Dear Sirs:
Re: Subsection 256(1) of the Income Tax Act (the "Act")
This is in reply to your letter of July 19, 1991 in which you requested our views on the application of the above-mentioned provision of the Act to the following situation.
24(l)
Comments
We agree with your interpretation that Holdco A, Holdco B and Opco are associated by virtue of paragraph 256(1)(d) of the Act.
Paragraph 256(1.2)(d) of the Act provides that where the shares of Opco are owned by Holdco A such shares shall be deemed to be owned by the shareholder of Holdco A, who is Mr. A. Similarly, Mr. B is deemed to own the shares of Opco which are owned by Holdco B. Therefore, Opco is controlled by a group consisting of Mr. A and Mr. B. As Holdco A is controlled by Mr. A and Mr. A is related to each member of the group of persons that control Opco (Mr A. and Mr B.) and Mr A owns not less than 25% of the issued share of any class of Opco, Holdco A and Opco are associated pursuant to paragraph 256(1)(d) of the Act. Similarly, Holdco B is associated with Opco.
As Holdco A and Holdco B are each associated with Opco, they will also be associated with each other pursuant to subsection 256(2) of the Act. However, subsection 256(2) of the Act provides an exception, for the purposes of the small business deduction, where the third corporation (Opco) is not a Canadian-controlled private corporation at that time or elects, in prescribed form, for its taxation year that includes that time not to be associated with either of Holdco A or Holdco B, Opco shall be deemed not to be associated with either of Holdco A or Holdco B and its business limit for that taxation year shall be deemed to be Nil.
We understand that this result was intended.
The comments expressed are not advance income tax rulings and are not considered binding on the Department in respect of any taxpayer in accordance with paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.
Your truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch