Section 256

Subsection 256(1) - Associated corporations

Paragraph 256(1)(a)

Cases

The Queen v. W. Ralston & Co., 96 DTC 6488 (FCTD)

100 voting common shares of the taxpayer were held by members of the Cohen family, and the 100 voting preferred shares of the taxpayer were held as to 50 shares by the son of the Cohen's solicitor as to the other 50 preferred shares, by the solicitor's secretary. The taxpayer was not controlled by the Cohens, with the result that it was not associated with various corporations that were controlled by the Cohens.

Harvard International Resources Ltd. v. Provincial Treasurer of Alberta, 93 DTC 5254 (Alta. Q.B.)

The taxpayer held an undivided 99.328% interest in the 100 outstanding common shares of a corporation ("Holdings") and another corporation ("Energy") held all the other outstanding shares including 150 voting preferred shares. In response to a submission of the provincial Crown that the taxpayer was associated with Holdings for purposes of s. 26.1 of the Alberta Corporate Tax Act (which applied the test in s. 256(1) of the federal Act as it then read) on the basis that under the terms of a shareholders agreement the taxpayer effectively had the right to cause Holdings to redeem the shares held by Energy upon the termination by the taxpayer of an agreement for the provision by Energy of certain management services to a partnership, Hutchinson J. found that such rights of the taxpayer were "not to be found within the confines of Holdings' charter and by-laws where the real test of de jure control must be found" (p. 5265). Accordingly, Holdings was controlled by Energy and not by the taxpayer.

The Queen v. Imperial General Properties Ltd., 85 DTC 5500, [1985] 2 CTC 299, [1985] 2 S.C.R. 288

The Wingold group held 90 common shares of the taxpayer and the Gasner group held 10 common shares and 80 voting cumulative preference shares with a nominal par value and the entitlement, upon the winding-up of the taxpayer, to receive that par value plus any accumulated but unpaid dividends. Since the corporate charter also provided that the taxpayer would be wound up upon a resolution for that purpose supported by 50% of the voting rights in the company, and the Wingold group thus had "the right to terminate the corporate existence should the presence of the minority common and preference shareholders become undesirable", the Wingold group controlled the taxpayer.

Allied Farm Equipment Ltd. v. MNR, 73 DTC 5036, [1972] CTC 619 (FCA)

Given that s. 39(4) of the pre-1972 Act applied only for the purposes of s. 39, which provided a reduced rate of tax for certain Canadian corporations, s. 39(4) did not make each of two Canadian-resident corporations associated with a U.S.-resident corporation, with the result that the two Canadian-resident corporations were not deemed by virtue of s. 39(5) to be associated with each other.

Donald Applicators Ltd. v. MNR, 69 DTC 5122, [1969] CTC 98 (Ex Ct), briefly aff'd 71 DTC 5202, [1971] CTC 402 (SCC)

498 Class B shares in the capital of each of ten companies was held by a corporation ("Saje") and 2 Class A shares were held in each corporation by two unrelated persons who, in each case, were Bahamian lawyers who did not hold shares in any of the other nine companies. The Class B shares carried the right to vote on all questions except the election of directors (who were the relevant Bahamian lawyers) and the Class A shares had full voting rights, including the exclusive right to vote on the election of directors. The net yearly profits of the company were required to be distributed each year in cash, and no shares could be issued by the directors without the unanimous consent of the existing shareholders.

All ten companies were controlled by Saje for purposes of s. 39(4)(a) of the pre-1972 Act in light of the fact that the Class B shareholders had the voting power to change the articles of each company, and thereby had the ultimate power to change the directors. Although in a situation where "the directors had been shorn of authority to make decisions binding upon the company and such decisions had been reserved for the shareholders in general meeting", the ordinary rule, that control resides in the voting power to elect directors, might not apply, here, the dividend and share-issuance restrictions did not constitute a substantial restriction on the powers of the directors.

MNR v. Dworkin Furs (Pembroke) Ltd., 67 DTC 5035, [1967] CTC 50, [1967] S.C.R. 223

Dworkin Furs Ltd. owned 48% of the issued shares of Dworkin Furs (Pembroke) Limited in its own name and 2% in the names of Roy Saipe and Helen Saipe as its nominees, with the other 50% being owned by Sadie Harris. In light of the test of de jure control enunciated in the Buckerfield's case (64 DTC 5301 at 5303), in these circumstances Dworkin Furs (Pembroke) Limited was not controlled by Dworkin Furs Ltd. for purposes of s. 39(4)(a) of the pre-1972 Act.

Administrative Policy

1 February 1999 T.I. 982371

It is generally the Department's view that a foreign corporation is a 'person' for purposes of the Act unless the context clearly indicates otherwise." Accordingly, for purposes of applying the personal services business rules, a Canadian corporation was found to be associated with a U.S. corporation that it controlled.

23 June 1995 T.I. 951047 (C.T.O. "Associated Corporations")

Where a corporation ("Supplyco") owns 50% of the shares of another corporation ("Distributorco") which is a franchisee of Supplyco, Supplyco will be considered to control Distributorco where Distributorco is economically dependent on Supplyco as a single supplier.

1993 APFF Roundtable, Q.1

Where a wholly-owned subsidiary ("Holdco II") of Holdco I is the sole general partner of three limited partnerships which, in turn, each hold 1/3 of the shares of Opco, Opco will be considered to be controlled by Holdco II (and therefore associated with Holdco I) - even though the general partner interest of Holdco II is not sufficient to deem a sufficient number of Opco shares to be owned by Holdco II so as to give rise to control by Holdco II - given that Holdco II appears to have de jure control of Opco. General partners are the sole persons authorized to administer a limited partnership, and it is assumed that Holdco II is able to vote for the members of Opco's board of directors.

IT-64R3 "Corporations: Association and Control - after 1988".

Paragraph 256(1)(b)

Cases

Southside Car Market Ltd. v. The Queen, 82 DTC 6179, [1982] CTC 214 (FCTD)

"[S]ince the language of paragraph 256(1)(b) sets forth two distinct circumstances when two corporations are associated, namely, when controlled by (1) the same person and (2) by the same group of persons, the two sets of circumstances are mutually exclusive." In other words, the mention of a "person" and a "group of persons" impliedly excludes a combination of the two. Accordingly, S.256(1)(b) does not cover the situation where Corporation A is controlled by an individual and Corporation B is controlled only by a group of which the individual is a member.

The Queen v. Mars Finance Inc., 80 DTC 6207, [1980] CTC 216 (FCTD)

It was stated, obiter, that where the Court has to decide whether two corporations are associated by reason of being controlled by the same persons or same group of persons, who might be complete strangers and not persons all related by blood, it is de facto control that must be considered, i.e., whether control of the two corporations is in fact exercised by the same group.

H.A. Fawcett & Son, Ltd. v. The Queen, 80 DTC 6195, [1980] CTC 293 (FCA)

A legatee of a control bloc of shares obtained control of the company immediately upon the death of the testator, notwithstanding that the will was not probated until after the end of the company's taxation year, because title to the shares vested in him immediately upon the death by force of the will, and his right to vote the shares was not dependent upon those shares being registered. It was irrelevant that notice requirements precluded him from being able to compel a shareholders' meeting to be held before the end of the taxation year. The company accordingly was associated with other companies that were controlled by him.

International Iron & Metal Co. Ltd. v. MNR, 72 DTC 6205, [1972] CTC 242, [1974] S.C.R. 898, aff'g 69 DTC 5445, [1969] CTC 668 (Ex Ct)

ignore voting agreements

A corporation ("Burland") was owned by nine children of four fathers. The taxpayer ("International Iron") would have been indirectly controlled by the same children through their respective four holding companies but for the possible effect of an agreement among the four holding companies and the four fathers which provided that so long as the fathers were alive, they would be designated and elected as directors of the four holding companies, and the affirmative vote of a majority of those directors would be required for the effecting or validating of any acts of the four holding companies. In the Exchequer Court, Gibson J., in finding that International Iron and Burland were controlled by the same group of persons for purposes of s. 39(4) of the pre-1972 Act, stated (p. 5448):

"The fact that a shareholder in such a corporation may be bound under contract to vote in a particular way regarding the election of Directors (as in this case), is irrelevant to the said meaning of 'control' because the corporation has nothing to do with such a restriction."

In affirming this finding, Hall J. in the Supreme Court stated (p. 6207):

"The meaning of 'control' in s. 39(4)(b) ... means the right of control that is vested in the owners of such a number of shares in a corporation so as to give them the majority of the voting power in the corporation."

Words and Phrases

control

MNR v. Consolidated Holding Co. Ltd., 72 DTC 6007, [1972] CTC 18, [1974] S.C.R. 419

control in individual and trustee capacity

Two individuals (Harold Gavin and Robert Gavin) each owned 50% of the shares of one corporation ("Consolidated") which in turn owned 43.7% of the voting shares of a second corporation ("Martin"). 45.9% of the voting shares of Martin were held by an estate of which the three executors were Harold, Robert and the Montreal Trust Company. Under the terms of the will of the deceased, the shares of Martin could be voted by a majority of the executors. Judson J. stated (p. 6008):

"Here, if one looks at the facts as a whole, one finds that the two Gavins, by combining, controlled the vote of the estate shares. They already controlled the voting of 'Consolidated'. In this case, therefore, both corporations are controlled by the same group of persons, namely, the two Gavins."

Consolidated and Martin accordingly were held to be associated by virtue of s. 39(4)(b) of the pre-1972 Act.

Vina-Rug (Canada) Ltd. v. MNR, 68 DTC 5021, [1968] CTC 1, [1968] S.C.R. 193

Because John Stradwick, Jr., his brother W.L. Stradwick and H.D. McGilvery, who collectively owned more than 50% of the shares of Stradwick's and Vina-Rug, had at all material times a sufficient interconnection as to be in a position to exercise control over the two corporations, and therefore constituted a 'group of persons' within the meaning of s. 39(4) of the pre-1972 Act, the two corporations were associated. It was irrelevant whether other combinations of majority shareholders could be found.

Words and Phrases

group of persons group

Vineland Quarries and Crushed Stone Ltd. v. MNR, 66 DTC 5092, [1966] CTC 69 (Ex Ct), briefly aff'd 67 DTC 5283 (SCC)

In finding that under the above arrangement, Vineland and S. & T. "were controlled by the same ... group of persons" (i.e., Saunder and Thornborrow) for purposes of s. 39(4)(b) of the pre-1972 Act, Cattanach J. stated (p. 5098):

"In my view the word 'controlled' in section 39(4)(b) contemplates and includes such a relationship as, in fact, brings about a control by virtue of majority voting power, no matter how that result is effected, that is, either directly or indirectly."

Yardley Plastics of Canada Ltd. v. MNR, 66 DTC 5183, [1966] CTC 215 (Ex Ct)

Two corporations whose voting shares were held as follows

Shareholder	Canadian Moldings	Yardley Plastics
Hill	4.6%	28%
Hill III	18.6%	22.5%
Wycoff	21.7%	11%
Daymond	21.7%	14%
Strachan	21.7%	nil
Ebner	nil	17%
Jacobson	11.7%	7.5%
	100%	100%

were found to be controlled by the same group of persons, namely, Hill, his son, Hill III, and three unrelated individuals, namely, Wycoff, Daymond and Jacobson, following the assumption to this effect by the Minister. Although Noël J. rejected a submission of the Minister "that the latter is allowed to choose out of several possible groups any aggregation holding more than 50% of the voting power ... and that such a group then becomes irrebuttably deemed to be the controlling group for purposes of section 39(4) of the [pre-1972] Act as this could lead to an absurd situation where no two large corporations in this country would be safe from being held to be associated" (p. 5188), he went on to indicate that the question whether there is control by a "group of persons" owning a majority of the voting power is a question of fact and, here, the taxpayer had failed to challenge the Minister's assumption of fact (and apparently would have had difficulty doing so in light of the common management of the two corporations). With respect to a submission that Hill and Hill III were a related group which were deemed by s. 139(5d) (now s. 251(5)(a)) to control Yardley Plastics, and that this related group did not control Canadian Moldings, the two corporations could therefore not be held to be associated, Noël J. held that s. 139(5d), although extending the concept of a related group, could not restrict the meeting of s. 39(4)(b) of the pre-1972 Act (subsequently, s. 256(1)(b) of the Act).

Words and Phrases

group of persons

Administrative Policy

5 April 1995 T.I. 5-941474

S.256(7)(b) will apply where the same group of unrelated individuals controls an amalgamated corporation as controlled both the predecessors.

80 C.R. - Q.25

A person who is the registered and beneficial owner of the shares of one company is the "same person" for purposes of s. 256(1)(b) where he also holds the shares of another company as trustee or executor.

IT-64R3 "Corporations

Association and Control - after 1988".

Paragraph 256(1)(c)

Cases

1056 Enterprises Ltd. v. The Queen, 89 DTC 5287 (FCTD)

The Minister assessed the taxpayer, whose shares were owned 99% by an individual ("John"), on the basis that John's brother ("William"), who was virtually the sole shareholder of another corporation ("Northland"), also had a 50% interest in the taxpayer. Muldoon J. found that although the brothers had an initial oral agreement to this effect, "it ceased before the brothers could carry it into effect", with the result that the taxpayer and Northland were not associated (p. 5293).

Paragraph 256(1)(d)

Cases

Allied Farm Equipment Ltd. v. MNR, 73 DTC 5036, [1972] CTC 619 (FCA)

Each of three brothers owned and controlled one Canadian corporation and, among the three of them, owned and controlled a U.S. corporation. In finding that the U.S. corporation was associated with each Canadian corporation (with the result that each Canadian corporation was associated with the other two Canadian corporations under the pre-1972 version of s. 256(2)), Jackett C.J. noted (p. 5037) that the rules in s. 39(4) of the pre-1972 Act applied "for the purposes of this section", that those rules determined the amount of tax payable under Part I by associated corporations and that it followed "that section 39(4) has no application to determine whether two corporations are associated unless they are both subject to income tax under Part I of the Income Tax Act".

1056 Enterprises Ltd. v. The Queen, 89 DTC 5287 (FCTD)

An individual ("John") was issued 99% of the shares of the appellant ("Cantex") on its incorporation, even though John's brother had provided Cantex with $20,000 in cash and a corporation controlled by the brother ("Northland") had financed the purchase by Cantex of certain equipment on the preliminary verbal understanding (made prior to its incorporation) that when Northland was repaid, John's brother would receive 49% of Cantex's shares. Since no agreement or legal relationship along these lines ever was consumated, Cantex was not associated with Northland.

Holiday Luggage Mfg. Co. Inc. v. The Queen, 86 DTC 6601, [1987] 1 CTC 23 (FCTD)

Father and son each owned substantially all the shares of a CCPC, and 30% of the shares of a U.S. corporation. Joyal, J. held that the two CCPC's were not associated because foreign corporations were intended to be excluded from the category of corporations for the purposes of that section. The definition of "corporation" in s. 248(1) was not conclusive.

Administrative Policy

4 April 1990 T.I. (September 1990 Access Letter, ¶1439)

Where A is the sole shareholder of A Ltd., and A along with his three brothers are the four trustees, having equal powers, of a testamentary trust holding all the shares of C Ltd., then A Ltd. and C Ltd. will not be associated. The 25% ownership test requires the person to have a beneficial interest in the shares.

IT-64R3 "Corporations: Association and Control - after 1988".

Paragraph 256(1)(e)

Cases

The Queen v. B.B. Fast & Sons Distributors, 86 DTC 6106, [1986] 1 CTC 299 (FCA)

William Fast and his wife each owned 50% of the shares of one corporation ("Willmar"), and William Fast and his 4 siblings each owned 20% of the shares of the taxpayer. The requirement that a related group own a 10% interest in each corporation was interpreted as requiring that two (or more) members of that related group hold a 10% aggregate interest in each corporation. Since Mrs. Fast owned none of the taxpayer's shares, this requirement was not satisfied. "William Fast, the only common relative in each group, could not by himself be a 'group'".

Atomic Truck Cartage Ltd. v. The Queen, [1985] 2 CTC 21 (FCTD)

The common shares of three corporations were held by individuals, all of whom were related to each other, as follows:

Entreprises:	X - 49.5%;	A - 49.5%;	B - 1%
Atomic:	X - 42%;	Y - 42%;	C - 16%
Roclar:	D - 49%;	Y - 49%;	E - 2%

Since no two individuals held, as a group, 10% or more of the shares of two corporations, and since the holdings of a member of such a group of two persons was irrelevant, the three corporations were not associated.

The Queen v. Mars Finance Inc., 80 DTC 6207, [1980] CTC 216 (FCTD)

Where the conditions of S.256(1)(e) are met, then it is irrelevant that de facto control of one of the corporations is exercised contrary to the wishes of a distinct group which controls the other corporation.

Administrative Policy

86 C.R. - Q.18 B.B. Fast.

IT-64R3 "Corporations: Association and Control - after 1988".

Subsection 256(1.1)

Administrative Policy

20 February 1996 T.I. 960508 (C.T.O. "Stock Dividend Shares those of a Specified Class?")

Where a share has been issued as a stock dividend, the consideration for which the share was issued would be considered to be nil.

31 October 1991 T.I. (Tax Window, No. 12, p. 13, ¶1560)

The "amount of unpaid dividends" referred to in s. 256(1.1)(e) may include accumulated but unpaid dividends.

3 September 1991 T.I. (Tax Window, No. 8, p. 3, ¶1437)

A share with no entitlement to dividends generally will comply with s. 256(1.1)(c).

If the share terms provide that the shares will become voting under certain circumstances, the test in paragraph (b) will not have been met from the time of issuance of the share.

Subsection 256(1.2) - Control, etc.

Cases

9044-2807 Québec Inc. v. The Queen, 2004 DTC 6636, 2004 FCA 23

Noël J.A. indicated (at p. 6639) that in order to avoid any conflict between applying the results of the de jure control and de facto control:

"The Act now provides in subparagraph 256(1.2)(b)(ii) that a corporation may be controlled by a person notwithstanding that the corporation is also controlled or deemed to be controlled by another person. Accordingly, Transport Couture could exercise de facto over MR1 and MR2 although de jure lay elsewhere."

Administrative Policy

89 C.R. - Q.14

Where a minor child owns 10% of the common shares of Holdco which owns 100% of the common shares of Opco, s. 256(1.2)(e) will not be applied more than once in respect of the shares of Opco held by Holdco (i.e., once when the parent is deemed to own the shares of Holdco by virtue of s. 256(1.3) and once in respect of the child's actual ownership of Holdco shares). Therefore, the parent would be deemed to own 10% of the shares of Holdco and 10% of the share of Opco.

88 C.R. - Q.39

RC will identify any group of persons, related or unrelated, without considering whether any group acts in concert.

Paragraph 256(1.2)(a)

Administrative Policy

IT-64R3 "Corporations: Association and Control - after 1988".

Paragraph 256(1.2)(b)

Administrative Policy

18 October 89 Meeting with Quebec Accountants, Q.3 (April 90 Access Letter, ¶1166)

Where A owns 95% of the shares of Corporation A and the other 5% are owned by B, and B owns all the shares of Corporation B, and to fund a particular project, Corporation B issues shares to A who then owns 10% of its issued shares, Corporations A and B would be deemed to be controlled by a group (A and B) regardless of the small participation of each individual in their corporations and regardless whether or not A and B have a mutual interest.

IT-64R3 "Corporations: Association and Control - after 1988".

Paragraph 256(1.2)(c)

Administrative Policy

29 June 1995 T.I. 951064 (C.T.O. "Cotrustees of Different Trusts Same Persons")

"Where the co-trustees of two trusts are the same persons and one of the trusts owns shares representing more than 50% of the fair market value of all of the issued and outstanding shares of one corporation (Corporation A) and the other trust owns shares representing more than 50% of the fair market value of all of the issued and outstanding shares of a second corporation (Corporation B), we believe that Corporation A and B would be associated by virtue of paragraph 256(1.2)(c), unless the conditions described in subsection 256(4) of the Act are satisfied."

Paragraph 256(1.2)(d)

Administrative Policy

IT-64R3 "Corporations: Association and Control - after 1988".

Paragraph 256(1.2)(f)

Cases

The Queen v. Propep Inc., 2010 DTC 5088 [at 6882], 2009 FCA 274

potential beneficiary was a beneficiary

The taxpayer was owned by another corporation (9059) which, in turn, was owned by a Quebec trust whose first-ranking beneficiary was 9059, and second-ranking beneficiary was the son of an individual who controlled two other corporations with which CRA had found the taxpayer was associated. It was accepted that the taxpayer would be so associated if the son was deemed by s. 256(1.2)(f)(ii) to own 9059.

Although the discretion conferred on the trustees to distribute capital to the son could not be exercised before the winding-up of 9059 or the expiration of 100 years, the trustees could in exercising their discretion and at the time of their choosing wind up 9059, thereby making the son the sole beneficiary. Accordingly, the son was deemed by s. 256(1.2)(f)(ii) to own 9059. In addition, he was an income beneficiary, and under the Act an income beneficiary was treated as a beneficiary of the trust. Finally, he was a beneficiary under the expanded definition of "beneficially interested" in s. 248(25). In this regard, Noël JA stated (at paras. 23-24) after referring to s. 248(25)(a):

The TCC judge seems to be of the opinion that this definition does not apply here because the expression "beneficially interested" is not used in either of the provisions dealing with associated corporations (256(1)( c ), 256(1.2) and 256(1.3))... . With respect, the expression "beneficially interested" does not have to be reproduced in each provision where it is likely to be applied. This concept applies each time the question arises whether a person is "beneficially interested" in a particular trust. A person who has a contingent right to the capital or income of a trust is "beneficially interested" for the purposes of the Act.

Words and Phrases

beneficiary

Administrative Policy

IT-64R3 "Corporations: Association and Control - after 1988".

Subsection 256(1.3) - Parent deemed to own shares

Administrative Policy

13 October 2000 T.I. 2000-003891 -

With respect to a situation where father held, as the sole trustee of a discretionary trust for minor children, 24% of the shares of a corporation, the Agency indicated that ss.256(1.2)(f)(ii) and 256(1.3) would not be double-counted so as to result in father being deemed to own 48% of the shares.

4 March 1994 T.I. 932874 (C.T.O. "Associated Corporations")

Where 16% of the shares of a corporation are held by a discretionary family trust and three beneficiaries of the trust (being siblings) are under the age of 18, the application of s. 256(1.3) will not result in the parent being deemed to own 48% of the shares. Instead, the application of ss.256(1.2)(f)(ii) and 256(1.3) will be considered from the viewpoint of each of the beneficiaries, on a person-by-person basis, with the result that the shares of the corporation will not be double counted.

21 August 1992 T.I. 921988 (April 1993 Access Letter, p. 155, ¶C248-133)

Where Mr. A. owns all the shares of X Ltd. and Mrs. A, who owned all the shares of Y Ltd., freezes her interest in Y Ltd. in favour of a discretionary trust for her children who are under 18 years of age, X Ltd. and Y Ltd. will be associated corporations.

Subsection 256(1.4) - Options and rights

Administrative Policy

16 March 2011 T.I. 2010-0380571E5 -

The wording of ss. 251(5)(b)(ii) and 256(1.4)(b) is sufficiently broad to cover a situation where a person does not have control over the triggering event giving him or her the right to cause the corporation to redeem, acquire, or cancel shares in its capital stock held by another person. CRA has ruled that these provisions would not generally apply where a corporation is required to redeem or purchase for cancellation shares held by a shareholder who has been found guilty of fraud in relation to the corporation (see 2002-0172315 and 2006-0167361E5).

24 July 1998 T.I. 980787

Where a corporation and its two 50% shareholders have agreed that the shares held by the shareholder shall be purchased by the corporation in the event that the shareholder ceases to be an employee, s. 256(1.4)(b) may apply in circumstances where the particular shareholder is in a position to trigger the event so as to force the corporation to acquire shares owned by the other shareholder.

18 June 1998 T.I. 980570

In indicating that s. 256(1.4)(b) could apply where pursuant to a unanimous shareholders agreement a corporation would automatically acquire the shares of a shareholder where there is a change in control of the shareholder, a receiver of the shareholder was appointed, the shareholder breached specified covenants in the agreement, the shareholder encumbered its shares or they were attached, Revenue Canada stated

"... The wording in subsection 256(1.4)... will not be applied unless both (or all) parties clearly have either a right or an obligation to buy or sell as the case may be. In a situation where a unanimous shareholders agreement provides for an automatic acquisition or redemption of shares of a corporation by the corporation upon the occurrence of a specified triggering event, it is our view that the corporation clearly has an obligation to acquire and the shareholder clearly has an obligation to sell the shares upon the occurrence of the specified triggering event. Consequently, paragraph 256(1.4)(b) will apply when a person or partnership is in a position to cause the occurrence of a specified triggering event referred to in such a unanimous shareholders agreement."

5 February 1993 T.I. (Tax Window, No. 28, p. 3, ¶2411)

S.256(1.4)(a) applies in a situation where the articles of incorporation or a shareholders' agreement for a corporation having three equal common shareholders (one of whom also owns all the preferred shares) provides that in the event a shareholders' meeting is called to consider a reorganization of the share capital, a winding-up of the corporation, or an amendment to the share provisions of the preferred shares, the preferred shares will be given the right to vote, with the result that the preferred shareholder would hold more than 50% of the votes.

S.256(1.4)(a) also would apply where it was provided that if any shareholder failed for a period of greater than one year to attend shareholders' meetings, the remaining shareholders would have the option to acquire the shares of the absent shareholder.

91 C.R. - Q.11

Where parties to a shareholders' agreement have made a bona fide attempt to define "permanent disability", their definition will be given weight by RC.

20 April 1990 T.I. (September 1990 Access Letter, ¶1440)

Permanent disability refers to impairments that are expected to last for continuous periods that will exceed the period provided in s. 118.4(1)(a).

In a situation where no one shareholder alone controls the corporation, the fact that a particular board of directors may cause a corporation to redeem its shares does not in itself cause s. 256(1.4)(b) to apply. If a shareholders' agreement were to provide that should a shareholding employee ceased to be employed by the corporation his shares will automatically be acquired by the corporation, no one would appear to have a right to cause the corporation to acquire the employee's shares.

IT-64R3 "Corporations: Association and Control - after 1988".

Subsection 256(2) - Corporations associated through a third corporation

Administrative Policy

10 December 1993 T.I. 5-933554 -

Re RC's requirements for acceptance of a late-filed Form T2144.

16 June 1993 T.I. (Tax Window, No. 32, p. 12, ¶2607)

An election by a corporation under s. 256(2) will not affect the status of the other two corporations in question for purposes of ss.129(6) and 181.5(7).

6 September 1991 T.I. (Tax Window, No. 9, p. 6, ¶1447)

Example of the application of s. 256(2).

30 March 1990 Memorandum (August 1990 Access Letter, ¶1395)

The phrase "either of the other two corporations" refers to both corporations. In the situation where corporations B, C, D and E are each associated with A but are not otherwise associated with each other, a single election by A listing B, C, D and E will be sufficient to disassociate the five corporations in a particular taxation year for the purposes of s. 125.

2 November 89 T.I. (April 90 Access Letter, ¶1181)

An election made by a corporation under s. 256(2) not to be associated is valid only for the purposes of section 125 and not for purposes of the deeming rule in s. 129(6)(b).

88 C.R. - F.Q.40

The election by the third corporation should be filed with its return of income for the relevant taxation year.

Subsection 256(2.1) - Anti-avoidance

Cases

Les installations de l'Est Inc. v. The Queen, 91 DTC 5185 (FCTD)

It was found that a second corporation was incorporated in order to deal with difficulties the first corporation had been having with its sub-contractors and in order to permit the son of the principal shareholder of the first corporation to develop his business career in managing the second corporation.

Maritime Forwarding Ltd v. The Queen, 88 DTC 6114, [1988] 1 CTC 186 (FCTD)

The taxpayer was unsuccessful in his assertions that the main reasons for the separate existence of a company (controlled by a family trust) whose principal activity was the leasing of trucks to a company ("MFL") controlled by the taxpayer and in the forwarding agent business were strictly to reduce truck leasing costs, protect his capital investment in MFL by removing tangible assets from possible seizures and benefiting his children.

Kencar Enterprises Ltd. v. The Queen, 87 DTC 5450, [1987] 2 CTC 246 (FCTD)

The taxpayer was formed for income tax estate planning reasons, and the taxpayer's appeal accordingly failed.

Alpha Forming Corp. Ltd. v. The Queen, 83 DTC 5021, [1982] CTC 425 (FCTD)

A direction was made under old S.247(2) respecting 2 corporations the first one of which ("Alpha") was owned primarily by 2 individuals, and the second of which ("Jenmari") was owned by their wives. Although it was accepted that Jenmari was incorporated for reasons entirely unrelated to tax advantage and that it continued to exist primarily for those reasons (i.e., to provide a vehicle for placing ownership of real property in the hands of their wives), there was an income-splitting purpose in the following transaction sufficient to violate the test in old S.247(3)(b)(ii): the rental of a crane by Jenmari to Alpha, with a consequent transfer of significant income in the form of rental charges from Alpha to Jenmari.

The Queen v. Covertite Ltd., 81 DTC 5363, [1981] CTC 464 (FCTD)

The onus under the section was not met by an unsubstantiated explanation by the wife of the chief shareholder of the first company that the second company was set up in Ontario to permit her to flee the social climate that prevailed in Quebec in the early 1970's and to invest in Ontario.

Honeywood Ltd. v. The Queen, 81 DTC 5066, [1981] CTC 38 (FCTD)

Since no "positive evidence" was adduced by the Crown to prove that one of the main reasons for the companies' separate existence was the reduction of income taxes otherwise payable, the taxpayer companies through adducing oral evidence had discharged the onus of proof placed on them by old S.7(3)(b)(ii).

Lenco Fibre Canada Corp. v. The Queen, 79 DTC 5292, [1979] CTC 374 (FCTD)

The wife of the owner of two companies incorporated the plaintiff company, which hired her as its sole employee, in order for the plaintiff company to act as an agent in the purchasing and selling of synthetic fibres or synthetic waste materials for her husband's companies. It was found that the main reason for having the plaintiff exist to engage in the purchasing and selling of fibres (rather than having those activities performed by the wife as an employee of her husband's companies), was to insulate her commission earnings from any claims against her husband's companies, and that none of the main reasons for the separate existence of the plaintiff was the reduction of taxes.

Decker Contracting Ltd. v. The Queen, 79 DTC 5001, [1979] CTC 838 (FCA)

It was argued that the separate existence of a company ("Garyray") owned by the wives of the individual owners of the appellant, did not result in a reduction of the tax burden of the appellant because if the appellant had not paid Garyray to effect repairs to its equipment it would have made deductible payments to third parties in order to have the repair work done. It was found, however, that although repairs prior to the incorporation of Garyray may have been carried out by third parties, the reference in old s. 247(3)(b)(ii) to "taxes that would otherwise be payable" "must refer to the tax which would have been payable had the Appellant ... employed its own mechanics and owned its own premises".

Debruth Investments Ltd. v. M.N.R., 75 DTC 5012, [1975] CTC 55 (FCA)

A successful businessman who carried on a real estate business through a company ("Don River") owned by him and his wife set up four separate trusts for his children which then incorporated four companies with nominal capital. Don River entered into a real estate partnership with the four companies. Everything was "carried on precisely as before except income split four ways found its way into the accounts of these four new separate companies." The reduction of income taxation was one of the main reasons for having separate companies for the four trusts.

First Pioneer Petroleums Ltd. v. MNR, 74 DTC 6109, [1974] CTC 108 (FCTD)

"[T]he question of fact to be determined is not whether the tax advantage is the main reason but rather whether it is a main reason for the separate existence of the corporations during the particular period in question. I have already indicated that I believe it was a main reason in this instance."

Administrative Policy

2013 Ruling 2013-0498961R3 - Partner creating a professional corporation

incorporated partners of professional partnership

CRA accepted a representation that the professional corporations (ProCorps) whose respective employees and controlling shareholder was a partner of a professional partnership and which provided professional services to the partnership at a fee were not partners of each other, including representations that each ProCorp is free to compete with the partnership. CRA accordingly ruled that the ProCorps are not required to share the small business deduction under the specified partnership income rules.

CRA went on to provide an opinion:

that the incorporation of ProCorps to provide the Professional Services to the Partnership will not, in and of itself, cause subsection 256(2.1)...to be applicable to the ProCorps.

84 C.R. - Q.87

Listing of RC criteria re the "most effective manner" phrase appearing in old s. 247(2)(a).

Subsection 256(3) - Saving provision

Administrative Policy

IT-64R3 "Corporations: Association and Control - after 1988".

Subsection 256(5.1) - Control in fact

Cases

Plomberie O.C. Langlois Inc. v. The Queen, 2007 DTC 5662, 2006 FCA 113

USA irrelevant if not complied with

In rejecting a submission on behalf of the taxpayer that the Tax Court judge had ignored the terms of a unanimous shareholder agreement in finding that an individual, who held 50% of the shares of the taxpayer, had de facto control of the taxpayer, the Court noted that the parties did not comply with the shareholders agreement and also noted that such individual had caused the corporation to engage in numerous unusual transactions without shareholder approval.

9044-2807 Québec Inc. v. The Queen, 2004 DTC 6636, 2004 FCA 23

situs of decision-making power

The trial judge had correctly found that a corporation ("ML1") whose shares were owned by an individual ("father"), and a corporation ("ML2") 90% of whose shares were owned by his wife ("mother") were subject to de facto control of a corporation ("Transport Couture") owned by the five sons of father and mother, so that ML1 and ML2 were associated with Transport Couture. ML1 and ML2 were economically dependent on Transport Couture (they would not have been in a position to pursue their activities if their contracts with Transport Couture had been terminated by it), Transport Couture exercised operational control (the sons and the manager of Transport Couture took all important decisions, the involvement of the father (who had Alzheimer's disease) was nil and that of mother was limited to one information session a month), and the relationship of trust which father and mother had with their sons caused them to rely on Transport Couture and delegate all decision-making powers they held as shareholders.

In commenting on the test in s. 256(5.1) Noël J.A. stated (at p. 6640) that:

"Whatever factors are considered, they must show that a person or group of persons has the clear right and ability to change the board of directors of the corporation in question or to influence in a very direct way the shareholders who would otherwise have the ability to elect the board of directors ... in other words, the evidence must show that the decision-making power of the corporation in fact lies elsewhere than with those who have de jure control."

Lanester Sales Ltd. v. The Queen, 2003 DTC 997 (TCC), aff'd 2004 DTC 6461, 2004 FCA 217

no de facto control by franchisor

Arrangements pursuant to a shareholders agreement under which the franchisor of the taxpayer (which owned 49.9% of the taxpayer's shares) was entitled to nominate one of the two directors to the board of directors, and arrangements for pooling the funds collected by the taxpayer with other franchisees in collectively managed bank accounts did not cause the taxpayer to be controlled by the franchisor. Furthermore, these arrangements were part of the extremely broad range of contractual and financial arrangements between franchisors and franchisees contemplated by s. 256(5.1). It was not necessary to deal with the suggestion of counsel for the Crown that the phrase "dealing at arm's length" should be interpreted as implicitly being qualified by the word "otherwise" although Bowman A.C.J. was inclined to agree with this interpretation.

Silicon Graphics Ltd. v. The Queen, 2002 DTC 7113, 2002 FCA 260

must be right to affect board or directly influence shareholders

The taxpayer was found to be a Canadian-controlled private corporation, as neither de jure nor de facto control was held by non-residents.

Respecting a submission of the Crown that a U.S. corporation ("Silicon U.S."), that had lent U.S $5 million to the taxpayer and made financial contributions for software development and marketing, whose founder was a director of the taxpayer and whose hardware was utilized by the taxpayer's software, exercised de facto control over the taxpayer. Sexton J.A. stated (at p. 7121) "that in order for there to be a finding of de facto control a person or group of persons must have the clear right and ability to effect a significant change in the board of directors or to influence in a very direct way the shareholders who would otherwise have the ability to elect the board of directors." Here, Silicon U.S. was merely protecting its interests as lender to the taxpayer, and Toronto management managed the taxpayer and annually prepared the slate of individuals to be elected to the board.

Administrative Policy

11 October 2013 APFF Roundtable Q. , 2013-0495811C6 F

S. 188 of the Quebec Business Corporations Act provided that "Unless otherwise provided in the by-laws, in the case of a tie, the chair of the meeting casts the tie-breaking vote." Where the shares of a corporation are held equally by two shareholders and s. 188 applies, does the chair have de facto control of the corporation under s. 256(5.1)?

CRA stated (TaxInterpretations translation):

[W]e do not believe that BCA section 188, respecting the conduct of an annual shareholders meeting, automatically confers de facto control of a corporation on the person occupying the post of chair of the meeting and having a casting vote. In this regard, we note that BCA section 186 provides that "Unless otherwise provided in the by-laws, the president of the corporation chairs a shareholders meeting," and that the chair, in general, is elected by the directors of the corporation.

[D]e facto

control…remains a question of fact… .For example, we note that in Brownco Inc. v. The Queen, 2008 DTC 2591 (TCC) and Avotus Corp. v. The Queen, 2007 DTC 215 (TCC), the Court recognized that the right to a casting vote attaching to the position of chair of the board of directors or of the shareholders' meeting accorded, to a shareholder holding 50% of the voting shares of a corporation, an influence whose exercise would result in de facto control of the corporation.

11 October 2013 APFF Roundtable Q. , 2013-0493651C6 F

All the voting common shares of Opco (carrying on an active business) are held by a discretionary inter vivos trust which was settled by the uncle of the four beneficiaries (the "children"), and its non-voting retractable preferred shares (which were issued on an estate freeze and have a value approximating 50% of the value of Opco) are held by a spousal testamentary trust, of which the four children are the beneficiaries upon the death of the surviving spouse (i.e., their mother), and of which their father was the testator).

If the testamentary trust redeemed its preferred shares for a note, would it be affiliated with Opco following such retraction?

It would be a question of fact as to whether the holding of the debt by the testamentary trust resulted in de facto control of Opco (as described in s. 256(5.1)). In such event, the exception in s. 40(3.61) would not prevent the application of the stop-loss rule in s. 40(3.6) "given that the testamentary trust is not an estate." CRA also noted [TaxInterpretations translation] that although IT-64R4 indicates that the holding of a large debt is relevant to determining whether the holder has de facto control of the debtor:

This factor nonetheless was considered of little importance in Technical Interpretation XXX where the debt represented virtually all the net value of a corporation but all its assets consisted of readily marketable securities which could serve to repay the debt held by an estate without imperiling its investment operations.

23 June 1995 T.I. 951047

With respect to a situation where one corporation ("Supplyco") owned 50% of the shares of another corporation ("Distributorco") and the majority of the products sold by Distributorco were acquired from Supplyco, RC stated that "a franchise or similar agreement which provides one party, such as Supplyco, a measure of control over the business carried on by another corporation, such as Distributorco, would not in itself result in Supplyco having control over Distributorco provided that the parties otherwise deal at arm's length and the purpose test referred to therein is satisfied. However, in a situation where such control over the business carried on by Distributorco is combined with item (d) in paragraph 19 of IT-64R3, being economic dependence on Supplyco as its single supplier, it is our view that Supplyco would have de facto control ... ."

20 March 1995 T.I. 942429

With respect to whether an incorporated professional business would be subject to de facto control by a professional body where an order has been issued by the body as a result of disciplinary action or where a quasi-professional has not achieved a certain level of expertise in his professional field, RC commented that the reference to "other similar agreement or arrangement" referred to an agreement or arrangement that was motivated by business relationships rather than some other factor.

1 September 1994 T.I. 5-950392

A submission that a 60% non-resident shareholder did not control what was alleged to be a CCPC by virtue of terms of the shareholders' agreement that required various decisions to be made with the consent of at least 61% of the shareholder votes was rejected on the basis that the non-resident had de jure control. RC effectively indicated that the defined phrase included de jure control.

28 July 1994 T.I. 941745

"In addition to the factors expressed in paragraph 19 of IT-64R3, the Department would also consider the composition of the board of directors, the control of day-to-day management and operation of the business and the ownership of a large debt of the corporation in the determination of whether any influences exist. In the case of related persons, the Department has stated that it would look at a person's ability to demonstrate their economic independence and autonomy in determining whether there exists significant influence over a family member who is a shareholder of the corporation. Where a shareholder has no source of income and relies on the income of a related person, we may conclude that the related person providing the financial support may have influence over that shareholder ... ."

91 C.R. - Q.9

Provided that Canadian-resident trustees, in fact, control a private corporation, it would be a CCPC even if it has non-resident beneficiaries.

A.P.F.F. 1990 Round Table, Question 36, No. 9317770

In order for the exception to apply, the arrangement must have been entered into for commercial and not for the purpose of controlling the other party. A franchisor is permitted to contractually impose restrictions respecting the financing or payment of dividends of the franchisee if such restrictions were imposed for protecting its investment and not for the purpose of controlling the franchisee.

20 March 1995 T.I. 942429 (C.T.O. "256(5.1) Control and Governing Bodies")

With respect to the situation where an incorporated professional is required to carry on business under the supervision and control of an unrelated third party, for example, because of an order issued by a governing body following disciplinary action being taken, RC observed that the expression "or other similar agreement or arrangement" should be interpreted as referring only to agreements and arrangements of the same general nature enunciated, i.e., those that are motivated by business relationships which the parties share. It was also noted that the "similar agreement or arrangement" need not be evidenced in writing.

12 August 1992 T.I. 921604 (April 1993 Access Letter, p. 155, ¶C248-134; Tax Window, No. 23, p. 12, ¶2130)

Where a shareholder's agreement between two 50% shareholders provides that each shareholder will elect two members of the board of the directors and that one director elected by the first shareholder will be the chairman of the board and will have a casting vote, that first shareholder will have the de facto control described in s. 256(5.1).

29 July 1992 Memorandum (Tax Window, No. 21, p. 4, ¶2037)

Where the chair of a shareholder's meeting has the deciding vote and is one of two 50% shareholders, she generally will have de facto control of the corporation.

29 July 1992 Memorandum (Tax Window, No. 21, p. 1, ¶2038)

An estate that does not own voting shares of a corporation nonetheless may be in a position to exercise some influence over the corporation that would result in it having de facto control of the corporation, for example, if it holds a demand promissory note and calling the note would have an adverse impact on the corporation's operations.

29 June 1992 Memorandum 7-920444 -

Discussion of whether persons have effective control with respect to a substantial block of shares in a widely-held corporation where there is effective control over the composition of the board of directors.

91 C.R. - Q.12

Where a 50% shareholder has a casting vote by virtue of being chairperson, the corporation generally will be controlled directly or indirectly in any manner whatever by that person.

20 September 1990 Memorandum 7-902376 -

"The introduction of subsection 256(5.1) expands the judicially based de jure control concept to include de facto control situations where the expression 'controlled directly or indirectly in any manner whatever' is used. In other words, that expression refers to both de jure and de facto control whereas the words 'control' or 'controlled' refers to the judicially adopted de jure control only unless a specific provision defines control for a specific purpose such as subsection 186(2)."

3 January 1990 T.I. 5-9256 (Tax Window Files "'Meaning of Canadian-Controlled Private Corporation' - Control Test"

Where a Canadian-resident private corporation owns all the shares of a resident Canadian corporation ("N") which, in turn, owns all the shares of a Canadian corporation ("A"), A will not qualify as a Canadian-controlled private corporation because of the direct de jure control by N. The introduction of the concept of de facto control by the enactment of s. 256(5.1) did not eliminate the relevance of direct de jure control by a non-resident person.

22 September 89 T.I. (February 1990 Access Letter, ¶1130)

Father has his corporation invest $150,000 in a corporation owned by his daughter and her husband, by acquiring shares that were retractable at any time that is three years after their issue. The retractability of the shares gave father's corporation influence that, if exercised, would result in the daughter's corporation being controlled by father's corporation at the particular time.

89 C.R. - Q.15

"While the ability to elect a majority of the directors, or to control the day to day management and operation of the business, may be indications of such influence, there are other factors such as the ownership of a large debt of the corporation, which might also indicate such influence."

3 Aug. 89 T.I. (Jan. 90 Access Letter, ¶1086)

RC rejected a submission that "control in fact" means control by a person who does not otherwise control the corporation where that person has any direct or indirect influence that, if exercised, would give that person the ability to cast or cause to be cast, in such manner as that person may determine, the majority of votes in the election of the board.

88 C.R. - Q.41

The enactment of ss.256(5.1) and 256(1.4) did not alter RC's policy described in IT-64R2, paragraph 31 respecting rights of first refusal and shotgun arrangements.

Gouin-Toussaint, September 1989 Revenue Canada Round Table (Dec. 89 Access Letter, ¶1040)

A public corporation and a private corporation plan to each acquire ½ of the common shares of a third corporation ("Opco"). The public corporation, which was experienced in the field in which Opco was to operate was to manage Opco and supervise the construction of a plant in the marketing of the products, and the shareholders' agreement between the public corporation and the private corporation ensured that they would have equal rights and obligations. RC, since it considered that only the rights and obligations established by the documents could be considered, considered that it was impossible to declare that there was de facto control of Opco by the public corporation.

Gouin-Toussaint, September 1989 Revenue Canada Round Table (Dec. 89 Access Letter, ¶1040)

A daughter who had de jure control of a corporation operating three boutiques was unlikely in the circumstances to run her business independently from her mother's shoe-manufacturing company in light of the significant purchases of the daughter's company from the mother's company, the daughter's lack of practical experience, the financing which the daughter's company had received from the mother's bank, and the employment by the daughter's corporation of a key employee of the mother's corporation.

Gouin-Toussaint, September 1989 Revenue Canada Round Table (Dec. 89 Access Letter, ¶1040)

A non-resident individual involved in the battery-making business in the United States controlled a Canadian corporation of which the non-resident and a Canadian resident individual held an equal number of shares and had equal rights and obligations, in light of the fact that the non-resident shareholder had all the technical expertise required to operate the business and could withdraw his support at any time. The fact that, for the time being, it was not advantageous for the non-resident to exercise his influence in this fashion did not preclude the finding of de facto control.

IT-64R4 "Corporations: Association and Control (Archived) 1 November 2004

23. Whether a person or group of persons can be said to have de facto control of a corporation, notwithstanding that they do not legally control more than 50 per cent of its voting shares, will depend on each factual situation. The following are some general factors that may be used in determining whether de facto control exists:

(a) the percentage of ownership of voting shares (when such ownership is not more than 50 per cent) in relation to the holdings of other shareholders;

(b) ownership of a large debt of a corporation which may become payable on demand (unless exempted by subsection 256(3) or (6)) or a substantial investment in retractable preferred shares;

(c) shareholder agreements including the holding of a casting vote;

(d) commercial or contractual relationships of the corporation, e.g., economic dependence on a single supplier or customer;

(e) possession of a unique expertise that is required to operate the business; and

(f) the influence that a family member, who is a shareholder, creditor, supplier, etc., of a corporation, may have over another family member who is a shareholder of the corporation.

Although the degree of influence in (f) is always a question of fact, close family ties (between parents and children or between spouses) especially lend themselves to the development of significant influences. Generally, these persons must demonstrate their economic independence and autonomy before escaping presumptions of fact which apply to related persons. However, with respect to siblings, unless the facts indicate otherwise, generally one sibling would not be considered to have influence over another.

In addition to the general factors described above, the composition of the board of directors and the control of day-to-day management and operation of the business would be considered.

IT-458R "Canadian-Controlled Private Corporation"

Articles

Boriana Christov, "De Facto Control", Tax Topics, No. 1978, 4 February 2010, p. 1.

Kroft, "Meaning of de facto Control - Emerging Income Tax Issues", 1991 Conference Report, p. 8:42.

Subsection 256(6) - Idem [Control in fact]

Cases

Silicon Graphics Ltd. v. The Queen, 2002 DTC 7113, 2002 FCA 260

In rejecting a submission of the Crown that a U.S. corporation ("Silicon U.S.") had de facto control of the taxpayer and finding that the taxpayer was a Canadian-controlled private corporation, Sexton J.A. noted (at p. 7121) that the facts alleged by the Crown simply demonstrated that Silicon U.S. was protecting its interests as a lender to the taxpayer.

Administrative Policy

4 February 2015 T.I. 2015-0565741E5 - Canadian-controlled private corporation

s. 256(6) does not protect a company's CCPC status where its shares are pledged to a pubco to secure an indemnity, not debt

As a condition to distributing shares of Aco to the beneficiaries of a testamentary trust of which it was sole trustee, the trustee ("Pubco"), which was a public company, required the beneficiaries to provide it with an indemnity which was secured by a pledge of the Aco shares, so that the Aco shares would be transferred to Pubco of a failure to honour the indemnity.

CRA first noted that as "Pubco, has a contingent right pursuant to the Pledge to acquire all the Aco shares from its shareholders," Pubco would be deemed by s. 251(5)(b) to control Aco. In then finding that s. 256(6) would not apply to override this result, CRA noted that "the question is whether the purpose of the Pledge would be to safeguard rights and interests of Pubco in respect of any indebtedness owing to Pubco." After discussing authorities on "indebtedness" including Fingold, Beament and Tonolli, CRA stated:

[T]here was no known liability or claim for which the Indemnified [sic] Parties may have liability under the Indemnification Agreement. Consequently… the rights and interests of Pubco under the Indemnity Agreement…do not seem to represent indebtedness the whole or any part of the principal amount of which was outstanding in the context of subparagraph 256(6)(b)(i).

IT-458R "Canadian-Controlled Private Corporation"

Subsection 256(6.1) - Simultaneous control

Administrative Policy

30 May 1997 T.I. 2000-0037965

With respect to cases prior to December 1999, it was the Agency's view "that Parthenon does not apply to restrict control of a corporation to only ultimate control for purposes of provisions other than the CCPC definition such as paragraph 55(3.1)(a), paragraph 88(1)(d) and the definition of restricted financial institution".

Subsection 256(7) - Acquiring control

Paragraph 256(7)(a)

Administrative Policy

22 August 2014 T.I. 2014-0540751E5 F - Acquisition of control

addition of cousin to control group would taint it/cousins part of related control group while fathers alive

Two brothers (A and B) own 100% of the shares of Holdco A and Holdco B, respectively, which, each in turn, owns 50% of the shares of Opco. A sells 1/3 of his shares of Holdco A to his adult child (C) and 1/3 of his shares to each of the two adult children of B (D and E). B simultaneously sells 1/3 of his shares of Holdco B to each of C, D and E. Is there an acquisition of control of Holdco A, Holdco B or Opco? CRA stated (TaxInterpretations translation):

Holdco A

After the acquisition…there was a group comprised at a minimum of D and E who controlled Holdco A. … D and E did not acquire their shares in … Holdco A from a related person. Furthermore, D and E were not related to Holdco A immediately before the acquisition of their shares as Holdco A was controlled by their uncle before that time. Consequently, subsection 256(7) (more precisely clauses 256(7)(a)(i)(A) and (B)) did not apply to deem the control of Holdco A not to be acquired. Thus, there was an acquisition of control… .

Holdco B

After the acquisition…there could be a related group, comprising D and E, which controlled Holdco B. D and E acquired their shares…from their father. He was related… . Furthermore, D and E were related to Holdco B immediately before their acquisition of shares…by virtue of subparagraph 251(2)(b)(iii) because Holdco B was controlled by their father….If the group comprising D and E represented the only control group for Holdco B, clauses 256(7)(a)(i)(A) and (B) applied to deemed control not to have been acquired… .

On the other hand, if C was part of the Holdco B control group…the provisions of subsection 256(7) (more precisely clauses 256(7)(a)(i)(A) and (B)) did not apply because C was not related immediately before the acquisition of the shares to Holdco B or his uncle. …

Opco

Before the [above] transfers of shares…Opco was controlled by a related group…being A and B, and Holdco A and Holdco B. …D and E, who were related to B…also were members of a related group which controlled Opco before the share acquisitions. C was related to Holdco A by virtue of subparagraph 251(2)(b)(iii)…and D and E were related to Holdco B by virtue of subparagraph 251(2)(b)(iii)… .Thus, C, D and E were all related to Opco by virtue of subparagraphs 251(2)(b)(ii) and (iii) while their fathers held the shares…of Holdco A and Holdco B.

Given that C, D and E were related to Opco immediately before the acquisitions of shares…, clause 256(7)(a)(i)(B) applied to deem there to be no acquisition of control of Opco… .

12 December 2013 T.I. 2013-0484031E5 - Application of clause 256(7)(a)(i)(B)

LP becomes controlling shareholder

A limited partnership which owns less than 50% of the voting shares of a corporation will, as a result of a reorganization of capital, own more than 50% of the voting shares of the corporation. CRA stated:

The partnership agreement and the equity interest of the members must be examined to determine which member(s) of the partnership can exercise voting rights in respect of the shares of the corporation. In the case of a limited partnership, it is our understanding that it is usually the general partner that can exercise those rights. …Consequently, for the purpose of determining whether clause 256(7)(a)(i)(B) would apply where the controlling interest in a corporation is acquired by a limited partnership, it is necessary to determine whether the partner or partners that control the voting rights in respect of the shares of the corporation held by the limited partnership would be related to the corporation immediately before control of the corporation was acquired.

2011 Ruling 2010-0360921R3 - Change of trustee - control

Opco, which has net capital and non-capital losses, is controlled by a Trust whose trustees are three resident individuals (Trustees 1, 2 and 3) who deal with each other at arm's length. Trustee decisions are made by majority decision. Each Trustee in succession will resign, with the concurrent appointment of a newly-incorporated special purpose corporation, which is wholly owned by that (former) Trustee, as the replacement trustee.

Ruling that these transactions will not result in an acquisition of control of Opco by virtue of s. 256(7)(a)(i)(A).

22 March 2005 T.I. 2005-011181

The transfer of shares from the deceased to trusts the executors of which were his surviving spouse and two children would not result in an acquisition of control given that the trustees were related to him.

12 August 1994 T.I. 5-941238

If at 10:00 a.m. a corporation ("Bco") issues one common share to an unrelated corporation ("Dco"), and at 10:30 on the same day, Bco acquires the shares of another corporation ("Cco") that is a wholly-owned subsidiary of the corporation ("Aco") that prior to 10:00 a.m. owned 100% of the shares of Bco and thereafter owns 50% of the shares of Bco, s. 256(7)(a)(i) will not apply to deem there not to have been an acquisition of control by Cco. Although the provisions of s. 256(9) deem control of Cco to have been acquired at the commencement of the day, they do not deem the shares of Cco to be acquired at the commencement of the day.

22 January 1993 T.I. (Tax Window, No. 28, p. 10, ¶2379)

Where the articles of a corporation provide that the voting rights associated with a particular block of voting shares (representing more than 50% of the total) lapse on the holder's death, the spouse holding the balance of the shares will acquire control when the taxpayer dies, assuming this arrangement is legally effective.

23 March 1992 T.I. 913478 (April 1993 Access Letter, p. 156, ¶C248-135)

Where an individual owned all the shares of A Co and controlled B Co by reason of being the sole trustee of a family trust which owned its shares, he will be deemed not to have acquired control of the corporation resulting from the amalgamation of A Co and B Co.

90 C.R. - Q44

Where an individual acquires from a related person the shares of a corporation which has a wholly-owned subsidiary, RC considers that there has been no change in the ultimate control of the subsidiary.

90 C.R. - Q41

Where there has been an acquisition of shares by more than one person, those persons will be deemed not to have acquired control if each of them is a person described in s. 256(7)(a)(i).

26 February 1990 T.I. (July 1990 Access Letter, ¶1350)

Where prior to a section 86 reorganization of Opco, 50% of its voting shares were held by Mr. A (through his holding company), 20% by Mrs. A and the remaining 30% by unrelated third parties, and following the reorganization, Mr. A will hold 25% of the voting shares, Mrs. A will hold 20%, their son will hold 25% and unrelated third parties will hold the remaining 30%, the family ties would reasonably indicate common connections, or acting in concert, with the result that there will be an acquisition of control by a new group comprising Mr. and Mrs. A and their son which acquisition will be exempted by s. 256(7)(a)(i).

89 C.R. - Q.16

Where two brothers (A and B) each own 50% of the voting shares of Opco and the shares of Opco owned by B are converted into non-voting shares, A will be considered to have acquired control of Opco. S.256(7)(a) will not apply because A will not have acquired control of Opco by virtue of an acquisition of shares of Opco by A.

October 1989 Revenue Canada Round Table - Q.25 (Jan. 90 Access Letter, ¶1075)

Where father and son hold respectively 51% and 49% of Opco through their respective wholly-owned holding corporations, and on the retirement of father he causes Opco to redeem all the shares held by his holding corporation, the exception provided in s. 256(7)(a) will not apply, because there has been no acquisition of shares of Opco by the son.

87 C.R. - Q.66

Where there is an acquisition of shares of a corporation by more than one person, those persons will be deemed not to have acquired control if each was related to the corporation.

81 C.R. - Q.47

Provided that on the death of a controlling shareholder there is no change in control of the parent pursuant to s. 256(7)(a)(ii) or (iii), then there will be no change in the "ultimate" control of the subsidiaries.

Paragraph 256(7)(b)

Administrative Policy

2014 Ruling 2014-0523221R3 - Amalgamation of mutual funds

amalgamation of two mutual fund corporations each with capital losses

Proposed transactions. C1, which is a smaller mutual fund corporation than C2, will amalgamate with C2 to form Amalco. C1, C2 and Amalco have different series of mutual fund shares each tracking what for securities law purposes is regarded as a separate mutual fund as well as nominal value voting common shares. On the amalgamation, the former common shareholders of C1 will acquire a majority of the voting common shares of Amalco. Both C1 and C2 have capital loss carryforwards. C1 will make step-up designations under s. 111(4)(e).

Rulings

include: As a result of the amalgamation there will be an acquisition of control of C1 pursuant to s. 256(7)(b)(iii), and there will not be an acquisition of control of C2. Ss. 69(11) and 111(5.5) will not apply.

2 December 2014 Folio S4-F7-C1

realted party, majority and 50% group exceptions

1.49 Pursuant to subparagraph 256(7)(b)(i), control of a corporation will be deemed not to have been acquired solely because of an amalgamation unless subparagraph 256(7)(b)(ii) or (iii) deems control of the corporation to have been acquired.

(a) Subparagraph 256(7)(b)(ii) provides that where a person or group of persons controls the new corporation immediately after the amalgamation and that person or group did not control a particular predecessor corporation immediately before the amalgamation, that person or group is deemed to have acquired immediately before the amalgamation control of that predecessor corporation and of each corporation controlled by that predecessor corporation at that time. This provision will not apply, however, if the person or group of persons which controls the new corporation would not have acquired control of the particular predecessor corporation if that person or group had acquired all of the shares of the predecessor corporation immediately before the amalgamation. For example, on the amalgamation of two or more corporations which were controlled by related persons prior to the amalgamation, no acquisition of control of a predecessor corporation will occur because paragraph 256(7)(a) would apply if the related persons had acquired all of the shares of the predecessor corporations prior to the amalgamation.

(b) Subparagraph 256(7)(b)(iii) provides that control of a predecessor corporation and each corporation controlled by it immediately before the amalgamation is deemed to have been acquired by a person or group of persons unless:

(i) the predecessor corporation was related (otherwise than because of a right referred to in paragraph 251(5)(b)) to each other predecessor corporation immediately before the amalgamation;

(ii) if a hypothetical person had, immediately after the amalgamation, acquired all of the shares of the new corporation received by the shareholders of the particular predecessor corporation (or another predecessor corporation that controlled the particular predecessor corporation) on the amalgamation in exchange for their shares of the predecessor corporation (or the other predecessor corporation, as the case may be), that hypothetical person would have acquired control of the new corporation. For example, this exception would apply to a particular predecessor corporation where on an amalgamation its shareholders collectively received more than 50% of the voting shares of the new corporation; or

(iii) subparagraph 256(7)(b)(iii) would otherwise apply to deem control of each predecessor corporation to have been acquired in an amalgamation of two corporations or two corporations and one or more of their controlled subsidiaries. For example, this exception would apply where two corporations of equal value amalgamated and the shareholders of each corporation received 50% of the voting shares of the new corporation on the amalgamation.

1.50 Notwithstanding subparagraph 256(7)(b)(i), the CRA considers that paragraph 256(7)(c) may apply to certain triangular amalgamations.

Example 2

Consider the situation where the shareholders of a public corporation (Pubco) acquire shares of a loss company (Lossco) on a triangular amalgamation of Pubco and a subsidiary wholly-owned corporation of Lossco. Since the shareholders of Pubco have acquired more than 50% of the shares of Lossco on the triangular amalgamation, paragraph 256(7)(c) will deem there to have been an acquisition of control of Lossco. In the CRA's view, subparagraph 256(7)(b)(i) does not override the acquisition of control under paragraph 256(7)(c) as control of Lossco has not been acquired solely because of the amalgamation.

2012 Ruling 2011-0402571R3 - De Jure Control - Debt Settlement

Parent owns the Class B common shares of Lossco and Mr. A, who deals at arm's length with Parent (and with Profitco, a subsidiary of Parent) holds a majority of the Class A shares of Lossco. Both the Class A and Class B shares have full voting rights except that the Class B shares are not permitted to vote on the election of directors of Lossco. However, the voting rights of the Class B shares held by Parent

entitles it at any time during its ownership of such shares to successfully propose and pass a resolution of the shareholders to approve a stock consolidation and an associated purchase for cash of fractional shares….Such an arrangement would permit the consolidation of Lossco Class A shares into fractions of shares that are cancelled for a cash payment as part of the consolidation without any special resolution of the holders of the Lossco Class A shares, voting separately as a class, first being required.

Ruling that s. 256(7)(b) would apply on an amalgamation of Profitco and Lossco under which Parent would receive common shares of Amalco and the Class A shareholders including Mr. A would receive non-voting preference shares. The ruling summary indicates that Parent is considered to have de jure control of Lossco (notwithstanding that it does not have an immediate right to elect a majority of the directors of Lossco) and that this is "consistent with the decision of the SCC in Donald Applicators Ltd. (1969)."

2010 T.I. 2010-0388081E5 -

double year ends where acquisition of control under s. 256(7)(b)(ii)

On the amalgamation of public corporation ("Pubco") and a private corporation ("Holdco") to form Amalco, the three shareholders of Holdco acquire control of Amalco. In finding that this gives rise to two taxation year ends of Pubco, CRA stated:

[O] n the one hand…the taxation year of Pubco would be deemed to have ended immediately before the amalgamation of Pubco and Holdco pursuant to paragraph 87(2)(a)… . On the other hand, the group of three persons originally shareholders of Holdco would be deemed to have acquired, immediately before the amalgamation, control of Pubco pursuant to subparagraph 256(7)(b)(ii),,, . Consequently, and in accordance with paragraph 249(4)(a)…the taxation year of Pubco...would be deemed to have ended immediately before that time. In other words, the deemed acquisition of control of Pubco resulting from the amalgamation would technically generate a deemed taxation year end with respect to Pubco immediately before the time that is immediately before the amalgamation.

7 January 2002 T.I. 2001-006494 -

Where shareholders of a public company ("Pubco") receive more than 50% of the shares of a loss company ("Lossco") on a triangular amalgamation of Pubco and a wholly-owned subsidiary of Lossco, s. 256(7)(b)(i) would not apply to negate the application of s. 256(7)(c) since control of Lossco was not acquired solely because of the amalgamation.

9 February 1999 T.I. 983175

Where two unrelated persons (X and Y) hold 60% and 40% of the shares of a corporation which then amalgamates, with X and Y each holding 50% of the shares of the amalgamated corporation, there will be an acquisition of control of that amalgamating corporation.

5 April 1995 T.I. 5-941474

Where four unrelated individuals (A, B, C and D) own 40%, 20%, 20% and 20% of the common shares of Xco, and own 15%, 24%, 24% and 24% of the common shares of Yco, there will be no acquisition of control of Xco on its amalgamation with Yco if, as a factual matter, Xco and Amalco both were controlled by the group comprising A, B, C and D.

22 August 1991 T.I. (Tax Window, No. 8, p. 4, ¶1408)

Where a partnership "owns" more than 50% of the voting shares of a corporation and a particular partner has the entitlement to exercise more than 50% of the votes at partnership meetings, that partner controls the corporation.

ATR-7 (31 March 86)

The amalgamation of Lossco and Opco following the transfer of the Opco shares held by Holdco and the brother-in-law to Newco in exchange for shares of Newco, will not result in an acquisition of control of Lossco by Newco.

Articles

Richler, "Triangular Amalgamations", March/April 1985 Canadian Tax Journal, p. 374

RC accepts that where on a triangular amalgamation, those who controlled the target corporation control the parent following the amalgamation, there is no acquisition of control of the target.

Paragraph 256(7)(e)

Administrative Policy

30 July 2001 T.I. 2001-009146 -

Common shares of a CBCA corporation ("Canco") held by dissenting shareholders will no longer be considered to be outstanding shares of Canco. Accordingly, where, under a plan of arrangement pursuant to s. 192(1) of the CBCA all the Canco common shares (other than those shares held by dissenting shareholders) are disposed of to another CBCA corporation ("Holdco") for consideration that consists solely of Holdco common shares, such transactions will not necessarily be disqualified under s. 256(7)(e) by reason only that dissenting shareholders dispose of their Canco common shares to Canco and receive consideration other than shares of Holdco by virtue of exercising their dissent rights.

Subsection 256(8) - Deemed exercise of right

Administrative Policy

92 C.R. - Q.23

Where an option to which s. 256(8) applies subsequently expires, there will be no acquisition of control by the grantor of the option.

Subsection 256(9) - Date of acquisition of control

Cases

La Survivance v. The Queen, 2007 DTC 5096, 2006 FCA 129

The taxpayer, a public corporation, which disposed of its shares of a subsidiary to a private corporation, was eligible to claim a business investment loss because, under subsection 256(9), the subject corporation was deemed to be controlled by the purchaser as of the beginning of the same day. Noël J.A. (p. 5105) noted that the scheme of the Act established that subsection 256(9) stated a rule of general application and, although subsection 256(9) did not refer to the relinquishing of control "control cannot be acquired without there being concomitantly an abandonment of control".

Administrative Policy

11 October 2013 APFF Roundtable Q. , 2013-0495751C6 F

After asserting that "it is generally accepted that the ‘particular time on a day' at which control of a corporation is acquired is the hour at which the transaction documents are signed, the questioner postulated that the control of ABC Inc. is acquired by Mr. X at 13:30 on July 26, 2013 when the signature of the sales agreement, endorsement of the share certificates and payment of the purchase price take place. However, given that the cut-off for financial purposes will be the end of the day, the following clause was inserted in the sales agreement:

Notwithstanding the time of signature of this agreement between the parties, they agree that for purposes of I.T.A. subsection 256(9), the moment at which the control of ABC Inc. will be acquired by Mr. X will be 0 hours, 27 July 2013.

CRA stated (TaxInterpretations translation):

ITA subsection 256(9) does not permit a corporation to select the moment of the acquisition of its control… . ABC Inc. cannot choose for purposes of ITA subsection 256(9) to have the acquisition of control by Mr. X occur at 0 hours, 27 July 2013 if Mr. X in fact became the owner of the shares of ABC Inc. at 13:30 on July 26, 2013 and acquired control of ABC Inc. at that moment.

1990 Round Table, Q.39: Respecting where Corporations A and B are amalgamated on the same day in which control of Corporation B was acquired by Corporation A, and no election is made under s. 256(9).

4 July 1989 T.I. (Dec. 89 Access Letter, ¶1067)

At 2 p.m. on June 1, 1989, all of the shares held by Company A in Company B (which prior to that time was controlled by it) are redeemed, with the result that the minority shareholder of Company B (namely, Company C) controls Company B. Company C is deemed to have acquired control of Company B at the beginning of June 1, and Company A will be deemed to have relinquished control immediately before the beginning of that day. Consequently, at no time in the year will Company A and Company C simultaneously have control of Company B.

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Section 256

Table of Contents

Subsection 256(1) - Associated corporations

Paragraph 256(1)(a)

Cases

The Queen v. W. Ralston & Co., 96 DTC 6488 (FCTD)

Harvard International Resources Ltd. v. Provincial Treasurer of Alberta, 93 DTC 5254 (Alta. Q.B.)

The Queen v. Imperial General Properties Ltd., 85 DTC 5500, [1985] 2 CTC 299, [1985] 2 S.C.R. 288

Allied Farm Equipment Ltd. v. MNR, 73 DTC 5036, [1972] CTC 619 (FCA)

Donald Applicators Ltd. v. MNR, 69 DTC 5122, [1969] CTC 98 (Ex Ct), briefly aff'd 71 DTC 5202, [1971] CTC 402 (SCC)

MNR v. Dworkin Furs (Pembroke) Ltd., 67 DTC 5035, [1967] CTC 50, [1967] S.C.R. 223

See Also

Kruger Wayagamack Inc. v. The Queen, 2015 TCC 90

Administrative Policy

1 February 1999 T.I. 982371

23 June 1995 T.I. 951047 (C.T.O. "Associated Corporations")

1993 APFF Roundtable, Q.1

IT-64R3 "Corporations: Association and Control - after 1988".

Paragraph 256(1)(b)

Cases

Southside Car Market Ltd. v. The Queen, 82 DTC 6179, [1982] CTC 214 (FCTD)

The Queen v. Mars Finance Inc., 80 DTC 6207, [1980] CTC 216 (FCTD)

H.A. Fawcett & Son, Ltd. v. The Queen, 80 DTC 6195, [1980] CTC 293 (FCA)

International Iron & Metal Co. Ltd. v. MNR, 72 DTC 6205, [1972] CTC 242, [1974] S.C.R. 898, aff'g 69 DTC 5445, [1969] CTC 668 (Ex Ct)

MNR v. Consolidated Holding Co. Ltd., 72 DTC 6007, [1972] CTC 18, [1974] S.C.R. 419

Vina-Rug (Canada) Ltd. v. MNR, 68 DTC 5021, [1968] CTC 1, [1968] S.C.R. 193

Vineland Quarries and Crushed Stone Ltd. v. MNR, 66 DTC 5092, [1966] CTC 69 (Ex Ct), briefly aff'd 67 DTC 5283 (SCC)

Yardley Plastics of Canada Ltd. v. MNR, 66 DTC 5183, [1966] CTC 215 (Ex Ct)

See Also

Quincaillerie Brassard Inc. v. MNR, 91 DTC 559 (TCC)

Express Cable Television Ltd. v. MNR, 82 DTC 1431 (TRB)

King George Hotels Ltd. v. MNR, 68 DTC 635 (TAB)

Buckerfield's Ltd. v. MNR, 64 D.T.C 5301 (Ex Ct)

Administrative Policy

5 April 1995 T.I. 5-941474

80 C.R. - Q.25

IT-64R3 "Corporations

Paragraph 256(1)(c)

Cases

1056 Enterprises Ltd. v. The Queen, 89 DTC 5287 (FCTD)

See Also

Disher-Winslow Products Ltd. v. MNR, 52 DTC 27 (TAB)

Paragraph 256(1)(d)

Cases

Allied Farm Equipment Ltd. v. MNR, 73 DTC 5036, [1972] CTC 619 (FCA)

1056 Enterprises Ltd. v. The Queen, 89 DTC 5287 (FCTD)

Holiday Luggage Mfg. Co. Inc. v. The Queen, 86 DTC 6601, [1987] 1 CTC 23 (FCTD)

Administrative Policy

4 April 1990 T.I. (September 1990 Access Letter, ¶1439)

IT-64R3 "Corporations: Association and Control - after 1988".

Paragraph 256(1)(e)

Cases

The Queen v. B.B. Fast & Sons Distributors, 86 DTC 6106, [1986] 1 CTC 299 (FCA)

Atomic Truck Cartage Ltd. v. The Queen, [1985] 2 CTC 21 (FCTD)

The Queen v. Mars Finance Inc., 80 DTC 6207, [1980] CTC 216 (FCTD)

Administrative Policy

86 C.R. - Q.18 B.B. Fast.

IT-64R3 "Corporations: Association and Control - after 1988".

Subsection 256(1.1)

Administrative Policy

20 February 1996 T.I. 960508 (C.T.O. "Stock Dividend Shares those of a Specified Class?")

31 October 1991 T.I. (Tax Window, No. 12, p. 13, ¶1560)

3 September 1991 T.I. (Tax Window, No. 8, p. 3, ¶1437)

Subsection 256(1.2) - Control, etc.

Cases

9044-2807 Québec Inc. v. The Queen, 2004 DTC 6636, 2004 FCA 23

Administrative Policy

89 C.R. - Q.14

88 C.R. - Q.39

Paragraph 256(1.2)(a)

Administrative Policy

IT-64R3 "Corporations: Association and Control - after 1988".

Paragraph 256(1.2)(b)

Administrative Policy

18 October 89 Meeting with Quebec Accountants, Q.3 (April 90 Access Letter, ¶1166)

IT-64R3 "Corporations: Association and Control - after 1988".

Paragraph 256(1.2)(c)