Principal Issues: A non-resident corporation ("USCO") owns all of the issued and outstanding shares of a Canadian corporation ("CANCO"). CANCO's fiscal period ends on XXXXXXXXXX of each year. On XXXXXXXXXX , USCO disposed of 50% of its CANCO shares in favour of another Canadian corporation ("HOLDCO"), with retroactive effect to XXXXXXXXXX . No non-resident person and/or public corporation and/or corporation described in paragraph (c) of the definition of Canadian-controlled private corporation ("CCPC") has, directly or indirectly, an interest in HOLDCO. Furthermore, no class of the shares of the capital stock of CANCO or HOLDCO is listed on a prescribed stock exchange. Whether CANCO would qualify as a CCPC as of XXXXXXXXXX or as of XXXXXXXXXX
Position: For Canadian tax purposes, the parties to an agreement can only stipulate that the contract is to take effect at a date earlier than the signing date if they reached a definitive agreement, a legally binding agreement, on this earlier date (the effective date) regarding the essential elements of the contract. Consequently, it is possible that, in the given situation, the disposition of the CANCO shares occurred on XXXXXXXXXX . This disposition of the CANCO shares would normally result in an acquisition of control of CANCO. Based on subsection 256(9) of the Act and assuming that no election under this provision would have been filed, the acquisition of control of CANCO would be deemed to occur at the commencement of the day. Consequently, under paragraph 249(4)(a) of the Act, CANCO's taxation year beginning on XXXXXXXXXX would be deemed to have ended on XXXXXXXXXX . Furthermore, under paragraph 249(4)(b) of the Act, a new taxation year of CANCO would be deemed to have commenced on XXXXXXXXXX . Based on the above, it is possible that CANCO would qualify as a CCPC as of XXXXXXXXXX . However, CANCO would still not qualify as a CCPC if it is established that, after this date, USCO has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently described in paragraph 251(5)(b) of the Act with respect to CANCO shares held by HOLDCO. Furthermore, CANCO would still not qualify as a CCPC if it is determined that, after XXXXXXXXXX , CANCO is controlled, directly or indirectly in any manner whatever, by USCO, within the meaning of subsection 256(5.1) of the Act.
Reasons: Wording of the Act and previous positions.
March 21, 2005
Canada Revenue Agency Income Tax Rulings Directorate
SR and ED Directorate
50 O'Connor Street S. Prud'Homme
Ottawa ON K1A 0L5 (613) 957-8975
Attention: Mr. Alain Marchand, CGA
2005-011996
Request for Opinion - Disposition of Shares of a Corporation - Impact on "Canadian Controlled Private Corporation" Status
This is in response to your email of March 8, 2005, in which you requested our opinion with respect to a particular situation involving, inter alia, a disposition of shares of the capital stock of a particular corporation, and the impact of such a disposition on the characterization of that corporation as a Canadian-controlled private corporation ("CCPC") within the meaning of the definition set out in subsection 125(7) of the Income Tax Act (the "Act").
Unless otherwise indicated, any statutory reference herein is to a provision of the Act.
1) Particular Situation
You have presented us with the following situation (the "Particular Situation") as part of your request for an opinion.
(a) A non-resident corporation ("USco") held all of the issued and outstanding shares of the capital stock of a particular corporation ("Canco").
(b) Canco was a "Canadian corporation" as defined in subsection 89(1). Canco's fiscal period ended on XXXXXXXXXX of each year.
We understand that no class of shares of the capital stock of Canco were listed on a prescribed stock exchange.
c) On XXXXXXXXXX, USco disposed of 50% of the shares of the capital stock of Canco to another corporation ("Holdco"), "retroactive" to XXXXXXXXXX. Holdco was a "Canadian corporation" within the meaning of the definition in subsection 89(1).
We have assumed for the purposes hereof that no non-resident person and/or public corporation and/or corporation described in paragraph (c) of the definition of CCPC in subsection 125(7) would have any interest, directly or indirectly, in Holdco. In addition, we understand that no class of shares of the capital stock of Holdco are listed on a prescribed stock exchange.
2) Your comments and questions regarding the Particular Situation
In general, you are of the view that the "retroactive" scope of the agreement between USco and Holdco would be unenforceable against the Canada Revenue Agency ("CRA"). Consequently, upon the sale of the shares of the capital stock of Canco held by USco to Holdco on XXXXXXXXXX, there would be an acquisition of control of Canco that would result in a deemed taxation year end and the commencement of a new taxation year for Canco under subsection 249(4). Consequently, you are of the view that Canco would appear to qualify as a CCPC commencing on XXXXXXXXXX. Canco would therefore be entitled to all the benefits of CCPC status from that date, including entitlement to the 35% refundable investment tax credits pursuant to subsection 127(10.1) and section 127.1, provided of course that it qualifies as a CCPC throughout the particular year.
You asked us for our opinion on the above. In particular, you asked whether it is possible that upon the sale of 50% of the shares of the capital stock of Canco, there was a change of control, but not an acquisition of control. If so, you asked whether this has the effect of causing Canco to lose its CCPC status for the entire period beginning on XXXXXXXXXX and ending on XXXXXXXXXX.
3) Our comments on the Particular Situation
First, it should be noted that the Particular Situation statement refers to an element of retroactivity that would have been provided for by contract. Given that your email only briefly describes the Particular Situation and in the absence of a review of the agreement(s) between USco and Holdco regarding the disposition of the Canco shares, it is difficult for us to make a definitive statement on this issue. However, we can make the following general comments.
With respect to the Particular Situation, one of the important elements would be to determine when the disposition of the Canco shares by USco to Holdco for Canadian tax purposes had taken place. In the context of the Particular Situation, this would require a determination of when ownership of the shares of the capital stock of Canco had been transferred from USco to Holdco. For there to be a legal transfer of ownership, there must be an agreement of the parties involved. In general, we are of the view that, for tax purposes, the parties may only stipulate an effective date of a contract that is earlier than the date of signature if, at that earlier date, the parties had reached a final agreement on the essential elements of the contract. Thus, in our view, the effective date in the contract will not be enforceable against the CRA if, after the effective date, the parties continue to negotiate essential elements of the contract (e.g., the price or the subject matter of the contract), or if the parties have indicated an intention not to be bound until a final contract is signed.
Based on the above, it is possible that, for Canadian tax purposes, the disposition of the shares of the capital stock of Canco by USco to Holdco occurred on XXXXXXXXXX. In this case, we are of the view that this disposition would likely have resulted in an acquisition of control of Canco. Indeed, prior to the disposition of the shares, Canco would appear to be controlled by a single person, namely USco. From the disposition of the shares, Canco would appear to be controlled by a group of persons consisting of USco and Holdco. The CRA's position on this point is that in almost all cases where the voting rights in a corporation are exercised equally by two shareholders, the corporation will be controlled by the group composed of those two shareholders. To rebut this presumption of control by the group, it would be necessary to show that no shareholder controls the corporation and that the decision-making process in the corporation is effectively deadlocked. Such a situation would be very exceptional. It could, however, occur when the two shareholders cannot agree on how to manage the corporation and therefore go to court to authorize the dissolution of their corporation.
To the extent that no election is made, for the purposes of the Act, control of a corporation that is acquired at a particular time is deemed to be acquired at the commencement of the day on which that time occurs, pursuant to subsection 256(9). In the Particular Situation, control of Canco that was acquired on XXXXXXXXXX would therefore be deemed to be acquired at the beginning of that day. Consequently, pursuant to paragraph 249(4)(a), Canco's taxation year that began on XXXXXXXXXX would be deemed to end on XXXXXXXXXX. In addition, under paragraph 249(4)(b), a new Canco taxation year would be deemed to begin on XXXXXXXXXX.
Based on the above, it would be possible for Canco to qualify as a CCPC from XXXXXXXXXX. However, Canco would not qualify as a CCPC even on or after XXXXXXXXXX to the extent that it is shown that, after that date, USco had a right, whether immediate or future, contingent or otherwise, described in paragraph 251(5)(b) to shares of the capital stock of Canco held by Holdco. In that regard, it would be important to examine, inter alia, any shareholders' agreement between USco and Holdco. Such agreements may contain section 251(5)(b) rights.
Furthermore, Canco would not qualify as a CCPC even from XXXXXXXXXX to the extent that, after that date, it is determined that Canco was controlled, directly or indirectly in any manner whatever, by USco. Pursuant to subsection 256(5.1), Canco would be considered to be so controlled by USco at a particular time if, at that time, USco had any direct or indirect influence that if exercised would result in control in fact of Canco.
In closing, depending on the facts and circumstances of the particular situation, it is possible that, for Canadian tax purposes, the disposition of the shares of the capital stock of Canco by USco to Holdco occurred on XXXXXXXXXX. In that case, and to the extent that no election is made, control of Canco acquired on XXXXXXXXXX would be deemed to be acquired at the beginning of that day pursuant to subsection 256(9). Consequently, and pursuant to paragraph 249(4)(a), Canco's taxation year that began on XXXXXXXXXX would be deemed to end on XXXXXXXXXX. In addition, under paragraph 249(4)(b), a new Canco taxation year would be deemed to begin on XXXXXXXXXX. Again, it would be possible for Canco to qualify as a CCPC from XXXXXXXXXX. However, Canco would not qualify as a CCPC even on or after XXXXXXXXXX to the extent that it is shown that, after that date, USco had a right, whether immediate or future, contingent or otherwise, described in paragraph 251(5)(b) to shares of the capital stock of Canco held by Holdco. Canco would not qualify as a CCPC even on or after XXXXXXXXXX to the extent that it is determined that, after that date, Canco was "controlled, directly or indirectly in any manner whatever" by USco, within the meaning of subsection 256(5.1).
Should you require further information on this subject, please do not hesitate to contact us.
Stéphane Prud'Homme, Notary, M. Fisc.
For the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch