Question

Rosanna owns 65% of the common shares of Rosanna’s Flowers Ltd. (RFL). Samantha owns 75% of the common shares of Riddled with Rain Investments Ltd. (RRIL). The other 25% of RRIL common shares are owned by unrelated persons. RRIL owns all of the common shares of Treading Water Ltd. (TWL). RRIL also owns the remaining 35% of the common shares of RFL. Rosanna is married to Samantha’s nephew, Sandro. The 35% ownership of RRIL in RFL was to provide RFL with some needed start-up financing. Samantha has no other involvement with RFL’s operations.

Required:

Explain, in detail, why the corporations involved in the preceding fact situation are associated or not associated. If they can be associated in more than one way, describe only one. Canadian Income Tax Law Section 256 (1)a

Answer 1

Solution :

As per section 256(1) of the Income-tax Act, the concerns are said to be "Associated Corporation s" when :

Clause (d) : " one of the corporations was controlled, directly or indirectly in any manner whatever, by a person and that person was related to each member of a group of persons that so controlled the other corporation, and that person owned, in respect of the other corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof; "

Explanation :

The above clause d, states the following :

1) One person controls a corporation, and

2) Other person (or group) controls another corporation and

3) Both the persons are already related to each other in some way

4) The other person should hold not less 25% of the shares in the corporation mentioned in (1)

If all the conditions mentioned above are satisfied, both the concerns are said to be associated corporations.

In the given case,

1) Rosanna controls RFL (as she holds more than one half of the share capital)

2) Samantha controls RRIL (as she holds more than one half of the share capital)

3) Rosanna and Samantha are NOT related persons (Rosanna is married to Samantha's nephew. The Act has clearly specifies that "an individual’s niece, nephew, aunt, uncle or cousin is not connected by blood, marriage or common-law partnership or adoption to the individual")

4) RRIL owns 35% of the share capital of the RFL.

(more than 25% of the stock)

All the conditions mentioned by clause (d) of the 256(1) are NOT satisfied.

Hence, RFL & RRIL are NOT associated concerns.

The other clauses of the 256 (1) are also not satisfied. Since the question has specifically stated to describe only one clause, the answer is restricted to the same.