Revenue Canada Revenu Canada Taxation Impôt
Head Office Bureau principal
Your file Votre reference Our file Notre reference A.A. Cameron (613) 957-2116
December 18, 1987
Dear Sirs:
Re: Whether or not a corporation is a "private corporation" and/or a "Canadian-controlled private corporation" (a "CCPC") as defined respectively in paragraph 89(1)(f) and 125(7)(b) of the Income Tax Act (the "Act")
We are writing in response to your letter of October 6, 1987 which requests our views as to whether or not a corporation would be a private corporation and/or a CCPC in a number of hypothetical situations. We respond to the hypothetical situations in the same order presented in your letter.
Situation I
You have indicated that the pertinent facts are as follows:
- Canco, a taxable Canadian corporation as defined under paragraph 89(1)(i) of the Act, has one class of shares issued. These shares are common shares and are beneficially owned as follows:
(i) 45% by a group of Canadian resident employee shareholders, of which no one individual owns more than 10%;
(ii) 30% by Pubco A, a public corporation as defined under paragraph 89(1)(g) of the Act; and
(iii) 25% by Pubco B, also a public corporation as defined under
paragraph 89(1)(g) of the Act.- The employee shareholder group, individual employee shareholders, Pubco A and Pubco B, all deal with each other at arm's length for the purposes of the Act.
- Pubco A and Pubco B are passive investors, and are content to let the employee shareholder group manage Canco. They do not act in concert to control Canco.
In your view Canco qualifies as both a private corporation and a CCPC as defined under the above-noted provisions of the Act.
The final determination of whether or not a corporation is a private corporation and/or a CCPC involves questions of fact which can only be made on a case by case basis after a thorough review of all of the relevant facts of a particular situation. Consequently we are unable to offer an opinion based on the above situation. However we have difficulty envisaging two public companies owning 55% of a corporation and not acting together in some manner to control that corporation.
Situation II
You have subdivided this situation into parts A and B.
A. The facts are as follows:
- Canco, a taxable Canadian corporation under paragraph 89(1)(i) of the Act, has one class of shares issued. These shares are common shares which are beneficially owned as follows:
(i) 50% by a group of resident and non-resident employee
shareholders, of which no one individual owns more than
10%. The non-resident shareholders own in aggregate
5% of Canco's shares; and (ii) 50% by Pubco, a public corporation as defined under
paragraph 89(1)(g) of the Act.- The employee shareholder group, individual employee shareholders and Pubco, all deal with each other at arm's length. There are no shareholder agreements or other undertakings between the various shareholders. Pubco does not act in concert with any of the employee shareholders to control Canco.
B. You have indicated the relevant facts under this part are the same as under part A, except that:
- There is a shareholders' agreement between the individual employee shareholders, as follows:
(i) Individual employee shareholders must first offer their
shares to existing employee shareholders; (ii) All Canco shares held by employee shareholders are registered
in the name of a Canadian trust, with beneficial ownership
remaining that of the individual; and (iii) Under the terms of the trust, all trust shares are to
be voted by the trust in accordance with the wishes
of the beneficial owners of a majority of those shares.In your view Canco will qualify as a private corporation and a CCPC under both parts A and B of Situation II.
The final determination of this matter would have to be made in the the general manner described in our response to Situation I and the introduction of the shareholders' agreement between the individual employee shareholders and the use of a trust in part B increase the questions of fact to be resolved in making the determination. In addition, the fact that an individual shareholder is an employee of Canco may influence a conclusion as to whether or not Pubco, a major shareholder, and the employee act together to control the corporation.
Situation III
You have also subdivided this situation into parts A and B.
A. The pertinent facts of this part are as follows:
- Canco, a taxable Canadian corporation under paragraph 89(1)(i) of the Act, has one class of shares issued. These shares are common shares which are beneficially owned as follows:
(i) 60% by Pubco, a public corporation as defined under paragraph
89(1)(g) of the Act; and(ii) 40% by a group of Canadian resident employee shareholders.
You have indicated that in your view Canco would be neither a private corporation nor a CCPC for the purposes of the Act. We concur with your view.
B. You have indicated the relevant facts under this part are the same as under part A, except that:
- Pursuant to the corporate by-laws of Canco, not less than 50% of Canco's directors must be persons designated by the employee shareholder group; and
- Amendment of that by-law requires that at least 75% of the common shares be voted in favour of such an amendment.
In your view Canco would qualify as both a private corporation and a CCPC for the purposes of the Act under part B of Scenario III.
In our opinion, based upon the facts presented, Canco would not be either a private corporation or a CCPC for the purposes of the Act. The fact that the controlling shareholder cannot designate more than 50% of the directors does not detract from the fact that one shareholder beneficially owns 60% of the voting shares of the corporation.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch