During the relevant taxation years of Corporation A (which had claimed the small business deduction), its shares were held equally by Corporation B (a resident corporation) and Corporation D, which were the two parties to a unanimous shareholder agreement. All of the shares of Corporation D were held by Corporation E, a non-resident corporation of Canada.
In finding that Corporation A was not a Canadian-controlled private corporation by virtue of the de jure control of Corporation E, the Directorate stated:
Corporation A was excluded from the definition of CCPC … by virtue of paragraph (a) of the CCPC definition because it was controlled, directly or indirectly in any manner whatever by an N-R, Corporation E. Corporation E exercised effective (de jure) control over Corporation A through Corporation D by virtue … of the USA, which accorded to Corporation D a share acquisition right, referred to in paragraph 251(5)(b), over all of the shares of the capital stock of Corporation A that it did not already own. Corporation D was therefore deemed, for the purposes of the CCPC definition, to be in the same position in relation to the control of Corporation A as if it owned the shares to which it held future rights to acquire. Consequently, for the purposes of the CCPC definition, Corporation D was deemed to own all of the shares of Corporation A … .