Dear Sirs:
Re: Subsection 256(2) of the Income Tax act (the "Act")
We are writing in response to your letter of June 8, 1990, wherein you requested our view as to the manner in which an election under subsection 256(2) of the Act is required to be filed by a "third corporation" as that term is defined in subsection 256(2).
Your letter contained an example which is as follows:
1. Co A and Co B are not, but for the application of subsection 256(2) of the Act, otherwise associated with each other at any time in a taxation year. Both corporations have a December 31 year-end.
2. A third company, Co C, has a January 31 year-end.
3. Co C is associated with each of Co A and Co B.
4. Pursuant to subsection 192(6), chap. 55 f S.C. 1988 with respect to the application of the amendments to subsections 256(1) and (2) of the Act, the new "association rules" would apply to the 1989 taxation years of Co A, Co B and Co C.
You stated in your letter that, based on your reading of subsection 256(2) of the Act, it would appear that Co C must make two separate elections under that subsection: one for its taxation year ending January 31, 1989 and the other for its taxation year ending January 31, 1990, in order that Co a and Co B will not be associated with each other for their taxation years beginning January 1, 1989 and ending December 31, 1989. In your view the two separate elections would be necessary because subsection 256(2) refers to two corporations being associated "at any time", and it also states that the election to be filed by Co C is to be for its taxation year that "includes that time".
Our comments
In our view the expressions "at any time" and "at that time" as used in subsection 256(2) of the Act mean a particular time in the same taxation year of all of the corporations involved. This interpretation is consistent with that of the expression :at the some time" as used in former version of the subsection. This interpretation is also found in former version of the subsection.
This interpretation is also found in the last sentence of paragraph 9 of Interpretation Bulletin IT-64R2 dated December 20, 1983 issued by Revenue Canada, Taxation which states
"For the rule (in subsection 256(2)) to be applicable, however, the association must have existed simultaneously at some time in the taxation year."
If, for example, the particular time is February 15, 1989, subsection 256(2) of the Act will not apply to deem Co A and Co B to be associated with each other for their 1989 taxation years because neither Co A nor Co B is associated with Co C at a time in the 1989 taxation year of all the corporations as February 15, 1989 is in the 1990 taxation year of Co C.
In the hypothetical situation outlined in your letter, if Co C is at any time in the month of January 1989 associated with Co A and is at the some time associated with Co B, and if an election is filed by Co C for its 1989 taxation year pursuant to subsection 256(2) of the Act, that subsection would not apply to deem Co A and Co B to be associated with each other for their 1989 taxation years. a separate election by Co C for its 1990 taxation year would not be necessary to cause Co A and Co B not to be associated for their 1989 taxation years.
The above comments are not rulings and, in accordance with paragraph 24 of Information Circular 70-6R dated December 18, 1978 issued by revenue Canada, Taxation, are not binding on the Department.
Yours truly,for DirectorReorganizations and Non-resident DivisionRulings directorateLegislative and Intergovernmental Affairs Branch