| March 30, 1990 | |
| Audit Programs Directorate | Specialty Rulings |
| Audit Applications Division | Directorate |
| Technical Publications Section | P.W. Osborn |
| 957-2120 | |
| R.S. Biscaro | |
| Acting Director | File No. 7-4551 |
Subject: 256(2) Election
This is in reply to your memorandum of November 28, 1989 which details a hypothetical situation involving four corporations; B, C, D and E, each of which is associated with corporation A but is not otherwise associated with each other. Subsection 256(2) will deem the first four corporations to be associated with each other, however, Corporation A wishes to elect not to be associated with any of the other corporations. You have asked if corporation A should file one election for each group of two corporations.
Subsection 256(2) of the Income Tax Act deems two corporations to be associated when each is associated with the same third corporation. For the purposes of the small business deduction two exceptions are provided to this general rule. The first exception arises when the third corporation is not a Canadian controlled private corporation. The second exception occurs when the third corporation elects, in prescribed form, not to be associated with either of the other two corporations.
The subsection is worded to allow the third corporation to choose whether it will be associated with the two corporations. In the context of this subsection the phrase "either of the two corporations" refers, in our opinion, to both corporations. However, it is our view that pursuant to the provisions of subsection 256(2), a single election by corporation A listing corporation A would have elected with regard to any particular grouping of two of the other four corporations.
M.A. HiltzDirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch