“The failure to elect out of subsection 256(9) can result in unintended results.”
Subsection 256(9) of the Income Tax Act is an often overlooked provision that deems control of a corporation to take place at the beginning of the day in which an acquisition of control occurs (even when the acquisition occurs later in the day). Corporations can elect out of this default timing and have the acquisition of control deemed to occur immediately prior to the actual acquisition of control. The election is to be made with the corporation’s tax return for the taxation year ending immediately preceding the acquisition of control.
The failure to elect out of subsection 256(9) can result in unintended results, both positive and negative.
For example, where an individual sells shares that would otherwise be qualifying small business corporation (“QSBC”) shares to a non-resident at the close of business on say, November 30th, subsection 256(9) could deem the non-resident to have acquired control of the private company at the beginning of November 30th. The result would be, technically, the sale by the taxpayer of a company that was not a QSBC at the close of business on November 30th. An election opting out of subsection 256(9) would solve this problem.
This interpretation has been confirmed by the CRA in a technical interpretation (2006-0214781E5).
Unfortunately, the CRA is not inclined to take this view when the results favour the taxpayer. In La Survivance v. R (2006 FCA 129), a public company sold its wholly-owned subsidiary to a private company at a loss. No election out of subsection 256(9) was made. Accordingly, the purchaser was deemed to have acquired the subsidiary at the beginning of the day. When the sale occurred later that same day, the Federal Court of Appeal confirmed that the subsidiary was deemed to be a small business corporation at the time of sale and the vendor’s capital loss qualified as a business investment loss.
Even after the court’s decision, the CRA has stated that it will continue to deny business investment losses in such cases.
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