The only voting and participating shares of a Canadian corporation ("Opco") are held 50% by a non-resident, and 50% by three Canadian residents. A unanimous shareholder agreement (USA) provides that the four directors will consist of two members appointed by the non-resident, and two directors jointly appointed by the residents (even if their aggregate shareholding falls well below 50%.) It also was agreed that on specified events such as fraud or theft and similar events, a resident shareholder (a "defaulted shareholder") would be required to withdraw and, in the case of a resident defaulted shareholder, that would give rise to a right of the non-resident to acquire the defaulted shareholder’s shares.
Situation 1
The non-resident’s right of purchase would be suspended for, say, 15 days, following the withdrawal event, during which other resident shareholders could acquire the shares of the defaulted shareholder, in which case, the non-resident's purchase rights and the agreement respecting equal board representation would continue to apply.
Situation 2
Same as Situation 1 except that resident shareholders would not exercise their priority purchase right, so that the defaulted shareholder’s shares would instead be acquired by the non-resident (but with the equal representation agreement still applying).
Situation 3
The same as Situation 1 except that if the defaulted shareholder's shares were not acquired by the other resident shareholders, they would be required to offer their own shares to the non-resident who could purchase them in addition to the shares of the defaulted shareholder.
Situation 6
If the resident shareholders did not exercise their entitlement to purchase the shares of the defaulted shareholder, the non-resident could require the defaulted shareholder to sell its shares at a determined value to an unrelated Canadian resident selected by the non-resident
Situation 7
If the resident shareholders did not purchase the shares of the defaulted shareholder within 15 days of the withdrawal event, the non-resident could require them to purchase the non-resident’s shares at fair market value plus a 5% premium.
Would Opco qualify as a CCPC?
CRA Response
After stating that, “following…Bagtech…we accept, where appropriate, taking into account a directors' appointment and appointment clause in the [USA] in determining whether a person controls a corporation,” CRA addressed the particular Situations.
Situations 1 and 2
CRA considered that the non-resident would have rights to all the Opco shares because the non-resident would have rights to the shares of each of the resident shareholders upon becoming a defaulted shareholder. As the deemed 100% shareholder, the clause for the designation and appointment of directors would no longer apply, so that Opco would not be a CCPC.
Situation 3
As in Situations 1 and 2, the directors' designation and appointment clause in the unanimous shareholder agreement would no longer preclude the non-resident from exercising control of the Opco as it would be deemed to own all the Opco shares.
Situations 6 and 7
S. 251(5)(b) would not apply solely as a result of the existence of the indicated clauses, so that Opco would be a CCPC.