Principal Issues: In a given situation, whether two corporations are associated pursuant to subsection 256(1).
Position: The two corporations are associated with each other pursuant to paragraph 256(1)(d) of the Act.
Reasons: Wording of the Act.
2009-031082 XXXXXXXXXX G. Gladu (613) 946-5344 March 31, 2009
Dear Sir,
Subject : Request for technical interpretation - Associated corporations
This is in response to your letter of February 12, 2009, in which you requested our comments on the above subject in relation to the situation described below.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
1) The Particular Situation
a) An individual ("A") held 50% of the voting and participating shares of the capital stock of a corporation ("AB Inc.").
b) Another individual ("B") held 100% of the voting and participating shares of the capital stock of another corporation ("B Inc."). B had effective (de jure) control of B Inc. for the purposes of the Act.
c) B Inc. held 12.5% of the voting and participating shares of the capital stock of AB Inc.
d) B held 37.5% of the voting and participating shares of the capital stock of AB Inc.
e) B was the brother of A. A and B were therefore related persons within the meaning of paragraphs 251(2)(a) and 251(6)(a).
(f) A and B formed a group of persons having effective (de jure) control of AB Inc. for the purposes of the Act.
2) Your Question
You wish to know our position on whether AB Inc. and B Inc. are associated with each other by virtue of subsection 256(1) in the particular situation.
3) Our Comments
We are of the view that in the particular situation, AB Inc. and B Inc. are associated with each other by virtue of paragraph 256(1)(d). Specifically, the person (in the particular situation, B) who controls one of the two corporations (in the particular situation, B Inc.), directly or indirectly, in any manner whatever, was related to each member of the group of persons (in the particular situation, A and B) who control the other corporation (in the particular situation, AB Inc.), directly or indirectly, in any manner whatsoever, and that person (in the particular situation, B) holds at least 25% of the issued shares of a class, other than a specified class, of the capital stock of the other corporation (in the particular situation, AB Inc.).
For greater certainty, in order to determine whether B is related to each member of the group that controls AB Inc., B, as owner of shares of the capital stock of B Inc. and AB Inc., would be deemed, as a shareholder of B Inc., to be related to himself as a shareholder of AB Inc. by virtue of subsection 256(1.5).
Please note that this opinion is not an advance income tax ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, is not binding on the CRA in respect of any particular factual situation.
We hope that our comments are of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
Manager
Mergers and Acquisitions Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.