Principal Issues: [TaxInterpretations translation] Does the position taken in technical interpretation 980787 still represent the CRA's position and if so, could that position apply to subparagraph 251(5)(b)(ii)?
Position: Our current position regarding the interpretation of subparagraph 251(5)(b)(ii) and paragraph 256(1.4)(b) is that their wording is broad enough to apply to a situation where a particular person would not have control over the triggering of an event, other than the death, bankruptcy or permanent disability of an individual, which would entitle the individual to compel a corporation to redeem, acquire or cancel shares of its capital stock owned by another shareholder. However, we have held in the past that those two provisions generally should not apply to a situation where a corporation has an obligation to redeem or purchase shares of its capital stock held by a shareholder found guilty of fraud against the corporation.
Reasons: Legislative analysis and positions already taken.
XXXXXXXXXX 2010-038057 I. Landry, M. Fisc March 16, 2011
Dear Sir,
Subject: Application of subparagraph 251(5)(b)(ii) and paragraph 256(1.4)(b)
This is in response to your letter of May 20, 2010 in which you asked whether the position in Technical Interpretation number E9807875 still represents the position of the Canada Revenue Agency ("CRA"). In that document, the CRA indicated that paragraph 256(1.4)(b) of the Income Tax Act (the "Act") would not generally apply where the occurrence of an event would create an obligation for a corporation to redeem shares of its capital stock held by a particular shareholder provided that the triggering of the event is beyond the control of another shareholder. In the event that the answer is in the affirmative, you also asked us if that position can also be applied for the purposes of subparagraph 251(5)(b)(ii).
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5, Advance Income Tax Rulings, it is the practice of the CRA not to issue a written opinion with respect to projected transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received adequate tax treatment, the 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 that we hope may be helpful to you.
Paragraph 256(1.4)(b) provides, in particular, that for the purpose of determining whether a corporation is associated with another corporation with which it is not otherwise associated, where a person or any partnership in which the person has an interest has a right at any time under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to cause a corporation to redeem, acquire or cancel any shares of its capital stock owned by other shareholders of a corporation, the person or partnership shall, except where the right is not exercisable at that time because the exercise thereof is contingent on the death, bankruptcy or permanent disability of an individual, be deemed at that time to have the same position in relation to control of the corporation and ownership of shares of its capital stock as if the shares were redeemed, acquired or cancelled by the corporation.
Subparagraph 251(5)(b)(ii) provides that for the purposes of subsection 251(2) and the definition of “Canadian-controlled private corporation” in subsection 125(7), where at any time a person has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to cause a corporation to redeem, acquire or cancel any shares of its capital stock owned by other shareholders of the corporation, the person shall, except where the right is not exercisable at that time because the exercise thereof is contingent on the death, bankruptcy or permanent disability of an individual, be deemed to have the same position in relation to the control of the corporation as if the shares were so redeemed, acquired or cancelled by the corporation at that time.
The CRA's current position with respect to the interpretation of subparagraph 251(5)(b)(ii) and paragraph 256(1.4)(b) is that their wording is broad enough to apply to a situation where a particular person does not have control over the triggering of an event that would entitle that person to require a corporation to redeem, acquire or cancel shares of its capital stock owned by another shareholder. However, neither subparagraph 251(5)(b)(ii) nor paragraph 256(1.4)(b) would apply if the event in question is the death, bankruptcy or permanent disability of an individual. In addition, the CRA has ruled in the past that those two provisions generally should not apply to a situation where a corporation is required to redeem or cancel shares of its capital stock held by a shareholder who has been found guilty of fraud in relation to the corporation. In this regard, we refer you to Technical Interpretation letters F2002-0172315 and F2006-0167361E5.
We hope that our comments are of assistance.
Best regards,
Guy Goulet CA, M. Fisc.
Manager
for the Director
Ontario Corporate Income Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.