Principal Issues: Whether control of corporation acquired when trustee of trust holding the shares of the corporation is replaced.
Position: Various scenarios - see document.
Reasons: See document.
XXXXXXXXXX 2004-008776
Fiona Harrison
May 24, 2005
Dear XXXXXXXXXX:
Re: Acquisition of control of corporation on replacement of trustees
This is in reply to your letter of July 26, 2004, wherein you requested a technical interpretation with respect to the following hypothetical situations:
Situation 1
- Lossco is a Canadian-controlled private corporation ("CCPC") as defined in subsections 125(7) and 248(1) of the Income Tax Act (the "Act"). The sole shareholder of Lossco is a discretionary trust for the members of Family A ("Trust 1");
- There are three trustees of Trust1: Trustees B, C and D;
- The trustees are not related to each other or to members of Family A;
- The decisions of the trust are made by a simple majority of the trustees;
- Lossco has non-capital and net capital losses.
You pose the following questions with respect to Situation 1:
a) If any of the above trustees resigns and is replaced by another trustee who is also unrelated to Family A, would this result in an acquisition of control of Lossco?
b) If two of the above trustees resign and are replaced by other trustees who are also unrelated to Family A, would this result in an acquisition of control of Lossco?
c) If Trustee B is related to Family A and does not resign, would a change in one or both of the unrelated trustees result in an acquisition of control of Lossco?
Situation 2
- The facts in Situation 1 pertaining to Lossco are the same;
- Profitco is a CCPC, the sole shareholder of which is another discretionary family trust for the members of Family A ("Trust2");
- There are three trustees of Trust2: Trustees B, C and E. Trustees B and C are also trustees of Trust1. Trustee E is not related to the members of Family A;
- The decisions of the trust are made by a simple majority of the trustees;
- Lossco and Profitco will amalgamate to form Amalco and Trust2 will receive the majority of the voting shares of Amalco.
You pose the following questions with respect to Situation 2:
a) Would there be an acquisition of control of Lossco on the amalgamation?
b) Would the answer be different if Trustee E resigns and is replaced by Trustee D, so that prior to the amalgamation, the trustees of Trust1 and Trust2 are the same?
c) Would the answer change if Trustee B is related to the members of Family A.
OUR COMMENTS
As noted in Information Circular 70-6R5 issued on May 17, 2002, we do not provide opinions in respect of actual proposed transactions otherwise than as a reply to an advance income tax ruling request. We note that your particular situation involves numerous issues which would necessitate a review of all the pertinent facts and supporting documentation. Consequently, we can provide only the following general comments with respect to the foregoing issues.
The test of de jure control contemplates the ownership of shares that give the holder the ability to elect a majority of directors. Where a trust is a shareholder, case law has referred to the trustees in assessing corporate control, since the trust is not a legal entity, but a relationship between the trustees and the beneficiaries. (See M.N.R. v. Consolidated Holding Company Limited, 72 DTC 6007 (SCC)). Where a trust has multiple trustees, the determination as to which trustee or group of trustees controls the corporation can only be made after a review of all the pertinent facts, including the terms of the trust instrument. However, in the absence of evidence to the contrary, we would consider there to be a presumption that all of the trustees would constitute a group that controls the corporation. Consequently, with respect to Situation 1, it is our view that a change in any of the trustees would result in a new group controlling Lossco and, subject to the provisions of paragraph 256(7)(a), an acquisition of control of Lossco.
With respect to Situation 2, in our view, the provisions of subparagraph 256(7)(b)(ii) will apply since the amalgamation will result in control of Amalco being acquired by a group of persons comprised of Trustees B, C and E, and it is clear that such group did not control Lossco immediately before the amalgamation. Consequently, this group would be deemed to have acquired control of Lossco immediately before the amalgamation, unless control would not have been acquired if such group had acquired all the shares of Lossco immediately before the amalgamation.
To answer this question, it is necessary to consider the provisions of paragraph 256(7)(a). We have taken the position, in our response to Question 41 at the 1990 Canadian Tax Foundation Conference Revenue Canada Round Table, that where there is an acquisition of shares of a corporation by more than one person, those persons will be deemed by paragraph 256(7)(a) not to have acquired control of the corporation by virtue of such share acquisition if each of those persons is a person described in subparagraph 256(7)(a)(i). Clause 256(7)(a)(i)(A) refers to a particular person who acquired the shares from a person to whom the particular person was related immediately before that time. Clause 256(7)(a)(ii)(B) refers to a particular person who was related to the particular corporation immediately before that time. Consequently, unless each trustee of Trust1 is related to each trustee of Trust2 or each trustee of Trust2 is related to Lossco, the above-described amalgamation would result in an acquisition of control of Lossco.
We trust that the above comments will be of assistance to you.
Yours truly,
Mark Symes
Corporate Reorganizations Section 1
Reorganizations and Resources Division
Income Tax Rulings Directorate