QUESTION I 67
Indirect Acquisition of Control
Subsection 256(7) of the Act provides rules where control of a corporation shall be deemed not to have been acquired. What is the Department's position in the following situation?
Mr. A acquires from a related person the shares of Co. Y, which has a wholly-owned subsidiary, Co. Z. It seems clear that subparagraph 256(7)(a)(i) of the Act applies to the acquisition of the shares of Co. Y. However, the shares of Co. Z were not acquired, and it can be argued that the acquisition of the shares of the parent company, Co. Y, did not result in an acquisition of control of Co. Z.
DEPARTMENT'S POSITION
Where paragraph 256(7)(a) of the Act applies, to deem that no change of control will have occurred in respect of the parent, Co. Y, the Department also considers that there has been no change in the ultimate control of its subsidiary, Co. Z.
However, subclause 187(4) of the Draft Legislation to Amend the Income Tax Act and Related Statutes issued by the Department of Finance on July 13, 1990 proposes to amend paragraph 256(7)(a) of the current Act to ensure that, effective for redemptions, acquisitions and cancellations of shares occurring after 1989, the exception provided in paragraph 256(7)(a) of the Act will apply not only to a particular corporation upon the acquisition of its shares, but also to any corporations that may be controlled by the particular corporation.
Prepared by: H. Woolley