The Unintended Consequences Of Subsection 256(9)

The lncome Tax Act (Canada) (the "Act"), contains all manner of "shoals and traps"1, which may result in unintended tax consequences to the unaware, and in some cases to the aware. A reminder of this fact is illustrated in a recent court decision, and subsequent Canada Revenue Agency ("CRA") technical opinion, pertaining to the application of subsection 256(9) of the Act.

Subsection 256(9) of the Act is a seemingly straight forward provision. It provides that where control of a corporation is acquired at any time during a given day, for purposes of the Act, control of the corporation will be deemed to have been acquired at the beginning of that day, unless the corporation elects this not to be the case. This corporate election is to be made with the corporation's tax return for its taxation year immediately preceding the change of control.

The rationale for this provision seems obvious. When control of a corporation has been acquired, the corporation's fiscal year is deemed to end immediately before that time. This allows the corporation's books to be closed during the time when it was owned by the previous owners and reopened in respect of the time when it was owned by the new owners. One can imagine the administrative nightmare it would be to have a corporation's fiscal year end during the middle of a business day.

Recently, this provision was considered by the Federal Court of Appeal in La Survivance2. While this case had taxpayer-friendly results for the appellant, it may result in unintended negative tax consequences in other situations.

La Survivance

In this case, the appellant, a publicly traded insurance company, sold all of its shares in a wholly owned subsidiary company ("Subco"), which also carried on an insurance business in Canada, to a private Canadian company ("the purchaser"). In respect of the sale, the appellant realized a $2,654,372 loss. Absent the operation of subsection 256(9) of the Act, the appellant's loss would have been treated as a capital loss. This loss would not qualify as a business investment loss, because Subco was not a Canadian-controlled private corporation ("CCPC"), on account of the fact that it was wholly owned by the appellant, a public company.

Relying on the acquisition of control deeming provision in subsection 256(9) of the Act, the appellant took the position that the purchaser acquired control of Subco at the beginning of the day in which the sale took place. Consequently, when the sale...