Mr. X holds all the shares of Aco and each of Mr. X and Mr. Y holds ½ of the shares (being common shares) of Zco. A shareholders' agreement provides that one shareholder (Mr. X or Mr. Z) has the option to acquire all of the Zco common shares held by the other shareholder, if the latter is unable to carry on his employment for a period of more than 12 months due to a temporary disability. CRA stated:
[P]aragraph 256(1.4)(a) would deem Mr. X to hold the common shares of the capital stock of Zco held by Mr. Y. As a result, Mr. Y would hold all of the common shares of the capital stock of Zco. The fact that Mr. Y would be deemed by virtue of paragraph 256(1.4)(a) to hold the common shares of the capital stock of Zco held by Mr. X would not change the effect of paragraph 256(1.4)(a) for Mr. X.
Therefore … Aco and Zco would be associated with each other pursuant to paragraph 256(1)(b).