| 19(1) | File No. 5-7721 |
| Firoz Ahmed | |
| (613) 957-2092 |
June 21, 1989
Dear Sirs:
Re: Subsection 249(4) of the Income Tax Act (Canada) (the "Act")
This is in response to your letter of March 17, 1989 in which you requested our views as to the application of subsection 249(4) of the Act in the context of the situation described below.
Company C is a wholly-owned Canadian subsidiary of a United States company ("Company U"). Company U is in turn wholly owned by a U.S. partnership of which United States corporations, Company X and Company y are unrelated are equal partners. Company X and Company are unrelated and are each general partners with equal votes and other rights in the partnership. During the year Company X sells its 50% interest in the partnership to Company Y.
You note that if Company X and Company Y each owned 50% of the shares of Company U directly, there would clearly be an acquisition of control, for purposes of subsection 249(4) of the Act, upon Company X selling its shares of Company U to Company X. However you are of the view that the interposition of the U.S. partnership raises some question as to whether there has been an acquisition of control for purposes of subsection 249(4) of the Act of Company C on the sale of the partnership interest by Company X.
Opinions
Upon the sale of Company X of the partnership interest to company Y, the partnership would cease to exist because Company Y would be the only remaining "partner". As a result Company Y would acquire 100% of the shares of Company U, which would constitute an acquisition of control of Company C, such that the taxation year of Company C would be deemed to have ended immediately before such acquisition, by virtue of subsection 249(4) of the Act.
In a situation where a partnership having particular partners owned all of the shares of a corporation and the identity of the particular partners changed, whether there would be an acquisition of control of the corporation would depend on the relevant circumstances, including the relative interests of the partners in the partnership and the terms of the partnership agreement. In many such cases, some or all of the partners of the partnership would likely constitute a group of persons which controlled the corporation indirectly through the partnership would likely constitute a group of persons which controlled the corporation indirectly through the partnership. If the change in the identity of the partners affected the composition of the control group anew group of persons would be considered to have acquired control of the corporation for purposes of subsection 249(4) of the Act.
The above comments are expressions of opinion given in accordance with the procedures set out in Information Circular 70-6R.
Yours truly,
for Director Reorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch