Principal Issues: In a given fact situation, where all the shares of a CCPC are sold to a sibling, whether (1) there is a change of control for the purpose of 249(4)? and (2) the change of control results in the CCPC's CDA and RDTOH becoming nil
Position: (1) No. (2) No to both.
Reasons: The law.
XXXXXXXXXX 2005-012027
Marc LeBlond
May 4, 2005
Dear Sir,
Subject: Sale of shares in a private corporation
This is in response to your facsimile of March 9, 2005, in which you requested our comments on the application of certain provisions of the Income Tax Act (the "Act") relating to the acquisition of control of a corporation and the calculation of its "capital dividend account" (the "CDA"), as defined in subsection 89(1), and its "refundable dividend tax on hand" (the "RDTOH"), as defined in subsection 129(3), in the situation described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act.
The Situation
Ms. A, the sole shareholder of Zco, sold her shares in Zco to her brother (Mr. B). We have assumed that Ms. A and Mr. B are resident in Canada, that Ms. A had always held all the shares of Zco since its incorporation, that Zco is a "Canadian-controlled private corporation", as defined in subsection 125(7), and that immediately before the sale of the shares, Zco had a "CDA" and "RDTOH".
Your Questions
You asked us, in the situation you have referred to us, whether there was an acquisition of control of Zco for the purposes of section 249(4) and, if the answer to that question is yes, whether the balance of Zco's "CDA" and "RDTOH" became nil.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of our Directorate not to issue a written opinion regarding proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments which may not apply in full to the situation you have submitted to us.
The rules in paragraphs 249(4)(a) and (b) provide, respectively, that the taxation year that would include the time of the acquisition of control of a corporation is deemed to have ended immediately before that time and that a new taxation year is deemed to have commenced at that time.
In the situation you have presented to us, Mr. B acquired de jure control of Zco. However, for the purposes of various provisions of the Act (including subsection 249(4)), control of Zco was deemed not to have been acquired by virtue of clause 256(7)(a)(i)(A), as control of Zco was acquired solely as a result of Mr. B's acquisition of shares of the capital stock of Zco from a person with whom Mr. B was related (i.e., Ms. A). Mr. B and Ms. A are related to each other by virtue of paragraph 251(2)(a) because they are related by blood within the meaning of paragraph 251(6)(a) as they are brother and sister.
Zco therefore does not have to file a tax return or prepare financial statements as a result of Mr B's acquisition of control of Zco.
Furthermore, in the situation submitted, the balance of Zco's "CDA" and "RDTOH" did not become nil by virtue only of control of Zco having been acquired by Mr. B.
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 Canada Revenue Agency with respect to any particular factual situation.
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch