Principal Issues: [TaxInterpretations translation] Are all the conditions of subsection 127(10.22) of the Income Tax Act satisfied in the particular situation?
Position: No.
Reasons: One of the conditions in subsection 127(10.22) is that the particular corporation has issued shares to one or more persons to whom the other corporation has issued shares. In this case, although Opco 1 issued shares directly to Investco 1 and Investco 2, the latter do not hold shares of Opco 2.
XXXXXXXXXX 2009-034384 André Gallant January 15, 2010
Dear Sir,
Subject: Application of subsection 127(10.22) of the Income Tax Act
This is in response to your letter of October 6, 2009, in which you requested our opinion on the above subject.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
More specifically, you described a situation where Investco 1 and Investco 2 are two corporations whose main activity is to invest in venture capital. These two corporations are Canadian-controlled private corporations ("CCPCs") as defined in subsection 127(5) and are not related or associated with each other for the purposes of the Act. Investco 1 and Investco 2 also invested in Opco 1 and Opco 2, which are both CCPCs.
The voting and participating shares of Opco 1 are held by Investco 1 (30%), Investco 2 (30%) and its two founding shareholders (20% each). None of these shareholders are related or associated with each other for the purposes of the Act and none of them has de facto control of Opco 1. The voting and participating shares of Opco 2 are wholly owned by Holdco. Holdco is a CCPC whose shareholders are Investco 1 (30%), Investco 2 (30%) and the three founding shareholders of Opco 2 (13.33% each). None of these shareholders has de facto control of Opco 2. The founding shareholders of Opco 1 and Opco 2 have no links of any kind between them.
Therefore, as a result of the application of paragraphs 256(1)(b) and 256(1.2)(a), you consider Opco 1 and Opco 2 to be associated corporations since Investco 1 and Investco 2 are deemed to be a group of persons that directly or indirectly control both corporations.
You wish to know if subsection 127(10.22) can apply to your situation so that Opco 1 and Opco 2 are not associated corporations for the purposes of subsection 127(10.2).
Our Comments
It appears to us that the situation described in your letter and summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that may be helpful.
Subsection 127(10.22) allows two corporations that are associated to not share the "expenditure limit" under subsection 127(10.2), subject to subsection 127(10.23). The relief in subsection 127(10.22) applies when all of the following conditions are satisfied:
- a particular Canadian-controlled private corporation is associated with another corporation in circumstances where those corporations would not be associated if the Act were read without reference to paragraph 256(1.2)(a);
- the particular corporation has issued shares to one or more persons who have been issued shares by the other corporation; and
- at least one of the shareholders of one of the corporations is not a shareholder of the other corporation.
By virtue of subsection 127(10.23), subsection 127(10.22) applies to the corporations referred to therein only if the Minister is satisfied that the following two conditions are met:
- the corporations are not otherwise associated under the Act; and
- the fact that there are one or more shareholders of one corporation who are not shareholders of the other corporation is not intended to satisfy the conditions listed in subsection 127(10.22).
It is our view that the relief in subsection 127(10.22) is not applicable to your hypothetical situation since the second condition of that subsection is not satisfied. Although Opco 1 issued shares directly to Investco 1 and Investco 2, they do not hold shares of Opco 2.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.