Principal Issues: a) Whether there is a difference between the scope of paragraphs 256(3) and 256(6). Since paragraph 256(3) applies for the purposes of the association rules and subsection 256(6) for the purposes of the Act, whether subsection 256(3) is relevant; b)(i) Whether the acquisition of control rules would not apply by reason of subsection 256(6) where the controller owns more than 50% of the voting rights of the issued and outstanding shares of the capital stock of a corporation; and b)(ii) Whether the controlled corporation would lose its CCPC status where the controller is a public corporation or a Crown corporation.
Position: See response below.
Reasons: See response below.
FEDERAL TAX ROUNDTABLE
APFF CONFERENCE 2010
Question 5
Application of subsections 256(3) and 256(6).
Subsections 256(3) and (6) are exceptions to the associated-corporation rules. Paragraphs 9 and 12 of Interpretation Bulletin IT64-R4 (footnote 1) provide examples for each of these provisions. In general, it could be concluded that subsection 256(3) deems corporations that would otherwise be associated to be deemed not to be so associated, while subsection 256(6) deals with situations where a "controlled" corporation is deemed not to have been so controlled by the dominant entity in question. Subsection 256(6) applies throughout the Act.
(a) In IT-64R4, the Agency provides this example of the application of subsection 256(3):
"... a manufacturing corporation that has financed a dealer corporation and has retained control, directly or indirectly in any manner whatever, of that dealer corporation, until the manufacturing corporation has recovered its advances.”
As for subsection 256(6), the example is as follows:
"[...] a manufacturing corporation establishes a dealership in another corporation and, under the terms of the financing arrangement, the operator or dealer will not acquire active control of the dealership corporation until certain financial obligations to the manufacturing corporation are met.”
These two examples are very similar.
Could the Agency provide an example of an application to highlight the differences in each of these provisions?
Our understanding of these subsections is that 256(3) applies for the purposes of the association rules and 256(6) applies for the purposes of the Act. How is subsection 256(3) necessary if subsection 256(6) is for the purposes of the Act?
(b) Could the Agency confirm that, given the application of subsection 256(6) to the entire Act, if the conditions set out in that subsection are otherwise satisfied:
(i) The acquisition of control rules would not apply in a situation where the controlling entity holds (temporarily, in all likelihood) more than 50 per cent of the voting rights on the shares issued by a corporation. Would that apply both at the time the shares are issued to it and at the time of their possible redemption?
(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 Response to Question 5(a)
The CRA is responsible for the interpretation and application of the Act as passed by Parliament. The Department of Finance is responsible for the development of tax policy and amendments to the Act.
Subsections 256(3) and 256(6) are two relieving measures that the CRA administers according to their conditions of application and the facts of a particular situation.
The rationale for these two relief provisions in the Act is a tax policy question that should be directed to the Department of Finance.
Furthermore, we agree with you that subsection 256(6) has a much broader scope than subsection 256(3).
CRA Response to Question 5(b)(i)
Although the answer to such a question can only be established with certainty after analyzing all the relevant facts in a given situation, it is our view that, in general, the acquisition of control rules, including subsection 249(4), would not apply in this situation.
CRA Response to Question 5(b)(ii)
While the answer to such a question can only be answered with certainty after analyzing all the relevant facts in a given situation, we are of the view that, prima 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.
Jean Lafrenière
(613) 941-2956
October 8, 2010
2010-037316.
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Interpretation Bulletin IT-64R4 (Consolidated), "Corporations: Association and Control," August 14, 2001.