| 24(1) | 5-9765 |
| S.J. Tevlin | |
| (613) 957-2118 |
19(1)
October 12, 1990
Dear Sirs:
Re: Subsection 256(2)
We are writing in response to your letter of March 5, 1990 in which you requested our opinion as to the application of subsection 256(2) of the Income Tax Act (the "Act") in a hypothetical situation.
In your case there are four corporations, Mco, Xco, Yco and Zco. Four unrelated individuals, M, X, Y and Z, own all the issued shares of the four corporations (M owns fifty per cent of the shares of each of the four corporations; X, Y and Z each own 16 2/3 per cent of the shares of Mco; (the remaining shares of Xco are owned by X; the remaining shares of Yco are owned by Y and the remaining shares of Zco are owned by Z). The various share holdings are diagrammed below:
You stated that Xco and Zco are both associated with Mco. We note that a group of individuals, M and X, own more than 50 percent of the fair market value of the issued shares of both Mco and Xco. We conclude that these two corporations are associated by paragraph 256(1)(b) by virtue of paragraphs 256(1.2)(a) and (c) of the Act. We note that these same provisions of the Act also associate Mco and Yco and Mco and Zco.
Since each of Xco, Yco and Zco are associated with Mco, they will be deemed pursuant to subsection 256(2) of the Act to be associated with each other.
Your concern is whether each member of the associated group can elect pursuant to subsection 256(2) of the Act not be associated with another member of the group or whether the group is restricted to making only one election. You have also enquired as to whether in our opinion, if Mco elects not to be associated with Xco and Zco will Xco and Zco continue to be associated since both Xco and Zco are associated with Yco.
Opinion
Subsection 256(2) of the Act, allows that where two corporations are associated or deemed to be associated with the same corporation (the "third corporation"), the "third corporation" may elect not to be associated with either of the other two corporations.
Since each of Xco, Yco and Zco are associated with Mco, then pursuant to paragraph 256(2)(b), Mco is the "third corporation" with respect to a combination of any two of those corporation. In addition since subsection 256(2) deems each of Xco, Yco and Zco to be associated, Xco and Zco would both be associated with the same corporation i.e. Yco, and therefore, Yco would also be a "third corporation" with respect to Xco and Zco. It follows from your example that any of Mco, Xco, Yco or Zco could be a "third corporation" and, therefore, able to elect for purposes of section 125 of the Act not to be associated with either of two other corporations that it is associated or deemed to be associated with.
If Mco elects not to be associated with Xco and Zco, it will still be associated with Yco will not be associated with Xco and Zco only for the purposes of section 125 of the Act. Therefore, for purposes of the Act, Xco, Yco and Zco will still be associated with each other pursuant to subsection 256(2) of the Act.
As explained in paragraph 24 of Information Circular 70-6R, any written or verbal opinions are not rulings and are not binding upon Revenue Canada, Taxation, in respect of any taxpayer.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch