| 19(1) | File No. 5-8996 |
| P. Diguer | |
| (613) 957-2120 |
November 24, 1989
Dear Sirs:
Re: Subsection 249(4) and 256(7) of the Income Tax Act (Canada) (the "Act")
We are writing in response to your letter dated October 24, 1989 wherein you requested our opinion regarding the application of, subsections 249(4) and 256(7) of the Act to the following hypothetical situation.
Facts
1. Mr. A is the sole shareholder of Company A, a taxable Canadian corporation.
2. Mr. A transfers all of his shares of Company A to Company X and receives as consideration therefore, 55% of the voting shares of Company X, a taxable Canadian corporation.
3. Mr. B owns the remaining 45% of the voting shares of Company X. Mr. B is not related to Mr. A.
In the above summarized example you are concerned that the control of Company A will be considered to have been acquired by a person or group of persons for the purposes of subsection 249(4) of the Act. Briefly, subsection 249(4) provides that, inter alia, where control of a corporation has been acquired, the taxation year of the acquired corporation is deemed to have ended immediately before that time.
Opinions
It is our view, as outlined in paragraph 13 of Interpretation Bulletin 64R2 (IT-64R2), that the word "control" as expressed in subsection 249(4) of the Act generally means the right of control that rests in ownership of such number of shares of a corporation as to give a majority of the voting power in the corporation.
In addition, it is our view, as outlined in paragraph 24 of IT-64R2, that a taxpayer who controls a particular corporation will be considered to control any corporation that is controlled by the first corporation. This view is consistent with the reasoning adopted by the courts in the case of Vineland Quarries and Crushed Stone Ltd. v. M.N.R. 66 DTC 5092 (Ex. Ct.) affirmed by 67 DTC 5283 (S.C.C.).
In the earlier summarized transaction, Mr. A, as sole shareholder, controlled Company A. Upon completion of the share transaction, Mr. A, with 55% of the voting shares, controls Company X, which in turn controls Company A. In view of the above, it is our opinion that in this particular case, Mr. A continues to control Company A and as such, control of Company A has not been "acquired by a person or group of persons" as required for the application of subsection 249(4).
We agree with your comments concerning subparagraph 256(7)(a)(i) in that, as Company A and Company X were not related immediately before the share acquisition, this particular provision would not apply.
In addition to the above, it is our view that, at the time of the acquisition of shares of Company X by Mr. A as outlined in paragraph 2 of the statement of facts above, there has been an acquisition of control of Company X.
The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978, are not binding on the Department.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch