Principal Issues: Whether a taxpayer would be a specified shareholder in the two scenarios described in the letter?
Position: Scenario 1 - yes, scenario 2 - no.
Reasons: Wording of subsection 74.4(2) and of definition "specified shareholder" in subsection 248(1).
XXXXXXXXXX 2005-016218 R. Gagnon July 18, 2006
Dear Sir,
Subject: Section 74.4(2) of the Income Tax Act
This is in response to your fax of December 5, 2005, in which you asked us about the application of section 74.4(2) in the scenarios described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Facts
Scenario 1
1. Aco and Bco are "taxable Canadian corporations" as defined in subsection 89(1) and "Canadian-controlled private corporations" as defined in subsection 125(7).
2. Aco and Bco are not "small business corporations" as defined in subsection 248(1).
3. Mr. A and Ms. B are individuals who are resident in Canada for the purposes of the Act. Ms. B is the "common-law partner", as defined in subsection 248(1), of Mr. A.
4. Ms. B holds all of the issued and outstanding shares of the capital stock of Bco and has effective (de jure) control of Bco for the purposes of the Act.
5. The issued and outstanding shares of the capital stock of Aco consist solely of 100 common shares. Mr. A holds 91 common shares of the capital stock of Aco and has effective control of Aco for the purposes of the Act. Bco holds 9 common shares of the capital stock of Aco.
Scenario 2
1. Aco is a "taxable Canadian corporation" as defined in subsection 89(1) and a "Canadian-controlled private corporation" as defined in subsection 125(7).
2. Aco is not a "small business corporation" as defined in subsection 248(1).
3. Mr. A and Ms. B are individuals who are resident in Canada for the purposes of the Act. Ms. B is the "common-law partner", as defined in subsection 248(1), of Mr. A.
4. The issued and outstanding shares of the capital stock of Aco consist solely of 100 common shares. Mr. A holds 91 common shares of the capital stock of Aco and has effective control of Aco for the purposes of the Act. Ms. B holds 9 common shares of the capital stock of Aco.
5. Ms. B does not hold any shares of the capital stock of a corporation that is a related person to Aco within the meaning of subsection 251(2).
Your Questions
1. In Scenario 1 as described above, is it the opinion of the Canada Revenue Agency ("CRA") that Ms. B is a "specified shareholder" of Aco, as that term is defined for the purposes of subsection 74.4(2), even though Ms. B does not hold any shares of the capital stock of Aco
2. In Scenario 2 as described above, is it the CRA's position that Ms. B is not a "specified shareholder" of Aco, as that term is defined for the purposes of subsection 74.4(2)?
3. If Ms. B is a "specified shareholder" of Aco in Scenario 1 but not in Scenario 2, is this result consistent with the tax policy underlying the attribution rules?
Our Comments
It appears to us that the scenarios described in your letter could be actual situations involving taxpayers. The CRA does not generally provide written opinions on proposed transactions otherwise than by way of an advance ruling. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received the appropriate tax treatment. We can, however, offer the following general comments which may not be fully applicable to the situations submitted.
Question 1
In Scenario 1, it appears to us that Ms. B would be a "specified shareholder" of Aco for the purposes of subsection 74.4(2), i.e., within the meaning of the definition of specified shareholder in subsection 248(1) as amended by subsection 74.4(2).
Ms. B holds at least 10% of the issued shares of a particular class of the capital stock of Bco, which is a related person of Aco by virtue of subsection 251(2).
Question 2
In Scenario 2, it appears to us that Ms. B would not be a "specified shareholder" of Aco for the purposes of subsection 74.4(2), i.e., within the meaning of the definition of specified shareholder in subsection 248(1) as amended by subsection 74.4(2).
Question 3
The result in Scenario 1 seems to us to be questionable in terms of tax policy. However, tax policy issues are the responsibility of the Department of Finance, and you should address your question to the Department of Finance.
Please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, is not binding on the CRA with respect to any particular factual situation.
We apologize for the delay in responding to your request.
Best regards,
for Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch