Principal Issues: In the particular situation, whether the corporation is a Canadian-controlled private corporation.
Position: No
Reasons: Exception provided in paragraph (a) of the definition of "Canadian-controlled private corporation" in subsection 125(7) applies.
May 19, 2010
Headquarters XXXXXXXXXX Tax Services Office Business and Partnerships Division A. Dagenais Attention: Ms. XXXXXXXXXX 2008-027944
XXXXXXXXXX - Subsection 125(7)
This is further to your memorandum of May 23, 2008, in which you requested our opinion on the interpretation of the term "Canadian-controlled private corporation" ("CCPC") as defined in subsection 125(7) of the Income Tax Act (the "Act") as it applies to the Particular Situation described below. We apologize for the delay in responding to your request.
Unless otherwise stated, all statutory references herein are to provisions of the Act.
Particular Situation
It is our understanding that the facts of this case can be summarized as follows.
XXXXXXXXXX
1. XXXXXXXXXX ("Corporation A") was incorporated on XXXXXXXXXX under the Canada Business Corporations Act (the "CBCA"). It is a "private corporation" and a "Canadian corporation" within the meaning of subsection 89(1).
2. Corporation A resulted from an amalgamation by virtue of the CBCA on XXXXXXXXXX. This corporation is involved in the research, development, manufacturing and production of XXXXXXXXXXX.
3. The fiscal period of Corporation A ends on XXXXXXXXXX of each year. For the purposes hereof, the relevant taxation years are the XXXXXXXXXX and XXXXXXXXXX taxation years of Corporation A.
4. During Corporation A's XXXXXXXXXX taxation year, i.e., until XXXXXXXXXX, the shares of Corporation A were held equally by XXXXXXXXXX ("Corporation B"), XXXXXXXXXX ("Corporation C") and XXXXXXXXXX ("Corporation D"), i.e., in a proportion of 33.33% each.
5. Until XXXXXXXXXX, 33.33% of the shares of Corporation A were held by XXXXXXXXXX ("Corporation G"). All the shares of Corporation G were held by Corporation D. On XXXXXXXXXX, Corporation G transferred all its assets to Corporation D in the course of its winding up and dissolution.
6. From XXXXXXXXXXXX onwards, the shares of the capital stock of Corporation A were held equally by Corporation B and Corporation D, i.e., 50% each.
7. At no time has any shareholder held more than 50% of the issued and outstanding voting shares of the capital stock of Corporation A.
XXXXXXXXXX
8. Corporation B is a corporation incorporated on XXXXXXXXXX under the laws of the Province of XXXXXXXXXX. It is a "private corporation" and a "Canadian corporation" within the meaning of subsection 89(1).
9. The voting shares of the capital stock of Corporation B are comprised of common shares ("CS") and preferred shares ("PS").
10. During the XXXXXXXXXX and XXXXXXXXXX taxation years of Corporation A, the voting shares of the capital stock of Corporation B were held by XXXXXXXXXX ("Z"), XXXXXXXXXX ("V"), XXXXXXXXXX ("W") and XXXXXXXXXX ("Mr. Y").
11. Z and Y are Canadian residents ("Residents"). V and W are non-residents ("N-Rs").
12. V became N-R towards the end of the XXXXXXXXXX year or at the beginning of the XXXXXXXXXX year.
13. W became N-R in XXXXXXXX.
14. During the XXXXXXXXXX and XXXXXXXXXX taxation years of Corporation A, the voting shares of the capital stock of Corporation B were held as follows:
TOTAL VOTING SHARES
CS
PS
R
N-R
Z
XXXX
XXXXX
XXXXX
V
XXXX
XXXXX
W
XXXX
XXXXXX
Mr. Y
XXXXX
XXXXX
XXXX
XXXXX
XXXXX
XXXXXX
15. During the XXXXXXXXXX to XXXXXXXXXX fiscal periods, Corporation B did not pay any dividends.
16. According to Corporation B's representatives, Corporation B's shareholders have not signed any shareholder agreement ("SA") and/or unanimous shareholder agreement ("USA").
XXXXXXXXXX
17. Corporation C is a corporation incorporated under the CBCA. It is a "private corporation" and a "Canadian corporation" within the meaning of subsection 89(1).
18. Until XXXXXXXXXX, all the shares of the capital stock of Corporation C were held 100% by Mr. Y.
XXXXXXXXXX
19. During the XXXXXXXXXX and XXXXXXXXXX taxation years of Corporation A, all of the shares of the capital stock of Corporation D were held by XXXXXXXXXX ("Corporation E"). Corporation E is a XXXXXXXXXX corporation and is a non-resident corporation of Canada.
XXXXXXXXXX
20. During the XXXXXXXXXX and XXXXXXXXXX taxation years of Corporation A, all of the shares of the capital stock of Corporation E were held by XXXXXXXXXX ("Corporation F"). Corporation F is a corporation formed under the XXXXXXXXXX Act.
XXXXXXXXXX
21. During the XXXXXXXXXX and XXXXXXXXXX taxation years of Corporation A, all of the shares of the capital stock of Corporation F were held by XXXXXXXXXX in its capacity as trustee of XXXXXXXXXX ("Trust"). Trust is governed on a discretionary basis under the laws of XXXXXXXXXXX.
Unanimous shareholder agreement
22. A USA was signed by Corporations B, C and D on XXXXXXXXXX.
23. This USA was in effect for the XXXXXXXXXX and XXXXXXXXXX taxation years of Corporation A.
24. Clause XXXXXXXXXX of the USA deals with the election of members of the Board of Directors and reads as follows:
XXXXXXXXXX
25. Clause XXXXXXXXXX grants each shareholder a future and conditional right to purchase shares and reads as follows:
XXXXXXXXXX
26. Clause XXXXXXXXXX deals with shareholder representatives and reads as follows:
XXXXXXXXXX
27. There is no clause in the USA dealing with the election of the Chair of Corporation A.
28. With respect to meetings of shareholders, clause XXXXXXXXXX indicates that the quorum at any meeting is XXXXXXXXXX%.
29. Clause XXXXXXXXXX restricts, to some extent, the powers of the directors and reads as follows:
XXXXXXXXXX
30. Clause XXXXXXXX deals with the duration of the USA and reads as follows:
XXXXXXXXXX
31. Clause XXXXXXXX deals with the term of the USA and reads as follows:
XXXXXXXXXX
32. According to the representatives, Corporations B, C and/or D did not sign any SA or USA before the USA concluded on XXXXXXXXXX.
33. Corporation A has claimed the small business deduction ("SBD") for the years XXXXXXXXXXXX.
Questions
34. You are asking us to determine, on the basis of the information you have provided, whether Corporation A was a CCPC under subsection 125(7) in its XXXXXXXX and XXXXXXXXXX taxation years.
Position of the XXXXXXXXXX TSO
35. You are of the view that Corporation A does not qualify as a CCPC as defined in subsection 125(7) and, therefore, cannot benefit from the SBD for its XXXXXXXXXX and XXXXXXXXXX taxation years. Your position is based on the provisions of the Act, and court decisions such as Oakfield Development Toronto Ltd. v. Minister of National Revenue, [1971] S.C.R. 1032 ("Oakfield") and The Queen v. Imperial General Properties Ltd. [1985] 2 S.C.R. 288 ("Imperial"). In particular, you are of the view that control of Corporation B is solely in the hands of the holders of the common shares, namely V and W (who are N-R) and Z (who is resident in Canada) since they would have the power to wind up the company and would have more rights than the preferred shareholders. Consequently, Corporation B would be controlled by N-Rs because XXXXXXXXXX% of the CSs would be held by N-Rs. Assuming that Corporation B is controlled by both N-Rs and that Corporation D is also controlled by an N-R, this would result in the application of the exclusion in paragraph (b) of the CCPC definition in subsection 125(7).
Position of the Taxpayer's Representative
36. The Representative submits that the decisions of the Supreme Court of Canada ("SCC") cited above do not support your position. He states that these decisions were rendered in a different context where two groups of shareholders each held 50% of the voting shares of a corporation, which is not the case for Corporation B. The above decisions were aimed at separating control where two groups of shareholders hold 50% of the votes and it is impossible to establish control of a corporation. In situations where the voting rights are shared equally between two shareholders or two groups of shareholders, but the rights and privileges of the shares held by those two shareholders differ, the SCC used indicia other than the mere right to vote, such as the power to force winding-up and to receive the profits and assets of the corporation, to determine who controlled the corporation. These were special situations. Indeed, the courts only moved to "extended de jure" control when "de jure" control did not provide a precise answer; this is not the case for Corporation B, whose resident shareholders hold XXXXXXXXXX% of the outstanding shares and which is controlled by a single shareholder, Z (Canadian resident), who holds XXXXXXXXXX% of the voting rights. In any event, the articles of Corporation B do not grant the holders of common shares the power to force the winding-up of the corporation.
37. Since Corporation B is not controlled directly or indirectly in any manner whatsoever by one or more N-R persons, the representative is of the view that Corporation B is a corporation controlled by Residents. Consequently, Corporation A is not controlled directly or indirectly in any manner whatever by one or more N-R persons under paragraph (a) of the definition of CCPC in subsection 125(7) since only XXXXXXXXXX% of the voting shares are indirectly owned by N-Rs, namely Corporation D, which is wholly owned by Corporation E.
38. Furthermore, in the representative's view, there is no evidence on the facts that either Corporation B or D has any direct or indirect influence that would result in control in fact of Corporation A within the meaning of subsection 256(5.1).
39. Finally, in applying paragraph (b) of the definition of CCPC in subsection 125(7), given that Corporation B is controlled by Residents, the shares of Corporation A cannot be attributed to a hypothetical shareholder.
Our Comments
40. We are of the view that Corporation A is not a CCPC in its XXXXXXXXXX and XXXXXXXXXX taxation years because, inter alia, a person not resident in Canada (Corporation E) controlled Corporation A directly or indirectly in any manner whatever by virtue of the application of paragraph 251(5)(b), paragraph (a) of the definition of CCPC in subsection 125(7) and paragraph 256(6.1). Consequently, Corporation A was not entitled to the SBD in its XXXXXXXXXX and XXXXXXXXXX taxation years. Our conclusions are based on the following observations.
Statutory definition
41. A CCPC is defined in subsection 125(7). The definition reads as follows:
Canadian-controlled private corporation means a private corporation that is a Canadian corporation other than
(a) a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation), by one or more corporations described in paragraph (c), or by any combination of them,
(b) a corporation that would, if each share of the capital stock of a corporation that is owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation described in paragraph (c) were owned by a particular person, be controlled by the particular person,
(c) a corporation a class of the shares of the capital stock of which is listed on a designated stock exchange, or
(d) in applying subsection (1), paragraphs 87(2)(vv) and (ww) (including, for greater certainty, in applying those paragraphs as provided under paragraph 88(1)(e.2)), the definitions excessive eligible dividend designation, general rate income pool and low rate income pool in subsection 89(1) and subsections 89(4) to (6), (8) to (10) and 249(3.1), a corporation that has made an election under subsection 89(11) and that has not revoked the election under subsection 89(12);
Interplay with subsection 251(5)
42. In applying the definition of CCPC in subsection 125(7), it is essential to take into account the presumptions in subsection 251(5). Subsection 251(5) reads in part as follows:
For the purposes of subsection 251(2) and the definition Canadian-controlled private corporation in subsection 125(7),
(a) where a related group is in a position to control a corporation, it shall be deemed to be a related group that controls the corporation whether or not it is part of a larger group by which the corporation is in fact controlled;
(b) where at any time a person has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently,
(i) to, or to acquire, shares of the capital stock of a corporation or to control the voting rights of such shares, the person shall, except where the right is not exercisable at that time because the exercise thereof is contingent on the death, bankruptcy or permanent disability of an individual, be deemed to have the same position in relation to the control of the corporation as if the person owned the shares at that time,
(ii) to cause a corporation to redeem, acquire or cancel any shares of its capital stock owned by other shareholders of the corporation, the person shall, except where the right is not exercisable at that time because the exercise thereof is contingent on the death, bankruptcy or permanent disability of an individual, be deemed to have the same position in relation to the control of the corporation as if the shares were so redeemed, acquired or cancelled by the corporation at that time;
(iii) to, or to acquire or control, voting rights in respect of shares of the capital stock of a corporation, the person is, except where the right is not exercisable at that time because its exercise is contingent on the death, bankruptcy or permanent disability of an individual, deemed to have the same position in relation to the control of the corporation as if the person could exercise the voting rights at that time, or
(iv) to cause the reduction of voting rights in respect of shares, owned by other shareholders, of the capital stock of a corporation, the person is, except where the right is not exercisable at that time because its exercise is contingent on the death, bankruptcy or permanent disability of an individual, deemed to have the same position in relation to the control of the corporation as if the voting rights were so reduced at that time;
Private Corporation and Canadian Corporation
43. The terms "private corporation", "Canadian corporation" and "public corporation" are defined in subsection 89(1) as follows:
“private corporation” at any particular time means a corporation that, at the particular time, is resident in Canada, is not a public corporation and is not controlled by one or more public corporations (other than prescribed venture capital corporations) or prescribed federal Crown corporations or by any combination thereof…
“Canadian corporation” at any time means a corporation that is resident in Canada at that time and was …
(b) resident in Canada throughout the period that began on June 18, 1971 and that ends at that time, …
“public corporation” at any particular time means
(a) a corporation that is resident in Canada at the particular time if at that time a class of shares of the capital stock of the corporation is listed on a designated stock exchange in Canada, …
44. In this case, it appears to us that Corporation A was a "private corporation" and a "Canadian corporation" at all relevant times during its taxation years XXXXXXXXXX and XXXXXXXXXX. Indeed, it was deemed to be resident in Canada for the purposes of the Act under paragraph 250(4)(a) and was not controlled by one or more public corporations.
45. Having considered this, the next step is to determine whether Corporation A was a corporation that fell within one of the exceptions listed in paragraphs (a) to (d) of the definition of CCPC in subsection 125(7) during a relevant period. If it were at any particular time, Corporation A would not be a CCPC during that period.
Application of paragraphs (c) and (d) of the CCPC definition in subsection 125(7)
46. The exception in paragraph (d) of the definition of CCPC in subsection 125(7) is not relevant for purposes here. In XXXXXXXXXX, this exception could not apply because, among other reasons, that provision only came into force in respect of the 2006 and subsequent taxation years. For Corporation A's XXXXXXXXXX taxation year, this exception did not apply because Corporation A did not make an election under subsection 89(11).
47. The exception in paragraph (c) of the definition of CCPC in subsection 125(7) also does not apply since no class of shares of the capital stock of Corporation A is listed on a designated stock exchange.
Application of paragraph (a) of the CCPC definition in subsection 125(7)
48. In determining whether Corporation A is a corporation described in the exception in paragraph (a) of the definition of CCPC in subsection 125(7), it is first necessary to determine whether the shareholders of Corporation A include one or more non-resident persons, one or more public corporations, or one or more corporations described in paragraph (c) of the definition of CCPC.
49. In this case, to our knowledge, there is no public corporation (as defined in subsection 89(1)) among the shareholders of Corporation A, nor is there any corporation of which any class of shares is listed on a designated stock exchange. However, as noted above, during the XXXXXXXXXX and XXXXXXXXXX taxation years, the shareholders of Corporation A were either resident in Canada or an N-R for purposes of the definition of "CCPC" in subsection 125(7).
50. For purposes of paragraph (a) of the CCPC definition, the next question that arises is whether Corporation A was controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, i.e., whether Corporation A was controlled de jure or de facto by one or more non-resident persons.
Legal control
51. For the purposes of determining effective (de jure) control of a corporation, the SCC in Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795 ("Duha Printers"), at paragraph 85 of the Court's judgment established inter alia the following principles:
(2) The general test for de jure control is that enunciated in Buckerfield’s Ltd. v. M.N.R., [1964] C.T.C. 504: whether the majority shareholder enjoys “effective control” over the “affairs and fortunes” of the corporation, as manifested in “ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the board of directors”.
(3) To determine whether such “effective control” exists, one must consider:
- the corporation’s governing statute;
- the share register of the corporation; and
- any specific or unique limitation on either the majority shareholder’s power to control the election of the board or the board’s power to manage the business and affairs of the company, as manifested in either:
i. the constating documents of the corporation; or
ii. any unanimous shareholder agreement.(4) Documents other than the share register, the constating documents, and any unanimous shareholder agreement are not generally to be considered for this purpose.
(5) If there exists any such limitation as contemplated by item 3(c), the majority shareholder may nonetheless possess de jure control, unless there remains no other way for that shareholder to exercise “effective control” over the affairs and fortunes of the corporation in a manner analogous or equivalent to the Buckerfield’s test.
52. The SCC, in Duha Printers, also held that even if, in general, an external agreement (i.e. other than a unanimous shareholder agreement) should not be taken into account in determining de jure control, it could still be taken into account in determining de facto control. (at paragraph 51 of the reasons for judgment)
53. Furthermore, in Silicon Graphics Ltd. v. Canada, (C.A.) [2003] 1 F.C. 447 ("Silicon Graphics") [2002 FCA 260], the Federal Court of Appeal made the following comments in paragraph 36 of the judgment regarding the determination of de jure control by a group of shareholders:
Based on these cases, I agree with the appellant's submission that simple ownership of a mathematical majority of shares by a random aggregation of shareholders in a widely held corporation with some common identifying feature (e.g. place of residence) but without a common connection does not constitute de jure control as that term has been defined in the case law. I also agree with the appellant's submission that in order for more than one person to be in a position to exercise control it is necessary that there be a sufficient common connection between the individual shareholders. The common connection might include, inter alia, a voting agreement, an agreement to act in concert, or business or family relationships.
De facto control
54. Furthermore, since the phrase "controlled, directly or indirectly in any manner whatever" is used in paragraph (a) of the CCPC definition, not only de jure control must be considered but also de facto control. In particular, subsection 256(5.1) provides that, for the purposes of the Act, where that expression is used, a corporation shall be considered to be so controlled by another corporation, person or group of persons, referred to as the "controller", at any time where, at that time, the controller has any direct or indirect influence that, if exercised, would result in control in fact of the corporation.
55. In Silicon Graphics, the Federal Court of Appeal made the following comments in paragraphs 66 and 67 of the judgment regarding the determination of de facto control of a corporation:
The case law suggests that in determining whether de facto control exists it is necessary to examine external agreements (Duha Printers, supra at 825); shareholder resolutions (Société Foncière d'Investissement Inc. v. Canada, [1996] T.C.J. No. 1568, para. 10 (T.C.C.)); and whether any party can change the board of directors or whether any shareholders' agreement gives any party the ability to influence the composition of the board of directors (International Mercantile Factors Ltd. v. The Queen (1990), 90 DTC 6390 at 6399 (F.C.T.D.), aff'd (1994), 94 DTC 6365 (F.C.A.); and Multiview Inc. v. The Queen (1997), 97 DTC 1489 at 1492-93 (T.C.C.)).
It is therefore my view that in order for there to be a finding of de facto control, a person or group of persons must have the clear right and ability to effect a significant change in the board of directors or the powers of the board of directors or to influence in a very direct way the shareholders who would otherwise have the ability to elect the board of directors.
56. Interpretation Bulletin IT-302R3 contains the following comments regarding the concept of control and of groups of persons:
Control by a group of persons
3. The notion of group control has different meanings in different areas of the Act. For the purpose of the associated corporation rules in section 256, a group of persons is interpreted in its broadest sense in that it is simply two or more persons who own shares in the same corporation (paragraph 256(1.2)(a)). The meaning of group of persons is more limited in the context of the acquisition of control rules discussed in this bulletin. A group of persons who own the majority of the voting shares of a corporation will be considered as having collectively acquired control of the corporation where there is an agreement amongst them to vote their shares jointly, when there is evidence that they act in concert to control the corporation, or when there is evidence of their intention to act in concert to control the corporation (see 4-6 below). When dealing with groups it is always a question of fact as to whether any group of persons who own the majority of the voting power in a corporation is in control of the corporation. However, where a corporation is controlled by a single person, this precludes a group from also controlling the corporation (Southside Car Market Ltd. v. The Queen, 82 DTC 6179, (1982) CTC 214 (FCTD)).
Acting in concert
4. A group of persons could be regarded as acting in concert when the group acts with considerable interdependence in transactions involving a common purpose. A predetermined agreement which sets out how the group is to act in certain situations would normally constitute acting in concert. In widely held corporations, the fact that a majority of shareholders vote collectively to take some action does not by itself indicate that the group of shareholders is acting in concert. However, in closely held corporations the fact that shareholders jointly adopt specific mutually advantageous measures is an important indicator of actions in concert.
5. In Vina Rug (Canada) Ltd. v. MNR, 68 DTC 5021, (1968) CTC 1 (SCC), some persons in a group of persons were related and others had been business associates for many years. This represented a common link which was sufficient to enable them to exercise control. Similarly, in Express Cable T.V. v. MNR 82 DTC 1431, (1982) CTC 2447, the Tax Review Board stated that the existence of voting trusts, community of interest and other common links between shareholders were important in determining which group controlled two corporations.
6. The purpose of seeking a link or common interest within a group of persons is to ensure that the acquisition of control by a given group of persons is not fortuitous or coincidental, but the outcome of an action or an event organized by the group. Seeking a tax advantage arising from the accumulated losses of a corporation may well provide a link or a common interest among the members of a given group. For a further discussion of acting in concert see the current version of IT-419, Meaning of Arm's Length.
57. In this case, based on the information provided, there are no facts that would lead us to conclude that any N-R or group of N-Rs would have de facto control of Corporation A, other than by reason of the USA.
Does Corporation A fall within paragraph (a) of the CCPC definition?
58. We consider that Corporation A was excluded from the definition of CCPC in its XXXXXXXXXX and XXXXXXXXXX taxation years 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 section XXXXXXXXXX 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 in Corporation A's XXXXXXXXXX and XXXXXXXXXX taxation years. Since Corporation D was controlled by an N-R (Corporation E), ultimate control of Corporation A was therefore held by an N-R. For this reason alone, we are of the view that Corporation A was not a CCPC in its XXXXXXXXXX and XXXXXXXXXX taxation years.
Access to Information
Taxpayers covered by this memorandum may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. Requests should be directed to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the taxpayer.
We hope that our comments will be of assistance. Should you require additional information regarding this letter, please do not hesitate to contact us.
Best regards,
Marc Vanasse, CA
Director
Corporate Reorganizations and Resource Industry Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.