E. Mikhail (613) 995-1787
September 27, 1988
Dear Sirs:
This is in reply to your letter of July 11, 1953 it which you asked for our views or whether the meaning of Control in subparagraph 40(2) (a)(ii) of the Income Tax Act is de jure rather than de facto control as established by the courts in the context of section 256.
The word control is not a defined term in the income Tax Act for purposes of subparagraph 40(2)(a)(ii). Accordingly, the determination of the meaning of control has been left to the courts. The courts have generally considered that control means de jure control as opposed to de facto control. Although these court cases dealt with the meaning of control within the context of section 256 and not specifically subparagraph 40(2)(a)(ii), it is our view that the concept of de jure control also applies to subparagraph 40(2)(a)(ii). As you know, the de jure control test was first accepted in the Buckerfield's Ltd. case (64 DTC 5301 (Ex.Ct.) and approved by the Supreme Court of Canada in the Dworkin Furs Ltd. case (67 DTC 5035).
The concept was later modified by the Supreme Court of Canada in Oakfield Developments Ltd. (71 DTC 5176) and later by the Federal Court of Appeal in the Imperial General Properties Ltd. case (83 DTC 5055). With respect to the last case quoted, we would like to add that the Crown has obtained leave to appeal to the Supreme Court of Canada.
Yours truly,
ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR D. B. MORPHY
for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch