Principal Issues: Whether Rulings' position taken at the 2009 APFF Conference is still valid considering the FCA decision in Canada (National Revenue) v. Equipment Boifor Inc., 2019 FCA 69.
Position: No.
Reasons: See below.
FEDERAL TAX ROUNDTABLE OCTOBER 7, 2020
APFF CONFERENCE 2020
6. Liability for employment insurance
The Employment Insurance Act ("EIA") provides in paragraph 5(2)(b) that employment of a person with a corporation is not insurable employment if that person controls more than 40% of the voting shares of that corporation.
In the context of two shareholders each holding 50% of the common shares of a holding corporation ("Holdco" or “Gesco”) which, in turn, holds all of the issued and outstanding shares of an operating corporation ("Opco"), it may become difficult to determine whether the employment of the two shareholders in Opco is insurable employment or not.
At the Federal Tax Roundtable at the 2009 APFF Conference, it was stated that, given the language used in section 5(2)(b) of the EIA, it is important to determine who actually controls the voting shares of the operating corporation since that legislation does not speak of control of the corporation, but rather control of the voting shares.
The CRA said in response to Question 7 at the Conference:
“In a situation where the shares are held equally (50%-50%), at first glance, no person has de jure control of this corporation. Therefore, one must determine if one person has effective control (control in fact or de facto) of Gesco. De facto control refers to control in fact of the voting shares of the corporation. In order to be able to demonstrate de facto control of the corporation, one must ensure that this shareholder exercises very significant direct or indirect influence.”
The CRA concluded that if neither shareholder controls more than 50% of the voting shares of Holdco, then neither could be considered to control Holdco. Consequently, since neither shareholder would control Holdco, neither could control the voting shares held by Holdco in Opco. The employment would therefore be insurable employment for the purposes of the EIA.
More recently, in Équipements Boifor, 2019 FCA 69, the Court concluded the opposite of what the CRA had said in 2009 by finding that the two shareholders controlled more than 40% of Boifor's shares, taking into account the shares held indirectly through a holding corporation, even though the shares were held on a 50-50 basis and no one individually held control of the holding corporation.
Questions to the CRA:
a) Does the CRA accept the conclusions of the Boifor Equipment decision and can it confirm that what it expressed at the 2009 APFF Conference no longer reflects its current position?
b) What would the CRA's position be for the two shareholders, where one shareholder held 51% of Holdco and the other held 49%, regarding their respective employment by Opco, which is wholly owned by Holdco?
CRA Response to Question 6(a)
Section 5(2)(b) of the EIA provides that the employment of a person by a corporation is not insurable employment if that person controls more than 40% of the voting shares of the corporation (the "employer corporation").
According to Canada (Attorney General) v. Cloutier, [1987] 2 F.C. 222, control of a corporation's voting shares under paragraph 5(2)(b) of the EIA requires not only de jure control, but more importantly that the worker has effective control over more than 40% of the voting shares of the employer corporation.
The position stated at the 2009 APFF Conference was consistent with the jurisprudence applicable at the time and was intended to explain how to interpret section 5(2)(b) of the EIA where a worker holds voting shares in a holding corporation that holds shares in the employer corporation.
In Canada (National Revenue) v. Boifor Equipment Inc, 2019 FCA 69, the Federal Court of Appeal ("FCA") upheld the Tax Court of Canada's interpretation of paragraph 5(2)(b) of the EIA. In light of the FCA's decision, the CRA must now consider the proportionate attribution approach in similar situations to determine whether the employment of a person who controls more than 40% of the voting shares of the employing corporation is insurable. Employment will not be insurable if the person actually controls more than 40% of the voting shares of the employing corporation.
Consequently, the employment of both shareholders would not be insurable by virtue of paragraph 5(2)(b) EIA to the extent that they actually control 50% of the voting shares of Holdco. The proportionate attribution approach leads to the conclusion that the two shareholders each control more than 40% of Opco's voting shares (50% of 100%) for the purposes of paragraph 5(2)(b) EIA.
CRA Response to Question 6(b)
The approach remains the same where the shareholders held 51% and 49% of the voting shares of Holdco, respectively. Thus, their employment would not be insurable because they had effective control of 51% and 49% of the voting shares of Opco, respectively, for the purposes of section 5(2)(b) of the EIA.
Response prepared by:
Sidi Ouattara
(450) 926-7687
October 7, 2020
2020-085218
Response approved by:
Éric Gagnon
Policy and Legislation Section
CPR/EA Rulings Division
Legislative Policy Directorate
Legislative Policy and Regulatory Affairs Branch
(613) 670-7436