Section 249

The taxation year of an inter vivo trust that has distributed all its property in the year to its beneficiary and, therefore, has effectively been wound-up in the year, is the calendar year. Accordingly the return filing deadline under Reg. 204(2) and s. 150(1)(c) is 90 days after the calendar year end. CRA stated:

We note that paragraph 104(23)(a) supports a conclusion that the tax year of a testamentary trust ends on the date of final distribution of its assets, however, the law does not support a similar conclusion in respect of an inter vivos trust.

"The taxation year of an inter vivos trust is December 31, regardless of when it is wound up....[T]he trust could not avoid the application of paragraph 94(1)(c) by winding up in that year."

"It is our view that by virtue of subsection 104(2) and 249(1) of the Act, the last taxation year of an inter-vivos trust ends on December 31 of that year, even if the assets of the trust have been distributed at an earlier date."

A taxpayer changes from a calendar to a floating fiscal period, with the first such period beginning on January 1, 2014, and ending on January 3, 2015. Would s. 249(3) apply to the subsequent fiscal period, beginning on January 4, 2015 and ending on January 1, 2016? CRA responded:

As a result of [2012] changes to subsection 249(3)… our views in document 5-933096 with respect to the application of 249(3) to the second fiscal period are no longer valid. …[A]ccording to paragraph 249(3)(b), the first fiscal period is deemed to end on December 31, 2014 and the next fiscal period is deemed to commence on January 1, 2015. In addition, paragraph 249(3)(a) would apply to deem the corporation's second taxation year to commence on the first day of the immediately following calendar year, January 1, 2015.

A corporation has a financial year commencing 31 December 2009 and ending 3 January 2011. The Directorate stated (TaxInterpretations translation):

[B]y the operation of paragraphs 249(3)(a) and (b), the corporation will have a deemed taxation year end as well as a deemed fiscal period end of 31 December 2010. Consequently…the corporation must make an adjustment on Schedule 1 of the … T2 in order not to include the results of the business attributable to the period of three days in the calculation of its income for the taxation year deemed to end on 31 December 2010.

Where a corporation has a fiscal year commencing on December 29, 1991 and ending on January 2, 1993 and its subsequent fiscal period commences on January 3, 1993 and ends on January 1, 1994, s. 249(3) will deem the first taxation year to end on December 31, 1992 so that a shareholder loan made on January 2, 1993 will have to be repaid by December 31, 1993 rather than January 2, 1994, and an amount to which s. 78(4) otherwise would apply will have to be paid 180 days after December 31, 1992 rather than 180 days after January 2, 1993. Because the second fiscal period will not exceed 365 days, s. 249(3) will not apply to deem a year-end of December 31, 1993.

Does s. 249(3.1) apply when a corporation files a s. 89(11) election, thereby triggering a deemed year-end - and does a revocation of the election trigger such a deemed year? CRA responded:

[T]he corporation becomes a non-CCPC at the beginning of this particular taxation year and after. Consequently, the fact that the corporation files a subsection 89(11) election will not, in and by itself, trigger a deemed year-end under subsection 249(3.1). …

[A] corporation that revokes its subsection 89(11) election will not be deemed not to be a CCPC at the beginning of the taxation year following the particular taxation year. Consequently, the revocation of the subsection 89(11) election under subsection 89(12) will not, in and by itself, trigger a deemed year-end under subsection 249(3.1).

A few years after the taxpayer (a Canadian-controlled private corporation) made the s. 89(11) election, two public corporations acquired more than 50% of its voting common shares. Did s. 249(3.1) apply to deem the taxpayer to have a taxation year ending immediately before the time of the share acquisition?

By virtue of the election, the taxpayer had ceased to be a CCPC under para. (d) of the definition. Accordingly, s. 249(3.1) did not apply at the time of the share acquisition. However, s. 249(4)(a) would apply if there was an acquisition of control at that time.

On December 1, Bco (a CCPC) makes a binding offer (to which s. 251(5)(b) applies) to purchase all the shares of Aco whose ultimate control is by a public corporation and whose taxation year end is December 31. Does Aco become a CCPC on December 1 at the moment of signature of the offer under s. 249(3.1) rather than at the time of the subsequent actual acquisition of control?

After noting the presumption in s. 251(5)(b), CRA stated (TaxInterpretations translation):

Nonetheless, even if Bco is deemed to control Aco, the Act does not contain any provision providing that the public company ceased to control Aco for purposes of determining if Aco was a CCPC… .This…is what the Court…indicated in Ekamant v. The Queen, 2009 DTC 1271 [2009 TCC 408 at para. 23]… . Thus…Aco did not become a CCPC at the moment of the signature of the purchase offer made by Bco because it continued to be controlled by the public company at such moment. … However, subsection 249(4) can apply when Bco acquires actual control of Aco by reason of the acquisition of all the shares…of Aco, held by the public company.

Opco, a Canadian-controlled private corporation with a September 30 year end, amalgamates on October 1 with another CCPC so that the deemed year end arising from the amalgamation coincides with Opco's normal year end. At noon on October 1, Amalco ceases to be a CCPC by issuing an option to a non-resident. Can Amalco make the s. 249(3.1) election with a view to having only one year end arising out of the transactions (September 30 of that year)?

After noting that in the absence of the election, s. 249(3.1) deemed a year end of Amalco to occur at 11:59 a.m. on October 1, CRA responded negatively (TaxInterpretations translation):

[T]he first condition provided in s. 249(3.1)(c)(i) is not satisfied. As Amalco is a new corporation by virtue of paragraph 87(2)(a) and no provision provides for a continuation of the predecessor corporations for these purposes, Amalco does not have a taxation year which would have ended in the period of seven days that ended immediately before the moment when Amalco lost its CCPC status.

on November 30, a Canadian-controlled private corporation (Corp A) and a non-resident enter into a purchase agreement, with the non-resident closing the purchase of Corp A later in the day. No election is made under s. 256(9), so that the taxation year of Corp A which commenced on January 1 is deemed by s. 249(4) to end at the end of November 29.

By virtue of s. 249(3.1)(a) and s. 251(5)(b), Corp A would have a second taxation year commencing at the beginning of November 30 and ending immediately before the signing of the sale agreement. Accordingly, Corp A would continue to be a Canadian-controlled private corporation for such (second) taxation year.

The common shares of Opco are held as follows: A-20%; B-9%; C-10%; D-25%; E-10%; F-13%; G-13%. A, B and C are a related group as are E, F and G. D is unrelated to the others. All the shareholders act in concert to control Opco.

Will there be an acquisition of control of Opco if: (i) A acquires the shares of E, F and G; (ii) such shares instead are acquired by a Holdco wholly-owned by A; or (iii) A, B, C and D acquire the shares of E, F and G in proportion to their respective existing percentage ownership? CRA responded (TaxInterpretations translation):

[B]y acquiring the common shares…held by E, F and G, A would hold 56% of the common shares of Opco. Consequently, A would control Opco. In these circumstances, the jurisprudence recognizes that control by one person excludes simultaneous control by a group [citing Southside and Emory]… .

Respecting your second question…the control of Opco also would have been acquired by A. With his direct and indirect (through Holdco) interest in Opco, A would control Opco after the share transfer. …

Respecting your last question, the described acquisition of the shares…of Opco by A, B and C and would establish respective interests of 31%, 14%, 16% and 39%. …[T]he related group comprising A, B and C would have an interest of 61%... .That could ["pourrait"] represent a sufficient common link to indicate that a new group controlled Opco. In such determination, it also is necessary to take into account that a significant number of the shareholders of Opco (three out of seven) would cease to be such and the total interest of the departing shareholders would represent a significant percentage (36%) of the totality of the shares of Opco. This situation differs significantly from the case of a departing shareholder with little or no common link or common interest with the other shareholders with which it did not act in concert, and thus did not form part of the control group. …[I]t is quite likely ["fort probable"] that there would be a resulting acquisition of control of Opco… .

A plan of arrangement provide for the following transactions to occur on 18 January 20X1 and in the indicated order but without a particular hour for each transaction being specified:

1. Sale of some assets of the corporation.
2. Roll of its shares.
3. Acquisition of its control (with no s. 256(9) election being made).
4. Amalgamation with the acquirer.

After repeating general comments from 2014-0523251E5 F (quoted immediately below), and noting that s. 249(4)(a) deemed there to be a taxation year end immediately before the commencement of January 18, CRA stated (TaxInterpretations translation):

The moment of such taxation year end thus could only be before the effective hour of the transactions occurring before the amalgamation (taking the into account the logic of their ordering). … Therefore, the corporation must account for the tax consequences respecting the asset sale and share rollover transactions (which occurred before the acquisition of control and the amalgamation) in the taxation year of the corporation terminating before the amalgamation.

The corporation thus technically has two taxation years, one which is deemed to end at the end of 17 January 20x1, and the other which would end in the course of January 18… . The second…would be very short.

Following a sale of assets of a corporation and a rollover of its shares on 18 January 20X1, an acquisition of control of the corporation occurs at 18:00 hours and it then is amalgamated with the acquirer. The plan of arrangement or closing agenda, as the case may be, does not specify particular times at which these transactions occur and the corporation elects under s. 256(9) for the acquisition of control to occur at 18:00 hours. Will multiple year ends occur as a result and, if so, in which taxation year will the preliminary transactions be considered to occur?

CRA stated (TaxInterpretations translation):

When a corporation does not effect transactions outside the ordinary course of business on the day of an amalgamation for which the certificate of amalgamation does not specify the hour of the amalgamation, we consider that the amalgamation generally will occur at the beginning of the day… . In contrast, our position is different when a plan of arrangement or a closing agenda provides for various transactions out of the ordinary course of business to occur on the day of the amalgamation in addition to the acquisition of control and the amalgamation… If the transactions are effected...in a logical order...[CRA] will consider that the amalgamation occurs at a moment determined in accordance with the logic of the transactions. … [Here] this moment follows the effective time of the acquisition of control. …

[B]y reason of the subsection 256(9) election, a deemed taxation year end occurs…at the moment immediately before 18:00 hours… .The corporation must take into account the taxation consequences of the sale transactions…and the share rollovers …in the taxation year…which terminated immediately before the effective time of the acquisition of control. …

Furthermore, given that the amalgamation occurs after all the transactions of January 18…including the acquisition of control…at 18:00 hours, the second taxation year of the corporation terminates immediately before the amalgamation by virtue of paragraph 87(2)(a). …Therefore, the corporation technically has two taxation years which are deemed to end on January 18… . The second…is very short.

An inter vivos trust (Trust), with three individual trustees holds Class A non-voting common shares and C special voting shares of Corporation. An estate, whose three executors are the same individuals, holds non-voting Class B preferred shares. In order to convert the estate's interest into a substantial interest for Part VI.1 purposes, they cause Corporation to redeem the Class C voting shares which, in turn, causes the Class B preferrred shares to become voting pursuant to s. 48(2) of the Quebec Business Corporations Act (a provision which effectively deems all shares to become voting whenever none is voting).

The redemption of the Class C shares did not result in an acquisition of control of the Corporation (TaxInterpretations translation):

[T]he same persons (D, F and G) controlled Corporation before and after the redemption of the Class C shares…because the trustees of Trust who controlled Corporation before the redemption were the same persons as the executors… .

Mr. X, who is the sole shareholder of XYZ Inc., signs a mandate (power of attorney) in favour of his accountant (with whom he deals at arm's length) to become effective in the event of his incapacity.

In stating that there is no acquisition of control when the power of attorney is homologated (becomes effective following such incapacity), CRA stated (Tax Interpretations translation), after referring to Duha:

In effect, notwithstanding the homologation of this mandate governed by the Quebec Civil Code, the ownership of that number of shares conferring a majority of the votes for the election of the board of directors is part of the patrimony of Mr. X. Furthermore, we are of the view that a mandate granted with a view to incapacity should be considered to be an "external document" (in relation to the constating documents of the corporation) in the determination of the de jure control of a corporation.

It is emphasized however that the rights of a mandatary pursuant to a mandate in contemplation of incapacity could, in certain circumstances, engage paragraph 251(5)(b) ITA and subsection 256(1) ITA.

It is generally CRA's position that a target corporation will only have one deemed year end where an acquisition of control of the target is followed on the same date by its amalgamation with the acquirer. "Furthermore...it would appear to be appropriate generally that the transactions which are legally effected by the predecessor corporation should be reported by that same predecessor corporation for tax purposes, rather than by the amalgamated entity."

Where a widely-held public corporation (A) issues treasury shares pursuant to a takeover bid to the shareholders of B (another widely-held public corporation) in exchange for their shares of B, and the exchange ratio is such that the former shareholders of B thereby acquire a majority of the issued shares of A, there will be an acquisition of control of B by A. Although, collectively, the former shareholders of B hold a majority of the shares of A, they would not control A unless there is a common link between them beyond their status as shareholders.

Where an individual (or group of persons) transfers a controlling interest in one corporation to a second corporation in exchange for a controlling interest in the second corporation, there will not be an acquisition of control of the first corporation, but there will be an acquisition of control of the second corporation, where the transfers were not related to the second corporation immediately before the acquisition. Unrelated persons will be considered to be a group where there is evidence that they have a common link or interest or that they act together (i.e., without independent interests) to control the corporation.

Where there is no change in the control of a parent corporation, there has been no change in control of its subsidiaries.

Discussion of what constitutes a "group of persons".

Where trustees of a trust control the voting rights of shares of a corporation prior to the distribution of the shares to unrelated beneficiaries, there will be a change of control on the distribution.

It is RC's position that a shareholders' agreement, regardless of whether or not it is pursuant to a specific statute or includes the corporation as a party, does not affect the determination of control for the purposes of the Act. Accordingly, where two shareholders, who deal at arms's length with each other and own 75% and 25%, respectively, of the shares of a corporation, enter into a unanimous shareholder agreement which provides that the two directors of the corporation shall be elected with the unanimous consent of the shareholders, the control of the corporation will not be affected, although the agreement may be relevant to the question de jure control for purposes of s. 256(5.1).

A corporation ("Holdco") which held less than 50% of the shares of another corporation ("Opco") and which dealt at arm's length with the other shareholders of Opco did not control Opco notwithstanding that pursuant to a voting agreement with another corporation ("Exco"), whose shares were sufficient to result in their combined holding exceeding 50%, Exco agreed to vote its shares of Opco in the same way as Holdco. Accordingly, a further acquisition of shares by Holdco resulting in its own shareholding exceeding 50% entailed an acquisition of control of Opco.

Where 50% of the shares of Corporation C are each owned by Corporation A and Corporation B and an individual (who previously owned 1/2 of the shares of Corporation A) acquired the balance of the shares of Corporation A from his father and all the shares of Corporation B from his uncle, there will be an acquisition of control of Corporation C because the individual will be considered to have acquired control of Corporation B which, prior to the acquisition, was a member of an unrelated group which controlled Corporation C.

Where one of the two 50% shareholders of a company sells his shares to an arm's length purchaser, a group of persons will be considered to have acquired control of the corporation where there is evidence that they have a common link or interest or that they act together to control the corporation. Because the word "control" in ss.111(5) and 249(4) refers to the right of control that rests in the ownership of a majority of the voting rights, the terms of a shareholders' agreement would not by themselves result in de jure control of the company having been acquired.

S.249(4) would apply to the Canadian branch of a U.K. company when control of the U.K. has been acquired.

The voting rights of a public corporation held by a Canadian-controlled private corporation increases from 45% to 55% as a result of the conversion of multiple-voting shares held by members of the public into non-multiple voting shares. If the holding company did not have control over the public corporation prior to the conversion, but had control after the conversion, there would have been an acquisition of control of the public corporation by the holding company. In determining whether a transaction amounts to an acquisition of control one must examine not only the share conditions but also the by-laws as well as any written agreement between the shareholders which may affect the share conditions.

Where Mr. A is a sole shareholder of company A and Mr. A transfers all the shares of company A to company X in exchange for 55% of the voting shares of company X, there would be no acquisition of control of company A.

The executors adopt a first year-end for the estate of an individual who died on March 31, 2016, of September 30, 2016. The second and third year-ends are September 30, 2017 and 2018. Lastly, a year-end is deemed to arise on March 31, 2019 (36 months after death), which is the last taxation year during which the testamentary trust is a graduated rate estate. Thereafter, it is required to adopt a December 31 year-end. Does CRA agree?

CRA responded:

Assuming the estate otherwise meets all the conditions to be the deceased individual's GRE throughout the first 36 month period, where the executor chooses to have a short first taxation year end for the estate the 36 month period would span four taxation years.

In the scenario provided, the first and fourth taxation years are less than 12 months long, and the estate would be subject to tax based on the graduated tax rates for individuals for the first four taxation years as indicated.