Principal Issues: In the context of a sale of the shares of the capital stock of a corporation, whether subsection 256(9) could allow the vendor and purchaser of the shares (with a specific clause in their contract) to have an acquisition of control of the corporation at a particular time that is different than the point in time at which the purchaser acquires ownership of the shares of the capital stock of the corporation under the contract.
Position: No.
Reasons: Subsection 256(9) does not allow the parties (with a specific clause in their contract) to have an acquisition of control at a particular time that is different than the point in time at which the purchaser acquires ownership of the shares of the corporation.
APFF Federal Tax Roundtable 7 October 2013
APFF Conference 2013
Question 12
Agreement on the time of acquisition of control under subsection 256(9)
Subsection 256(9) provides that, for the purposes of the ITA, other than for the purposes of determining if a corporation is, at any time, a small business corporation or a Canadian-controlled private corporation, control of the corporation that is acquired at a particular time on a day will be deemed to have been acquired at the beginning of that day or, if the corporation so elects, at the time of the day on which the control is acquired. The election is made in the corporation's income tax return filed under Part I for the taxation year ending immediately before the acquisition of control.
It is generally accepted that the "particuar time on a day" when "control of a corporation is acquired" is the time at which the transaction documents are signed.
Question to the CRA
Can parties to a transaction choose by agreement a precise time of the day at which control is acquired that is other than the time at which the transaction documents are actually signed?
Take for example the following situation.
A shareholder ("Mr.A") sold all of his shares of ABC Inc. to a third party ("Mr.X"). The signature of all the documents necessary to effect the transfer of the shares by the parties (sales agreement, endorsement of share certificates, payment) took place at 13.30 hours on Friday, July 26, 2013.
In order for the cut-off for financial and accounting adjustments relating to the sale transaction to take place at the end of the day instead of in its middle, the following clause was provided in the share sale agreement entered into between Mr. A and Mr. X:
Notwithstanding the time of the signing of this agreement between the parties, the parties agree that for the purposes of subsection 256(9), the time when the control of ABC Inc. will be acquired by Mr. X will be at 0 hours on Saturday, July 27, 2013.
No other agreement was made between the parties respecting the transfer of ABC Inc. shares by Mr. A to Mr. X.
The purpose of this clause was to set a prospective and non-retroactive time for the acquisition of control.
CRA response
Subsection 256(9) does not allow a corporation to choose a time of acquisition of control that would be different from when the control of the corporation is actually acquired.
In the situation described above, ABC Inc. could not choose for the purposes of subsection 256(9) to have an acquisition of control by Mr. X occur at 0 hours on Saturday, July 27, 2013, if Mr. X actually became the owner of the shares of the capital stock of ABC Inc. at 13:30 hours on Friday, July 26, 2013 and acquired the control of ABC Inc. at that time.
Where the election under subsection 256(9) is effected by a corporation, the effect of the election is that the time of acquisition of control of the corporation is the time of the day the control of the corporation is acquired. In other words, the legal fiction in subsection 256(9) to the effect that “where control of a corporation is acquired … at a particular time on a day, control of the corporation shall be deemed to have been acquired … at the beginning of that day” does not apply.
Robert Gagnon
(613) 957-2108
2013-049575