A.A. Cameron (613) 957-2121
Re: Whether corporations are related for the purposes of the Income Tax Act (the "Act")
June 17, 1986
Dear Sirs:
We apologize for the delay in responding to your letter of March 17, 1986 in which you requested our opinion as to whether two corporations, say X and Y, would be related for the purposes of the Act in the following hypothetical situation:
- the shares of Corporation X are beneficially owned equally by individual A and his spouse, individual B
- individual B's brother-in-law ("Mr. C") and three of Mr. C's brothers each beneficially own 25% of the shares of corporation Y
In order to determine whether corporations are related for the purposes of the Act it must first be determined who controls the corporations. The word control, while not defined in the Act, has been considered by the courts to refer to the right that rests in ownership of a sufficient number of shares as to give a majority of the voting power in the corporation. The determination of control is therefore a question of fact and it may be necessary to look beyond a corporation's share register to make the determination e.g. special provision in the letters patent, articles of association or by-laws of the corporation or written restrictive agreements between shareholders may affect this determination.
In the hypothetical situation presented above individuals A and B would both be related to Mr. C, however, provided neither corporation X nor corporation Y is controlled by one person who is related for the purposes of the Act to the person, or to any member of the related group, that controls the other corporation, and that both these corporations are not related for the purposes of the Act to the same third party corporation, corporation X and Y would not, in our opinion, be related for the purposes of the Act. Even though these two corporations may not be related it would remain a question of fact as to whether or not at a particular time they were dealing with each other at arm's length for the purposes of the Act.
We hope our comments are of assistance to you.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs branch