Principal Issues: The shares of the capital stock of Opco1 and of the capital stock of Opco2 would be held by the same individuals and in the same proportion. The individuals would not be related to each other. The author of the question claims that the individuals would not be considered a group of persons in the absence of sufficient common connection between them, and that the individuals would not act in concert to control the corporations. Are Opco1 and Opco2 related?
Position: General comments. In this type of situation, the CRA would question the validity of the assumption that the individuals would not have sufficient connection between them and would not act in concert to control the corporations.
Reasons: Question of fact.
FEDERAL TAX ROUNDTABLE
APFF CONFERENCE 2010
Question 2
Related corporations
Consider the situation illustrated below: Individuals W, X, Y and Z hold 40%, 20%, 20% and 20% of the voting shares of Opco A, respectively. The same individuals also hold, in identical proportions, the voting shares of Opco B.
As defined in subsection 251(2) of the Income Tax Act (the "Act"), individuals W, X, Y and Z are not related persons. There is no relationship between Individuals W, X, Y and Z or common interest between them that would demonstrate that these shareholders are acting together to exercise control over the corporation. Therefore, Opco A is not controlled by any person or group and Opco B is not controlled by any person or group.
Paragraph 251(2)(c) specifies that two corporations are related if both corporations are controlled by the same person or group of persons.
In this situation, does the CRA consider Opco A and Opco B to be controlled by the same group and therefore Opco A and Opco B to be related persons within the meaning of subsection 251(2)?
CRA Response
Subparagraph 251(2)(c)(vi) provides that two corporations are related if each member of an unrelated group that controls one of the corporations is related to at least one member of an unrelated group that controls the other corporation.
Paragraph 251(5)(c) provides, for the purposes of subsection 251(2) and the definition "Canadian-controlled private corporation" in subsection 125(7), that where a person owns shares in two or more corporations, the person shall as shareholder of one of the corporations be deemed to be related to that person as shareholder of each of the other corporations.
Consequently, if the corporations were controlled by a group of persons, the two corporations could be related depending on the composition of the control group of each corporation.
Furthermore, subparagraph 251(2)(c)(i) could also apply in certain situations where we can determine that the two corporations are controlled by the same group of persons.
The CRA has taken the following position in paragraph 12 of Interpretation Bulletin IT-419R2 with respect to control of a corporation by a group of unrelated persons:
“…For a group of unrelated persons to constitute a group of persons which controls a corporation, there must be a common link or interest between the persons (which must involve more than their mere status as shareholders) or there must be evidence that those shareholders act together to exert control over the corporation. In the case of a closely-held corporation (i.e. where there are two or three unrelated shareholders, none of which individually controls the corporation) the CRA considers that there is a presumption that the shareholders of such a closely-held corporation will act together to control the corporation. In order to rebut this presumption, it would be necessary to show that no one is controlling the corporation and that the decision-making process in the corporation is effectively deadlocked.”
Furthermore, the Federal Court of Appeal made the following comments in Silicon Graphics Limited v. The Queen, 2002 DTC 7112:
“[36] 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.”
In Crystal Beach Park Limited v. The Queen, 2006 DTC 2845, the Tax Court of Canada clarified that the list of examples of evidentiary items in Silicon Graphics was not exhaustive.
Determining whether a group of persons controls a corporation and determining the composition of the control group, if any, requires a review and analysis of all the facts and circumstances surrounding a particular situation. In a situation such as the one described above, the CRA would question the appropriateness of the assumption that individuals do not have a common link and do not act in concert and would require that this assumption be demonstrated.
Sylvie Labarre
(613) 946-5357
October 8, 2010
2010-037314.