common goal."

Joncas v. The Queen, 2002 DTC 1813 (TCC), aff'd 2002 DTC 7060, 2002 FCA 234 (French)

A sale by the taxpayer of his shares of a company (Trans Côte) to a corporation (LBS) whose voting shares were equally owned by the taxpayer and another individual (Labadie) was found to be a non-arm's length sale given that the terms of the transaction were determined by the taxpayer and his advisors without significant input by Labadie (who worked in low-level jobs). Labadie did not have a significant interest in the transaction given the nominal purchase price paid and he understood that he would take future directions from the taxpayer for a further sale of Trans Côte. Dussault T.C.J. stated (at p. 1835) that:

"It is not believable that the appellant could have divested himself of the control of Trans Côte for nothing, or for so little without ensuring that he had effective control of LBS both before and after the transaction, in particular by seeing to it that his agents and advisors were put in the right places and that Philippe Labadie also became an agent of his in the search for third-party purchaser after the contract was signed."

Brown v. The Queen, 2001 DTC 1094 (TCC), aff'd supra 2003 DTC 5298 (FCA)

The purchase by a partnership of software from an American company ("ASC") was found to be a transaction between persons not dealing with each other at arm's length given that the general partner was owned by a solicitor for ASC until shortly before the time of the transaction and thereafter the general partner was controlled by an individual ("Williams") who was heavily involved in the sale and promotion of tax shelter investments with which ASC was involved (and, in fact, memoranda on ASC letterhead were sent by him to the partners). Furthermore, the terms of the promissory note issued by the partnership to ASC were not those that would have been agreed to by an arm's length vendor. Williams was found to have acted in concert with ASC and to have the same interest as ASC in directing the conduct of the partnership.

Campbell v. The Queen, 99 DTC 1073 (TCC)

individual with right to replace trustees lacked de jure control

A Bahamian company ("Helvetia") distributed all the shares of its Canadian subsidiary ("Quamco") equally to three trusts each of which owned one-third of its shares. The Minister assessed on the basis that the distribution of Quamco was a non-arm's length transaction, so that s. 84.1 applied to a subsequent disposition of the Quamco shares to a non-arm's length Canadian corporation for promissory notes. At trial, the Crown took the position that because the mother of the beneficiaries of the trusts, who was also the wife of the settlor, had de jure control of Helvetia by virtue of her right under the trust deed to appoint and remove trustees of each trust (who were unrelated individuals), she (and, by extension, the settlor himself) had de jure control of Helvetia. In rejecting this submission, Sarchuk TCJ. stated (at p. 1081):

There is no basis upon which this Court could conclude that trustees would neglect their fiduciary obligation to exercise voting rights in accordance with their independent judgment and would follow the wishes of another person solely because of the risk of being removed and replaced by another trustee.

MFC Bancorp Ltd. v. The Queen, 99 DTC 905 (TCC)

A transfer by the taxpayer of its interest as lessor in mining concessions and railway rights-of-way to a corporation ("CJC") in which a subsidiary of the taxpayer had a beneficial 37% interest was found to be a non-arm's length transaction given that the boards of the taxpayer and CJC had mostly overlapping directors and that one of those directors had determined that the transfer should occur for consideration that was 20% less than the appraised value of the leasehold interest.

Christensen v. The Queen, 98 DTC 1893 (TCC)

The transfer to the taxpayer of a property in which she had been living with a married man who controlled the corporate transferor was found to be an arm's length transaction. She wanted the property in order to secure her future, and there was no existence of a common mind directing the bargaining for both parties to the transfer of land.

H.T. Hoy Holdings Ltd. v. The Queen, 97 DTC 1180 (TCC)

common goal but distinct interests

The taxpayer and an unrelated individual (Cloutier) were found to be dealing at arm's length in transactions through which the taxpayer indirectly sold its interest in a company to Cloutier given that the taxpayer did not make all of the decisions for both parties, there was independent bargaining, and each was acting in his own self-interest. Although they shared a common goal in seeking to further the success of the company in order to finance the redemption of shares held by the taxpayer, distinct interests were served in so doing. McArthur TCJ. stated (at p. 1186) that "buyer and seller do not act in concert simply because the agreement which they seek to achieve can be expected to benefit both".

Lixo Investments Ltd. v. The Queen, 97 DTC 1030 (TCC)

The corporate taxpayer was found to be dealing in arm's length with a non-resident corporation ("Slupy") which had provided most of the taxpayer's debt and equity capital based on a finding that the family that owned most of the voting common shares of the taxpayer (having a relatively nominal capital) dealt at arm's length with the persons owning a second non-resident corporation that had de facto control of Slupy. The fact that the terms of the equity portion of the investment of Slupy in the taxpayer (non-cumulative and non-participating preferred shares) were not those that would have been normally agreed to by persons dealing at arm's length only reflected the fact that the non-resident group had made a bad investment. Accordingly, interest paid by the taxpayer to Slupy on advances was exempt under s.212(1)(b)(vii).

Robertson v. The Queen, 97 DTC 449 (TCC)

The taxpayer, who was the deputy chairman and a director of a public corporation ("Central Capital"), was found to be dealing at arm's length with Central Capital when he exercised stock options that had been granted to him by Central Capital notwithstanding that he had a degree of friendship with the principal shareholders of Central Capital and that the allotment of option shares to him had been generous.

RMM Canadian Enterprises Inc. v. The Queen, 97 DTC 302, [1998] 1 C.T.C. 2300 (TCC)

A non-resident corporation ("EC") approached a business associate who, along with two other individuals, formed a Canadian corporation ("RMM") to buy the shares of a Canadian subsidiary ("EL") of EC for a cash purchase price approximating the cash and near cash on hand of EL and a Canadian subsidiary of EL ("ECL"). Immediately following the purchase, EL was wound-up into RMM and ECL was amalgamated with RMM; and three or four days later, RMM used the cash received by it from EL and ECL to pay off a loan that had financed the acquisition.

In finding that RMM was not dealing at arm's length with EC, (with the result that s.212.1 would have applied to deem the excess of the sale proceeds over the paid-up capital of the EL shares to be a deemed dividend, if s. 84(2) did not already accomplish this result), Bowman TCJ. found that once the implicit compensation of RMM for acting as an accommodation party had been negotiated, it virtually disappeared from the scene and had no independent role.

McNichol et al. v. The Queen, 97 DTC 111 (TCC)

In order to effectively receive the cash held by a corporation ("Bec") owned by them, the taxpayers found a corporate purchaser to purchase their shares thereby giving rise (before the application of s.245 of the Act) to exempt capital gains rather than distributions taxable under s. 84(2) of the Act. In finding that the sale transaction was an arm's length transaction (with the result that s. 84.1 did not apply), Bonner TCJ. noted the element of arm's length bargaining, that the interest of vendors and purchaser were divergent with regard to the purchase price, and that the individual shareholder of the corporate purchaser received his own accounting and tax advice before committing the purchaser to the transaction.

Davidson Estate v. The Queen, 96 DTC 1652 (TCC)

The estate of a deceased taxpayer (which was deemed by s.248 to be a person) was found to be dealing at arm's length with the taxpayer's surviving wife with respect to a transfer of shares from the estate to her, given that two of the three executors were unrelated to the deceased taxpayer, and that the estate had complete discretion as to whether it would sell the shares or transfer them to the wife in specie.

Locations of other summaries Wordcount
Tax Topics - Income Tax Application Rules - Subsection 26(5) 96

Wright Estate v. The Queen, 96 DTC 1509 (TCC)

A testamentary trust was found to be dealing at arm's length with the three shareholders of a family corporation (the son and daughter of the deceased, and his accountant who had married his surviving wife before her death) who also were the beneficiaries of the trust and two of whom (the accountant and son) were its administrators, given that as a factual matter the three individuals did not get along or trust each other and zealously guarded their own respective interests and given that decisions of the two administrators were required to be taken unanimously.

Freedman Holdings Inc. v. The Queen, 96 DTC 1447 (TCC)

Pursuant to a separation agreement between Mr. and Mrs. Freedman, Mr. Freedman agreed to pay Mrs. Freedman the sum of $950,000 in full satisfaction of all claims for support and maintenance or division of property, she loaned the money to a Cayman Islands company in which she held substantially all the equity, and the Cayman Islands company loaned the money to a Canadian holding company ("Holdings") which was controlled by Mr. Freedman and beneficially owned by a family trust of which she was the income beneficiary. In finding that interest paid by Holdings to the Cayman Island company following the death of Mr. Freedman was eligible for the exemption in s.212(1)(b)(vii) because Holdings and the Cayman Islands company were dealing at arm's length, Rip TCJ. noted that there was no evidence that the board of directors of Holdings (which consisted of Mrs. Freedman, a brother of Mr. Freedman, a family lawyer and the controller of the family business) was controlled by Mrs. Freedman or her son (who was a manager of Holdings) and that, in any event, neither the son nor Mrs. Freedman was likely to take orders from the other but, instead, looked after his or her own separate interest.

Whitehouse v. Ellam, [1995] BTC 284 (Ch. D.)

The written assignment by the Netherlands judgment creditor of an insolvent company of debt for a nominal amount to the taxpayer and the other shareholder of the company was an acquisition "by way of a bargain made at arm's length" for purposes of s.29A(1) of the Capital Gains Tax Act 1979 given that the taxpayer had no relevant connection with the creditor.

Husky Oil Ltd. v. The Queen, 95 DTC 316 (TCC), aff'd 95 DTC 5244 (FCA)

The taxpayer purchased the shares of a holding company whose assets consisted of shares of operating companies whose adjusted cost base substantially exceeded their fair market value, and further agreed that following the winding-up of the holding company it would sell the shares of the operating companies back to the vendor for their respective fair market values.

In finding that the taxpayer was dealing at arm's length with the vendor, Kempo TCJ. found that the common interest of both parties to carry out the transactions in a way that did not result in the disappearance of the potential capital loss was not sufficient to say that there was a "lack of independent judgment or interest, or of subordination of one to the other" with respect to the transactions (p. 326).

Bowens v. The Queen, 94 DTC 1863 (TCC), aff'd 96 DTC 6128 (FCA)

When a corporation ("Trilogy") made an offer to acquire all the shares of a corporation ("DEB"), including any outstanding stock options, the taxpayer, who was the chief financial officer of DEB incorporated a numbered company, transferred his options to it, sold the shares of the numbered company to Trilogy for shares of Trilogy, and filed a joint election with Trilogy under s. 85. In finding that the taxpayer did not deal at arm's length with Trilogy, so that s. 7(1)(b) could not apply to a transfer of his option rights to Trilogy, Bowman TCJ. noted that the taxpayer was a partner in a partnership which, with other corporations, raised capital and promoted the acquisition by Trilogy of the shares of DEB and that the taxpayer for some time had been an executive vice-president of Trilogy and was instrumental in formulating the exchange offer made by Trilogy for the shares and options.

Del Grande v. The Queen, 93 DTC 133 (TCC)

The taxpayer, who was a 25% shareholder in a private company, was found to be dealing at arm's length with the company given that the other principal was "a strong minded man who, while he respected the appellant, was very much in charge of the business and was not likely to be influenced by the appellant if he did not choose to be" (p. 141).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) not a shareholder benefit if option exercisable only while officer; obligation v. conferral 189
Tax Topics - Income Tax Act - Section 7 - Subsection 7(5) 108
Tax Topics - Statutory Interpretation - Specific v. General Provisions 75

Martin Feed Mills Ltd. v. MNR, 91 DTC 1069 (TCC)

A third party ("Grundy") purchased shares of a corporation indirectly controlled by an individual ("Martin") only to accommodate Martin as his friend and business associate. Grundy essentially was a trustee or agent for Martin's corporation and it was quite clear that Martin was the directing mind in the transaction. Accordingly, it was a non-arm's length transaction, and the capital loss realized on the sale was not a business investment loss.

Fournier v. MNR, 91 DTC 746 (TCC)

two shareholders acted in concert to withdraw profits

The taxpayer, who had a 45% shareholding in a private company, agreed with the other principal shareholder and director and on the advice of the company's accountant that it would declare a $100,000 dividend to its shareholders. In finding that this was a non-arm's length transaction, with the result that s.160 applied to the $45,000 dividend received by the taxpayer, Dussault J. stated (p. 748) that:

"the company's two principal directors and shareholders apparently acted in concert and with a common economic interest to decide how they would withdraw the profits made by the company for their personal use. Acting both as directors of the company and its shareholders, they were in a position where the concept of not being at arm's length in fact as established by our courts could hardly be better applied."

International Aviation Terminals (Calgary) Ltd. v. MNR, 89 DTC 671 (TCC)

A transaction whereby the three indirect individual shareholders of the Appellant "acted in concert to cause the Appellant to distribute $715,000 pro rata in accordance with their personal equity in the Appellant by causing the Appellant to purchase preference shares in their respective holding companies" (which, in the case of the preference shares of the holding company at issue, had a liquidation value of 31% of the purchase price) was not an arm's length transaction.

Grant v. MNR, 89 DTC 16 (TCC)

Two couples each owned 50% of the voting shares of a private corporation, either directly or through holding companies. A declaration of a dividend on the Class B shares of the corporation, 25% of which were held directly by each of the four individuals, in order to utilize the $1,000 dividend deduction was an arm's length transaction. Tremblay J. noted that all the acting-in-concert cases cited by the Minister entailed "a transaction of sale or purchase and not an administrative decision as it is in the instant case."

Roxon Property Management Ltd. v. MNR, 88 DTC 1306 (TCC)

In order for the taxpayer to realize an allowable business investment loss with respect to a debt owing to it by its subsidiary (MIL) the two controlling shareholders of the taxpayer (Wallace and Foster) effected a restructuring in December 1979 by virtue of which the taxpayer was enabled to sell the debt to Wallace for $1.00 at a time that Foster owned the taxpayer and Wallace owned MIL. Taylor J. found that the parties in December 1979 had not "operated independently and for separate and distinct purposes" and that the December transactions reflected "the combined mind and will of Wallace and Foster." The sale of the debt accordingly was to a non-arm's length person.

May Estate v. MNR, 88 DTC 1189, [1988] 1 CTC 2303 (TCC)

The acquisition of shares by an estate by virtue of the death of the deceased was not an arm's length transaction because "the trust created by the [deceased's will] could not alter the conditions under which the shares were transferred," and therefore the same person could be said to be dictating the terms of the bargain on behalf of both the testatrix and the trust. However, the repurchase for cancellation by the corporation (whose president was the deceased's father) of the shares from the estate (whose two trustees were the deceased's husband and a lawyer) was found to be an arm's length transaction, because the evidence indicated "that both the trustees and the beneficiaries of the trust had interests that were opposed to those of the corporation and that the corporation had no power to influence or control the trustees."

Noranda Mines Ltd. v. MNR, 87 DTC 379 (TCC)

45.3% of the common shares of Orchan Mines Limited ("Orchan") were owned by Noranda Mines Limited ("Noranda"), and 5.53% of the common shares of Orchan were owned by Kerr Addison Mines Limited ("Kerr Addison") and Pamour Porcupine Mines, Limited ("Pamour"), 41%, or 45%, of the shares of which were owned by Noranda. The balance of the shares of Orchan, Kerr Addison and Pamour were held by the public.

Noranda was held by Bonner J. not to be dealing at arm's length with Orchan:

"From a practical standpoint Noranda controlled Orchan. It would be unrealistic to suppose, in light of the shareholdings outlined earlier, that Orchan was in a position to act exclusively on the basis of its own perception of its own best interests ... Furthermore, the presence in various companies of the group of common Directors and officers served to foster a group approach at senior management levels."

Re Tremblay (1980), 36 C.B.R. (N.S.) 111 (Q.S.C.)

It was stated, in the context of the Bankruptcy Act, that a transaction is not at arm's length "where one of the co-contracting parties is, by reason of his influence, or superiority, in a position to pervert the ordinary rule of supply and demand and force the other to transact for a consideration which is substantially different than adequate normal or fair market value". [Carswell translation]

MNR v. Merritt Estate, 69 DTC 5159, [1969] CTC 207 (Ex Ct)

relevant time: when directions given

The deceased, in one of his sober moments, agreed with his son's professional adviser that in order to protect his investments from further depletion due to the imprudent decisions to which he was prone, he should transfer those assets to a newly-incorporated corporation to be owned by his son and daughter in consideration for an annuity and a 25-year debenture of the corporation bearing interest at 3% (at a time at which Canada bonds yielded 4.83%). The below-market yield reflected a tacit understanding that the corporation should hold only trust type securities.

Cattanach J. held that the debenture was to be valued at the time of the death of the deceased pursuant to s.29(1) of the Estate Tax Act, which applied to debts owing to a deceased by a corporation controlled by relatives "unless it is established that at the time of the creation of the debt the deceased and such debtor were persons dealing with each other at arm's length." Cattanach J. (after noting that it was "immaterial that the whole arrangement was the 'brain child' of the professional advisers") held that "regardless of who had 'control' of the corporation at the time that the debentures were authorized and issued ... the only time when any decision was taken was when the instructions for the scheme as a whole were given, and the decision to give such instructions was a unilateral decision of the deceased." Given that "where the evidence reveals that the same person was 'dictating' the 'terms of the bargain' on behalf of both parties, it cannot be said that the parties were dealing at arm's length," the deceased was not dealing at arm's length with the corporation at the time of issuance of the debentures.

Gatineau Westgate Inc. v. MNR, 66 DTC 560 (TCC)

The two principal shareholders and directors of the taxpayer, who also carried on a real estate business in partnership, sold real estate to the taxpayer for a deferred purchase price. The taxpayer was not dealing at arm's length with the two shareholders for the purposes of what now is s. 78. The two shareholders were "partners united by a common interest in a property, who sold that property to themselves by the instrumentality of a company which they may get to do anything they want ... The partners ... by selling, acted together as they were obliged by [partnership] law so to do, and together they authorized the appellant to make the purchase ... Therefore, as purchaser, the appellant was dependant upon, and under the thumb of, the vendors."

Sheldons Engineering Ltd. v. MNR, 53 DTC 11 (TAB), aff'd 54 DTC 1106 (Ex Ct) and at 55 DTC 1110, [1955] S.C.R. 637 (supra).

aff'd on other grounds 54 DTC 1106 (Ex Ct) and at 55 DTC 1110, [1955] S.C.R. 637 (supra).

Before going on to find that a transaction was an arm's length one, Mr. Fisher noted (at p. 22) that "the expression 'to deal at arm's length' is one which is found chiefly where one person is in a position of trustee and another person is cestui que trust".

Administrative Policy

7 September 2016 External T.I. 2014-0563781E5 - Articles 10 and 11 of Canada-UK Treaty

limited partners of an LP could deal at arm’s length with a Canadian sub of the LP

An issue arising under the Canada-UK Treaty was whether the 99% share of the limited partners of a UK LP in interest paid by a Canadian subsidiary (Canco) to the UK LP would be exempt from interest withholding. Under the ITA, the LP would be deemed to be a non-resident person for Part XIII purposes and that fictional person would be related to Canco under s. 251(2), so that the interest would be considered to be ineligible for the domestic exemption for arm’s length interest. However, Art. 11, subpara. 3(c) of the Treaty also has an exemption for arm’s length interest, and for Treaty purposes the UK LP would be fiscally transparent. Accordingly, the interest paid would be exempt provided that the limited partners were dealing at arm’s length with Canco as a factual matter.

In this regard, CRA stated that it was in general agreement with a submission that referred to the statement in Folio S1-F5-C1 that “when a partner is not in a position to control a partnership…that…partner is dealing at arm's length with the partnership,” and reasoned that a partner who is considered to be dealing at arm’s length with a partnership should also be considered to be dealing at arm’s length with the corporation controlled by the partnership.

Locations of other summaries Wordcount
Tax Topics - Treaties - Article 11 limited partners of an LP can deal at arm’s length with a Canadian subsidiary of the LP 436
Tax Topics - Treaties - Article 10 limited partners generally do not have control over a company’s voting power/an over-10% limited partner is considered to “indirectly” own over 10% of an LP subsidiary 439

19 January 2017 External T.I. 2015-0576751E5 F - Trust, Disposition of depreciable property, Assumption

trust cannot have a NAL relationship with itself

CRA agreed that the ½ step-up rule in s. 13(7)(e) does not apply to a deemed disposition under s. 104(5) given that the trust is not related to itself and does not otherwise not deal at arm’s length with itself.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) s. 13(7)(e) applicable to s. 107(2.1) distribution but not s. 104(5) deemed disposition 257
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2) s. 107(2) generally available where beneficiary assumes trust debt 158
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Personal Trust non-commital as to whether assumption of debt could constitute tainting consideration 175
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2.1) s. 13(7)(e) applicable to depreciable property distribution 117

7 October 2016 APFF Roundtable Q. 6, 2016-0652821C6 F - Graduated Rate Estate - Total Charitable Gifts

touchstones for accommodation party

Does the Poulin decision affect CRA’s view of employee buyco arrangements? CRA responded that it could be established that the employee-shareholder and the employee-buyco are acting in concert without separate interests where, for example:

  • the employee-buyco assumes no economic risks;
  • the employee-buyco does not benefit from acquiring the Opco shares;
  • the employee-buyco has no interest other than to enable the employee-shareholder to realize a capital gain and benefit from the capital gains deduction; or
  • the employee-buyco has no role independent of the employee-shareholder or the operating corporation.

CRA went on to state that this position is consistent with its discussion at the 2012 Annual Conference.

CRA also indicated respecting the other transaction at issue in the case (the sale by Poulin to Turgeon) that the fact “that Mr. Poulin and Mr. Turgeon structured the transaction so that Mr. Poulin could benefit from the capital gains deduction did not mean that the parties acted in concert without separate interests.”

Words and Phrases
accommodation party
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts - Paragraph (c) - Subparagraph (c)(ii) right of GREs to carry forward donations for five years 103
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) Poulin is consistent with CRA's previous statements on employee buycos 119

7 October 2016 APFF Roundtable Q. 20, 2016-0655831C6 F - Employee Buycos and the Poulin Case

Poulin distinction between accommodation parties and tax advantaged arm’s length dealings accepted

Following the Poulin decision, does CRA intend to modify its position respecting the potential application of s. 84.1 where a departing employee sells shares of the employer to a Buyco? CRA responded:

[T]he CRA generally agrees with the Court when it recognized that "[t]he fact that Mr. Poulin and Mr. Turgeon had structured the transaction such that Mr. Poulin could benefit from his capital gains deduction does not mean that the parties acted in concert without separate interests.” …

[I]t could nevertheless be established that…as with Hélie Holdco, BuyCo incurred no economic risk in participating in the transaction, did not derive any benefit from the purchase of shares, had no interest other than to allow the employee/shareholder to realize a capital gain and benefit from the deduction, and had no function independent of the employee /shareholder or the operating corporation - and, in short, it only participated in the transaction as an accommodation for the benefit of the employee/shareholder.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) Poulin accepted 122

2014 Ruling 2014-0539791R3 - Paragraph 212(1)(b)

creditors' approval of CCAA plan of compromise for the debtor trust did not cause them to not deal at arm's length with trust

CDS trust entered into credit default swaps with a counterparty (a non-resident Bank) desiring credit protection for its bond portfolios and funded its purchase of the required collateral for its CDS obligations by issuing short-term notes. It defaulted on the notes in the 2008 financial crisis.

It settled litigation with the bank under a compromise which was voted on and approved by the Noteholders under a CCAA plan. Under this settlement, the Bank (which in the meantime had acquired some of the Notes directly and through non-resident subsidiaries) made payments under the CDS, which were applied by the Trust to repay all of the unpaid Note principal but only a portion of the unpaid interest (with recourse for such interest obligations being specified in the CCAA plan to be only to the Trust assets.)

CRA ruled:

The entering by the [Bank and its subsidiaries] into the Settlement Agreement and their voting in favour of the Plan, in and of themselves, will not result in any of [their] being considered to not deal at arm's length…with either the Trust or the Trustee.

See more detailed summary under s. 212(1)(b).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(b) creditors' approval of CCAA plan of compromise for the debtor trust did not cause them to not deal at arm's length with trust 365
Tax Topics - Income Tax Act - Section 212 - Subsection 212(3) - Participating debt interest interest paid on limited recourse debt to the extent of available debtor was not participating debt interest 231

S1-F5-C1 - Related persons and dealing at arm's length

In response to the release in draft form of Folio S1-F5-C1 entitled "Related persons and dealing at arm's length," the Joint Committee made detailed submissions that a statement (in the previous version of para. 1.39 below) that highly interdependent dealings presumptively establish a non-arm's length relationship does not accord with the jurisprudence, and also suggested an acknowledgement that generally it is the GP of a limited partnership who controls corporate investments of the partnership.

S1-F5-C1 - Related persons and dealing at arm's length

General critiera for non-arm's length

1.38 The following criteria have generally been used by the courts in determining whether parties to a transaction are not dealing at arm's length:

  • whether there is a common mind which directs the bargaining for both parties to a transaction;
  • whether the parties to a transaction act in concert without separate interests; and
  • whether there is de facto control.

...In any particular case, any one or more of the criteria may be of greater or lesser importance [citing Remai Estate at par. 32. Note: this sentence was added from May 2014 version].

Acting in concert

1.39 The courts have held that when one person (or a group of persons) is, in fact, the bargaining agent, or the mind by which the bargaining is directed, on behalf of both (or all) parties to a transaction, then the parties cannot be dealing atarm's length. The courts have expanded this principle to include the concept of acting in concert with respect to an element of common interest. The fact that two or more parties act in a highly interdependent manner (in respect of a transaction of mutual interest) can be an indication of the fact that the parties are acting in concert and in the same interest and therefore are not dealing with each other at arm's length. When a common purpose exists, a transaction is not necessarily a non-arm's-length one when different interests (or independent parties) are also present. In this context, different interests are considered to exist when each party has an independent interest from the other parties to a transaction, notwithstanding the fact that each party may have the same purpose, such as economic gain. [Note: 2nd preceding sentence in May 2014 version stated "when there are two distinct parties (or minds) to a transaction, but these parties act in a highly interdependent manner (in respect of a transaction of mutual interest), then it can be assumed that the parties are acting in concert".]

De facto control

1.40 The courts have also held, in certain cases, that excessive or constant advantage, authority or influence can constitute de facto control (that is, effective without legal control). This situation can bring parties into a non-arm's-length relationship.

Accommodation parties

1.41 ...A situation where one party to a transaction is merely accommodating the other party in an attempt to obtain a certain tax result may be a situation where the parties are not dealing at arm's length because they do not have separate economic interests which reflect ordinary commercial dealings between parties acting in their own separate interests.

Partners

1.43 …[W]hen a partner is not in a position to control a partnership and that partner has little or no say in directing the operations of the partnership, it is generally recognized that the partner is dealing at arm's length with the partnership. …

1.44 Partners are not necessarily considered not to deal at arm's length with each other in transactions outside of their partnership activity merely because they are members of the same partnership

Shareholders acting in concert

1.53 …[I]f a sufficient number of minority shareholders act in concert in order to direct the affairs of a corporation, they may be considered not to be dealing at arm's length with the corporation. … In a widely-held corporation, the fact that a majority of shareholders vote collectively to take some business action may not, by itself, indicate that those shareholders are acting in concert… .

1.54 [In] situations where closely-held private corporations employ some of the same personnel, occupy the same premises, and to the public eye, appear to be one enterprise…the corporations may be considered not to be dealing with each other at arm's length.

25 November 2012 CTF Roundtable, 2013-0479402C6 - Employee Buycos - comments from CRA Panel

stock option share Buyco not at arm's length

Employees of Opco received Opco shares as incentives under an Opco employee share ownership plan ("ESOP"). Under the terms of the ESOP, on retirement or other termination of employment, the employees would be required to dispose of these shares. To facilitate the disposition of such shares on retirement or other termination, Opco incorporates another corporation ("Buyco"), and Buyco purchase the departing employee's Opco shares. CRA stated:

[G]iven the degree of accommodation provided by Buyco to the departing employees and the parties' lack of separate interests, the better view is that the employees and Buyco are generally not dealing at arm's length. This view is consistent with several of our published documents (2007-0243171C6, 2002-0166655, and 2004-0103061E5) as well as the jurisprudence (Petro-Canada v. The Queen (2003 DTC 94) (confirmed by the Federal Court of Appeal (2004 DTC 6329)) and RMM Canadian Enterprises Inc. et al. v. The Queen (97 DTC 302)). Accordingly, in ruling requests on this type of transaction, considered in 2012, we refused to confirm that section 84.1 would not apply to deem employees to receive a dividend from a Buyco on the disposition of their Opco shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) stock option Buyco not at arm's length 184

19 April 2012 External T.I. 2012-0439781E5 - Specified employee for SRED credits

sole shareholder of majority interest partner not at arm's length with partnership?

Corporation A and Corporation B have 60% and 40% interests in a partnership which employs Corporation A's sole shareholder (Mr A) to perform scientific research and experimental development.

CRA states that "it might be argued" that Mr A does not deal at arm's length with the partnership as he is the sole shareholder of the majority interest partner - with the result that Mr A will be a "specified employee" of the partnership.

10 April 2012 External T.I. 2011-0428701E5 F - Lien de dépendance - commanditaire et SEC

limited partner at arm's length if not able to control or direct

Two corporations (X and Y) each wholly own the two general partners (each with a 1% GP interest) of a limited partnership and also own (on a 50-50 basis) the limited partner (A), holding a 98% LP interest.

CRA indicated that the question as to whether A dealt at arm's length with the partnership would turn on whether its holding a 98% interest in the partnership resulted in its being able to control the partnership or to direct its operations.

8 October 2010 APFF Roundtable, 2010-0373181C6 F - Non-arm's length relationship

common boards

Respecting a transaction between a non-profit organization and a registered charity where both entities share certain board members, CRA stated (after referring to the Noranda decision):

The CRA could, depending on the facts and on the context, conclude that the two entities do not deal at arm's length with each other due to the fact that certain individuals sit on the board of directors of both entities.

IT-419R2

"Meaning of Arm's Length." At para. 29:

The following criteria have generally been used by the courts in determining whether parties to a transaction are not dealing at "arm's length":

  • was there a common mind which directs the bargaining for both parties to a transaction;
  • were the parties to a transaction acting in concert without separate interests; and
  • was there "de facto" control.

2005 Ruling 2005-013304 -

In the context of an issue as to whether shares of a non-resident corporation were taxable Canadian property, CRA ruled that the winding-up of the corporation and related transactions by a group of shareholders would not, by itself, cause them to be considered to be not dealing arm's length with each other or with the corporation and its subsidiaries.

28 March 2003 External T.I. 2002-016665 -

Two shareholders collectively holding 24% of the shares of Opco transfer their shares of Opco to a newly-incorporated holding company ("Xyco") and Xyco purchases shares held by two of the other shareholders for a non-share consideration. CCRA indicated that the shareholders of Opco

"Appear to be acting in concert to direct Xyco in connection with the sale of the shares of Opco. While there may be arm's length bargaining concerning the price to be paid for the shares of Opco, the shareholders appear to be acting in a highly independent manner to avoid tax in the transactions. In our view, Xyco may be viewed as merely accommodating the shareholders by structuring the transactions in this manner, since it does not appear to have any independent interest in acquiring the shares of Opco. Consequently, section 84.1 may apply to the above-described situation".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) 139

10 May 2001 External T.I. 2001-007568 -

An employee implicitly was treated as not dealing at arm's length with his RRSP.

30 March 2001 External T.I. 2000-007414 -

Where the shares of a corporation are owned equally by four trusts having the same corporate trustee, s. 40(3.6) will apply to deny a capital loss arising on the redemption of the shares of one of the trusts. There is no specific provision like ss.256(4) and (5) that would prevent the trust and the corporation from being affiliated after their redemption by virtue of the control by the same trustee.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.6) 68

May 1998 Conference for Advanced Life Underwriting Round Table, Q. 1, No. 9807000

A donor and donee may be considered to have different interests and, therefore, to deal at arm's length notwithstanding that each party may have the same purpose such as the same charitable objective.

Income Tax Technical News, No. 9, 10 February 1997

Where two unrelated shareholders each own 50% of the shares of a corporation, the fact that they used their own RRSPs to acquire shares of the corporation is not by itself an indication that they do not deal at arm's length with the corporation immediately after the acquisition, even though the corporation will be controlled by the group consisting of the two shareholders since they generally would act in concert.

6 January 1997 External T.I. 5-964084 -

"The fact that two trusts have the same financial institution as their trustee will not, in and by itself, be sufficient to conclude that these two trusts are not dealing at arm's length."

23 May 1996 External T.I. 5-960465 -

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) person potentially may not deal at arm's length with itself 72

1996 A.P.F.F. Round Table No. SM12910 (Item 4.4.1)

Because two shareholders who together own all the shares of a corporation used their respective RRSPs to acquire shares in the corporation is not by itself a sign that they are not dealing at arm's length with the corporation immediately after such acquisition.

1995 Ontario Tax Conference Round Table, Q. 5 (No. 952503)

Where $500,000 of shares of Opco are sold by its individual shareholder to a corporate purchaser, following which the purchased shares are purchased for cancellation by Opco for $500,000 and the purchaser acquires the remaining net assets of Opco, RC will consider that the purchaser is merely accommodating the individual shareholder's desire to structure the transaction in order to realize a tax-free capital gain. Because the purchaser has no independent interest in acquiring the shares and its acquisition of the shares appears to be on the condition that they be immediately purchased for cancellation, RC will consider that the individual shareholder and the purchaser are not, in fact, dealing at arm's length in respect of this aspect of the transaction. Accordingly, s. 84.1 will be applicable if Opco was connected with the purchaser immediately after the purchaser's acquisition of the shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 122

27 October 1994 T.I. 942454

"Where a partnership owns more than 50% of the issued voting shares of a corporation and where a particular partner is entitled without restriction, to exercise more than 50% of the votes that may be cast at a meeting of the partnership, it is our view that the particular partner controls the corporation."

12 January 1993 T.I. (Tax Window, No. 28, p. 21, ¶2388)

Where a widow is the sole beneficiary of her husband's estate and all the shares of a corporation previously owned by her husband are held by an unrelated trustee, she will be considered to have a right to those shares under s.251(5)(b)(i), with the result that that corporation will be considered to be related to a second corporation that is wholly-owned by her.

21 August 1992 T.I. (Tax Window, No. 23, p. 1, ¶2141)

Discussion whether a transaction occurring pursuant to a buy-sell agreement entered into between a taxpayer and a company owned by her husband as part of a divorce settlement, would be considered to be an arm's length transaction.

92 C.R. - Q.33

The acquisition of shares of a deceased by his estate is a transaction between persons not dealing at arm's length.

92 CPTJ - Q.14

Under normal circumstances, the general partner in a limited partnership will be considered to control the partnership and, therefore, will not be considered to deal with it at arm's length.

18 December 1991 T.I. (Tax Window, No. 12, p. 23, ¶1572)

The Bank of Canada does not deal at arm's length with any federal department, agency or Crown corporation.

10 July 1991 T.I. 1991-111

Where two limited partnerships have the same general partner and none of the limited partners in either partnership are related to each other, the partnerships may not deal at arm's length because (under the test in the Merritt Estate case) the general partner is the "directing mind" of both; however, this ultimately is a question of fact.

9 May 1991 T.I. 5-7883 [GP control's LP's business]

GP control's LP's business

CRA stated:

[I]n a limited partnership with only one general partner, that general partner will generally have control of the partnership's business. Therefore, as supported by virtue of the "common mind" test as outlined in Merritt Estates or the concept of "a relationship of subordination" discussed in Special Risks, it is our opinion that a sole general partner of the limited partnership would not normally deal at arm's length with that limited partnership.

Where such a general partner is a wholly-owned subsidiary of the sole limited partner, it is possible that the limited partner has "de facto" control over the limited partnership, or that the general partner is in a relationship of subordination to the limited partner, in which event the limited partner would not deal at arm's length with the limited partnership (unless Regulation 1102(20) applied). It is our opinion that in a limited partnership with only one general partner, that general partner will generally have control of the partnership's business. Therefore, as supported by virtue of the "common mind" test as outlined in Merritt Estates or the concept of "a relationship of subordination" discussed in Special Risks, it is our opinion that a sole general partner of the limited partnership would not normally deal at arm's length with that limited partnership. -- At-risk amount of limited partner

8 March 1991 T.I. (Tax Window, No. 2, p. 23, ¶1190)

Even if the beneficiary of a trust is found not to deal at arm's length with the trust, he will not necessarily be considered not to deal at arm's length with the corporation controlled by the trust.

29 December 1989 T.I. (May 1990 Access Letter, ¶1223)

Whether a partnership and a corporation are dealing at arm's length with each other is a question of fact. A series of examples were given. For example, if two brothers each own 50% of a partnership and their wives each own 50% of the voting shares of Opco, whether the partnership and Opco are dealing at arm's length could only be determined on the basis of the facts, and the nature of any transactions between the two entities would be of significance. Where depreciable property is transferred from the partnership to Opco, the depreciables would not be considered to be transferred from the individual partners some of whom were at arm's length and some of whom were not at arm's length. Instead, all the depreciables would be treated as being transferred in either an arm's length transaction or a non-arm's length transaction.

September 1989 Revenue Canada Round Table (December 89 Access Letter, ¶1040.11)

If a person acquires a minority interest in a small private corporation, operating with a deficit, it is likely that this person has expressed conditions such that he will be deemed to have acquired control of the corporation as a member of a new group.

IT-140R3 "Buy-Sell Agreements"

Where the deceased and the survivor did not deal at arm's length at the time a buy-sell agreement was made, s. 69(1)(b) applies when the estate sells the property to the survivor pursuant to the agreement.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares 0

Articles

Sandra Mah, Mark Meredith, "Factual Non-Arm's Length Relationships", 2014 Conference Report, (Canadian Tax Foundation), 16:1-24

Kirby-Maurice (16.3)

Kirby-Maurice…formulates in different terms the concept that was expressed by the Supreme Court in Sheldon's Engineering as "dictating the terms of the bargain".

Merritt Estate (p.16:5)

[F]lowing from Merritt Estate, a non-arm's-length finding may result when there is a single directing mind or where there is an absence of bargaining between parties with independent interests.

Robson Leather (p.16:6)

Robson Leather applied the directing mind standard initially developed in Sheldon's Engineering and formulated in those terms in Merritt Estate. Furthermore, it did so expressly taking a practical business view of what would constitute a directing mind (expressed as "de facto control of both sides of the transaction").

Peter Cundill (p.16:7)

The Peter Cundill case is important for two reasons. First, the willingness of the courts to take into account relatively subjective business considerations, such as strength of bargaining power, in finding a directing mind seems to have carried the latter concept a long way. … .

Second, the Federal Court of Appeal stated that, "[i]t was accepted on appeal that IT-419 correctly and fully defined the factors determinative of whether or not dealings are at arm's length."…

Swiss Bank (p.16:10)

[I]t is arguable that the acting-in-concert formulation of the Exchequer Court is no longer good law, at least outside the context of the interest withholding tax exemption now found in paragraph 212(l)(b) or in the absence of very similar facts, having been supplanted by the purposive approach taken by the Supreme Court. Second, even if the acting-in-concert standard is still good law, it only supports a vertical non-arm's-length finding (between each of the investors, regarded severally, and City Park or their analogues), and not a horizontal non-arm's-length finding (among the investors or their analogues inter se). While this may not be a perfect correlation, it seems to follow that the invocation of Swiss Bank may be relevant in cases where transaction non-arm's-length rules are asserted, but not where aggregation non-arm's-length rules are asserted.

Fournier (pp. 16:10)

In Fournier, the Tax Court... followed Swiss Bank in reaching a non-arm's length finding, stating the principle from that case very broadly [viz.]: "that company's two principal directors and shareholders apparently acted in concert and with a common economic interest to decide how they would withdraw the profits made by the company for their personal use…."

…[I]f this view is correct, it is hard to imagine a private corporation situation in which the same non-arm's-length finding could not be made. Nevertheless, the Canadian Revenue Agency (CRA) has incorporated a similar notion in its folio version of what was previously IT-419. In its Income Tax Folio S1-F5-C1, the CRA states, "Even when there are two distinct parties (or minds) to a transaction, but these parties act in a highly interdependent manner (in respect of a transaction of mutual interest), then it can be assumed that the parties are acting in concert and therefore are not dealing with each other at arm's length." [fn 30: …2013-0479402C6…reverses CRA's previous position on corporations established for employees to access surplus funds of the operating corporation to purchase shares, now asserting that CRA will no longer consider these arrangements to be arm's length given what it construes as the degree of accommodation and lack of separate interests.]

Drouin (p. 16:11)

The Drouin case […2001 DTC 72…] involved facts quite similar to those in Fournier…[stating]:…"Above all it must not be forgotten that the test is not merely ''act[ing] in concert'' but "act[ing] in concert, and in the same interest". Thurlow J. [in Swiss Bank] was careful to acknowledge that people who act in concert but with a separate interest are dealing with each other at arm's length....

Petro-Canada (p. 16:13)

In Petro-Canada…[t]he court did not differ from the statement in Drouin; however, it distinguished the latter case on the basis that in Petro-Canada the result of the structure was that there was no "commercial safeguard" preventing the shareholder's self-interest from overriding the interests of the corporation or the other shareholder.

H.T. Hoy (p. 16:17-18)

HT Hoy Holdings…involved the structured transfer of ownership of an operating corporation….Thus, two parties exercising their independent economic interests should not be found not to be dealing at arm's length, even where they otherwise might be found to be "acting in concert" in the literal sense of acting in an agreed manner. The existence of a common goal does not prevent each party from looking after his or her own interests in an arm's-length manner.

Brouillette (p. 16:18)

The Brouillette case also involved a structured sale transaction. …[T]he court observed that (unlike the situation in Petro-Canada) there was no evidence of "ordinary or normal commercial relations" that would have differed from those entered into by the parties here, and that the parties were clearly adverse in their objectives regarding price.

McMullen (p. 16:18)

McMullen held that while the parties had entered into a structured sale transaction for their mutual benefit, they nevertherless dealt at arm's length.

McLarty (p. 16:19)

[In McLarty] it appears that willing entry into a structured arrangement may still be an arm's length transaction, even if the entry then subjects the taxpayer to binding obligations (even regarding price).

Wiffen Financial (p. 16:19)

In Wiffen Financial Services […2003 TCC 780…], the issue was whether an employment relationship was at arm's length, thus constituting insurable employment pursuant to the Employment Insurance Act. The employee was one of three shareholders of the employer corporation, having joined the business by transferring his client base and paying $34,000 to the two current shareholders in consideration for one-third of the shares of the company, and entering into an employment agreement. The court held that the employee/shareholder did not deal at arm's length with the corporation in his employment relationship, finding that the parties "conducted themselves in accordance with an oral agreement which called for decisions to be made by consensus and not by majority rule". …

With respect, it appears to us that the court in this case may have confused relative informality among the three shareholders with a lack of separate interests, and that it is unlikely that the case will be extended much beyond its own facts.

Remai Estate (pp.16:19-20)

[In Remai Estate] the Federal Court of Appeal... made it clear that it is possible to find an "ordinary commercial transaction," even when the transaction in issue is not, viewed in and of itself, the subject of hard bargaining. … [T]he existence of ordinary commercial dealings is not sufficient to find the parties to be dealing at arm's length; rather, the key factual question is whether the commerciality of the dealings entered into constitutes sufficient evidence of the parties acting in their own separate interests.

Flannigan, "The Legal Construction of Rights of First Refusal", The Canadian Bar Review, Vol. 76, Nos. 1 & 2, March - June 1997, p. 1.

Owen, "Acting in Concert: Fact or Fiction?", 1992 Canadian Tax Journal, No. 4, p. 829.

Subsection 251(2)

Paragraph 251(2)(a)

See Also

Mathieu v. The Queen, 2014 TCC 207

separated wife was related

Through a holding company, the taxpayer held 37.5% of the shares of a corporation which granted him employee stock options ("Forages Garant"). A holding company whose shares were held as to 50% by his son and as to 25% by his wife (from whom he was legally separated) held 25% of the shares of Forages Garant. Accordingly, he was a member of a related group which controlled Forages Garant if he was related to his wife.

In finding that the taxpayer was so related, so that his subsequent surrender of stock options to Forages Garant did not represent an arm's length transaction, and in responding to a submission (at para. 30) that "in Quebec, marriage breakdown can take the form of a legal separation" (para. 30), Paris J stated (at paras. 42, 44, TaxInterpretations translation):

In Canada, a marriage is dissolved by divorce or by the death of one of the spouses. …Even if in practice a legal separation represents a definitive marriage breakdown, it does not, strictly speaking, break the marriage tie… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(a) non-arm's length option surrender proceeds were exempted by s. 7(3)(a) 144
Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 45(2) may look at subsequent amendment to determine whether it changed the law 126
Tax Topics - Statutory Interpretation - Specific v. General Provisions stock option rules more specific than employee benefits 51

May Estate v. MNR, 88 DTC 1189, [1988] 1 CTC 2303 (TCC)

An individual is not related to the relatives of his deceased wife.

Paragraph 251(2)(b)

Subparagraph 251(2)(b)(i)

See Also

Kruger Wayagamack Inc. v. The Queen, 2015 DTC 1112 [at 667], 2015 TCC 90, aff'd 2016 FCA 192

de jure control requires strategic control, not merely operational control

Kruger Inc. was the 51% shareholder of the taxpayer and was entitled under the unanimous shareholders agreement between it and the other shareholder (SGF) to appoint three of the five directors. However, Jorré J found that such a wide range of decisions were specified in the USA to require unanimous director (or shareholder) approval – to the point that he characterized Kruger as having control of only operating, and not strategic, decisions – that Kruger did not have de jure control.

See summary under s. 256(1)(a).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares non-assignable put right ignored 90
Tax Topics - Income Tax Act - Section 256 - Subsection 256(1) - Paragraph 256(1)(a) de jure or de facto control requires strategic control, not merely operational control 314
Tax Topics - Income Tax Act - Section 256 - Subsection 256(1.2) - Paragraph 256(1.2)(c) effect of s. 256(1.2)(g) is as if company were run by 3rd party 236
Tax Topics - Income Tax Act - Section 256 - Subsection 256(5.1) de facto control requires strategic control, not merely operational control 200

Ministic Air Ltd. v. The Queen, 2008 TCC 296

The appellant was denied a credit under ETA s. 231(1) in respect of an alleged bad debt, in part, on the basis that 1/3 of the appellant's receivable was owing by a person with which it did not deal at arm's length, namely, the holder ("Garden Hill") of 98% of its shares. In this regard, Bowie J rejected the appellant's submission (at para. 20) that the provisions of ITA s. 251(2) (adopted for ETA purposes by ETA s. 126(2)) "simply raise a rebuttable presumption that the appellant and Garden Hill did not deal at arm's length, and that this presumption is rebutted by the evidence that the appellant's policy was to provide service to Garden Hill and its members at the same commercial rates that it charged to all its other customers."

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 231 - Subsection 231(1) debt not written off a recipient not at arm's length 198

Administrative Policy

5 November 2014 External T.I. 2014-0529991E5 F - Avantage pour automobile-personne liée

control of non-share corp references who can appoint board

The board members of a Quebec non-share corporation that is exempt under s. 149(1) ("Entity") are appointed by "Municipality." During a Municipality employee’s temporary assignment to a position of employment with Entity, Municipality agreed to continue making an automobile available to such employee (“Employee”) in connection with such temporary employment.

Before making the assumption that Municipality was related to Entity for purposes of computing the standby charge benefit under ss. 6(1)(e) and 6(2), CRA stated:

For the purposes of subsection 251(2), control extends to legal control. The Tax Court [HSC Research, 95 DTC 225] stated that a corporation without share capital should be considered to be controlled by the person appointing the majority of the board of directors. …

Accordingly…we assume that Municipality would be the person who could elect the majority of the Board….

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(2) standby charge computed based on cost to auto owner which is related to employer 179

10 October 2014 APFF Roundtable Q. 16, 2014-0538031C6 - APFF 2014 Q. 16 - Capital gain

incorporator related to corporation

In the course of considering the availability of the exception in s. 55(3)(a) for a spin-off, CRA stated (TaxInterpretations translation): "Respecting the issuance of shares on an incorporation…prior to the first issuance…the incorporator controls [the corporation] and consequently…he will be considered as being related to that corporation before the first issuance of shares." See summary under s. 55(3)(a).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) interposition of holdco to permit related-person spin-off compliant with s. 55(3)(a)(ii) and (v) 845
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3.01) - Paragraph 55(3.01)(g) interposition of holdco to permit related-person spin-off compliant with s. 55(3)(a)(ii) and (v) 844

Example 7

Mr. A is the sole trustee of a particular trust that owns all of the issued shares in the capital of a corporation.

Both the particular trust and Mr. A will be related to the corporation and deemed not to be dealing at arm's length with the corporation.

1 May 2014 External T.I. 2013-0494981E5 F - De Jure Control

potential de jure control, if right to replace trustees is coupled with advance notice of major decisions

The sole beneficiary of a Quebec trust with two trustees who are unrelated to him has the power to dismiss them (Scenario 1), to dismiss and appoint them (Scenario 2), or to dismiss and replace them coupled with a requirement on the trustees to provide XX days' notice of specified decisions (i.e., the sale or transfer of the shares of the corporation which was wholly-owned by the Trust or reorganization events respecting the corporation), but without any effect on the exercise of the voting rights for its shares (Scenario 3).

CRA stated (TaxInterpretations translation) respecting Scenario 2 (and similarly Scenario 1) that:

[I]n light of the jurisprudence [e.g., Rostal, Lusita, Campbell], the powers of the Beneficiary to remove and appoint the Trustees of Trust would not have the effect by itself of preventing them from exercising the de jure control attached to the shares of the Corporation.

Respecting Scenario 3 and in response to a submission emphasizing the statement in Duha at para. 49 that "the trustee is not free to act other than in accordance with the trust document, and if the trust document imposes limitations upon the capacity of the trustee to vote the shares then these must accordingly be taken into account in the de jure control analysis," CRA stated:

[S]ubsequently to the Duha Printers case, the Tax Court of Canada instead adopted an approach placing emphasis on an analysis of the provisions of the trust deed indicating that a particular person can legally direct the trustees respecting the manner of exercise of the voting rights attached to the shares of the particular corporation, in other word, upon the analysis of the factual elements for establishing that such person has an influence over [alt. translation: can impact] the decisions of the trustees [citing Helen Campbell v. The Queen, 99 DTC 1073 (TCC), at p. 1081)]. …

[T]his approach should be preferred, in any situation similar to that described in Scenario 3, for establishing who has de jure control of a corporation.

2012 Ruling 2011-0402571R3 - De Jure Control - Debt Settlement

no immediate right to elect directors

Parent owns the Class B common shares of Lossco and Mr. A, who deals at arm's length with Parent (and with Profitco, a subsidiary of Parent) holds a majority of the Class A shares of Lossco. Both the Class A and Class B shares have full voting rights except that the Class B shares are not permitted to vote on the election of directors of Lossco. However, the voting rights of the Class B shares held by Parent

entitles it at any time during its ownership of such shares to successfully propose and pass a resolution of the shareholders to approve a stock consolidation and an associated purchase for cash of fractional shares….Such an arrangement would permit the consolidation of Lossco Class A shares into fractions of shares that are cancelled for a cash payment as part of the consolidation without any special resolution of the holders of the Lossco Class A shares, voting separately as a class, first being required.

Ruling that s. 256(7)(b) would apply on an amalgamation of Profitco and Lossco under which Parent would receive common shares of Amalco and the Class A shareholders including Mr. A would receive non-voting preference shares. The ruling summary indicates that Parent is considered to have de jure control of Lossco (notwithstanding that it does not have an immediate right to elect a majority of the directors of Lossco) and that this is "consistent with the decision of the SCC in Donald Applicators Ltd. (1969)."

2000 APFF Roundtable Q. 21, 2000-0038055 -

GP usually controls

Respecting the question whether two corporations are related persons if they are controlled by a limited partnership or a general partnership, the Directorate indicated that where shares are held by a partnership, the question of de jure control should take into account the terms of the partnership agreement in order to determine which members can exercise voting rights in respect of the shares of the corporation.

The partnership contract and the equity interest of the members must be examined to determine which member(s) of the partnership can exercise voting rights in respect of the shares of the corporation. In the case of a limited partnership, it is usually the general partner. Consequently, two corporations are usually related under subparagraph 251(2)(c)(i)...when the shares in the capital stock of the corporations that make it possible to exercise effective control over the corporations are owned by the limited partnership and there is only one general partner. It is also our view that two corporations would be considered related under subparagraph 251(2)(c)(i)...if a member...of a general partnership is able to control the activities of the partnership, including the exercise of the voting rights in respect of the shares of the two corporations owned by the general partnership....

9 August 1994 T.I. 933312 [control by partner with voting rights]

control by partner with voting rights

In a situation where a husband and wife each own a holding company (H Holdco and W Holdco), H Holdco has a controlling interest in a partnership with W Holdco holding the other partnership interest, and the partnership in turn owns all the shares of a third corporation, the third corporation will be related to H Holdco and W Holdco:

... Where a partnership owns more than 50% of the issued voting shares of a corporation and where a particular partner is entitled without restriction, to exercise more than 50% of the votes that may be cast at a meeting of the partnership, it is our view that the particular partner controls the corporation.

23 March 1992 T.I. (Tax Window, No. 18, p. 20, ¶1825) [control by trustee]

control by trustee

The sole individual trustee of the family trust controls the corporation whose shares are held by the trust, with the result that that corporation is related to a second corporation owned by that individual.

90 C.R. - Q28

partnership as person

A partnership is considered to be a person when the computation of income at the partnership level is involved. For example, a partnership that controls a corporation is related to the corporation where such a relationship is relevant to the computation of the partnership's income.

87 C.R. - Q.18

contrast with extended definition in s. 60(1)(j.1)(iv)

Where a subsequent employer purchases all the assets or shares of the former employer, the former employer will qualify as a "person related to the employer" for purposes of s. 60(1)(j.1), on the basis of the extended definition in s. 60(1)(j.1)(iv).

Subparagraph 251(2)(b)(ii)

Cases

Miron and Frères Ltd. v. Minister of National Revenue, 55 DTC 1109, [1955] CTC 182, [1955] S.C.R. 679

group control

997 out of the outstanding common shares of a corporation were owned as to 400 shares by an individual and his brother (200 shares each) and, as to the balance, by their four brothers as to 150 or 149 shares each. The corporation was deemed not to deal with the individual at arm's length pursuant to s.127(5)(a) of the pre-1972 Act which apply to "a corporation and a person or one of several persons by whom it is directly or indirectly controlled."

See Also

Côté-Létourneau v. The Queen, 2010 DTC 1116 [at 3092], 2007 TCC 91

A sale by the taxpayers (a husband and wife) of their shares of a controlled corporation to another corporation ("9061") all of whose shares were held by a trust of which they and the family accountant were the trustees did not represent a sale of those shares to a related person given that decisions of the trust were required to be made unanimously, so that the taxpayers did not have de jure control of the purchaser corporation.

Subparagraph 251(2)(b)(iii)

Administrative Policy

22 August 2014 External T.I. 2014-0540751E5 F - Acquisition of control

cousins part of related control group while fathers alive

Two brothers (A and B) own 100% of the shares of Holdco A and Holdco B, respectively, which, each in turn, owns 50% of the shares of Opco. A sells 1/3 of his shares of Holdco A to his adult child (C) and 1/3 of his shares to each of the two adult children of B (D and E). B simultaneously sells 1/3 of his shares of Holdco B to each of C, D and E. Is there an acquisition of control of Holdco A, Holdco B or Opco? Before concluding that as "C, D and E were related to Opco immediately before the acquisitions of shares…, clause 256(7)(a)(i)(B) applied to deem there to be no acquisition of control of Opco," CRA stated (TaxInterpretations translation):

Before the [above] transfers of shares…Opco was controlled by a related group…being A and B, and Holdco A and Holdco B. …D and E, who were related to B…also were members of a related group which controlled Opco before the share acquisitions. C was related to Holdco A by virtue of subparagraph 251(2)(b)(iii)…and D and E were related to Holdco B by virtue of subparagraph 251(2)(b)(iii)… .Thus, C, D and E were all related to Opco by virtue of subparagraphs 251(2)(b)(ii) and (iii) while their fathers held the shares…of Holdco A and Holdco B.

Detailed summary under s. 256(7)(a).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(a) addition of cousin to control group would taint it/cousins part of related control group while fathers alive 455

30 January 2013 External T.I. 2012-0470931E5 - Related corporations

ParentCo is related to KidsCo

Suppose parents Mr. and Mrs. X hold ParentCo, and their children ("Son and Daughter") hold KidsCo. Then:

Mr. X and Mrs. X are related to ParentCo by virtue of subparagraph 251(2)(b)(ii) as they are each a member of a related group that controls ParentCo. Son and Daughter are also related to ParentCo by virtue of subparagraph 251(2)(b)(iii) as Son and Daughter are related to Mr. X and Mrs. X, each a person described in subparagraph 251(2)(b)(ii).

Son and Daughter are related to KidsCo by virtue of subparagraph 251(2)(b)(ii) as they are each a member of a related group that controls KidsCo. Mr. X and Mrs. X are related to KidsCo by virtue of subparagraph 251(2)(b)(iii) as Mr. X and Mrs. X are related to Son and Daughter, each a person described in subparagraph 251(2)(b)(ii).

Consequently, ParentCo is related to KidsCo by virtue of subparagraph 251(2)(b)(iii) as KidsCo is related to Mr. X and Mrs. X, each a person described in subparagraph 251(2)(b)(ii).

Paragraph 251(2)(c)

Subparagraph 251(2)(c)(i)

Cases

Chutka v. Canada, 2001 DTC 5093 (FCA)

A sale of equipment by a corporation to a partnership whose general partner was wholly-owned by the same individual who owned the vendor corporation was found to be a non-arm's length transaction, with the result that s. 69(1)(a) apply to reduce the capital cost of the equipment to the purchasing partnership to the equipment's fair market value. Linden J.A. found (at p. 5098) that "the fiction of a partnership as an entity separate from the partners is temporary and does not extend to colour the true legal nature of transactions at the time they are entered into by a partnership" and that both the vendor corporation and the general partner were persons and taxpayers within the meaning of the Act and were related persons, so that s.251 deemed the transaction to occur not at arm's length.

Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795, 98 DTC 6334

A corporation ("Marr's") controlled by Mr. Marr paid $2,000 to subscribe for redeemable preferred shares representing a majority of the voting rights of a corporation ("Duha") previously controlled by the Duha family. A shareholders' agreement provided that new shares could only be issued with the unanimous consent of the existing shareholders and that the board was to comprise any three of: Mr. & Mrs. Duha, Mr. Marr; and a friend of Messrs. Duha and Marr who previously had served on the Duha board. One day later, Marr's sold the shares of a subsidiary ("Outdoor") with significant non-capital losses to Duha.

Iacobucci C.J. found that Marr had acquired control of Duha when it subscribed for the redeemable preferred shares, with the result that there was no subsequent acquisition of control of Outdoors by Duha due to the exception in s.256(7)(a)(i) (respecting acquisitions by related corporations). The prohibition in the shareholders' agreement against the issuance of further shares without the written consent of all the shareholders imposed a clear restriction upon the directors' power to manage (i.e., issue shares pursuant to s. 25(1) of the Corporations Act (Manitoba)). Accordingly, the agreement was a unanimous shareholders' agreement that was required to be taken into account in determining who had de jure control of Duha. However, even taking into account its inability to issue new shares without unanimous shareholder approval, there was not such a restriction that Marr's could be said to have lost the ability "to exercise effective control over the affairs and fortunes of the corporation" (Duha) through its majority shareholding.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Tax Avoidance no business purpose test 75

Zeal and Gold Ltd. v. MNR, 73 DTC 5116, [1973] CTC 129 (FCTD)

As part of a series of transactions wherein one company ("Mercantile") would become owned solely by two of its three shareholders ("Zeal" and "Gold") and the third shareholder ("Stearns") was to become the sole shareholder of the taxpayer, the taxpayer agreed to purchase equipment from Mercantile at a time when the taxpayer and Mercantile were owned equally by the three shareholders. This was a non-arm's length transaction. "It seems inconceivable to me, bearing in mind that all transactions were directed to achieving one desired result, that the relationship which prevailed among all necessary parties at the initiation of the overall plan could change during the intermediary steps to bring that plan to fruition."

International Fruit Distributors Ltd. v. MNR, 53 DTC 1222 (Ex Ct), aff'd without reasons 55 DTC 1186 (SCC)

The taxpayer, which along with another Canadian corporation was controlled by a U.S. parent, was unsuccessful in a submission that it was related to the other Canadian corporation because the term "person" in s. 36(4)(b)(i) as it applied in 1949 would not extend to a corporation or, in any event, a foreign corporation. Thorson P. noted that the definition of "person" in the Act "clearly includes a corporation. Indeed, it includes 'any' corporation and there is no reason for holding that it does not extend to a foreign corporation ... ."

Army & Navy Department Stores Ltd. v. Minister of National Revenue, 53 DTC 1185, [1953] CTC 293, [1953] 2 S.C.R. 496

S.36(4)(b)(iii) of the 1948 Act, which deemed one corporation to be related to another where "70% or more of all the issued common shares of the capital stock of each of them is owned directly or indirectly by ... persons not dealing with each other at arm's length one of whom owned directly or indirectly one or more of the shares of the capital stock of each of the corporations", did not apply to make the Western Company related to the Alberta Company and the Saskatchewan Company given that the individual shareholders of the Alberta Company and the Saskatchewan Company did not have any ownership (direct or otherwise) in the property of the companies in which they held shares. However, the Alberta Company and the Saskatchewan Company were related to each other under the same provision.

Administrative Policy

2000 APFF Roundtable Q. 21, 2000-0038055 -

respecting the question whether two corporations are related persons if they are contolled by a limited partnership or a general partnership, the Directorate indicated that where shares are held by a partnership, the question of de jure control should take into account the terms of the partnership agreement in order to determine which members can exercise voting rights in respect of the shares of the corporation.

The partnership contract and the equity interest of the members must be examined to determine which member(s) of the partnership can exercise voting rights in respect of the shares of the corporation. In the case of a limited partnership, it is usually the general partner. Consequently, two corporations are usually related under subparagraph 251(2)(c)(i)...when the shares in the capital stock of the corporations that make it possible to exercise effective control over the corporations are owned by the limited partnership and there is only one general partner It is also our view that two corporations would be considered related under subparagraph 251(2)(c)(i)...if a member...of a general partnership is able to control the activities of the partnership, including the exercise of the voting rights in respect of the shares of the two corporations owned by the general partnership....

27 October 1994 T.I. 942454

The concept of indirect control includes the situation where the intermediate entity is a partnership rather than a corporation. For this purpose "where a partnership owns more than 50% of the issued voting shares of a corporation and where a particular partner is entitled without restriction, to exercise more than 50% of the votes that may be cast at a meeting of the partnership, it is our view that the particular partner controls the corporation".

9 August 1994 T.I. 9333125

The respective corporations of a husband and wife together hold 100% and 40%, respectively, of Opco 1 and Opco 2 "through" a general partnership in which the husband's and wife's corporation have respective partnership interests of 60% and 40%. In addressing whether Opcos 1 and 2 are related to the corporations of husband and wife for purposes of the the definition of qualified small business corporation share in s. 110.6(1), the Directorate stated:

Indirect control of a particular corporation includes ownership of the controlling shares of an intermediary corporation that, in turn, owns the controlling shares of the particular corporation. This would also be our view where the intermediary shareholder is a partnership. In other words, where a partnership owns more than 50% of the issued voting shares of a corporation and where a particular partner is entitled without restriction, to exercise more than 50% of the votes that may be cast at a meeting of the partnership, it is our view that the particular partner controls the corporation.

8 January 1992 Memorandum (Tax Window, No. 15, p. 9, ¶1685)

Where a court-appointed receiver takes control of the assets of A Co. and transfers those assets to a wholly-owned subsidiary (B Co.) before a sale of the shares of B Co. to a third party, A Co. and B Co. may not be related prior to the shares of B Co. being sold, depending upon the specific facts of the case.

23 April 1991 T.I. (Tax Window, No. 2, p. 28, ¶1214)

Two wholly-owned subsidiaries of a U.S. corporation are related to each other because a foreign corporation is both a "person" and a "corporation".

Subparagraph 251(2)(c)(ii)

See Also

Re A. Zimet Ltd. (1982), 44 C.B.R. (N.S.) 136 (S.C.O.)

Two bankrupt corporations were related to a third corporation notwithstanding that two trusts were interposed as majority shareholders of the third corporation.

Subparagraph 251(2)(c)(vi)

Subsection 251(3) - Corporations related through a third corporation

Administrative Policy

10 October 2014 October APFF Roundtable Q. 17, 2014-0538071C6 F - 2014 APFF Roundtable, Q. 17 - Related Group

related corporations whose shareholders are not all related

Mr. A and Mr. C are both related to Mr. B, but Mr. A is not related to Mr. C. Each of Mr. A, Mr. B and Mr. C wholly-owns Aco, Bco and Cco, respectively, which, in turn, each holds 1/3 of the shares of Dco. Aco and Cco are both related to Bco. Thus, Aco and Cco are related under s. 251(3). Aco also holds all of the shares of Eco. (a) Are Aco, Bco and Cco a related group? (b) Are Aco and Dco related? (c) Are Eco and Dco related? CRA responded (TaxInterpretations translation):

(a) Aco, Bco and Cco are a "related group" as per ITA subsection 251(4) taking into account that these corporations are related with each other by virtue of ITA subsection 251(3). Consistently with ITA paragraph 251(5)(a), since the related group comprising Aco, Bco and Cco is in a position to control Dco, this related group is deemed to be a related group that controls Dco for purposes of the application of ITA subsection 251(2).

(b) In light of the above, Dco would also be related to Aco by virtue of ITA subparagraph 251(2)(b)(ii) given that Aco is a member of a related group controlling Dco. Furthermore, Aco and Dco would also be related with each other by virtue of ITA subparagraph 251(2)(c)(iii) by reason of the fact that Aco is controlled by a person (Mr. A) who inter alia is related with a person (Aco) which is a member of the related group controlling Dco.

(c) In light of the above, Dco and Eco would be related with each other by virtue of ITA subparagraph 251(2)(c)(iii) by reason of the fact that Eco is controlled by a person (Aco) who is related inter alia with a person (Bco) which is a member of the related group controlling Dco.

S1-F5-C1 - Related persons and dealing at arm's length

Facts. A and B are sisters. Each of A and B has an adult child, being C and D, respectively. Each of A, B, C and D owns all of the issued shares of one corporation, ACo, BCo, CCo and DCo, respectively.

Analysis. In this situation, ACo and BCo are related to each other by virtue of subparagraph 251(2)(c)(ii). Also, ACo and CCo are related to each other and BCo and DCo are related to each other by virtue of subparagraph 251(2)(c)(ii).

Therefore, ACo and DCo will be related to each other by virtue of subsection 251(3) because each of them is related to BCo. Similarly, BCo and CCo will be related under subsection 251(3) because each of them is related to ACo. However, since subsection 251(3) does not apply for the purposes of a subsequent application of subsection 251(3), CCo will not be related to DCo.

13 March 1990 T.I. (August 1990 Access Letter, ¶1394)

Where two brothers (A and B) each have a son (C and D), and each of the foregoing owns all the shares of A Ltd., B Ltd., C Ltd. and D Ltd., s.251(3) will not deem C Ltd. to be related to D Ltd. notwithstanding that they both are related to A Ltd. (C Ltd. by virtue of s.251(2)(c)(ii) and B Ltd. by virtue of s.251(3)). S.251(3) only deems two corporations to be related to each other for purposes of ss.251(1) and (2) and does not apply for purposes of s.251(3).

Articles

Marc N. Ton-That, "Deemed Relationships: A More Restrictive View", Corporate Structures and Groups, Vol. IX, No. 4, 1997, p. 237

Discussion of whether s.251(3) applies for purposes of the Act.

Subsection 251(3.1) - Relation where amalgamation or merger

See Also

Dow Chemical Canada Inc. v. The Queen, 2007 DTC 1701, 2007 TCC 668

The taxpayer was formed on the amalgamation of two corporations, one of which ("UCCI") had previously incurred interest-bearing indebtedness to a financing affiliate within the Union Carbide group of companies and the other of which ("DCCI") was a Canadian subsidiary within the Dow group of companies that dealt at arm's length with UCCI and the financing affiliate. The U.S. parent of the taxpayer ("Dow") had acquired control of the U.S. parent of UCCI, and the amalgamation then occurred.

Mogan, D.J. found that s. 78(1) did not apply to the interest on such debt as the taxpayer was not related to UCCI or the financing affiliate in fact or by any deeming rule during the calendar year in which such interest was incurred.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 78 - Subsection 78(1) 124

Administrative Policy

S4-F7-C1 - Amalgamations of Canadian Corporations

deemed non-arm's length relationship on amalgamation

1.32 …[S]ubsection 251(3.1) deems the new corporation formed on an amalgamation to be related to (and, therefore, not deal at arm's length with) a predecessor corporation where the two corporations would have been related immediately before the amalgamation if the new corporation had been in existence at that time with the same shareholders that it had after the amalgamation. For example, a predecessor corporation will be deemed to be related to the new corporation where the predecessor corporation was, immediately before the amalgamation, controlled by a person or group of persons and the new corporation was, immediately following the amalgamation, controlled by that same person or group of persons. In addition, subsection 251(3.2) provides that where there is an amalgamation of two or more related corporations (other than corporations which are related solely because of a right referred to in paragraph 251(5)(b)) the new corporation will be deemed to be related to (and therefore, not to deal at arm's length with) each of the predecessor corporations.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 100 - Subsection 100(2.1) s. 100(2.1) applies to non-qualifying amalgamation 58
Tax Topics - Income Tax Act - Section 111 - Subsection 111(12) application following amalgamation 103
Tax Topics - Income Tax Act - Section 116 - Subsection 116(1) deemed tcp following amalgamation 155
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5.1) continuity of s. 13(5.1) on amalgamation 126
Tax Topics - Income Tax Act - Section 165 - Subsection 165(1) Amalco can continue objection and receive refunds 145
Tax Topics - Income Tax Act - Section 169 Amalco can continue objection 97
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(n) reserve after amalgamation 50
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Shareholder shareholder need not hold shares 82
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(b) realted party, majority and 50% group exceptions 448
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(iii) reserve after amalgamation 50
Tax Topics - Income Tax Act - Section 66.7 - Subsection 66.7(7) successoring where non-wholly owned amalgamation 85
Tax Topics - Income Tax Act - Section 69 - Subsection 69(13) no disposition of predecessor property on general principles 103
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.4) s. 87(5) not applicable 104
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(3) non-87 amalgamation/no FX gain 159
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) no deemed dividend to dissenter on amalgamation 81
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) election filing by Amalco 103
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.1) s. 87(1.1) qualifies for all s. 87 purposes 60
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.2) successoring where non-wholly owned amalgamation 85
Tax Topics - Income Tax Act - Section 87 - Subsection 87(10) deemed listing of temporary Amalco shares 114
Tax Topics - Income Tax Act - Section 87 - Subsection 87(11) gain if high PUC is sub shares 47
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) presumptive satisfaction of s. 87(1)(a)/dissent and squeeze-outs onside 260
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(a) new corp/deemed year end coinciding or not with acquisition of control 0
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(b) Amalco must follow predecessor's valuation method subject to truer picture doctrine 58
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(c) reserve after amalgamation 103
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(d) cost amount carryover 135
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(e.1) s. 100(2.1) applies to non-qualifying amalgamation 58
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(o) no continuity rule for non-security options 133
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(q) pre-amalgamation services 96
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.11) loss-carry back to parent 159
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.1) dovetailing with s. 88(1.1) 38
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3.1) 328
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3) PUC shifts 181
Tax Topics - Income Tax Act - Section 87 - Subsection 87(4) fractional share cash/ACB or value shift/implied non-recognition for predecessor shares 247
Tax Topics - Income Tax Act - Section 87 - Subsection 87(7) dovetailing with s. 78 and 112(12) 171
Tax Topics - Income Tax Act - Section 87 - Subsection 87(9) allocation of s. 87(9)(c)(ii) excess as parent chooses 218
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) late designation 106
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1.1) dovetailing with s. 87(2.1) 56
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) partnership dissolution on amalgamation 123
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) deemed non-arm's length relationship on amalgamation 415
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) deemed non-arm's length relationship on amalgamation 323
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(14) class continuity on non-arm's length amalgamation 311
Tax Topics - Income Tax Regulations - Regulation 8503 - Subsection 8503(3) - Paragraph 8503(3)(b) pre-amalgamation services 96

11 November 1993 Memorandum (Tax Window, No. 30, p. 3, ¶2482)

Where a corporation (A) is owned equally by three other corporations (X, Y and Z) who do not deal with one another at arm's length and do not act in concert as a group to control A or a wholly-owned subsidiary (B), the corporation resulting from the amalgamation of A and B would not be related persons pursuant to s.251(3.1) because X, Y and Z did not, as a group, exercise control over A.

Subsection 251(4) - Definitions concerning groups

Related Group

Cases

Atomic Truck Cartage Ltd. v. The Queen, [1985] 2 CTC 21 (FCTD)

The phrase "group of persons" in s.251(4)(a) refers to a group of two or more persons.

Words and Phrases
group

Subsection 251(5) - Control by related groups, options, etc.

Paragraph 251(5)(a)

Administrative Policy

26 October 2010 External T.I. 2010-0363341E5 - Related corporations

Grandfather has 42% of the voting rights for Aco and his son has the balance of 58% of the voting rights. Grandchildren (who thus are related to Grandfather but are nephews of his son and, thus, unrelated to the son) own Bco. Becasue Grandfather controls Aco alone, it follows that Aco is not controlled by a related group, so that Aco and Bco are not related under s. 251(2)(c)(v). "Our position is based on the understanding that the comments in the Southside Car Market decision apply even in situations where the shareholders of a corporation are related persons...."

Paragraph 251(5)(b)

Cases

Durocher v. The Queen, 2016 CAF 299

option valid notwthstanding that its exercise in full by holder would be illegal

A holding company (“RJCG”) held by the taxpayers through family trusts was the sole common shareholder of “Gestion Lagarde,” which was a holding company holding all the shares of a Canadian operating company (“Dale Parizeau”). Whether a capital gain realized by the trusts on a sale of their RJCG shares, which closed on April 28, 2006, was eligible for the capital gains deduction, turned on whether an option of “Aviva”( a financial institution owned by a non-resident parent) to acquire 66.3% of the common shares of Gestion Lagarde, as well as an option of Aviva to acquire the Gestion Lagarde shares held by RJCG, caused Dale Parizeau to not qualify as a Canadian-controlled private corporation.

The taxpayers argued that these options were void by virtue of s. 148 of the Act respecting financial services (Quebec) (the “ARDFPS”), which provided that no more than 20% of the shares or related voting rights in a firm could be held directly or indirectly by financial institutions or related persons. In rejecting this argument, Rip J had stated (at paras. 48, 50):

[N]either Aviva nor an assignee "held" or owned shares of Gestion Lagarde or RJCG before April 28, 2006. … Until such time as the contemplated transaction closed, it is arguable that Aviva could have carved up its rights to acquire the shares among other persons so that, at closing, it would acquire not more than 20 per cent of the target company. And, in fact, Aviva did so.

Similarly, in the Court of Appeal, Noël CJ dismissed the appeal, stating (at paras 50, 54, TaxInterpretations translation):

[T]he reality is the holding of a future right to acquire shares does not equate to the holding of shares to which such right relates.

… [N]othing in this case suggests that the purchase option conferred by [the shareholders’ agreement] was intended to frustrate section 148 of the ARDFPS. The opposite is instead evident when one considers how the option was exercised.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation Act - Section 8.1 Tax Court can review validity of contract in reviewing assessment 123
Tax Topics - General Concepts - Illegality proper for the Tax Court to pass on the alleged nullity of a contract in the context of passing on the correctness of an assessment 235

The Queen v. Lusita Holdings, 84 D.T.C 6346, [1984] CTC 335 (FCA)

right of one of two trustees to replace the other

An individual ("Gustav") was one of two trustees in various trusts which held a majority of the voting shares of Lusita Holdings. Although Gustav had the right under the various trust indentures to require the resignation of his co-trustee and appoint a successor, this right did not place the "right ... to control the voting rights of the shares" of Lusita Holdings in Gustav's hands because of the requirement of the indentures that both co-trustees decide as to how the votes attaching to the shares should be voted, and their obligation to exercise their duties and powers in a fiduciary capacity. Accordingly, Lusita Holdings was not associated with a corporation controlled by Gustav and his wife.

Rostal Sales Agency Ltd. v. The Queen, 83 DTC 5036, [1983] CTC 5 (FCTD)

right to remove trustees; right includes non-contractual right

The settlor of a trust did not have any right to control the voting rights of shares held by the trust because he did not have the power under the trust deed to remove the current trustee. In addition, it was stated, obiter, that "the mere fact that, at some time the settlor might be in a position to remove trustees at will, does not necessarily mean that incumbent trustees are mere nominees for the voting rights of any shares held by the trust".

Collier J. also concurred with Mahoney J. in Lusita Holdings Ltd. v. The Queen, 82 DTC 6297, affirmed supra, "that the 'right' referred to in paragraph 251(5)(b) is not confined to rights arising under a contract, but extends to rights arising in 'equity or otherwise', apart from pure contract." (p. 5037)

Toric Optical Ltd. v. The Queen, 78 DTC 6310, [1978] CTC 436 (FCTD)

right to acquire "shareholder's equity"

An individual agreed with a company ("Imperial") that in the event of the individual's prolonged illness, retirement or death, the individual would sell and Imperial would purchase the individual's "shareholder's equity" in the taxpayer for a formula price. The taxpayer and Imperial were found to be associated corporations as a result of the application of s.139(5d)(b) of the pre-1972 Act, given that in the context of the agreement it was apparent that "shareholder's equity" referred to the individual's 50% shareholding in the taxpayer.

Viking Food Products Ltd. v. The MNR, 67 DTC 5067 (Ex Ct)

The taxpayer was controlled by an individual and the individual's father and a second corporation ("Empire") was controlled by the individual's father. The taxpayer and Empire were associated under the predecessor of s.256(1)(d) notwithstanding that the individual's son had an option to acquire all the shares in the capital of the taxpayer. Jackett P. found (at p. 5071) it highly improbable that Parliament would have intended that s.139(5d)(b) of the pre-1972 Act "would have the unexpressed effect of artificially deeming a person to have ceased to control a company whose issued shares all belong to him merely because he had granted an option to someone else to buy such shares". (Jackett P. also rejected an argument that s.139(5d)(b) effectively deemed the share capital of a corporation to be doubled to the extent that shares owned by one shareholder were subject to an option held by another person.)

See Also

ARTV Inc. v. Agence du revenu du Québec, 2016 QCCQ 8757 (Cour du Québec)

a shareholder’s right to put its shares did not give the other shareholder a s. 251(5)(b)(i) “right” to acquire those shares

The rate of health premium tax to which ARTV Inc. (“ARTV”) was subject (under the Loi sur la régie de l'assurance maladie du Québec) turned on whether the total annual payroll of it and persons with whom it was associated exceeded $5 million. Although Radio Canada held 61% of the ARTV shares (which were voting), this did not give it control of ARTV in light of a unanimous shareholder’ agreement (the “USA”) which required a special voting majority of 66 2/3%. Whether ARTV was associated with Radio Canada instead turned on whether Radio Canada had (as per the Quebec equivalent of s. 251(5)(b)(i), namely, s. 21.20.4 of the Taxation Act) "a right...either immediately or in the future and either absolutely or contingently...to acquire" a pro rata portion of a 15% bloc of ARTV shares held by the second-largest shareholder (“ARTE France”). This question referenced a term of the USA which gave ARTE France the right to put its shares to the other shareholders at its cost, so that the ARQ was arguing that Radio Canada had a right described in the equivalent of s. 251(5)(b)(i) to acquire 61% of the 15% ARTE France bloc (or 9%), so that, including this contingent right, Radio Canada should be treated as having voting rights over more than 66 2/3% of the ARTV shares.

In finding that this clause did not give Radio Canada the “right” to acquire the 9% bloc of shares (so that Radio Canada was not associated with ARTV), Cameron JCQ stated (at paras. 41, 45, TaxInterpretations translation):

Before the exercise by ARTE France of its option, which depended on its will, Radio Canada had no right and, notwithstanding the irrevocability of its obligation to purchase, no expectation of purchasing, given the absence of control or influence over ARTE France. ...

[T]he suspensive condition and the decision of ARTE France to trigger the sale or not depended on the sole discretion of the latter. The obligation of ARTE France, if one wished to term it that, was nul by reason of the existence of the purely potestative condition. [He then quoted s. 1500 of the Civil Code.]

Words and Phrases
right
Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation Act - Section 8.1 tax law superimposed on the general law 152

Lyrtech RD Inc. v. The Queen, 2013 DTC 1147 [at 820], 2013 TCC 12, aff'd 2014 FCA 267

s. 248(25) does not apply for s. 251(5)(b) purposes

In order to generate refundable investment tax credits for research and development expenditures, a Canadian public corporation ("Lyrtech") transferred its R&D operations to the taxpayer, which was intended to qualify as a Canadian-controlled private corporation. The taxpayer initially was financed through debt owing to a discretionary trust which also held it shares. The trust's trustees were two individuals, one of whom was the president and a director of Lyrtech, of the other trust beneficiaries and of the taxpayer, and the other of whom was a director of such companies and a co-founder of Lyrtech. The trust's capital beneficiaries were various subsidiaries of Lyrtech.

After finding that the taxpayer was controlled de facto by Lyrtech, Favreau J went on to indicate that the contingent right of subsidiaries of Lyrtech to receive a distribution of the shares of the taxpayer qua discretionary beneficiary did not cause the taxpayer to be deemed to be controlled de jure by any of those subsidiaries (and, thus, by Lyrthech). He stated (at para. 55-56):

[T]he nature of the beneficial interest of each beneficiary ... is too aleatory, uncertain or indirect to be a right to the appellant's shares under paragraph 251(5)(b). ...

I highly doubt that Parliament's intent was for subsection 248(25) to apply to paragraph 251(5)(b) because the concept of beneficial interest is far too broad in scope and much too vague for it to apply to the concept of de jure control for the purposes of the definition of "Canadian

I strongly doubt that the legislator intended that subsection 248(25) should apply to paragraph 251(5)(b) as the concept of beneficial right has a scope that is too expansive and nebulous for it to apply to the notion of legal control for purposes of the definition of "Canadian controlled private corporation."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 256 - Subsection 256(5.1) de facto control by public company even though de jure control by trust 310

Ekamant Canada Inc. v. The Queen, 2010 DTC 1039 [at 2741], 2009 TCC 408

real owner still owns

The taxpayer was held 25% by a Canadian individual ("Côté") and three US family members. The four acquired the taxpayer with the understanding that Côté would operate the business. Two of the US shareholders delegated their power of attorney to the third, who then appointed Côté as his proxy. The taxpayer argued that, because Côté had the right to acquire the shares of the other three, he had control of the taxpayer; and therefore the US shareholders could not also have control.

Archambault J dismissed the taxpayer's appeal for a small business deduction. Deemed control under s. 251(5)(b)(i) is a legal fiction that did not have the effect of nullifying the US shareholders' actual control. He stated (at para. 23):

There can in a sense, be two distinct persons or groups of persons that are simultaneously in a position of control with respect to a corporation, namely: the person or group determined on the basis of reality, and the person or group determined on the basis of the legal fiction. ... [P]aragraph 251(5)(b) of the Act does not state that the real owners ... are no longer to control the corporation.

Sedona Networks Corporation v. The Queen, 2006 DTC 2486, 2006 TCC 80

actual shareholder not deemed to be non-owner

Paragraph 251(5)(b), which deemed a shareholder to be in the same position in relation to control of a corporation as if the shareholder owned shares that were subject to options, did not have the effect of deeming such optioned shares to be owned by the shareholder for purposes of the definition of "Canadian-controlled private corporation" in light of the contrast with the wording of subsection 256(1.4), which deems the option holder to own the optioned shares. In any event, paragraph 251(5)(b) did not deem the actual owner of the shares (in respect of which option rights have been transferred to somebody else) to have ceased to own those shares or to have ceased to control the target corporation. Accordingly, Archambault J. rejected a submission of the taxpayer's counsel that shares owned by a subsidiary of a public corporation should not be considered to be treated as shares that tainted the corporation's mooted status as a CCPC because the right to control the voting rights of those shares had been transferred to a Canadian-resident non-public corporation for a six-year period.

H.T. Hoy Holdings Ltd. v. The Queen, 97 DTC 1180 (TCC)

An arrangement under which the majority of the voting shares of a company were not turned over to another corporation ("Cloutier") until all of the preferred shares held by the taxpayer in the company were redeemed in accordance with provisions that required their redemption out of earnings of the company did not represent a right described in the pre-1989 version of s.251(5)(b).

Hudson's Investment Co. (London) Ltd. v. MNR, 68 DTC 83 (TAB)

An individual (Shapiro) was the shareholder of all the shares of Richard Shapiro Limited ("RSL") and of one-half of the common shares of the taxpayer. Most of the balance of the shares of the taxpayer were held by the Canada Trust Company under a voting trust agreement pursuant to which the common shares were held for the benefit of nieces and nephews of Shapiro and their father was designated as the voting trustee. Because under the terms of the voting trust agreement, the voting trustee was required to act on the advice of Shapiro and could be replaced if he refused to do so, Shapiro had the right to control the voting rights held pursuant to the voting trust agreement, i.e., the right "to have or exercise the power of direction or command" in respect of those voting rights. Accordingly, the taxpayer and RSL were associated corporations.

Words and Phrases
control

Administrative Policy

7 July 2015 External T.I. 2014-0552711E5 - Application of paragraph 251(5)(b)

LOI must be a contract to engage s. 251(5)(b)

In a letter of intent ("LOI") for the purchase of shares provides, the seller and purchaser agree to enter into a purchase agreement following the acceptance of the LOI, which states that the parties are not bound to consummate the sale transaction and that any binding commitment will only result from the execution of a purchase agreement. Does s. 251(5)(b) apply? In a general response, CRA stated:

[T]he following conditions must be met…:

  • The LOI must contemplate the exercise of one of the rights provided at paragraph 251(5)(b);
  • The right provided in the LOI can either be absolute or contingent and can be exercised either immediately or in the future; and
  • The LOI must constitute a contract between two or more persons, in equity or otherwise.

…[T]he question of whether the LOI constitutes a contract, in equity or otherwise, is a question of fact and law… . It is not within [our] mandate…to provide legal opinions…with respect to contract law in the context of a technical interpretation.

4 February 2015 External T.I. 2015-0565741E5 - Canadian-controlled private corporation

s. 256(5)(b) applied to acquisition right upon default under indemnity

As a condition to distributing shares of Aco to the beneficiaries of a testamentary trust of which it was sole trustee, the trustee ("Pubco"), which was a public company, required the beneficiaries to provide it with an indemnity which was secured by a pledge of the Aco shares, so that the Aco shares would be transferred to Pubco of a failure to honour the indemnity.

In finding that Aco thereby was not a Canadian-controlled private corporation, CRA first noted a submission that "Pubco, has a contingent right pursuant to the Pledge to acquire all the Aco shares from its shareholders," and then stated:

[S]ubparagraph 251(5)(b) would apply… . Therefore, Pubco would be considered to be in the same position in relation to the control of Aco as if Pubco owned the Aco shares at that time.

CRA then found that s. 256(6)(b) did not apply to override this result. See summary under s. 256(6).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(11) - Investment Contract indemnity agreement was not "indebtedness" 23
Tax Topics - Income Tax Act - Section 256 - Subsection 256(6) s. 256(6) does not protect a company's CCPC status where its shares are pledged to a pubco to secure an indemnity, not debt 209

S1-F5-C1 - Related persons and dealing at arm's length

1.28 [P]aragraph 251(5)(b)… will not normally be applied solely because the applicable shareholder agreement contains: a right of first refusal; or a shotgun arrangement. …

1.29 [I]t is possible for each of two unrelated persons to be regarded, for the purposes of subsection 251(2), as having control of the same corporation at the same time. While paragraph 251(5)(b) does not deny that actual control is held by the person who has the direct ownership of shares, another person could have control simultaneously as a result of the application of one of the rules in paragraph 251(5)(b).

Example 6

S owns a majority of the voting shares in each of Corporations A and B and, therefore, has actual control of Corporations A and B.

J, who controls Corporation C, has an option to purchase the controlling shares in Corporation A from S... . S and J are not related.

...[P]aragraph 251(5)(b) deems J to have control of Corporation A, but does not deny that S has the actual control of it.

As a result:

  • ... On the basis that J is deemed by paragraph 251(5)(b) to be in the same position in relation to the control of Corporation A as if J owned the majority of the voting shares of Corporation A, Corporation A is related to J (see subparagraph 251(2)(b)(i)) and is deemed not to deal with J at arm's length (see paragraph 251(1)(a)); and
  • Corporations B and C are related (see subsection 251(3)) and are deemed not to deal with each other at arm's length (see paragraph 251(1)(a)).

27 March 2014 External T.I. 2014-0524851E5 F - Deemed year-end and CPCC status

Ekamant: s. 251(5)(b) does not vitiate actual control by share owner

On December 1, Bco (a CCPC) makes a binding offer (to which s. 251(5)(b) applies) to purchase all the shares of Aco whose ultimate control is by a public corporation and whose taxation year end is December 31. Does Aco become a CCPC on December 1 at the moment of signature of the offer under s. 249(3.1) rather than at the time of the subsequent actual acquisition of control?

After noting the presumption in s. 251(5)(b), CRA stated (TaxInterpretations translation):

Nonetheless, even if Bco is deemed to control Aco, the Act does not contain any provision providing that the public company ceased to control Aco for purposes of determining if Aco was a CCPC… .This…is what the Court…indicated in Ekamant v. The Queen, 2009 DTC 1271 [2009 TCC 408 at para. 23]… . Thus…Aco did not become a CCPC at the moment of the signature of the purchase offer made by Bco because it continued to be controlled by the public company at such moment. … However, subsection 249(4) can apply when Bco acquires actual control of Aco by reason of the acquisition of all the shares…of Aco, held by the public company.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 249 - Subsection 249(3.1) Ekamant: s. 251(5)(b) does not vitiate actual control by share owner 185

16 March 2011 External T.I. 2010-0380571E5 F - Application de 251(5)b)(ii) et 256(1.4)b)

The wording of ss. 251(5)(b)(ii) and 256(1.4)(b) is sufficiently broad to cover a situation where a person does not have control over the triggering event giving him or her the right to cause the corporation to redeem, acquire, or cancel shares in its capital stock held by another person. CRA has ruled that these provisions would not generally apply where a corporation is required to redeem or purchase for cancellation shares held by a shareholder who has been found guilty of fraud in relation to the corporation (see 2002-0172315 and 2006-0167361E5).

28 April 2005 External T.I. 2005-012195 -

As s.251(5)(b) can be applied even though the right to acquire shares may be dependent on multiple contingencies, a call option to acquire shares of the corporation was described in that paragraph.

2003 CALU Roundtable Q. 10, 2003-000425 -

A owns 80% of the shares of Corporation A and B owns all of the shares of Corporation B and 20% of the shares of Corporation A. A and B enter into an agreement that provides that if either party wishes to sell his shares of Corporation A or B, the other party is granted a right of first refusal.

CCRA noted that the administrative position set out in IT-419R, para. 13 "is confined to rights contained in shareholder agreements, i.e., agreements between the shareholders of the corporation in question. As Mr. A is not a shareholder of Corporation B, the administrative position would not apply to the right of first refusal that he has with respect to Mr. B's shares of Corporation B."

7 January 2003 External T.I. 2002-013367 -

Ss.251(5)(b) and 256(1.4) applied to a shareholders agreement that provided that where one of the shareholders failed to advance money to the company following an operating fund deficiency, the other shareholders could choose to advance the funds which the defaulting shareholder had failed to advance, in which event the defaulting shareholder would have its equity diluted.

1998 Strategy Institute Round Table, Q. 11, No. 8M17920

The position of RC respecting Alberta powers of attorney also applies to Ontario continuing powers of attorney for property, i.e., the attorney is considered to have a right referred to in s.251(5)(b)(i) and s.256(1.4)(a) where the powers under the CPA can be exercised at any time.

17 October 1996 External T.I. 5-962367 -

Where an enduring power of attorney becomes effective solely on the permanent disability of the donor, ss.251(5)(b) and 256(1.4)(a) do not apply prior to the time that the donor becomes permanently disabled. However, they apply where the power can be exercised at any time by the attorney, if the power of attorney includes control of voting rights of shares of a corporation owned by the donor.

19 July 1996 External T.I. 5-960746 -

Discussion of various scenarios under which shares of what may be a CCPC are held indirectly by a public company through a partnership. The wording s.251(5)(b) is "very broad and seems capable of including a partner's future right to the shares in a corporation upon the dissolution of the partnership." However, this might not be the case where under the terms of the partnership agreement the shares are to be sold or delivered to another partner on the partnership liquidation.

8 February 1995 T.I. 942128

Where two shareholders holding a minority of the Class A voting shares of a corporation, but all of the Class B non-voting shares representing most of the equity, have the right to convert their Class B non-voting shares into an equal number of Class A voting shares on the happening of certain possible future events, the first such shareholder will be considered to have a right to acquire control notwithstanding that such control could only be acquired if the other shareholder did not exercise his right to convert as well.

12 January 1993 T.I. (Tax Window, No. 28, p. 21, ¶2388)

Where a widow is the sole beneficiary of her husband's estate and all the shares of a corporation previously owned by her husband are held by an unrelated trustee, she will be considered to have a right to those shares under s.251(5)(b)(i), with the result that that corporation will be considered to be related to a second corporation that is wholly-owned by her.

Harris, "Insight into the 1991 Revenue Canada Round Table Discussion", 29 July 1992, Q. 24

"Where shares of a corporation are owned by a trust, the Department's general position is that paragraph 251(5)(b) will only apply where the beneficiaries have an absolute, though not necessarily immediate, right to the shares under the terms of the trust."

92 C.M.TC - Q.8

Although it is RC's position that s.251(5)(b) does not apply in the case of a right of first refusal and normally does not apply to a shotgun arrangement, this position does not extend to rights to acquire shares in certain events of default.

19 March 1992 T.I. (Tax Window, No. 15, p. 15, ¶1705)

Where a shareholder agreement provides one shareholder with an option to acquire the shares of another shareholder on certain specified events of default including bankruptcy of the other shareholder, s.251(5)(b) will apply to such option.

18 October 1991 T.I. (Tax Window, No. 11, p. 19, ¶1529)

A corporation holding a large block of preferred shares which become voting in the event of default by the issuer corporation (e.g., the failure to pay two consecutive annual dividends on the preferred shares) has a contingent right to the control of voting rights attached to a majority of the shares of the issuer corporation.

8 January 1991 External T.I. 7-913477 -

By virtue of s.251(5)(b), a court-appointed receiver "may control the shares of [the corporation] as its position is somewhat akin to that of a trustee".

30 May 1990 T.I. (October 1990 Access Letter, ¶1493)

S.251(5)(b) will apply to a shareholders agreement governing the consequences of the withdrawal of a shareholder from a corporation where it is provided that the withdrawing shareholder will have to offer his shares to the other shareholder who has an option to acquire them, and where the corporation is compelled to acquire the shares of the withdrawing shareholder.

30 April 1990 TI C-9132 (September 1990 Access Letter, ¶1438)

S.251(5)(b) does not apply to a "put" right.

21 February 1990 T.I. (July 1990 Access Letter, ¶1349)

"A permanent disability for purposes of paragraph 256(1.4)(a) and (b) and subparagraphs 251(5)(b)(i) and (ii), would involve a disability which has incapacitated the individual from performing functions formerly performed before the event which has caused the disability and there is no reason to believe that such incapacity will not continue throughout the lifetime of the person."

18 December 1989 Decision Summary (May 1990 Access Letter, ¶1220)

The acquisition of shares by an estate from a deceased person is a non-arm's length transaction.

88 C.R. - Q.42

Where an agreement to purchase the shares of a corporation is entered into well in advance of the actual closing, RC will apply s.251(5)(b) at the time the agreement is entered into.

79 C.R. - Q.38

RC does not apply s.251(5)(b) unless both parties clearly have either a right or an obligation to buy or sell.

IT-64R2 "Corporations: Association and Control" under "Options"

S.251(5)(b) does not apply to rights of first refusal and to shotgun arrangements.

Subparagraph 251(5)(b)(i)

Administrative Policy

24 March 2017 External T.I. 2016-0662381E5 F - Control - unanimous shareholders agreement

highly contingent secondary call right of a non-resident on shares of minority residents undercuts for CCPC purposes their USA right to appoint half the board

The only voting and participating shares of a Canadian corporation ("Opco") are held 50% by a non-resident, and 50% by three Canadian residents. A unanimous shareholder agreement (USA) provides that the four directors will consist of two members appointed by the non-resident, and two directors jointly appointed by the residents (even if their aggregate shareholding falls well below 50%.) It also was agreed that on specified events such as fraud or theft and similar events, a resident shareholder (a "defaulted shareholder") would be required to withdraw and, in the case of a resident defaulted shareholder, that would give rise to a right of the non-resident to acquire the defaulted shareholder’s shares.

Situation 1

The non-resident’s right of purchase would be suspended for, say, 15 days, following the withdrawal event, during which other resident shareholders could acquire the shares of the defaulted shareholder, in which case, the non-resident's purchase rights and the agreement respecting equal board representation would continue to apply.

Situation 2

Same as Situation 1 except that resident shareholders would not exercise their priority purchase right, so that the defaulted shareholder’s shares would instead be acquired by the non-resident (but with the equal representation agreement still applying).

Situation 3

The same as Situation 1 except that if the defaulted shareholder's shares were not acquired by the other resident shareholders, they would be required to offer their own shares to the non-resident who could purchase them in addition to the shares of the defaulted shareholder.

Situation 6

If the resident shareholders did not exercise their entitlement to purchase the shares of the defaulted shareholder, the non-resident could require the defaulted shareholder to sell its shares at a determined value to an unrelated Canadian resident selected by the non-resident

Situation 7

If the resident shareholders did not purchase the shares of the defaulted shareholder within 15 days of the withdrawal event, the non-resident could require them to purchase the non-resident’s shares at fair market value plus a 5% premium.

Would Opco qualify as a CCPC?

CRA Response

After stating that, “following…Bagtech…we accept, where appropriate, taking into account a directors' appointment and appointment clause in the [USA] in determining whether a person controls a corporation,” CRA addressed the particular Situations.

Situations 1 and 2

CRA considered that the non-resident would have rights to all the Opco shares because the non-resident would have rights to the shares of each of the resident shareholders upon becoming a defaulted shareholder. As the deemed 100% shareholder, the clause for the designation and appointment of directors would no longer apply, so that Opco would not be a CCPC.

Situation 3

As in Situations 1 and 2, the directors' designation and appointment clause in the unanimous shareholder agreement would no longer preclude the non-resident from exercising control of the Opco as it would be deemed to own all the Opco shares.

Situations 6 and 7

S. 251(5)(b) would not apply solely as a result of the existence of the indicated clauses, so that Opco would be a CCPC.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) - Subparagraph 251(5)(b)(ii) no application if non-resident under USA cannot control board decision to redeem residents’ shares – applies if automatic redemption requirement 393
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Canadian-Controlled Private Corporation non-resident would control notwithstanding USA board appointment right of residents due to its secondary call right on their shares or right to require corp to honour automatic redemption clause 280

7 October 2016 APFF Roundtable Q. 7, 2016-0652971C6 F - Paragraph 251(5)(b) and subsection 256(1.4)

right to find 3rd party purchaser

CRA did not consider there to be a right (including a contingent right) to, or to acquire, shares where the shareholders’ agreement for a corporation carrying on a franchised operation (“Franchisee”) specifies that in the event that the individual manager of Franchisee (who holds 50% of Franchisee’s commons shares) departs, the other 50% common shareholder (the Franchisor) has the mandate to find an third party to purchase the manager’s shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 256 - Subsection 256(1.4) - Paragraph 256(1.4)(a) does not include right to find a 3rd party purchaser for another’s shares 123
Tax Topics - Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) - Subparagraph 251(5)(b)(ii) may include right arising after triggering of event over which no control 266

Subparagraph 251(5)(b)(ii)

Administrative Policy

24 March 2017 External T.I. 2016-0662381E5 F - Control - unanimous shareholders agreement

no application if non-resident under USA cannot control board decision to redeem residents’ shares – applies if automatic redemption requirement

The only voting and participating shares of a Canadian corporation ("Opco") are held 50% by a non-resident, and 50% by three Canadian residents. A unanimous shareholder agreement (USA) provides that the four directors will consist of two members appointed by the non-resident, and two directors jointly appointed by the residents (even if their aggregate shareholding falls well below 50%.) It also was agreed that on specified events such as fraud or theft and similar events, a resident shareholder (a "defaulted shareholder") would be required to withdraw and, in the case of a resident defaulted shareholder, that would give rise to a right of the non-resident to acquire the defaulted shareholder’s shares.

CRA addressed the application of s. 251(5)(b)(i) to a number of scenarios respecting a contingent right of the non-resident to acquire the shares of a defaulted shareholder. In addition, CRA was asked about the following scenarios.

Situation 4

Opco would have the right, exercised by a decision of the Board, to purchase for cancellation the shares of the defaulted shareholder at a determined value, in which case the equal board representation agreement would continue to apply (notwithstanding that the two resident shareholders would together would own less than 50% of the voting shares.)

Situation 5

Same as Situation 4 except that Opco would be obligated to purchase for cancellation the shares of the defaulted shareholder at the determined value.

Would Opco qualify as a CCPC?

CRA Response

After stating that, “following… Bagtech …we accept, where appropriate, taking into account a directors' appointment and appointment clause in the [USA] in determining whether a person controls a corporation,” CRA addressed these Situations.

Situation 4

S. 251(5)(b) would not apply taking into account only the indicated clause, so that Opco would be a CCPC.

Situation 5

[I]t would be necessary to determine whether the non-resident had the right to require Opco to acquire or cancel the shares in its capital stock if it did not effect the required purchase for cancellation, or if the non-resident had control over the triggering of an event that would entail an obligation to purchase for cancellation. … The non-resident would be deemed by s. 251(5)(b) to own 100% of the Opco voting shares (since the other shareholders could be defaulted shareholders), so that the directors' designation and appointment clause would no longer preclude the non-resident from exercising control of Opco. Thus, Opco would not be a CCPC.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) - Subparagraph 251(5)(b)(i) highly contingent secondary call right of a non-resident on shares of minority residents undercuts for CCPC purposes their USA right to appoint half the board 485
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Canadian-Controlled Private Corporation non-resident would control notwithstanding USA board appointment right of residents due to its secondary call right on their shares or right to require corp to honour automatic redemption clause 280

7 October 2016 APFF Roundtable Q. 7, 2016-0652971C6 F - Paragraph 251(5)(b) and subsection 256(1.4)

may include right arising after triggering of event over which no control

Franchisor and Manager each hold 50% of the shares (being common shares) of Franchisee. The shareholders’ agreement for Franchisee (a) provides, in the event the Manager wishes to depart, a mandate to Franchisor to identify an independent acquiror of the shares of Manager, or (b) provides that the corporation will automatically redeem the Manager’s shares. Would either right come within s. 256(1.4) or would the retraction right come within s. 251(5)(b)? After indicating, that it would be reasonable to consider that (a) did not entail a right of the franchisor to or to acquire the manager’s shares, CRA then indicated respecting the second question that further information and analysis was required, and stated:

[T]he wording of paragraph 256(1.4)(b) and subparagraph 251(5)(b)(ii) are broad enough to apply to a situation in which a given person would control the triggering of an event that would require a corporation to redeem, acquire or cancel any shares of its capital stock held by other shareholders. In this regard, the CRA has ruled that a person does not generally control the triggering of an event where a corporation is obliged to redeem or purchase shares of its capital stock held by a shareholder convicted of defrauding the corporation.

The wording of paragraph 256(1.4)(b) and subparagraph 251(5)(b)(ii) also applies to a situation where a particular person would have the right to cause a corporation to redeem, acquire or cancel any shares of its capital stock owned by another shareholder even if the person has no control over the triggering of an event requiring the company to make the purchase.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 256 - Subsection 256(1.4) - Paragraph 256(1.4)(a) does not include right to find a 3rd party purchaser for another’s shares 123
Tax Topics - Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) - Subparagraph 251(5)(b)(i) right to find 3rd party purchaser 70

Paragraph 251(5)(c)

See Also

Côté-Létourneau v. The Queen, 2010 DTC 1116 [at 3092], 2007 TCC 91

The taxpayers (a husband and wife) were not dealing at arm's length with a corporation ("29061") whose shareholder was a trust of which they and their accountant were the trustees. Although major decisions of the trustees were required to be unanimous, the accountant would never have voted against his clients' wishes, and as a role was essentially passive.

As the sale of shares by the taxpayers 29061 was a non-arm's length transaction, s. 84.1 applied to deem them to receive a dividend on the sale.

Naples v. Martin Estate, [1987] 1 WWR 52 (BCSC)

"Children" in the Wills Variation Act (B.C.) did not include stepchildren.

Subsection 251(6) - Blood relationship, etc.

Paragraph 251(6)(a)

Administrative Policy

13 April 1995 T.I. 942994 (C.T.O. "Related and Associated")

A half-brother and half-sister are connected by blood relationship.

However, the half-brother would not be connected by blood with his stepmother unless she adopted him (her step-son), based on the decisions in Pembroke Ferry Ltd. v. MNR, 52 DTC 255 and May Estate v. MNR, 88 DTC 1189.

Paragraph 251(6)(b)

See Also

May Estate v. MNR, 88 DTC 1189, [1988] 1 CTC 2303 (TCC)

A husband was not related to his deceased wife.

Administrative Policy

Paragraph 251(6)(c)