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.
CRA addressed the application of s. 251(5)(b)(i) to a number of scenarios respecting a contingent right of the non-resident to acquire the shares of a defaulted shareholder. In addition, CRA was asked about the following scenarios.
Situation 4
Opco would have the right, exercised by a decision of the Board, to purchase for cancellation the shares of the defaulted shareholder at a determined value, in which case the equal board representation agreement would continue to apply (notwithstanding that the two resident shareholders would together would own less than 50% of the voting shares.)
Situation 5
Same as Situation 4 except that Opco would be obligated to purchase for cancellation the shares of the defaulted shareholder at the determined value.
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 these Situations.
Situation 4
S. 251(5)(b) would not apply taking into account only the indicated clause, so that Opco would be a CCPC.
Situation 5
[I]t would be necessary to determine whether the non-resident had the right to require Opco to acquire or cancel the shares in its capital stock if it did not effect the required purchase for cancellation, or if the non-resident had control over the triggering of an event that would entail an obligation to purchase for cancellation. … The non-resident would be deemed by s. 251(5)(b) to own 100% of the Opco voting shares (since the other shareholders could be defaulted shareholders), so that the directors' designation and appointment clause would no longer preclude the non-resident from exercising control of Opco. Thus, Opco would not be a CCPC.