Section 256

Where a share has been issued as a stock dividend, the consideration for which the share was issued would be considered to be nil.

The "amount of unpaid dividends" referred to in s. 256(1.1)(e) may include accumulated but unpaid dividends.

A share with no entitlement to dividends generally will comply with s. 256(1.1)(c).

If the share terms provide that the shares will become voting under certain circumstances, the test in paragraph (b) will not have been met from the time of issuance of the share.

Father and Mother each hold 80 shares of Newco and Opco, respectively, and two discretionary trusts, with their three minor children as beneficiaries, hold 20 shares, respectively, of Newco and Opco. S. 256(1.2)(f)(ii) would deem, say, the eldest child to own the 20 share bloc in each corporation and that bloc of shares would then be re-attributed to a parent under s. 256(1.3), so that Newco would be deemed to be owned as to 80 and 20 shares by Father and Mother, respectively, and Opco would be deemed to be owned as to 80 and 20 shares by Mother and Father, respectively.

If the same process were repeated for the other two children, the deemed cross-shareholdings would be increased to 60 shares for each corporation. However, CRA will not do this, stating that the shares “would not be counted two or more times.”

On January 1 of a particular year, “Child”, who is 17 years, becomes the shareholder of Opco (a CCPC with a calendar year which is not managed by Child) and on April 1 of that year, Child turns 18. How does s. 256(1.3) apply in that year? CRA responded (TaxInterpretations translation):

At each moment in January, February and March, Child would be a child under 18 years of age who is the owner of the shares of the capital stock of Opco. Consequently, at any time during those three months, the shares in the capital stock of Opco held by Child would be deemed to be owned at that moment by the parent of Child for the purposes provided by subsection 256(1.3).

Given that the months of January, February and March in the particular year would fall in the course of the particular taxation year of Opco, it could be that Opco would be associated with another corporation during that taxation year by reason of one of the paragraphs of subsection 256(1) and of the presumption in subsection 256(1.3).

With respect to a situation where father held, as the sole trustee of a discretionary trust for minor children, 24% of the shares of a corporation, the Agency indicated that ss.256(1.2)(f)(ii) and 256(1.3) would not be double-counted so as to result in father being deemed to own 48% of the shares.

Where 16% of the shares of a corporation are held by a discretionary family trust and three beneficiaries of the trust (being siblings) are under the age of 18, the application of s. 256(1.3) will not result in the parent being deemed to own 48% of the shares. Instead, the application of ss.256(1.2)(f)(ii) and 256(1.3) will be considered from the viewpoint of each of the beneficiaries, on a person-by-person basis, with the result that the shares of the corporation will not be double counted.

Where Mr. A. owns all the shares of X Ltd. and Mrs. A, who owned all the shares of Y Ltd., freezes her interest in Y Ltd. in favour of a discretionary trust for her children who are under 18 years of age, X Ltd. and Y Ltd. will be associated corporations.

Where a corporation and its two 50% shareholders have agreed that the shares held by the shareholder shall be purchased by the corporation in the event that the shareholder ceases to be an employee, s. 256(1.4)(b) may apply in circumstances where the particular shareholder is in a position to trigger the event so as to force the corporation to acquire shares owned by the other shareholder.

In indicating that s. 256(1.4)(b) could apply where pursuant to a unanimous shareholders agreement a corporation would automatically acquire the shares of a shareholder where there is a change in control of the shareholder, a receiver of the shareholder was appointed, the shareholder breached specified covenants in the agreement, the shareholder encumbered its shares or they were attached, Revenue Canada stated

"... The wording in subsection 256(1.4)... will not be applied unless both (or all) parties clearly have either a right or an obligation to buy or sell as the case may be. In a situation where a unanimous shareholders agreement provides for an automatic acquisition or redemption of shares of a corporation by the corporation upon the occurrence of a specified triggering event, it is our view that the corporation clearly has an obligation to acquire and the shareholder clearly has an obligation to sell the shares upon the occurrence of the specified triggering event. Consequently, paragraph 256(1.4)(b) will apply when a person or partnership is in a position to cause the occurrence of a specified triggering event referred to in such a unanimous shareholders agreement."

S.256(1.4)(a) applies in a situation where the articles of incorporation or a shareholders' agreement for a corporation having three equal common shareholders (one of whom also owns all the preferred shares) provides that in the event a shareholders' meeting is called to consider a reorganization of the share capital, a winding-up of the corporation, or an amendment to the share provisions of the preferred shares, the preferred shares will be given the right to vote, with the result that the preferred shareholder would hold more than 50% of the votes.

S.256(1.4)(a) also would apply where it was provided that if any shareholder failed for a period of greater than one year to attend shareholders' meetings, the remaining shareholders would have the option to acquire the shares of the absent shareholder.

Permanent disability refers to impairments that are expected to last for continuous periods that will exceed the period provided in s. 118.4(1)(a).

In a situation where no one shareholder alone controls the corporation, the fact that a particular board of directors may cause a corporation to redeem its shares does not in itself cause s. 256(1.4)(b) to apply. If a shareholders' agreement were to provide that should a shareholding employee ceased to be employed by the corporation his shares will automatically be acquired by the corporation, no one would appear to have a right to cause the corporation to acquire the employee's shares.

In rejecting a taxpayer view that s. 256(2) permits the multiplication of the small business deduction (“SBD”) in the same corporate group in certain situations, CRA stated:

[S]ubsection 256(2) was introduced as a relieving measure to permit, among other things, each of two corporations operating separate businesses, which become associated with each other because of the integration of a third corporation into the group, to claim the entirety of the SBD that it would otherwise have the right to claim.

The Directorate provided the example of an incorporated construction business and incorporated restaurant business each wholly-owned by two spouses (Mr. and Mrs. X), which are not associated with each other and each entitled to the full SBD. Mr. and Mrs. X incorporate Corporation C, which carries on a tool manufacturing business and become equal shareholders. By making the election, Corporation C waives the claim for the SBD, but the other two corporations continue to receive the full amount of their SBD, notwithstanding that they would have become associated under s. 256(1)(d) but for such election.

A real estate rental company (ABco), which otherwise would be associated with its two 50% shareholders (Aco and Bco, which are wholly-owned by two brothers) pursuant to s. 256(2), are not associated as a result of ABco electing under s. 256(2) not to be associated with Aco and Bco. Similarly, CDco), which carries on an active business and has incurred loans to Aco and Bco (each 33% shareholders) elects under s. 256(2) not to be associated with Aco and Bco.

CRA stated:

[T]he election under subsection 256(2) applies only for the purposes of section 125. Thus …Bco and ABco would continue to be associated for the purposes of all other provisions of the Act, including subsection 129(6). Thus, subparagraph 129(6)(b)(i) would apply to deem the amounts paid to ABco as rent by Aco and Bco to be income from an active business carried on by it in Canada. The same reasoning would apply … for Aco, Bco and CDco.

After describing an intricate and redacted factual situation regarding the eligibility to the small business deduction (SBD) of numerous Canadian-controlled private corporations for three sets of taxation years, CRA concluded that, absent the s. 256(2) election, all of the corporations were associated with each other for the 2003, 2004 and 2005 taxation years and that, even if all the third corporations were to make the election for the 2003, 2004 and 2005 taxation years, and in light of s. 125(5.1), no amount in respect of a SBD could be claimed by any of the corporations for the 2005 taxation year, and that the SBD would only be available for one of the corporations for its 2003 taxation year and for two of the corporations for their 2004 taxation year. Before so concluding, CRA noted:

We understand that it has been the policy of the Compliance Programs Branch since October 21, 1993, to administratively accept a late-filed election from a third corporation where the following two conditions are satisfied:

(a) the T2 return of the electing corporation for the particular year is not statute-barred or, if statute-barred, the corporation did not claim any amount as a business limit for the year; and

(b) where the T2 return for the particular year of any other corporation to which the election applies is statute-barred, there will be no revision to the amount of the business limit allocated to that corporation for the taxation year.

X wholly-owned Aco, which held 70% of the shares of Cco, which wholly-owned Dco. X also held 25% of the shares of Bco, with the other 75% held by Y. Bco held the other 30% of the Cco shares. All corporations had calendar taxation years. On January 1 of a particular taxation year, X sold all of its shares in Bco to Y so that after this transaction, Y held 100% of the issued and outstanding shares of Bco. On January 1 of a particular taxation year, X sold all of X’s shares of Bco to Y. Cco and Dco made the s. 256(2) election for the particular year not to be associated with Bco.

Did Cco and Dco remain associated with Aco in the particular taxation year if each had made an election under s. 256(2) not to be associated with Bco only? CRA responded:

[S]ubsection 256(2) would not apply in the particular taxation year … because Aco and Bco would be associated with each other in the particular year but for subsection 256(2). Indeed, these two corporations would be associated in the particular year under paragraph 256(1)(c) given that, at some point in the particular year (January 1 of the particular year), X, who controls, directly or indirectly, in any manner whatever, Aco, would be related to Y, who controls, directly or indirectly, in any manner whatever, Bco, and would own at least 25% of the issued shares of a non-excluded class of the capital stock of each corporation (Aco and Bco). The first condition for the application of section 256(2) would therefore not be met.

If it is instead assumed that Y held 100% of the issued and outstanding shares of Bco throughout the particular taxation year, did Cco and Dco remain associated with Aco in that taxation year for s. 125 purposes if each had made an s. 256(2) election not to be associated with Bco only? CRA responded:

Cco and Dco would not be associated in the particular year with Aco and Bco for the purposes of section 125 if those two corporations made an election, pursuant to subsection 256(2), not to be associated with each of the two corporations. Indeed, it is our Directorate's position that in the context of subsection 256(2), the phrase "with, the same corporation" in that subsection can be interpreted to mean "both of the other corporations" as well.

A held all the shares of Aco (with calendar years) and 90% of the voting shares of Bco (with June 30 year ends), and his common law partner (B) held the other 10%. B also wholly-owned Cco (with calendar years) and Dco (with June 30 year ends).

On December 31, 2004, A transferred all his shares of Bco to B, and B simultaneously (or immediately thereafter) transferred all her shares of Cco to A. Aco elected under s. 256(2) not to be associated with either Bco or Cco.

CRA confirmed that Aco and Bco, Cco and Dco and Aco and Cco were associated with each other for the 2004 taxation year because there was a point in time in that year in which each had common control. Conversely, but for the s. 256(2) election, Bco and Cco, and Bco and Dco were not associated in that year.

CRA then stated:

Bco and Cco would be deemed to be associated with each other in the 2004 taxation year by virtue of subsection 256(2). Indeed, as indicated above, Bco and Cco would not be associated with each other but for subsection 256(2) and would be associated with the same third corporation, namely Aco.

Similarly, Aco and Dco were deemed to be associated with each other in the 2004 taxation year by virtue of subsection 256(2). In particular, as indicated above, Aco and Dco would not be associated with each other but for subsection 256(2) and would be associated with the same third corporation, Cco.

In addition, Bco and Dco would be deemed to be associated with each other in the 2004 taxation year by virtue of subsection 256(2). In particular, as indicated above, Bco and Dco would not be associated with each other but for subsection 256(2), and would be associated or deemed to be associated under subsection 256(2) with the same third corporation, namely Cco.

However … under subsection 256(2), Aco could elect in prescribed form for the 2004 taxation year not to be associated with either Bco or Cco. As a result of this election, Aco would be deemed not to be associated with either Bco or Cco during the 2004 taxation year and to have a nil business limit for that year. Consequently, Bco would have a business limit for itself, and Cco and Dco would be able to share a further business limit between them.

Four brothers (A, B, C and D) each held 25% of the shares of Opco 1 and corporations wholly-owned by the respective brothers (Aco, Bco, Cco and Dco) each held 24% of the shares of Opco 2, which held 100% of the shares of five subsidiaries (S 1, S 2, S 3, S 4 and S 5). Regarding the application of s. 256(2) where s. 129(6) otherwise applied to deem interest paid by S 1, S 2, S 3, S 4 and S 5 on loans from Aco, Bco, Cco, and Dco to be active business income, CCRA stated:

[A] third-party corporation may elect pursuant to subsection 256(2) to no longer be associated with more than one other corporation for which it represents a third-party.

In the Particular Situation, Aco, Bco, Cco, and Dco are corporations that would not otherwise be associated with each other but for subsection 256(2). They are deemed to be associated with each other pursuant to subsection 256(2) because they are each associated with the same third corporation, namely Opco1. They are also deemed to be associated with Opco2 and its subsidiaries for the same reason.

It appears to us that if for a particular year Opco1 (the third corporation) elected pursuant to subsection 256(2) not to be associated with Aco, Bco, Cco, and Dco, for the purposes of section 125, Aco, Bco, Cco, and Dco would not be associated with each other nor would they be associated with Opco2 and its subsidiaries. In addition, Opco1 would be deemed to have a nil business limit for that particular year and Aco, Bco, Cco, and Dco would each have a business limit determined under subsection 125(2) or (3) as the case may be.

Despite the filing of this election by Opco1, we are of the view that Aco, Bco, Cco, Dco, Opco1, Opco2, S 1, S 2, S 3, S 4 and S 5 would continue to be associated for the purposes of all other provisions of the Act, including subsection 129(6). Thus, subparagraph 129(6)(b)(i) could apply to deem the amounts paid by the five subsidiaries of Opco2 as interest to Aco, Bco, Cco, and Dco to be income from an active business carried on by them in Canada.

Three CCPCs, Aco and Opco, and Bco and Opco, are associated. Aco and Bco, which are not otherwise associated, are deemed by s. 256(2) to be associated for purposes of the Act.

Opco elects in prescribed form pursuant to s. 256(2) not to be associated with either Aco or Bco, so that it is deemed for the purposes of s. 125 not to be associated with Aco or Bco, and its business limit is deemed to be nil.

Having regard to interest paid by Opco to Aco and Bco which was deductible in computing its active business income, CCRA indicated that Aco and Bco would continue be associated (following the election) for the purposes of s. 129(6).

Re RC's requirements for acceptance of a late-filed Form T2144.

An election by a corporation under s. 256(2) will not affect the status of the other two corporations in question for purposes of ss.129(6) and 181.5(7).

Example of the application of s. 256(2).

An election made by a corporation under s. 256(2) not to be associated is valid only for the purposes of section 125 and not for purposes of the deeming rule in s. 129(6)(b).

CRA accepted a representation that the professional corporations (ProCorps) whose respective employees and controlling shareholder was a partner of a professional partnership and which provided professional services to the partnership at a fee were not partners of each other, including representations that each ProCorp is free to compete with the partnership. CRA accordingly ruled that the ProCorps are not required to share the small business deduction under the specified partnership income rules.

CRA went on to provide an opinion:

that the incorporation of ProCorps to provide the Professional Services to the Partnership will not, in and of itself, cause subsection 256(2.1)...to be applicable to the ProCorps.

In the course of a general discussion, the Directorate described the following factors (taken from Maureen Donnelly and Allister Young, "Deemed Association Cases: Probative Factors in a Predictive Model," (1992) Canadian Tax Journal, Vol. 40, No. 2, at p.367) as being “useful in determining whether subsection 256(2.1) may apply in a particular situation”:

The following recurring factors have probative value in the ultimate judicial determination of whether or not one of the main reasons for the separate existence of two or more corporations is to reduce the amount of taxes that would otherwise be payable:

1) the taxpayer's awareness of the tax advantages of non-association,

2) the economic interdependence of the businesses carried on by the corporations,

3) the existence of alternate corporate structures,

4) the relationship between the controlling shareholders of the corporations within the group, and

5) the extent to which the corporations share a common "directing mind.”

Four brothers and an unrelated individual, who were actively involved in a succession of construction projects, through their respective management corporations (of which they and their spouses were employees), each subscribed for 20% of the shares of the particular ‘Operator” (which had no employees) that was formed to carry out each such construction project. Towards the conclusion of the project, a management fee is paid to the management corporations, equivalent to 20% of sales. After noting that this structure appeared to be intended to maximize the small business deductions by the five managementcos, CRA stated:

According … Hughes Homes … 98 DTC 1082 … taxpayers have the burden of demonstrating that the fundamental reasons for the existence of the corporations are not tax-related. … [I]t seems unlikely that the corporate structure was put in place by the Individuals for reasons other than tax:

• … an operating corporation is created and used for each of the projects involving a real business risk;
• the payment of management fees to the management corporations instead of the payment of dividends (if the Operator had paid dividends, the management corporations would have been specified investment business corporations);
• … 4 out of 5 of the individuals are related by blood.

Before going on to find that s. 256(6) did not apply, the Directorate indicated that s. 256(3) did not apply, stating:

Subsections 256(3) and 256(6) are similar. However, subsection 256(3) never appears to apply where subsection 256(6) applies. Subsection 256(6) provides a deeming rule that there is no de jure or de facto control at a particular time where the required conditions are satisfied. If there is no de jure or de facto control at a particular time, a corporation cannot be associated at the particular time by virtue of being “controlled, directly or indirectly...” for the purposes of subsection 256(3), and subsection 256(3) then does not apply. On the other hand, the deeming rule created by subsection 256(3) (i.e., that the corporations are deemed not to be associated) does not affect the application of subsection 256(6). Subsection 256(6) is relevant where a corporation would, but for subsection 256(6), be controlled, directly or indirectly in any manner whatever by a person (see preamble). In addition, given that the conditions set out in paragraphs 256(6)(a) and (b) are almost identical to the conditions set out in paragraphs 256(3)(a) and (b), subsection 256(3) does not apply where subsection 256(6) does not apply.

In the context of noting that a corporation whose capital was held by a municipality nonetheless would not qualify for s. 149(1)(d.5) exemption if it was controlled (as described s. 256(5.1)) by an entity referenced in s. 149(1.3)(b), CRA stated (TaxInterpretations translation):

The phrase "controlled directly or indirectly in any manner whatever" is a concept discussed in subsections 256(5.1) and (6) of the Act. Generally, this expression refers to a dominant entity that has direct or indirect influence that results in de facto control of a person.

S. 188 of the Quebec Business Corporations Act provided that "Unless otherwise provided in the by-laws, in the case of a tie, the chair of the meeting casts the tie-breaking vote." Where the shares of a corporation are held equally by two shareholders and s. 188 applies, does the chair have de facto control of the corporation under s. 256(5.1)?

CRA stated (TaxInterpretations translation):

[W]e do not believe that section 188 of the QBCA, respecting the conduct of an annual shareholders meeting, automatically confers de facto control of a corporation on the person occupying the post of chair of the meeting and having a tie-breaking vote.

In this regard, we note that section 188 of the QBCA provides that "Unless otherwise provided in the by-laws, the president of the corporation chairs a shareholders meeting," and that the chair, in general, is elected by the directors of the corporation.

The determination of de facto control ... remains a question of fact ... .

For example, we note that ... Brownco ... and Avotus ... recognized that the right to a tie-breaking vote attaching to the position of chair of the board of directors or of the shareholders' meeting accorded, to a shareholder holding 50% of the voting shares of a corporation, an influence whose exercise would result in de facto control of the corporation.

All the voting common shares of Opco (carrying on an active business) are held by a discretionary inter vivos trust which was settled by the uncle of the four beneficiaries (the "children"), and its non-voting retractable preferred shares (which were issued on an estate freeze and have a value approximating 50% of the value of Opco) are held by a spousal testamentary trust, of which the four children are the beneficiaries upon the death of the surviving spouse (i.e., their mother), and of which their father was the testator).

If the testamentary trust redeemed its preferred shares for a note, would it be affiliated with Opco following such retraction?

It would be a question of fact as to whether the holding of the debt by the testamentary trust resulted in de facto control of Opco (as described in s. 256(5.1)). In such event, the exception in s. 40(3.61) would not prevent the application of the stop-loss rule in s. 40(3.6) "given that the testamentary trust is not an estate." CRA also noted [TaxInterpretations translation] that although IT-64R4 indicates that the holding of a large debt is relevant to determining whether the holder has de facto control of the debtor:

This factor nonetheless was considered of little importance in Technical Interpretation XXX where the debt represented virtually all the net value of a corporation but all its assets consisted of readily marketable securities which could serve to repay the debt held by an estate without imperiling its investment operations.

Transport M.L. Couture was discussed as an example of the application of s. 256(5.1).

At issue was whether a start-up Canadian private corporation engaged in SR&ED was a Canadian-controlled private corporation (“CCPC”). Shareholder1, Shareholder2 and Shareholder3, which were controlled by X (a non-resident of Canada), held less than 41% of the (Class A) voting shares of the Corporation, having a nominal economic value; and resident Canadian investors together with the trust (the “Trust) referred to below, held the balance of the Class A shares, with the Trust apparently holding the majority of such shares. Shareholder 1 (apparently, the main corporate vehicle for X), by virtue of directly (or indirectly) holding non-voting participating shares, had an equity interest in the Corporation of over 60%.

The Trust (accepted by the Directorate as being a resident trust) held a sufficient number of the voting shares of the Corporation in order for the Corporation to qualify as not being controlled de jure by X and Shareholder1. The three board members were appointed by the three groups of shareholders (the Trust, Shareholder1 etc. and the Trust). Such designates were the CEO (who was appointed by the Trust), X and a third individual. The trust had a sole beneficiary (the “Beneficiary”). The Trust had a resident protector (related to X), who had the right to appoint or remove trustees (and who, in fact, were related to X) and who, in turn, was appointed and could be removed, by the resident settlor. Any provision of the Declaration of Trust could be amended by the trustees and the protector.

An agreement (the “Agreement”) among the shareholders accorded veto rights to Shareholder1 over most major decisions of the Corporation.

Headquarters found that the Corporation was not a CCPC based on the significant influence exercisable by the non-resident (X) as a factual matter. Numerous factors listed included:

• the extensive veto right of Shareholder1 (but with Headquarters noting that “The holding by a shareholder of a veto right with respect to the amalgamation or dissolution of a corporation, amendments to the articles or by-laws of a corporation, the issue of additional shares or the purchase of shares of a corporation does not in itself automatically result in de facto control of the corporation by the shareholder”
• “the high degree of artificiality in the addition of the Trust to the implemented structure” (with the Trust having a nominal economic interest and trustees related to X, and with the Trust appearing “to have played an accommodation role”)
• the membership of X on the board (with a suggestion of significant influence on the other two members)
• the reliance of the Corporation if conducting its continued R&D work on funding commitments of Shareholder1

A Quebec corporation (the “Corporation”) whose only outstanding shares were common shares, agreed in the Contract with a non-resident partnership (the "Limited Partnership") to issue Class A voting preferred shares to the Limited Partnership in tranches as R&D work was performed and met milestones. Such shares, when issued, would give the Limited Partnership a majority of the voting rights. The shareholders of the Corporation, the Limited Partnership and the Corporation entered into the Agreement providing that important decisions must include the approval of the director representing the Limited Partnership.

After finding that the general partner of the Limited Partnership had de jure control of the Corporation, the Directorate went on to find that the Limited Partnership also had de facto control given that its capital invested was the only source (other than grants and tax credits) of funding for the research work, the retractable nature of its Class A shares, its influence over strategic decisions. Notwithstanding Silicon Graphics, the concept of de facto control was not to be restricted to where there is a clear right and ability to effect a significant change in the board of directors, or to influence in a very direct way the shareholders who would otherwise have the ability to select the board of directors.

In 1999-0008405 F, CRA applied IT-64R4 in generally commenting that s. 84.1 could apply where an individual who sold the individual’s shares of a corporation to another corporation in consideration for a demand loan the value of which equaled 80% of the total value of such purchaser's assets. Has Silicon Graphic affected this position? CRA indicated that following the subsequent decisions in Mimetix Pharmaceuticals, 9044-2807 and Lenester Sales “there was no need to change its position on de facto control and that it was of the opinion that the criteria contained in … IT-64R4 [paras. 21, 23] remained valid for determining whether a person or group of persons has de facto control of a corporation.”

CRA indicated, regarding a debenture that was convertible into shares of the CCPC issuer by the holder (Lenderco) in order to safeguard the creditor rights of Lenderco, that the phrase "controlled, directly or indirectly in any manner whatever" referred to de jure in addition to de facto control under subsection 256(5.1).

With respect to a situation where one corporation ("Supplyco") owned 50% of the shares of another corporation ("Distributorco") and the majority of the products sold by Distributorco were acquired from Supplyco, RC stated that "a franchise or similar agreement which provides one party, such as Supplyco, a measure of control over the business carried on by another corporation, such as Distributorco, would not in itself result in Supplyco having control over Distributorco provided that the parties otherwise deal at arm's length and the purpose test referred to therein is satisfied. However, in a situation where such control over the business carried on by Distributorco is combined with item (d) in paragraph 19 of IT-64R3, being economic dependence on Supplyco as its single supplier, it is our view that Supplyco would have de facto control ... ."

With respect to whether an incorporated professional business would be subject to de facto control by a professional body where an order has been issued by the body as a result of disciplinary action or where a quasi-professional has not achieved a certain level of expertise in his professional field, RC commented that the reference to "other similar agreement or arrangement" referred to an agreement or arrangement that was motivated by business relationships rather than some other factor.

A submission that a 60% non-resident shareholder did not control what was alleged to be a CCPC by virtue of terms of the shareholders' agreement that required various decisions to be made with the consent of at least 61% of the shareholder votes was rejected on the basis that the non-resident had de jure control. RC effectively indicated that the defined phrase included de jure control.

"In addition to the factors expressed in paragraph 19 of IT-64R3, the Department would also consider the composition of the board of directors, the control of day-to-day management and operation of the business and the ownership of a large debt of the corporation in the determination of whether any influences exist. In the case of related persons, the Department has stated that it would look at a person's ability to demonstrate their economic independence and autonomy in determining whether there exists significant influence over a family member who is a shareholder of the corporation. Where a shareholder has no source of income and relies on the income of a related person, we may conclude that the related person providing the financial support may have influence over that shareholder ... ."

With respect to the situation where an incorporated professional is required to carry on business under the supervision and control of an unrelated third party, for example, because of an order issued by a governing body following disciplinary action being taken, RC observed that the expression "or other similar agreement or arrangement" should be interpreted as referring only to agreements and arrangements of the same general nature enunciated, i.e., those that are motivated by business relationships which the parties share. It was also noted that the "similar agreement or arrangement" need not be evidenced in writing.

Where a shareholder's agreement between two 50% shareholders provides that each shareholder will elect two members of the board of the directors and that one director elected by the first shareholder will be the chairman of the board and will have a casting vote, that first shareholder will have the de facto control described in s. 256(5.1).

Discussion of whether persons have effective control with respect to a substantial block of shares in a widely-held corporation where there is effective control over the composition of the board of directors.

"The introduction of subsection 256(5.1) expands the judicially based de jure control concept to include de facto control situations where the expression 'controlled directly or indirectly in any manner whatever' is used. In other words, that expression refers to both de jure and de facto control whereas the words 'control' or 'controlled' refers to the judicially adopted de jure control only unless a specific provision defines control for a specific purpose such as subsection 186(2)."

Where a Canadian-resident private corporation owns all the shares of a resident Canadian corporation ("N") which, in turn, owns all the shares of a Canadian corporation ("A"), A will not qualify as a Canadian-controlled private corporation because of the direct de jure control by N. The introduction of the concept of de facto control by the enactment of s. 256(5.1) did not eliminate the relevance of direct de jure control by a non-resident person.

Father has his corporation invest $150,000 in a corporation owned by his daughter and her husband, by acquiring shares that were retractable at any time that is three years after their issue. The retractability of the shares gave father's corporation influence that, if exercised, would result in the daughter's corporation being controlled by father's corporation at the particular time.

RC rejected a submission that "control in fact" means control by a person who does not otherwise control the corporation where that person has any direct or indirect influence that, if exercised, would give that person the ability to cast or cause to be cast, in such manner as that person may determine, the majority of votes in the election of the board.

A corporation (Brother-Portfolioco) owned by an individual (Brother) sells a 50% shareholding in Opco to a corporation (Sister-Holdco) owned by Brother’s sister (Sister) – but with a capital gains reserve being claimed because most of the sales proceeds are deferred. After noting that, under s. 40(1)(a)(ii), the availability of the reserve turned on Brother-Portfolioco and Brother not having de facto control of Sister-Holdco and on Sister-Holdco not having de facto control of Brother-Portfolioco, CRA commented on the expansion of de facto control under s. 256(5.11) stating:

As provided for in subsection 256(5.11) and the applicable jurisprudence, any factor, whether contractual, commercial, economic, moral or familial, may be taken into consideration in order to determine whether a person or group of persons has influence, direct or indirect, the exercise of which would result in de facto control of a corporation ("Influence"). In this regard, only a complete review of all relevant facts, actions, circumstances and documents surrounding a particular situation can enable us to determine whether a person has Influence over a Corporation.

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.

CRA first noted that as "Pubco, has a contingent right pursuant to the Pledge to acquire all the Aco shares from its shareholders," Pubco would be deemed by s. 251(5)(b) to control Aco. In then finding that s. 256(6) would not apply to override this result, CRA noted that "the question is whether the purpose of the Pledge would be to safeguard rights and interests of Pubco in respect of any indebtedness owing to Pubco." After discussing authorities on "indebtedness" including Fingold, Beament and Tonolli, CRA stated:

[T]here was no known liability or claim for which the Indemnified [sic] Parties may have liability under the Indemnification Agreement. Consequently… the rights and interests of Pubco under the Indemnity Agreement…do not seem to represent indebtedness the whole or any part of the principal amount of which was outstanding in the context of subparagraph 256(6)(b)(i).

Given the application of s. 256(6) to the entire Act, if the conditions set out in that subsection are otherwise satisfied, can CRA confirm that:

(i) The acquisition of control rules would not apply in a situation where the controlling entity holds (temporarily, in all likelihood) more than 50% of the voting rights for the shares issued by a corporation; and

(ii) If the dominant entity is a public corporation or a Crown corporation, the controlled corporation would not lose its CCPC status, if applicable.

CRA responded:

[(i)] …[I]n general, the acquisition of control rules, including subsection 249(4), would not apply in this situation.

[(ii)] ... [P]rima facie, the controlled corporation would not lose its status as a "private corporation" or as a "Canadian-controlled private corporation" in the situation before us.

After indicating, regarding a debenture that was convertible into shares of the CCPC issuer by the holder (Lenderco) in order to safeguard the creditor rights of Lenderco, that the phrase "controlled, directly or indirectly in any manner whatever" referred to de jure in addition to de facto control under subsection 256(5.1), CRA responded to a further question as to whether s. 256(6) only has the effect of deeming a corporation not to be controlled de jure and has no effect on "controlled, directly or indirectly in any manner whatever," so that both s. 256(6) and 256(3) would not cover de facto control by a creditor for the purposes of the definition of "Canadian-controlled private corporation", CRA stated:

[W]here it is determined that all of the conditions for the application of that subsection are met, the controlled corporation is deemed not to have been controlled in law or fact by the controller at the particular time.

Although s. 256(6)(a) was satisfied, s. 256(6)(b) was not satisfied regarding the shareholding of Holdco1 in Opco1. Although CCRA accepted that one of the reasons for Holdco1 controlling Opco1 was to safeguard its rights with respect to the shares it owned and which Opco1 was to purchase for cancellation based on Opco1’s financial performance, Holdco1 also wanted such control in order to indirectly protect its investment in a building that it had leased to Opco1 for use in Opco1’s business. Such building had a value significantly greater than the amount invested by Holdco1 in the shares of Opco1.

S. 256(6)(b) also was not satisfied because the Opco1 shares were not redeemable by Opco1 but instead were required to be repurchased for cancellation by Opco1 based on its financial performance.

In the course of a non-committal response as to whether there is an acquisition of control of a public company when its shareholders exchange most of their shares for shares of a Newco, CRA responded:

[S.] 256(6.1) … is the legislative response to … Parthenon Investments … . Briefly, one of the purposes of subsection 256(6.1) is to take into account, for the purpose of the application of the law, the simultaneous control of a corporation at different levels.

The Directorate followed Parthenon in finding that a private corporation, whose shares were held by a public corporation as an intermediary in a chain of control, and a second private corporation, which had intermediate non-resident management companies held by Canadian residents in the chain of control, were CCPCs for the period prior to December 1, 1999, the effective date of the introduction of s. 256(6.1).

With respect to cases prior to December 1999, it was the Agency's view "that Parthenon does not apply to restrict control of a corporation to only ultimate control for purposes of provisions other than the CCPC definition such as paragraph 55(3.1)(a), paragraph 88(1)(d) and the definition of restricted financial institution".

The questioner asserted:

It is generally accepted that the "particuar time on a day" when "control of a corporation is acquired" is the time at which the transaction documents are signed.

The questioner then postulated that the control of ABC Inc. is acquired by Mr. X at 13:30 on July 26, 2013 when the signature of the sales agreement, endorsement of the share certificates and payment of the purchase price take place. However, given that the cut-off for financial purposes will be the end of the day, the following clause was inserted in the sale agreement:

Notwithstanding the time of the signing of this agreement between the parties, the parties agree that for the purposes of subsection 256(9), the time when the control of ABC Inc. will be acquired by Mr. X will be at 0 hours on Saturday, July 27, 2013.

CRA stated (TaxInterpretations translation):

Subsection 256(9) does not allow a corporation to choose a time of acquisition of control that would be different from when the control of the corporation is actually acquired.

... ABC Inc. could not choose for the purposes of subsection 256(9) to have an acquisition of control by Mr. X occur at 0 hours on Saturday, July 27, 2013, if Mr. X actually became the owner of the shares of the capital stock of ABC Inc. at 13:30 hours on Friday, July 26, 2013 and acquired the control of ABC Inc. at that time.

1990 Round Table, Q.39: Respecting where Corporations A and B are amalgamated on the same day in which control of Corporation B was acquired by Corporation A, and no election is made under s. 256(9).

Parentco, which had a January 31 year end, sold one of its subsidiaries (Subco1) at a capital loss on January 14, 2000, and amalgamated with its other subsidiary (Subco2) on April 17, 2000. On April 18, 2000, one of its 50% shareholders sold its shares to the other shareholder, resulting in an acquisition of control. Amalco then made an s. 111(4)(e) designation to step up land and building. CCRA indicated:

Amalco's first taxation year would … have begun on the first instant of April 17, 2000. …

[C]ontrol of Amalco would be deemed to be acquired at the beginning of April 18, 2000 pursuant to subsection 256(9). In addition, Amalco's taxation year that would have commenced on April 17, 2000 would end at midnight on April 17, 2000, and Amalco would have a new taxation year commencing at the beginning of April 18, 2000. …

Consequently, for the purposes of calculating Amalco's CDA, the dispositions [pursuant to s. 111(4)(e)] would occur in Amalco's taxation year beginning at the beginning of April 17, 2000 and ending at midnight on April 17, 2000.

At 2 p.m. on June 1, 1989, all of the shares held by Company A in Company B (which prior to that time was controlled by it) are redeemed, with the result that the minority shareholder of Company B (namely, Company C) controls Company B. Company C is deemed to have acquired control of Company B at the beginning of June 1, and Company A will be deemed to have relinquished control immediately before the beginning of that day. Consequently, at no time in the year will Company A and Company C simultaneously have control of Company B.