Victoria District Office
Date August 21, 1986
FROM Head Office
Specialty Rulings Directorate
R.A. Primaeau
(613) 957-2127ATTENTION G.K. Tse
Business Audit Section 1431-2RE Audit of XXXX
This is in reply to your memorandum of June 3, 1986 to which was attached a copy of a draft letter to the Department in Head Office from the above taxpayer's solicitors, XXXX. You have asked to be provided with a copy of our reply thereto. As our records do not indicate our having received a final original letter directly from XXXX we are responding to the position taken by them in the draft letter in this memorandum to you, which you may forward to XXXX.
One issue raised concerns the interpretation of subparagraph 251(2)(c)(vi) of the Income Tax Act (the "Act"). According to XXXX there are two possible interpretations for this subparagraph. The first is that for two corporations to be considered related, all the members of an unrelated group which controls one corporation must be related to the same member of an unrelated group which controls the other corporation. The second possible interpretation given by XXXX is that each member of an unrelated group that controls one corporation may be related to either the same or a different member of an unrelated group which controls the other corporation.
XXXX take the position that the first interpretation is the correct one. They argue that the situations set out in subparagraphs 251(2)(c)(i) through (vi) of the Act are all illustrative of a common mind existing within the two corporations and that there needs to be a direct link between the corporations which is created by the relationships between the person or group of persons controlling each corporation in order to establish this common mind. They then go on to state why they think such a direct link between, and resultant common mind within, the corporations exist under the situations described in each of subparagraphs 251(2)(c)(i) through (v), as well as the reasons why they exist using the above-mentioned first interpretation of subparagraph 251(2)(c)(vi) but not using the second. XXXX refer to the comments regarding a "group" contained in The Queen v. B.B. Fast & Sons Distributors Ltd., 86 DTC 6106. They also refer to the comments and illustrative examples given by CCH Limited at paragraph 28,366 of the Canadian Tax Reporter and by MacDonald and Cronkright on page 48,038 of Income Taxation in Canada.
We agree with XXXX that all of the situations set out in subparagraphs 251(2)(c)(1) to (vi) are situations involving a direct link between the two corporations which is created by the relationships between the person or group of persons controlling each corporation. However, we do not think that the above-mentioned first interpretation of subparagraph 251(2)(c)(vi) is more illustrative of such a direct link between or common mind within the two corporations than is the second interpretation, nor do we think that the B.B. Fast case has any relevance with respect thereto.
With respect to the references from CCH Limited and MacDonald and Cronkright, we find that they in fact support the view that the above-mentioned second interpretation is the more correct one. We agree that the illustrative examples of subparagraph 251(2)(c)(vi) given in the Canadian Tax Reporter and in Income taxation in Canada are examples of the situation described in the above-mentioned first interpretation. However, if one studies these examples carefully, it can be seen that both are also examples of the situation described in the second interpretation. Thus, nothing conclusive can be drawn from the examples themselves. (To further muddy the waters, it should be noted that the narrow situation described in the first interpretation fits within the broader situation described in the second interpretation). However, the comments by both CCH Limited and by MacDonald & Cronkright provide clarification. CC Limited states that "(t)he members of one of the unrelated groups may be related to members of the other unrelated group ..." (underlining ours). The use of the plural of the word "member" twice cannot possibly support the first interpretation, although it clearly supports the second interpretation. MacDonald and Cronkright state (on page 48,039) with respect to the illustrative example which they give that the two corporations are related because "X is related to C" and "N is related to B", which again clearly supports the second interpretation.
All of the above notwithstanding, we think that the best way to resolve this issue is to simply read the words in paragraph 251(2)(c) of the Act. When we do so, we do not see any ambiguity. Subparagraphs 251(2)(c)(i) to (vi) do not in fact mention any requirement that there be a direct link between the two corporations or a common mind within the two corporations. They simply provide that the two corporations are related in certain situations where specific relationships exist between the person or group of persons controlling each corporation. With regard to the relationships that must exist in a subparagraph 251(2)(c)(vi) situation, the words of that subparagraph are very clear. They simply indicate that each and every one of the members of an unrelated group that controls one of the corporations must be related to at least one of the members of an unrelated group that controls the other corporation. These words do not say that, in each of these relationships, the one member of the unrelated group that controls the second corporation must be the same person.
We therefore respectfully disagree with XXXX. That is, in our opinion, the only possible interpretation that can be taken from the words in subparagraph 251(2)(c)(vi) of the Act is the above-mentioned second interpretation.
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