Principal Issues: Whether there is an acquisition of control of a particular corporation (OPCO) for the purposes of subsection 249(4) in the following two given fact situations:
Where shares of the capital stock of OPCO are disposed of to another corporation (HOLDCO) for consideration that includes shares of HOLDCO's capital stock and, immediately after that time, HOLDCO and OPCO are controlled by a group of persons who controlled OPCO immediately before that time, and did not, as part of the series of transactions or event that includes the disposition, cease to control HOLDCO.
Where shares of the capital stock of OPCO are acquired by a corporation from a person to whom the corporation is related.
Position: 1) No.
2) No.
Reasons: 1) The control of OCPO shall be deemed not to have been acquired by virtue of paragraph 256(7)d).
2) The control of OCPO shall be deemed not to have been acquired by virtue of clause 256(7)(a)(i)(A)
2004-009226
XXXXXXXXXX Guy Goulet, CA, M.Fisc.
(613) 957-9768
September 29, 2004
Dear Sir,
Subject: Concept of acquisition of control
This is in response to your email of August 24, 2004, in which you requested our opinion regarding the application of the acquisition of control concept to two particular situations described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Particular Situations:
The Particular Situations as you have explained them to us are the following:
Particular Situation 1:
1. OPCO was a Canadian-controlled corporation within the meaning of subsection 125(7).
2. The issued and paid-up capital stock of OPCO consisted of 100 common shares owned 50% by Mr. A and 50% by Mr. B.
3. Mr. A and Mr. B dealt with each other at arm's length.
4. Mr. A and Mr. B formed a holding company (HOLDCO AB) and each transferred to it by way of a tax rollover pursuant to subsection 85(1) their shares of the capital stock of OPCO in exchange for shares of the capital stock of HOLDCO AB.
5. As a result of the transaction described in paragraph 4 above, Mr. A held 50% of the issued and outstanding shares of the capital stock of HOLDCO AB, Mr. B held 50% of the issued and outstanding shares of the capital stock of HOLDCO AB and HOLDCO AB held 100% of the issued and outstanding shares of the capital stock of OPCO.
Particular Situation 2:
The situation described in paragraphs 1 to 3 of Particular Situation 1 applies to Particular Situation 2.
4. Mr. A and Mr. B formed a holding company (HOLDCO A and HOLDCO B). Subsequently, each transferred, by way of a tax rollover pursuant to subsection 85(1), its shares in the capital stock of OPCO to its holding company in exchange for shares of the capital stock of the latter.
5. As a result of the transaction described in paragraph 4 above, Mr. A held 100% of the issued and outstanding shares of the capital stock of HOLDCO A, Mr. B held 100% of the issued and outstanding shares of the capital stock of HOLDCO B, HOLDCO A held 50% of the issued and outstanding shares of the capital stock of OCPO and HOLDCO B held 50% of the issued and outstanding shares of the capital stock of OPCO.
Your Questions:
You wish to know if in the particular situations the control of OPCO was acquired by virtue of the transactions in paragraph 4 of each of these situations.
Our Comments
It appears to us that the situation described in your letter may be an actual situation involving taxpayers. The Canada Revenue Agency ("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 in a particular situation.
In Particular Situation 1, following the transactions in paragraph 4, OPCO would be controlled under subsection 256(6.1) by both HOLDCO AB and the group of persons consisting of Mr. A and Mr. B. We are of the view that control of OPCO would be deemed not to have been acquired by HOLDCO AB solely as a result of the transactions described in paragraph 4 of Particular Situation 1 by virtue of paragraph 256(7)(d), since the shares of the capital stock of OPCO were disposed of to another corporation (HOLDCO AB) for consideration that included shares of the capital stock of HOLDCO AB and immediately after the time of the disposition HOLDCO AB and OPCO were controlled by a group of persons (Mr. A and Mr. B) who controlled OPCO immediately before that time without having ceased, as part of the series of transactions or events that included the disposition, to control HOLDCO AB.
With respect to Particular Situation 2, we are of the view that control of OPCO would be deemed not to have been acquired solely as a result of the acquisition, at any relevant time, of shares of the capital stock of OPCO by HOLDCO A or HOLDCO B by virtue of clause 256(7)(a)(i)(A), since HOLDCO A or HOLDCO B acquired the shares of the capital stock of OPCO from a person with whom it is related immediately before that time. Indeed, at all relevant times, HOLDCO A and Mr. A and HOLDCO B and Mr. B would be related persons by virtue of subparagraph 251(2)(b)(i).
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch