Principal Issues: In a particular situation, Mr. A and Mr. C are both related to Mr. B. However, Mr. A is not related to Mr. C. Each of Mr. A, Mr. B and Mr. C holds all of the issued and outstanding shares of the capital stock of, respectively Aco, Bco and Cco. Each of Aco, Bco and Cco holds one-third of the issued and outstanding shares of the capital stock of Dco. Aco and Cco are both related to Bco. Thus, Aco and Cco are deemed to be related to each other for the purposes of subsections 251(1) and 251(2) pursuant to subsection 251(3). But for the deeming rule in subsection 251(3), Aco and Cco would not be related to each other. Aco also holds all of the issued and outstanding shares of the capital stock of Eco. a) Whether Aco, Bco and Cco form a related group as defined in subsection 251(4); if the answer in a) is affirmative, b) whether Aco is related to Dco; and c) whether Eco is related to Dco.
Position: a) yes; b) as the related group formed by Aco, Bco and Cco is in a position to control Dco, that related group is deemed, pursuant to paragraph 251(5)(a), to be a related group that controls Dco. Thus Aco and Dco are related to each other pursuant to subparagraph 251(2)(b)(ii) and also pursuant to subparagraph 251(2)(c)(iii); and c) Eco and Aco are related to each other pursuant to subparagraph 251(2)(c)(iii).
Reasons: Question of fact and wording of the Act.
APFF - 2014 Conference
Question 17
Related group under subsections 251(3) and (4)
Mr. A and Mr. C are both related to Mr. B. However, Mr. A is not related to Mr. C. Mr. A, Mr. B and Mr. C each holds all of the issued and outstanding shares in the capital stock of Aco, Bco and Cco, respectively. Aco, Bco and Cco each holds one-third of the shares in the capital stock of another corporation, Dco. Aco and Cco are both related to Bco. Aco holds all of the issued and outstanding shares in the capital stock of another corporation, Eco.
Since Aco and Cco are both related to the same corporation, Bco, it follows that Aco and Cco are deemed to be related under subsection 251(3) for the purposes of subsections 251(1) and 251(2). It should be noted that Aco and Cco would not be related to each other, had it not been for the presumption in subsection 251(3).
Questions to the CRA
a) Does the CRA consider that, because Aco, Bco and Cco are deemed to be related to each other under subsection 251(3) for the purposes of subsections 251(1) and 251(2), they also form a "related group" for the purposes of subsection 251(4)?
b) Does the CRA consider that Aco is related to Dco?
We are of the view that if the answer to question 1(a) were affirmative, Aco and Dco would be related to each other under subparagraph 251(2)(b)(ii) while if the answer to question (a) were negative, Aco would not be related to Dco.
c) Does the CRA consider Eco to be related to Dco?
We are of the view that if the answer to question 1 (a) were affirmative, Eco would be related to Dco under subparagraph 251(2)(c)(iii) since Aco would be related to a member of a related group that controls Dco. On the other hand, if the answer to question 1 (a) were negative, Eco would not be related to Dco since Aco would not be related to each member of an unrelated group that controls Dco (as required by subparagraph 251(2)(c)(iv) to ensure that Eco and Dco are related).
CRA response to question 17(a)
Aco, Bco and Cco are a "related group" as per subsection 251(4) taking into account that these corporations are related with each other by virtue of subsection 251(3).
Consistently with paragraph 251(5)(a), since the related group comprising Aco, Bco and Cco is in a position to control Dco, this related group is deemed to be a related group that controls Dco for purposes of the application of subsection 251(2).
CRA response to question 17(b)
In light of the above, Dco would also be related to Aco by virtue of subparagraph 251(2)(b)(ii) given that Aco is a member of a related group controlling Dco.
Furthermore, Aco and Dco would also be related with each other by virtue of subparagraph 251(2)(c)(iii) by reason of the fact that Aco is controlled by a person (Mr. A) who inter alia is related with a person (Aco) which is a member of the related group controlling Dco.
CRA response to question 17(c)
In light of the above, Dco and Eco would be related with each other by virtue of subparagraph 251(2)(c)(iii) by reason of the fact that Eco is controlled by a person (Aco) who is related inter alia with a person (Bco) which is a member of the related group controlling Dco.
Jean Lafrenière
(613) 941-2956
October 10, 2014
2014-053807