20 September 1995 External T.I. 9515635 - SCIENTIFIC RESEARCH & EXPERIMENTAL DEVEL. - 256(1.4)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

In paragraph 37 of IT-64R3, the Department described two situations where subsection 256(1.4) will not apply to associate two corporations, i.e. the existence of a "shotgun arrangement" and a "right of first refusal". Can the Department extend its policy to other circumstances usually contained in a standard shareholders agreement?

Position TAKEN:

No.

Reasons FOR POSITION TAKEN:

In conformity with IT-64R3 and with other opinions given in the past in respect of paragraph 251(5)(b).

		5-951563
XXXXXXXXXX                             (613) 957-8953

Attention: XXXXXXXXXX

September 20, 1995

Dear Sirs:

Re: Scientific Research and Experimental Development ("SR&ED") - Associated Corporations

This is in reply to your letter dated June 12, 1995, requesting our opinion as to whether subsection 256(1.4) of the Income Tax Act (the "Act") would apply to associate two corporations for purposes of various provisions of the Act related to SR&ED in the hypothetical situation described in your letter.

The shareholders agreement described in your letter provides, inter alia, that in certain circumstances, a shareholder of a corporation will be required to sell its/his shares of the corporation back to the corporation for a pre-determined purchase price depending on the various circumstances outlined in the shareholders agreement.

You are of the opinion that subsection 256(1.4) of the Act provides specific exceptions to determine whether the corporation is associated with another corporation. The exceptions are related to rights, the exercise of which are contingent on the death, bankruptcy or permanent disability of an individual.

You are referring to Interpretation Bulletin IT-64R3 where the Department expressed its views that certain other rights such as a "right of first refusal" and a "shotgun arrangement" would not be covered by subsection 256(1.4) of the Act and you submitted that a similar position should be taken with respect to the circumstances described in your letter.

Comments

It appears that your request for an interpretation may relate to specific proposed transactions. Confirmation of the tax consequences of a specific proposed transaction will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance ruling are set out in Information Circular 70-6R2 dated September 28, 1990. If you wish to submit such a request, we would be pleased to consider it. Nevertheless, we are able to provide you with the following general comments which may apply to your situation.

In addition to the specific exclusions described in subsection 256(1.4) of the Act (such as death, bankruptcy or permanent disability of an individual), paragraph 37 of IT-64R3 outlines situations where the Department will not apply subsection 256(1.4) in order to associate corporations. These situations are where shareholders agreements contain other rights such as a "right of first refusal" and a "shotgun arrangement".

Consequenly, it is the Department's view that the position stated in paragraph 37 of IT-64R3 will not be extended to rights arising in circumstances that are not expressly excluded by subsection 256(1.4).

The above comments are not rulings and in accordance with the guidelines explained in IC 70-6R2, are not binding on the Department.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch