2020-0846931E5 CEWS - public institution

Principal Issues: What criteria should be considered when determining whether a particular entity is a public institution.

Position: General criteria provided.

Reasons: The determination is a question of fact.

Author: Naufal, Bob
Section: 149(1)(d) to (d.6), 149(1.1) and (1.3), 125.7(1)

XXXXXXXXXX                                                                                     Bob Naufal
                                                                                                             2020-084693
Attention: XXXXXXXXXX

May 1, 2020

Dear XXXXXXXXXX,

We are writing to you in response to your enquiry of April 21, 2020, wherein you are requesting our comments with respect to the definition of “public institution” under recently enacted subsection 125.7(1) of the Income Tax Act (the “Act”). Specifically, you ask for clarification on the following in the context of Crown corporations:

1.    Whether the question of eligibility depends on whether an entity’s enabling legislation expressly provides that it is a Crown agent (i.e., if an agency’s legislation expressly provides that it is a Crown agent, the agency is therefore a “public institution” and therefore ineligible for the subsidy?)

2.    What are the determining factors in assessing whether an entity is a “public institution” by reason of paragraph 149(1)(d) of the Act?

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R9, Advance Income Tax Rulings and Technical Interpretations.

A “public institution” is defined in subsection 125.7(1) of the Act to mean

(a)   an organization described in any of paragraphs 149(1)(a) to (d.6) of the Act; or
(b)   a school, school board, hospital, health authority, public university or college.

Paragraph 149(1)(d) of the Act refers to a corporation, commission or association all of the shares (except directors' qualifying shares) or of the capital of which was owned by one or more persons each of which is Her Majesty in right of Canada or Her Majesty in right of a province. Paragraph 149(1)(d.1) of the Act refers to a corporation, commission or association not less than 90% of the shares (except directors' qualifying shares) or of the capital of which was owned by one or more persons each of which is Her Majesty in right of Canada or Her Majesty in right of a province.

Paragraph 149(1)(d.2) of the Act refers to a corporation where all of the shares (except directors’ qualifying shares) or capital of which are owned by an entity referred to in paragraph 149(1)(d) as well as a subsidiary of such a corporation. Subparagraph 149(1)(d.3)(i) of the Act refers to a corporation, commission or association where not less than 90% of its shares (except directors’ qualifying shares) or capital are owned by Her Majesty in right of Canada or a province or a person to which paragraph (d) or (d.2) applies (i.e. corporation 100% owned by Her Majesty in right of Canada or a province, or a 100% owned subsidiary of such a corporation). Subparagraph 149(1)(d.3)(ii) of the Act refers to a corporation, commission or association where not less than 90% of the shares (except directors’ qualifying shares) or the capital of the corporation, commission or association are owned by one or more municipalities in Canada in combination with one or more persons each of which is Her Majesty in Right of Canada or a province, or a person to which paragraphs 149(1)(d) or (d.2) of the Act applies.

Paragraph 149(1)(d.4) refers to corporations, all of the shares (except directors’ qualifying shares) or capital of which are owned by corporations, commissions or associations that are exempt under any of paragraphs 149(1)(d) to (d.3) or paragraph 149(1)(d.4). Paragraph 149(1)(d.5) of the Act refers to a corporation, commission or association where not less than 90% of the capital of which is owned by one or more municipalities in Canada or a municipal or public body performing a function of government in Canada. Paragraph 149(1)(d.6) of the Act refers to a corporation, all of the shares (except directors' qualifying shares) or of the capital of which was owned by one or more entities each of which is a corporation, commission or association to which paragraph (d.5) applies, a corporation to which paragraph (d.6) applies, a municipality in Canada, or a municipal or public body performing a function of government in Canada. Municipal corporations that qualify for exemption under paragraphs (d.5) and (d.6) have income and geographical boundary tests that must be satisfied to be exempt from tax.

In addition, subsection 149(1.1) of the Act provides that for the purposes of determining the 100% and 90% ownership tests in paragraphs (d) to (d.6) any right to acquire shares or capital of a corporation should be considered as though the right had been exercised. For example, assume that a province currently owned 100% of the outstanding shares of a corporation but a person who was not Her Majesty in right of Canada, a province, or a Canadian municipality had a right under which they could obtain 20% of the outstanding shares of the corporation from the province.  For the purposes of determining whether the 90% or 100% test is met, the non-government person would be considered to own 20% of the shares or capital. As a result, the government would own less than 90% of the corporation’s shares or capital and it would not be one that is described in paragraphs (d) to (d.6).

Whether a particular entity is one described in paragraphs 149(1)(d) to (d.6) would be determined with reference to the ownership of the shares or capital of the corporation as well as the existence of any right by a person other than Her Majesty in right of Canada, a province or a Canadian municipality to acquire such shares or capital.

In the context of a corporation without share capital, the determination of the ownership necessitates a review of all the relevant documents such as articles of incorporation, by-laws and agreements relating to the operation and control of the corporation and its assets. We consider that the following factors would be relevant in making such determination:

•    the identity of members,
•    the structure of the corporation,
•    who exercises control over the financing, operation and direction of the corporation,
•    who has the right to elect or change the board of directors or to reverse its decision,
•    who can contribute capital and receive a distribution of capital,
•    details regarding asset distribution on winding-up or dissolution and
•    whether a person other than her Majesty in right of Canada, a province or a Canadian municipality has any right to acquire any capital of the corporation.

We trust our comments will be of assistance.

Yours truly,

Bob Naufal
Manager
Financial Institutions Section
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2020

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2020