Principal Issues: Whether it is sufficient for municipalities to hold 90% of the voting shares of a corporation with share capital in order for the corporation to be exempt from tax under 149(1)(d.5).
Position: No.
Reasons: The requirement to own 90% of capital (including non-voting shares) and the requirement to be entitled to 90% of votes at shareholder meetings are different and distinct requirements. Amendments to 149(1.3), if enacted as proposed, expand the application of the voting requirement from annual meetings of shareholders to any meetings of shareholders and add a de facto control test.
2008-026447 XXXXXXXXXX Eliza Erskine (613) 274-3022 May 1, 2008
Dear XXXXXXXXXX :
Re: Interaction of Paragraph 149(1)(d.5) and Subsection 149(1.3) of the Income Tax Act (Canada) (the "Act")
This is in response to your letter of January 8, 2008 requesting our comments on paragraph 149(1)(d.5) and subsection 149(1.3) of the Act with respect to corporations with share capital.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings. However, we are prepared to provide the following general comments, which may be of assistance.
Paragraph 149(1)(d.5) of the Act provides that if not less than 90% of the capital of a corporation is owned by one or more municipalities in Canada, then the corporation is exempt from tax, subject to subsections 149(1.2) and (1.3) of the Act, and provided that the income of the corporation from activities carried on outside the geographical boundaries of the municipalities does not exceed 10% of its income. For the purposes of paragraph 149(1)(d.5) and subsection 149(1.2) of the Act, subsection 149(1.3) of the Act provides that 90% of the capital of a corporation that has issued share capital will not be considered to be owned by one or more municipalities unless the municipalities are also entitled to at least 90% of the votes that would be cast under all circumstances at an annual meeting of shareholders of the corporation (see our document #2001-0114125). Thus, paragraph 149(1)(d.5) and subsection 149(1.3) interact to require a corporation to meet two distinct tests - the capital ownership test and the shareholder votes test.
Proposed changes to subsection 149(1.3) of the Act will add two new paragraphs to that subsection. If enacted as proposed, new paragraph 149(1.3)(a) of the Act will preclude the application of any of paragraphs 149(1)(d ) to (d.6) of the Act to a corporation during a period in a taxation year in which persons other than Her Majesty in right of Canada or of a province, a municipality in Canada, a municipal or public body performing a function of government in Canada or a corporation, commission or association to which any of paragraphs 149(1)(d) to (d.6) apply own shares that, in total, give them more than 10% of the votes that could be cast at any meeting of shareholders.
In addition, new paragraph 149(1.3)(b) of the Act, if enacted as proposed, will preclude the application of any of paragraphs 149(1)(d) to (d.6) of the Act to a corporation if it can be shown that any person (or a group including any person) other than a municipality, Her Majesty in right of Canada or a province, or a municipal or public body performing a function of government in Canada, controls the corporation directly or indirectly in any matter whatever, that is, if any such person or group has de facto control of the corporation.
We trust these comments will be of assistance.
Yours truly,
Robin Maley
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch