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Attention: XXXXXXXXXX
Dear Sirs:
RE: Acquisition of Control of a Corporation - Subsections 111(4), 111(5) and 256(7) of the Income Tax Act (the "Act")
We refer to your letter of July 28, 1993, in which you requested our views as to whether the acquisition of control of a corporation would occur in the circumstances described below.
Mr. C. owns all of the issued and outstanding voting common shares of S. Ltd. The estate of the late Mr. D. (the "Estate"), holds voting preferred shares of S. Ltd. such that the Estate exercises voting control over S. Ltd. These shares are held for the life of Mrs. D. (who may encroach on capital) with the remainder to be distributed equally between Mr. C. and Mrs. N., subsequent to the death of Mrs. D. The trustees of the Estate are Mrs. D., Mr. C., Mrs. N. and an arm's length trust company (collectively the "Trustees"). Mrs. N. is the sister of Mr. C., and Mrs. D. is their mother. Mr. C. and Mrs N. are both over 18 years of age.
In addition to owning all of the issued and outstanding voting common shares of S. Ltd., Mr. C. also owns all of the issued and outstanding shares of R. Ltd. R. Ltd. has net capital losses and non-capital losses, within the meaning of paragraph 111(8)(a) and paragraph 111(8)(b) of the Act, respectively.
The last will and testament of the late Mr. D. (the "Will"), confers certain powers on the Trustees in addition to those powers conferred on them by law, including the power to act for, vote and represent the Estate as a shareholder in any corporation in which the Estate holds shares. However, as the Will is silent as to whether a decision affecting the Estate may be made by majority vote of the Trustees, the common law applicable to trusts requires that unanimity of the Trustees is necessary to implement a particular decision. No person, including a trustee, has the right to replace a trustee or to cause any one of them to resign.
It is proposed to amalgamate S. Ltd. and R. Ltd. to form Amalco. As a result of the amalgamation, control of Amalco would be acquired by the Estate, since the Estate would receive sufficient voting preferred shares of Amalco for this purpose.
You have asked us to comment on the following questions:
(i) Would S. Ltd. and R. Ltd. be related prior to the amalgamation?
(ii) For the purposes of section 111 and subsection 87(2.1) of the Act, would control of R. Ltd. be acquired by the Estate as a result of the amalgamation, such that the deduction of any net capital losses of R. Ltd. would, pursuant to subsection 111(4) of the Act, be denied to Amalco, and the deduction of any non-capital losses of R. Ltd. would be restricted pursuant to the provisions of subsection 111(5) of the Act?
(iii) If an acquisition of control of R. Ltd. would be considered to have occurred, would the provisions of subparagraph 256(7)(a)(iv) of the Act apply such that the Estate would be deemed not to have acquired control?
It is your view that pursuant to subparagraph 256(7)(a)(iv) of the Act, the amalgamation would not result in an acquisition of control, because S. Ltd. and R. Ltd. would be related to one another by virtue of subparagraph 251(2)(c)(iii) and paragraph 251(5)(a) of the Act. For this purpose, you are also of the view that Mr. C., Mrs. N. and Mrs. D. constitute a related group that controls the Estate, and therefore, would be able to exercise voting control over S. Ltd. Alternatively, if Mr. C. chose not to agree with the other trustees of the Estate, he would, as a result, be able to exercise voting control over S. Ltd. by virtue of his ownership of the voting common shares of S. Co.
Our Comments:
From the contents of your letter, it would appear that the above situation refers to specific taxpayers and describes a transaction that the taxpayers would like to carry out. Confirmation of the tax consequences of specific proposed transactions will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance ruling are set out in Information Circular 70-6R2 dated September 28, 1990, and if you wish to submit such a request, we would be pleased to consider it. Nevertheless, we are able to provide you with the following general comments.
The provisions of subparagraph 256(7)(a)(iv) of the Act apply where a corporation formed by an amalgamation acquires control of a particular corporation referred to in the subparagraph. This is not the case in the situation described in your letter, since it is the acquisition of control of R. Ltd., one of the predecessors of Amalco, that is in question. Consequently, subparagraph 256(7)(a)(iv) of the Act has no application to your situation. Therefore, it is unnecessary to consider the application of subparagraph 251(2)(c)(iii) and paragraph 251(5)(a) of the Act in this context.
However, we would note that subparagraph 251(2)(c)(iii) of the Act would not apply to relate S. Ltd. and R. Ltd., because given the facts of the situation described above, we do not think that Mr. C. is related to any member of a related group that controls S. Ltd. Since the arm's length trust company is one of the trustees of the Estate, and because the Will does not provide that a decision affecting the Estate may be made by majority vote, it cannot be said that control of S. Ltd. is exercisable by the related group of Mr. C., Mrs. N. and Mrs. D. While we acknowledge that Mr. C. is the only person who may be in a position to control S. Ltd., this position would not arise unless the Trustees of the Estate disagreed with respect to a situation affecting the voting of the shares of S. Co. However, this possibility does not result in control of S. Ltd. by Mr. C., because one or more of the other Trustees may apply to the courts to determine the outcome of any dispute arising between them.
In our view, it is the provisions of paragraph 256(7)(b) of the Act that would apply to the situation described above, since the amalgamation of S. Ltd. and R. Ltd. would result in control of Amalco being acquired by a group of persons comprised of the Trustees of the Estate, which would include the arm's length trust company as well as Mr. C., and it is clear that such group did not control R. Ltd. immediately before the amalgamation. Consequently, pursuant to paragraph 256(7)(b), such group would be deemed to have acquired control of R. Ltd. immediately before the amalgamation, unless control would not have been acquired if such group had acquired all of the shares of R. Ltd. immediately before the amalgamation.
To answer this question, it is necessary to consider the provisions of paragraph 256(7)(a) of the Act, in that one would have to conclude that the group of persons comprised of the Trustees of the Estate would not have acquired control of R. Ltd. had the group acquired all of the shares of R. Ltd. immediately before the amalgamation. In interpreting the provisions of paragraph 256(7)(a) where there would be an acquisition of shares of a corporation by more than one person, it is the Department's position that those persons will be deemed by paragraph 256(7)(a) not to have acquired control if each of those persons is a person described in subparagraph 256(7)(a)(i) of the Act. We stated this position in question 66 of the 1987 Revenue Canada Round Table that was published in the 1987 Conference Report, and again in question 41 of the 1990 Revenue Canada Round Table that was published in the 1990 Conference Report.
In applying the provisions of subparagraph 256(7)(a)(i) for the purposes of paragraph 256(7)(b), although Mr. C would be related to R. Ltd. by virtue of subparagraph 251(2)(b)(i), and each of Mrs. N and Mrs. D would be related to R. Ltd. by virtue of subparagraph 251(2)(b)(iii), clearly, the arm's length trust company would not be related to R. Ltd. Therefore, the provisions of paragraph 256(7)(a) of the Act will not apply to prevent the application of paragraph 256(7)(b) of the Act. It is therefore our view that, an acquisition of control of R. Ltd. would, pursuant to paragraph 256(7)(b), be deemed to have occurred immediately before the amalgamation of S. Ltd. and R. Ltd. This view presupposes that the Trustees would vote unanimously in favour of the amalgamation of S. Ltd. and R. Ltd., and having done so, the application of paragraph 256(7)(b) of the Act would automatically follow.
We also considered the effect of the provisions of new subparagraph 256(7)(a)(ii) of the Act as set out in draft legislation issued in August 1993 by the Minister of Finance, the Honourable Gilles Loiselle, on the situation described above. As indicated above, the Will does not provide that the related group of Mr C, Mrs D and Mrs N may by majority vote prevail in the administration of the Estate, and therefore, the "group of persons" controlling Amalco includes the arm's length trust company. Consequently, for the purposes of paragraph 256(7)(b) of the Act, because such group would be deemed to have acquired control of R Ltd. immediately before the amalgamation, it cannot be said that each member of the group would, for the purposes of proposed subparagraph 256(7)(a)(ii) of the Act, have been related to R Ltd. immediately before the time that control of R. Ltd would have been so acquired.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch