Dear Sirs:
We are writing in response to your letter dated April 11, 1991 wherein you requested a technical interpretation on the application of subsection 256(2) of the Income Tax Act (Canada) (the "Act") to a hypothetical situation involving five corporations; A, B, C, D and E.
Each of A, D and E is associated with C pursuant to subsection 256(1) of the Act. Also, each of B, C and D is associated with E under subsection 256(1). By virtue of their association with C, each of A, D and E is associated pursuant to subsection 256(2) of the Act. Similarly, by virtue of their association with E, each of B, C and D is associated pursuant to the provisions of subsection 256(2) of the Act. Finally, A and B are deemed to be associated pursuant to the provisions of subsection 256(2) of the Act. Consequently, if it were not for the existence of C and E, the other companies, A, B and D, would not be associated.
You are of the view that if each of C and E elect pursuant to subsection 256(2) of the Act not to be associated with A, B, D and E and A, B, C and D, respectively, then A, B and D will not be associated corporations for the purposes of section 125 of the Act. You believe that this result is not inappropriate or abusive as there are no undue tax advantages created by the elections and the elections restore A, B and D to the position they would otherwise have enjoyed had it not been for the existence of C and E.
Our Comments
Subsection 256(2) of the Act provides that where two corporations are associated or deemed to be associated with the same corporation (the "third corporations"), the third corporation may elect not to be associated with either of the other two corporations for the purposes of section 125 of the Act.
Consequently, we agree that if each of C and E elect pursuant to subsection 256(2) of the Act not to be associated with A, B, D and E and A, B, C and D, respectively, then A, B and D will not be associated, for the purposes of section 125 of the Act, with each other. For the purposes of section 125 of the Act, the business limit for each of C and E will be deemed to be nil. All of the corporations will, however, continue to be associated with each other for the purposes of all other provisions of the Act.
The foregoing comments represent our general views with respect to the subject matter of your letter. The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch