In 18 March 2019 Interpretation 186839, all the shareholders of a corporation (the “Corporation”) entered into a unanimous shareholders agreement (USA) that stripped away all the management powers of the board of the Corporation, with all those powers instead exercised by majority vote of the shareholders. CRA accepted that included in the powers taken away from the Corporation’s board under the USA was the right to exercise the voting rights attached to the shares of the wholly-owned subsidiaries of the Corporation.
In CRA’s view, this then engaged ETA s. 128(4), which provides that for qualifying voting control purposes, a person is not considered to own shares if another person (other than a closely-related person) has voting rights over those shares described in similar terms to ITA s. 251(5)((b)(i), e.g., a “right under a contract … to control the voting rights attached to the share.” Since the corporation (which was not closely related to any of its shareholders) thus was deemed not to have voting control of its subsidiaries, they were not closely related to it.
CRA was now asked to consider the effect a variation of the above structure under which the USA, as before, removed all powers of the directors of the Corporation with respect to the management of the business and affairs of the Corporation in favour of its Shareholders, but did not remove the power of the directors of the Subsidiaries with respect to the management of their business and affairs, so that the Shareholders will act as if they were the directors of the Corporation only and the decisions of the Corporation will therefore be approved by a majority of the votes of Shareholders holding voting shares. Those decisions include the exercise of the voting rights attached to the shares held by the Corporation in its Subsidiaries for the purpose of, inter alia, appointing the directors of the Subsidiaries.
In finding that this variation would not make a difference, CRA stated:
Since the voting rights attached to the shares of the Subsidiaries held by the Corporation are subject to the control of the Shareholders of the Corporation, the Shareholders of the Corporation retain control of those voting rights, and it would appear that ETA subsection 128(4) would apply to deem that the Corporation does not hold the shares of the Subsidiaries. Consequently, the Corporation would not have qualifying voting control over the Subsidiaries, as defined in ETA subsection 128(1.1), and the Corporation and its Subsidiaries would not be considered closely related for GST/HST purposes.