28 November 1989 Income Tax Severed Letter AC5867 - Association of Corporations Rules

Current Amendments Division                    Specialty Rulings
B.J. Bryson, A/Director General                  Directorate
                                               P. Diguer
                                               957-8677

Subsection 256(1) of the Income Tax Act

We have recently been asked for our opinion concerning the application of the new association rules and the timing of the application of these new rules as provided in subsection 256(1) of the Act and subsection 192(6) of Bill C-139, respectively. Briefly, the situation in question involves 3 corporations wherein two particular corporation under the new rules.

The relevant facts concerning this matter, as presented to us, are as follows:

FACTS

1) Mr. A is the sole shareholder of Holdco A and also owns 75% of the shares of Opco A.

2) Son A owns 25% of the shares of Opco A and also owns 25% of the shares of Opco B.

3) Mrs. A owns 75% of the shares of Opco B.

4) The taxation years of Holdco A, Opco A and Opco B are June 30, December 31 and December 31, respectively.

5) All of the companies referred to are Canadian-controlled private corporations within the assigned by paragraph 125(7)(b) of the Act.

6) All of the above corporations were in existence prior to February 10, 1988 and none of these corporations:

    a)    was incorporated;

    b)    was formed as result of an amalgamation; or 

    c)    acquired from a person with whom it did not deal at
          arm's length all or substantially all of the assets
          used by it in its business; after February 10, 1988.

7) The 1989 taxation year of each of these corporations will end on the same calendar date in 1989 as the calendar date in 1987 on which the 1987 taxation year of that corporation ended.

It is our opinion that the New Rules will apply to the 1989 taxation year of any two or more corporations if the 1989 taxation year of each such corporation will commence after 1988. In light of the above and given the hypothetical situation outlined earlier, the New Rules would apply to the 1989 taxation year of Opco A and Opco B, in order to determine whether or not these companies are associated with each other in their 1989 taxation year.

The old rules would apply to the 1989 taxation year of any grouping of the above companies that includes Holdco A because the 1989 taxation year of all these companies did not commence after 1988. As such, Holdco and Opco A will continue to be associated under the old rules in each of their 1989 taxation years. The New Rules will apply to the 1990 and subsequent taxation years of any grouping of companies that includes Holdco A.

However, in light of the above and given their common association with Opco A in each of their 1989 taxation years, it would appear that Holdco A and Opco B may be associated in 1989 by virtue of subsection 256(2) of the Act.

                 21(1)(b)

M.A. Hiltz for Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch