Principal Issues: Whether in a factual situation the four corporations would be associated with each other.
Position: Yes. However, some corporations may be disassociated for the purposes of the Act if an election is made under subparagraph 256(2)(b)(ii) by the "third corporation".
Reasons: See below.
XXXXXXXXXX 2017-068512 M. Séguin September 14, 2017
Dear Sir,
Subject: Section 256(2)
This is in response to your email of January 25, 2017 in which you requested our views respecting the Canada Revenue Agency's interpretation of subsection 256(2) regarding a hypothetical situation that you described.
Unless otherwise indicated, any reference to any section of the Act or any of its provisions in this document is to a section of the Income Tax Act (the "Act") or to one of its provisions.
This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Situation
1. Aco, Bco, Cco and Dco are Canadian-controlled private corporations as defined in subsection 125(7).
2. Aco is controlled by A who holds all of the voting and participating shares in the capital stock of Aco. No other shares are issued and outstanding.
3. Bco is controlled by B who holds all of the voting and participating shares in the capital stock of Bco. No other shares are issued and outstanding.
4. Cco is controlled by C who holds all the voting and participating shares in the capital stock of Cco. No other shares are issued and outstanding.
5. Dco is controlled by D who holds all of the voting and non-participating shares in the capital stock of Dco. All of the participating and non-voting shares in the capital stock of Dco are held by a discretionary trust. A, B, C and D are discretionary beneficiaries of the income and capital of the trust. D and his accountant, a person unrelated to A, B, C or D, are the trustees of the trust.
6. A, B and C are the children of D.
Your questions
1. Would the transitivity rule in subsection 256(2) apply more than once in a group of corporations such as the one mentioned in the example so that Aco, Bco and Cco would be deemed to be corporations associated with each other?
2. If Dco makes three elections under subsection 256(2) to not be associated with Aco, Bco and Cco, would Aco, Bco and Cco then be associated corporations for purposes of section 125?
3. If Dco made the elections referred to in the previous question, should the taxable capital of Dco, Bco and Cco be considered in calculating the reduction in the business limit of Aco under subsection 125(5.1)?
Our Comments
Subsection 256(2) may apply more than once within a group of corporations.
Aco and Dco are associated with each other pursuant to paragraph 256(1)(c). In particular, A is related to D under paragraph 251(2)(a) and, because of the presumption in subparagraph 256(1.2)(f)(ii), A is deemed to own the shares in the capital stock of Dco owned by the Trust. Consequently, A, who controls Aco, is related to D, who controls Dco, and A owns at least 25% of the issued shares of any class, other than a specified class, in the capital stock of Aco and Dco.
Bco and Dco are associated with each other pursuant to paragraph 256(1)(c). In particular, B is related to D under paragraph 251(2)(a) and, because of the presumption in subparagraph 256(1.2)(f)(ii), B is deemed to own the shares in the capital stock of Dco owned by the Trust. Consequently, B, who controls Bco, is related to D, who controls Dco, and B owns at least 25% of the issued shares of any class, other than a specified class, in the capital stock of Bco and Dco.
Cco and Dco are associated with each other pursuant to paragraph 256(1)(c). In particular, C is related to D under paragraph 251(2)(a) and, because of the presumption in subparagraph 256(1.2)(f)(ii), C is deemed to own the shares in the capital stock of Dco owned by the Trust. Consequently, C, who controls Cco, is related to D, who controls Dco, and C owns at least 25% of the issued shares of any class, other than a specified class, in the capital stock of Cco and Dco.
As for Aco and Bco, they are deemed to be associated with each other under paragraph 256(2)(a), since had it not been for subsection 256(2), they would not be associated with each other, but both are associated with Dco, a third corporation.
Aco and Cco are deemed to be associated with each other under paragraph 256(2)(a), since had it not been for subsection 256(2), Aco and Cco would not be associated with each other, but both are associated with Dco, a third corporation.
Bco and Cco are deemed to be associated with each other under paragraph 256(2)(a), since had it not been for subsection 256(2), Bco and Cco would not be associated with each other, but both are associated with Dco, a third corporation.
Dco, as the third corporation, could make three elections, as provided under subparagraph 256(2)(b)(ii), in order to deem Aco, Bco and Cco not to be associated with each other for the purposes of section 125. In addition, Dco's business limit, for its taxation year that would include that time, would be deemed to be nil. Consequently, Aco, Bco and Cco would no longer be associated corporations for purposes of section 125. However, Aco, Bco and Cco would remain associated with Dco.
To the extent that Dco makes the elections referred to above, in computing the business limit reduction under subsection 125(5.1) for Aco, the taxable capital employed in Canada of Aco and of Dco should be taken into account.
Best regards,
Urszula Chalupa, LL.B, M. Fisc.
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch