X, who is the sole shareholder of a CCPC, sells 25% of his shares to Acquireco, whose two shareholders (both key employees) are his son (as to 49%) and an unrelated person (51%). The shareholders’ agreement for Acquireco accords the son the right to purchase the remaining shares in the event of that person’s death, or permanent illness or disability, but also on other specified events, such as voluntarily ceasing employment with the CCPC.
- Will s. 251(5)(b) apply to deem Acquireco to not deal at arm’s length with X, so as to engage s. 84,1?
- If the shareholders of Acquireco instead were the son (as to 30%) and 10 other key employees (each with 7%), and with the same clause in the shareholders’ agreement except that, on any such voluntary departure, the remaining shareholders have a proportionate right to acquire the departing employee’s shares, would the answer change?
Respecting (a), in finding that Mr. X would not deal at arm's length with Acquireco pursuant to s. 251(1)(a), so that s. section 84.1 could apply, CRA noted that the buy-sell clause between the shareholders of Acquireco did not come within the exceptions for death, bankruptcy, permanent disability or shotgun clauses, and then found that by virtue of s. 251(5)(b)(i) and the buy-sell clause, Mr. X's son would therefore be related to Acquireco as he would be deemed to hold 100% of its shares, so that Mr. X would be related to Acquireco under s. 251(2)(b)(iii).
Respecting (b), CRA stated:
As a general rule, the CRA will apply this presumption [in s. 251(5)(b)(i)] by taking into account the rights of Mr. X's son in respect of all other shareholders ("holder-by-holder" method). Accordingly, Mr. X's son would have rights to all of the shares because he would have rights to the shares of each of the shareholders if each of them became a shareholder affected by an event provided for in the agreement. Therefore, as with the previous question, Mr. X's son would be related to Acquireco under subparagraph 251(2)(b)(i) [and Mr. X under s. 251(2)(b)(iii)].