| Revenue Canada | |
| Customs and Excise | |
| 25 St. Clair Avenue East | |
| 4th Floor | 5-902580 |
| P.O. Box 100, Station "Q" | R.D. Mundell |
| Toronto, Ontario | (613) 957-2139 |
| M4T 2L7 | |
| Attention: S.D. DufourFacilitation Unit, Excise |
October 5, 1990
Dear Sirs:
This is in reply to your letter of September 6, 1990 requesting our opinion as to whether or not for purposes of section 251 of the Income Tax Act (the "Act") 24(1) and its individual members considered to be "related persons", and consequently, whether or not they are considered to deal with each other at arm's length.
24(1)
Section 251 of the Act refers to two classes of persons in determining whether or not persons deal with each other at arm's length. The first class of persons is "related persons" as defined in subsection 251(2) who are deemed not to deal with each other at arm's length. The second class is "persons not related to each other" or unrelated persons.
Our Comments
It seems clear that the members of 24(1) are not related and therefore we will provide our views only as to unrelated persons. It is a question of fact whether any combination of members are dealing at arm's length. In the absence of a better definition, a transaction at arm's length could be considered to be a transaction between persons between whom there are no bonds of dependence, control or the sense that neither of the two co-contracting parties has available any moral or psychological leverage sufficient to diminish or possibly influence the free decision-making of the other. Inversely, the transaction is not at arm's length where one of the co-contracting parties is in a situation where he may exercise a control, influence or moral pressure on the free will of the other. In the situation described 24(1). Therefore, we rater you to paragraphs of though 14 of Interpretation Bulletin IT-419 which sets out our general guidelines about certain relationships. These criteria, which have been examined by the courts, are as follows:
(a) the existence of a common mind which directs the bargaining for both parties to a transaction,
(b) parties to a transaction acting in concert without separate interests, and
(c) 'de facto' control.
Were one person (or a group of persons) is, in fact, the bargaining agent, or the mind by which the bargaining is directed, on behalf of both (or all) parties to a transaction, then the parties cannot be dealing at arm's length. Even when there are two distinct parties (or minds) to a transaction, but these parties act in a highly interdependent manner (in respect of a transaction of mutual interest) then it can be assumed that the parties are acting in concert, and hence not at arm's length. Nevertheless, a common purpose is not conclusive. Different interests are considered to exist when each party has completely independent interests from the other parties to a transaction, notwithstanding the fact that each party may have the same purpose of economic gain. De facto control depends upon authority or influence rather than legal control.
In the particular example at hand 24(1)
We trust our comments will prove helpful.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch