5-9256
P. Diguer
(613) 957-2120JAN 30 1990
Dear Sirs:
Re: Subsection 256(5.1) and paragraph 125(7)(b) of the Income Tax Act (Canada) (the "Act")
We are writing in response to your letter of December 13, 1989 wherein you requested our opinion regarding the application of subsection 256(5.1) and paragraph 125(7)(b) of the Act in the hypothetical situation outlined hereunder.
Facts
1. Corporation A, a Canadian corporation and a private corporation is a wholly-owned subsidiary of Corporation N. The expression "Canadian corporation" and "private corporation" as referred to here and subsequently have the meaning assigned in paragraphs 89(1) (a) and 89(1)(f) of the Act, respectively.
2. Corporation N, all of whose shares are held by Corporation 8, is a non-resident corporation for purposes of the Act.
3. Corporation 8, whose shares are held by persons resident in Canada, is a Canadian corporation and a private corporation.
In your earlier referenced letter you indicate that it is the Department's view, as indicated in example 3 of Interpretation Bulletin IT-458 , dated September 8, 1980, that in a corporate structure such as the one described above, Corporation A would not be considered a Canadian-controlled private corporation as it is directly controlled by a non-resident corporation. The expression "Canadian-controlled private corporation" as referred to here and subsequently has the meaning assigned in paragraph 125(7)(b) of the Act.
You enquire as to the status of the Department's view as summarized above in light of the recently enacted provisions of subsection 256(5.1). Briefly, this new provision expands the concept of control for certain provisions of the Act to include de facto control by clarifying, for purposes of the Act, the expression "controlled, directly or indirectly in any manner whatever".
It is your expressed view that subsection 256(5.1) will apply in making the determination under paragraph 125(7)(b) of the Act since the latter includes the expression, "controlled, directly or indirectly in any manner whatever". In particular, it is your contention that in the hypothetical situation described above, Corporation A should be considered a Canadian-controlled private corporation as control in fact, to the exclusion of all others, rests with Corporation 8.
Opinion
Control of a particular corporation may be direct or indirect, de jure or de facto and as such, in the final determination, it is a question of fact whether a particular corporation is a Canadian-controlled private corporation and accordingly, each case must be considered individually. Nevertheless, it is important to note that corporation can be considered to be controlled at the same time by several persons or groups of persons.
In the hypothetical situation described above, we will assume for discussion purposes, that Corporation N exerts direct control over Corporation A, as it holds all of the issued shares whereas Corporation 8 exerts indirect control over Corporation A through its shareholdings in Corporation N.
The term "controlled, directly or indirectly in any manner whatever" was an undefined term for purposes of the Act, prior to the introduction of subsection 256(5.1). It was the Department's view, adopted from various judicial decisions, that the expressions "control" and "control, directly or indirectly in any manner whatever", contemplated the right of control that rests in ownership of such a number of shares of a particular corporation, as carries with it the right to a majority of the votes in the election of the board of directors of the particular corporation.
It continues to be our view, as outlined in paragraph 24 of Interpretation Bulletin IT-64R2 , dated December 20, 1983, that a taxpayer controls a corporation provided he controls one or more other corporations which, singly or between them have voting control of the first-mentioned corporation. This view of indirect control is consistent with the reasoning adopted by the courts in the case of Vineland Quarries and Crushed Stone Ltd. v. M.N.R. ( 66 DTC 5092) (Ex. Ct.) affirmed by ( 67 DTC 5283) (S.C.C.). Therefore, in the hypothetical situation outlined in your letter, Corporation N will be considered to control Corporation 8 directly whereas, Corporation A will be considered to control Corporation 8 indirectly.
As indicated above, the legislation has been expanded to include the concept of de facto control for certain provisions of the Act by clarifying the expression "control, directly or indirectly in any manner whatever". However, the introduction of this new provision in the Act does not alter the fact that in the hypothetical situation described above, direct de jure control remains with Corporation N, a non-resident. Accordingly, it is our view that Corporation A is controlled directly by Corporation N, a non-resident corporation, and as such would not qualify as a Canadian-controlled private corporation.
We trust our comments will be of assistance.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch