10 September 1990 Internal T.I. 59519 F - Associated Corporations

September 10, 1990

Dear Sirs:

Re:  Section 256 and paragraph 125(5)(a) of the Income Tax Act (Canada) (the "Act") Request for technical interpretation

This is in reply to your letter dated January 30, 1990 in which you requested our views on the application of the provisions of section 256 and paragraph 125(5)(a) of the Act to the following hypothetical situation.

Hypothetical Facts

1.          Three companies, namely Aco, Bco and Cco, are associated by virtue of the provisions of section 256 of the Act in effect in 1988.

2.          The 1987 taxation year of Aco and Bco ended on November 30 and the 1987 taxation year of Cco ended on December 31.

3.          Prior to December 30, 1989, Aco owned non-voting participating shares of a fourth company, Dco, having a fair market value greater than 50, of the fair market value of all of the shares of Dco.

4.          Dco owns all of the issued shares of a fifth company, Xco.

5.          The 1987 taxation year of Dco and Xco ended on September 30.

6.          The following events occurred in 1989:

(a)        On December 30, 1989, Aco acquired all of the remaining shares of Dco from an arm's-length party, thereby acquiring control of Dco.

(b)        A new company, Nco, was incorporated on December 15, 1989. It is controlled by Aco.  Its first taxation year ended December                      31, 1989.

(c)        The companies had the following year-ends in 1989: 

7.         Dco and Xco have allocated, pursuant to subsection 125(3) of the Act, the sum of $200,000 to Dco as its business limit for its year ended September 30, 1989.

8.     The six companies have allocated, pursuant to subsection 125(3) of the Act, the sum of $200,000 to Cco as its business limit for its year ended December 31, 1989.

9.         The 1990 taxation year of Dco and Xco will end on September 30, 1990.

Your views

You have requested that we confirm your view that the application of subsection 256(1) and paragraph 256(1.2)(c) of the Act to the above hypothetical circumstances would result in the companies being associated as follows:

1.         Aco, Bco and Cco would be associated with each other for the taxation year ending November 30, 1989.

2.         Dco and Xco would be associated with each other for the taxation year ending September 30, 1989.

3.         All six companies would be associated with each other for the taxation years ending December 29, 1989 and December 31, 1989.

It is also your understanding that, despite the fact that no amount would have been allocated to Dco in the T2013 filed with its return for its year ended December 29 1989, Dco would be deemed by paragraph 125(5)(a) of the Act to have a business limit for its year ending December 29, 1989 equal to that proportion of $200,000 that the number of days in that taxation year is of 365.

Our Comments

Application of section 256: 

At issue is whether the rules in section 256 of the Act, as amended by S.C. 1988, Chap. 55, subsection 192(1) (the "new rules"), apply to all of the 1989 taxation years of the six corporations in question.  The test in subparagraph (a)(iv) of subsection 192(6), S.C. 1988, Chap. 55 (the "coming-into-force provision") is clearly satisfied in respect of the second 1989 taxation year of Dco and Xco and it might therefore be argued, based on the opening words of paragraph (a) of the coming-into-force provision, that the new rules should apply to all of the 1989 taxation years of the corporations in question, with the result that Dco and Xco would be associated with Aco, Bco and Cco not only for the taxation year ending December 29, 1989, but also for the taxation year ending September 30, 1989. However, the fact that subparagraph (a)(iv) of the coming-into-force provision refers to "the 1989 taxation year" rather than to "any 1989 taxation year" suggests that the coming-into-force provision should be applied separately in respect of each 1989 taxation year of a company where that company has two or more taxation years ending in 1989.  Further support for this interpretation is found in the fact that the opening words of subsection 256(1) of the Act require the associated corporation rules to be applied in respect of a taxation year (as opposed to all of the taxation years ending in a calendar year) of the corporation in question.

Thus, in our view, the fact that Dco and Xco each have two taxation years in 1989 would not result in the application of the new rules to their first 1989 taxation year which ended September 30, 1989. 

The application of section 256 of the Act to the above situation would therefore result in the various companies being associated with each other as follows for their 1989 taxation years:

1.       Dco and Xco would be associated with each other for their first 1989 taxation year by virtue of section 256 as it read prior to the coming-into-force of subsection 192(1) of S.C. 1988, Chap. 55, and would not be associated with any of the other four companies for that taxation year. 

2.         All six companies would be associated with each other for their following 1989 taxation years:

Application of paragraph 125(5)(a):

Your interpretation of paragraph 125(5)(a) of the Act may lead to an inappropriate result in that the aggregate amount of the annual business limits of corporations that are associated with each other might, if the associated corporations do not agree to allocate to Dco the amount that is deemed by paragraph 125(5)(a) to be its annual business limit, exceed  $200,000.  We will therefore be referring the matter to the Department of Finance for their consideration before providing you with our comments.

The foregoing expressions of opinion are provided in accordance with the practice referred to in paragraph 24 of Information Circular 70-6R, dated December 18, 1978, and are not binding on Revenue Canada, Taxation.

Yours truly,

for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch