Principal Issues: In applying 251(5)(b)(i) and 256(1.4)(a), whether the determination of control is made assuming that (1) all the rights owned by all persons are considered "exercised" jointly at a single time and tested together for control or (2) the individual shareholder's rights are deemed exercised separately and tested separately for control.
Position: When 251(5)(b)(i) applies, for each person that has a right, a distinct determination of "control" of the corporation must be made on the assumption that that person owned the shares of the corporation which the person has the right to, or the right to acquire, or the right to control the voting rights of such shares. When 256(1.4)(a) applies, the "control" of a corporation must be determined once, taking into account all the shares that all the persons with a right are deemed to own and that are deemed to be issued and outstanding.
Reasons: The law and positions taken in previous technical interpretations.
Tax Executives Institute Inc.
CCRA Liaison Meeting
December 2, 2002
Question 16. Control
Paragraph 251(5)(b) (for the purposes of subsection 251(2) and the definition of Canadian controlled private corporation (CCPC)) and paragraph 256(1.4)(a) (for purposes of the association rules) both provide that, for purposes of determining "control" of a corporation, a person is deemed to own all the shares that the person has a right to acquire. In other words, for such purposes the underlying shares that each shareholder has a right to acquire are deemed issued and outstanding. The Act is unclear, however, whether the determination of "control" is made assuming that (1) all the rights owned by all persons are deemed "exercised" jointly at a single time and tested together or (2) the individual shareholder's rights are deemed exercised separately and tested separately for control.
To illustrate the difference in result, consider the following example for determining CCPC status. A corporation has two shareholders. Shareholder A, a Canadian resident individual, owns 1,000 common shares of the corporation and has an option to acquire 400 additional common shares. Shareholder B, a public corporation, owns 600 common shares of the corporation and has an option to acquire an additional 500 common shares. The table below summarizes the ownership of the shares before and after the additional shares are considered issued and outstanding.
Further Assumptions:
1. There is only one class of common shares and each carries one vote per share. There are no preferred shares.
2. There are no agreements or other constating documents of the corporation that affect control of the corporation.
3. No de facto control exists.
Shareholder A: Canadian resident individual
Shareholder B:
Public corporation
Total
Number of common shares
1,000
600
1,600
Number of additional common
shares if exercise options
400
500
900
Percentage of common shares owned if options are exercised separately
70%
52%
Percentage of common shares owned if all options are exercised at the same time
56%
44%
Question:
If only shareholder B, the public corporation, is deemed to have exercised its option, then shareholder B controls 52 percent and the subsidiary will not be considered a CCPC. If all the options owned by shareholder A and shareholder B are deemed exercised at the same time, however, shareholder B will be considered as controlling only a 44-percent interest in the subsidiary and the subsidiary will be a CCPC. Would the CCRA provide its interpretation of the application of paragraph 251(5)(b) and subsection 256(1.4) to the example?
CCRA Response
When a number of persons have a right that meets the conditions in subparagraph 251(5)(b)(i), it is CCRA's view that, for each person that has a right, a distinct determination of "control" of the corporation must be made on the assumption that that person owned the shares of the corporation which the person has the right to, or the right to acquire, or the right to control the voting rights of such shares.
For the purpose of determining whether a corporation is associated with another corporation, with which it is not otherwise associated, in a situation where a number of persons have a right described under paragraph 256(1.4)(a), it is CCRA's view that the "control" of a corporation must be determined once, taking into account all the shares that all the persons with a right are deemed to own and that are deemed to be issued and outstanding.
Our opinion is based on the fact that the presumptions under paragraph 251(5)(b) and under paragraph 256(1.4)(a) are different, in that, under paragraph 251(5)(b), "... the person shall, ..., be deemed to have the same position in relation to the control of the corporation as if the person owned the shares ..." and, under paragraph 256(1.4)(a), " ... the person or partnership shall, ..., be deemed to own the shares at that time, and the shares shall be deemed to be issued and outstanding at that time; "
In the situation described above, the application of paragraph 251(5)(b) results in shareholder B, the public corporation, controlling the subsidiary, and, therefore, the subsidiary not being a CCPC, as defined under subsection 125(7). In this situation, absent de facto control, shareholder B, the public corporation, is not associated with the subsidiary as shareholder B does not control the subsidiary whether control is determined with or without applying paragraph 256(1.4)(a).
Author: Marc LeBlond
Corporate Reorganizations
and Resources Division
Phone Number: 946-3261
Tracking ID: 2003-004857