| 24(1) | File No. 5-9655 |
| M. Sarazin | |
| (613) 957-2125 |
19(1)
June 11, 1990
Dear Sirs:
Re: Subsections 249(4) and 256(7) of the Income Tax Act (Canada) (the "Act")
We are writing in response to your letter dated February 20, 1990 in which you requested our comments on the potential application of subsections 249(4) and 256(7) of the Act to the following hypothetical situation.
Facts
1. A family owns all of the shares of A Corporation and B family owns all the shares of B Corporation. Mr. A and Mr. B are brothers.
2. A Corporation and B Corporation each owns 50% of the shares of C Corporation. Neither individual family exercises control over C. Corporation.
3. One of Mr. A's sons ("Son A") acquires all of the outstanding shares of A Corporation from his family and a majority of the outstanding shares of B Corporation from his uncle, aunt and one cousin.
In the above summarized example you wish to determine whether C Corporation will be considered to have been acquired by a person or group of persons for the purposes of subsection 249(4) of the Act. Where control of a corporation has been acquired, subsection 249(4) provides that, the taxation year of the acquired corporation is deemed to have ended immediately before that time.
Opinions
It is our view, as outlined in paragraph 13 of Interpretation Bulletin 64R2 (IT-64R2), that the word "Control" as expressed in subsection 249(4) of the Act generally means the right of control that rests in ownership of such number of shares of a corporation as to give a majority of the voting power in the corporation.
We, therefore, agree with your interpretation relating to A Corporation whereby Son A is deemed not to have acquired control of Corporation A under subparagraph 256(7)(a)(i) of the Act, since he was, by virtue of subparagraph 251(2)(b)(ii) of the Act, related to Corporation A immediately before that time.
We are also in agreement with your interpretation of the facts relating to B Corporation. Control of B Corporation has changed thereby resulting in a deemed taxation year ending immediately prior to Son A's acquisition of control under paragraph 249(4)(a) of the Act. Since Son A was not related to Corporation B before his acquisition of control thereof, the provisions of subparagraph 256(7)(a)(i) would not apply.
It is our opinion that paragraph 249(4)(a) of the Act applies in relation to C Corporation and as such there is a deemed taxation year ending immediately prior to Son A's acquisition of control of C Corporation. Prior to Son A's acquisition of B Corporation, C Corporation was controlled by the unrelated group made up of A Corporation and B Corporation since each corporation owned 50% of the shares of C Corporation. Following his acquisition of the outstanding shares of A Corporation and the majority of the shares of B Corporation, Son A has acquired control of Corporation C, resulting in a change of control and the application of paragraph 249(4)(a) of the Act.
The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978, are not binding on the Department.
Yours truly,
for Director Reorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch