18 January 2000 Internal T.I. 9928077 - ASSOCIATED EMPLOYERS

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: What employers are associated under section subsection 126.1(2)?

Position: Question of fact - but partial listing provided based on stated assumptions.

Reasons: We do not have all facts.

		January 18, 2000

	CPP/EI	HEADQUARTERS
	Eligibility Division	Reorganizations and
	Revenue Collections Directorate	  International Division
		Michael Cooke
	Attention:  Bea Vincent	(613) 946-3259

		992807

Associated Employers - Subsection 126.1(2)

This is in reply to your memorandum dated October 20, 1999 and your subsequent correspondence dated November 2 and 5, 1999 wherein you requested our views as to whether the certain corporations and partnerships listed on your Appendix B are deemed to be "associated employers" as that term is defined under subsection 126.1(2) of the Income Tax Act (the "Act").

We understand that the reason for your request is that pursuant to subsection 96(9) of the Employment Insurance Act ("EIA"), "If at any time during a year for which a refund is sought two or more employers are associated, as defined by the regulations, they shall be considered a single employer for the purposes of subsections (6) to (8.4) and any refund shall be allocated to them in the prescribed manner". The prescribed regulations under the EIA provide, inter alia, that employers are associated employers, "...if they are deemed to be associated under the Income Tax Act...".

For the purpose of determining whether two or more corporate employers are considered to be "associated employers" as that term is defined in subsection 126.1(2) of the Act it is necessary to consider whether such employers are "associated corporations" under the rules found in section 256 of the Act. For this purpose subsection 126.1(3) of the Act deems an employer who is an individual or partnership to be corporation that has issued all the voting shares to the individual or to the partners in the greatest proportion to their respective share of the partnership income or loss, as the case may be.

We are unable to provide you with a definitive response to your question since determining whether two or more corporations are associated under section 256 of the Act would involve a complete understanding and analysis of all the facts of a particular situation. For example, as we discussed by telephone (Cooke/Vincent) in order to make such a determination one would be required to perform a detailed review of the corporate share register and minute book of each corporation, as well considering any other factors or relevant information in order to conclude whether any person was party to any agreement, commercial or contractual relationship, option, etc., or could exercise any influence that would or could cause or allow such a person to have the ability to have control in fact over the particular corporation or would cause such a person to have deemed ownership of the shares of a particular corporation for the purposes of section 256 of the Act (see IT-64R3).

Moreover, subsection 256(2.1) of the Act is a specific anti-avoidance rule that deems two or more corporations to be associated corporations (where they otherwise would not be) where one of the main reasons for the separate existence of those corporations is to reduce the amount of taxes that would otherwise be payable. Since a taxpayer can have more than one main purpose it remains a question of fact as to whether the separate existence of the various corporations (deemed or otherwise) in this situation are for such a main reason. While it is possible, given the apparent similarity of the business operations being conducted (i.e., XXXXXXXXXX) and the complex ownership structure used, that subsection 256(2.1) may apply, evidence to corroborate such a finding would be required. The ultimate determination of this matter is the responsibility of the Canada Custom and Revenue Agency's (CCRA) verification, enforcement and audit division.

Notwithstanding the above, based on the information contained in your correspondence we have attached a chart (Appendix 1) listing each employer corporation (deemed by subsection 126.1(3) or otherwise) that in our view, based on certain stated assumptions, would be associated corporations under section 256 of the Act. We caution that this analysis would only establish the minimum number of associated corporations since we do not have the information necessary to consider the potential application of paragraph 256(1.2)(c) and subsections 256(1.4), (2.1) and (5.1) of the Act.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the CCRA's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 819-994-2898. The severed copy will be sent to you for delivery to the client.

We trust the above comments will be of assistance.

Ted Harris
Manager
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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