At issue was whether a start-up Canadian private corporation engaged in SR&ED was a Canadian-controlled private corporation (“CCPC”). Shareholder1, Shareholder2 and Shareholder3, which were controlled by X (a non-resident of Canada), held less than 41% of the (Class A) voting shares of the Corporation, having a nominal economic value; and resident Canadian investors together with the trust (the “Trust) referred to below, held the balance of the Class A shares, with the Trust apparently holding the majority of such shares. Shareholder 1 (apparently, the main corporate vehicle for X), by virtue of directly (or indirectly) holding non-voting participating shares, had an equity interest in the Corporation of over 60%.
The Trust (accepted by the Directorate as being a resident trust) held a sufficient number of the voting shares of the Corporation in order for the Corporation to qualify as not being controlled de jure by X and Shareholder1. The three board members were appointed by the three groups of shareholders (the Trust, Shareholder1 etc. and the Trust). Such designates were the CEO (who was appointed by the Trust), X and a third individual. The trust had a sole beneficiary (the “Beneficiary”). The Trust had a resident protector (related to X), who had the right to appoint or remove trustees (and who, in fact, were related to X) and who, in turn, was appointed and could be removed, by the resident settlor. Any provision of the Declaration of Trust could be amended by the trustees and the protector.
An agreement (the “Agreement”) among the shareholders accorded veto rights to Shareholder1 over most major decisions of the Corporation.
Headquarters found that the Corporation was not a CCPC based on the significant influence exercisable by the non-resident (X) as a factual matter. Numerous factors listed included:
- the extensive veto right of Shareholder1 (but with Headquarters noting that “The holding by a shareholder of a veto right with respect to the amalgamation or dissolution of a corporation, amendments to the articles or by-laws of a corporation, the issue of additional shares or the purchase of shares of a corporation does not in itself automatically result in de facto control of the corporation by the shareholder”
- “the high degree of artificiality in the addition of the Trust to the implemented structure” (with the Trust having a nominal economic interest and trustees related to X, and with the Trust appearing “to have played an accommodation role”)
- the membership of X on the board (with a suggestion of significant influence on the other two members)
- the reliance of the Corporation if conducting its continued R&D work on funding commitments of Shareholder1