| 19(1) | File No. 5-8676 |
| H.K. Tilak | |
| (613) 957-2122 |
September 22, 1989
Dear Sirs:
Re: Subsections 256(1). (1.1) and (5.1) of the Income Tax Act
We are writing in response to your letter of September 8, 1989 in which you requested our opinions with respect to the application of subsections 256(1.1) and 256(5.1) of the Income Tax Act (the "Act") for the purposes of determining whether or not two corporations are associated with each other within the meaning of subsection 256(1) of the Act in the hypothetical situation described below.
In the hypothetical situation that you describe, a father, who wishes to assist his son-in-lain start up a home building business, will cause his corporation ("ParentCo") to invest $150,000 in non-voting preferred shares of a corporation that will carry on the business ("ChildCo"). Other than this $150,000, ChildCo has nominal capital. All of the voting shares of ChildCo are owned by his daughter and her husband who have both attained the age of 18 years. The father wishes to ensure that, for the purposes of the Act, ParentCo and ChildCo will not be associated with each other within the meaning of subsection 256(1) of the Act. To ensure that the class of preferred shares of ChildCo will be a specified class, within the meaning of subsection 256(1.1) of the Act, the terms and conditions of the class of the preferred shares of ChildCo held by ParentCo will be the terms and conditions described in paragraphs 256(1.1)(a) to (e) of the Act and there will be no agreement in respect of the preferred shares. In addition, the preferred shares of ChildCo will be retractable by the holder thereof at any time that is more than three years after their issue.
You have asked whether or not, for the purposes of subsection 256(1) of the Act, the class of preferred shares of ChildCo would be a specified class, within the meaning of subsection 256(1.1) of the Act.
It is the Department's opinion that, in the hypothetical situation you describe, the class of preferred shares of ChildCo will be a specified class, within the meaning of subsection 256(1.1) of the Act, even if the shares of such class are retractable by the holder thereof as described above, provided, of course, that the amount that the holder is entitled to receive upon exercising such right to have any share of such class redeemed by ChildCo does not exceed the amount described in paragraph 256(1.1)(e) of the Act in respect of that share.
You have also asked whether or not ChildCo would be controlled, directly or indirectly in any manner whatever, by ParentCo, within the meaning of subsection 256(5.1) of the Act, and, if ChildCo would be so controlled by ParentCo, whether ChildCo would only be so controlled after the preferred shares of ChildCo are immediately retractable, that is, at least three years after such shares were issued.
It is the Department's opinion that Childco would be controlled, directly or indirectly in any manner whatever, by ParentCo, within the meaning of subsection 256(5.1) of the Act. The ownership by ParentCo of the preferred shares of ChildCo would result in ParentCo having influence that, if exercised, would result in control of ChildCo by ParentCo. That the preferred shares' of ChildCo owned by ParentCo may not be immediately retractable does not preclude ChildCO from being so controlled by ParentCo at the particular time. ParentCo's right to require ChildCo to redeem such preferred shares at some time thereafter gives ParentCo influence that, if exercised, would result in ChildCo being controlled by ParentCo at the particular time.
Our opinions in this letter are not rulings and are expressed in accordance with paragraph 24 of Information Circular 70-6R dated December 18, 1978. The facts of a particular situation may lead to a different conclusion.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch