8 October 2003 External T.I. 2003-0038235 - Association Rules and Subsection 256(2)

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 CCRA.

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

Principal Issues: Can more than one subsection 256(2) election be made where there are more than three corporations in a corporate group?

Position: Yes.

Reasons: The law.

XXXXXXXXXX 2003-003823
Michael Cooke
October 8, 2003

Dear XXXXXXXXXX:

Re: Associated Corporations

This is in reply to your letter dated September 8, 2003 wherein you requested our opinion on the application of subsection 256(2) of the Income Tax Act (the "Act") in the following fact situation:

Mr. X, Mr. Y and Mr. Z are brothers.

Mr. X owns 100% of Aco.

Mr. X and Mr. Y each own 50% of Bco.

Mr. X, Mr. Y and Mr. Z each own 33 1/3rd% of Cco.

Mr. Y and Mr. Z each own 50% of Dco.

Each of the corporations carries on an active business and all of the corporations are associated.

You asked whether Bco could elect under subsection 256(2) not to be associated with both Aco and Dco when there are more than three corporations in the corporate group. Further, if such an election is possible, you asked whether Cco could also elect under subsection 256(2) not to be associated with either Aco and Dco and whether Bco and Cco would continue to be associated with each other as a result.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling.

To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 dated May 17, 2002 ("IC 70-6R5"). However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's ("CCRA") views must be made to your local Tax Services Office. We can, however, provide the following comments.

In the above situation, it is our understanding that Aco and Bco would be associated with each other by virtue of paragraph 256(1)(d); Aco and Bco would be associated with Cco by virtue of paragraph 256(1)(d) and paragraph 256(1)(b) of the Act, respectively; and Bco and Cco would be associated with Dco by virtue of paragraph 256(1)(e) and paragraph 256(1)(b) of the Act, respectively.

However, ignoring the possible application of subsection 256(2.1) which remains a question of fact, but for the application of subsection 256(2) Aco and Dco would not otherwise be associated with each other since Mr. X does not own (or is not otherwise deemed to own) at least 25% of the shares in Dco, and similarly, Mr. Z or Mr. Y does not own (or is not otherwise deemed to own) at least 25% of the shares in Aco.

Based on the above, if Bco elects under subsection 256(2) not to be associated with either Aco or Dco for the purposes of section 125, Dco and Aco would still continue to be associated with each other by virtue of subsection 256(2) because they are both still associated with Cco as described above. Thus, Bco's business limit for that taxation year would be deemed to be nil and Aco, Cco and Dco would have to share one business limit between them. However, if Cco also elects under subsection 256(2) not to be associated with either Aco or Dco for the purposes of section 125, Cco's business limit would be deemed to be nil but Dco and Aco each have their own business limit for the purposes of section 125. Cco and Bco would still be associated with each other since they are associated by virtue of paragraph 256(1)(b) as described above.

We trust that our comments will be of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the CCRA.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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