March 9, 1982
E. Mikhail (613) 995-1737
Attention: XXXX
Dear Sirs:
This is in reply to your letter of February 8, 1982 in which you enquired about the application of subsection 256(7) of the Income Tax Act.
The hypothetical situation described by you is as follows:
A non-resident parent company owns 100% of a Canadian holding company and this holding company in turn holds varying percentage interests in numerous operating subsidiaries. The non-resident parent company also owns 100% of a United States holding company and this holding company in turn owns varying percentage interests in numerous operating companies. The Canadian holding company controls certain United States corporations while the United States holding company controls certain Canadian corporations.
The situation you are concerned with is where the Canadian holding company acquires the shares of a Canadian operating company owned by the United States holding company and then proposes to amalgamate the acquired company with one of its other Canadian operating companies. The question to be answered relating to the proposed amalgamation of these two companies would be whether or not there has been a change in control in the Canadian operating company owned by the United States holding company as a consequence of the acquisition by the Canadian holding company or whether the deeming provision of paragraph 256(7)(a)(i) applies and deems no change in control to have occurred.
Subparagraph 256(7)(a)(i) provides that where shares of a particular corporation (in this example, the Canadian operating company owned by the U.S. holding company) have been acquired by a person (the Canadian holding company) after March 31, 1977 that person (being the Canadian holding company) shall be deemed not to have acquired control of the particular corporation (the Canadian operating company owned by the U.S. holding company) by virtue of such share acquisition if that person (the Canadian holding company) was, immediately before such share acquisition, related to the particular corporation (the Canadian operating company owned by the United States holding company).
It is our view that the deeming provision of subparagraph 256(7)(a)(i) applies and deems the Canadian holding company not to have acquired control of the Canadian operating company. It is our opinion that the Canadian holding company is related to the Canadian operating company immediately before the share acquisition under the provisions of sub- paragraph 251(2)(c)(i), paragraph 251(2)(b) and subsection 251(3). Needless to say, the deeming provision of subparagraph 256(7)(a)(i) is for purposes of subsection 66(11), 87(2.1) 88(1.1) and (1.2) and 111(4) and (5) only.
Yours truly,
for Director Corporate Rulings Division Legislation Branch