Situation 1
A, B and C were three unrelated individuals. A and B, who were the sole shareholders of Opco, each holding 50% of the common shares, each sold 1/3 of their shares to C, for FMV consideration.
Would a new group (A, B and C) be considered to have acquired control of Opco, or would CRA consider that the group formed by A and B still controlled the corporation, so that there was no acquisition of control?
CRA indicated:
- The CRA position as per Folio S1-F5-C1 is that the shareholders of a private corporation are presumed to act in concert to control the corporation (the “control group presumption”); and that, in almost all cases where the voting rights in a corporation are exercised equally by two shareholders, the corporation will be controlled by the group formed by those two shareholders.
- Consequently, here, unless it can be shown that neither A nor B controlled Opco prior to the disposition to C and that the decision-making process in the corporation was effectively at a standstill, A and B would be presumed to form a group of persons that controlled Opco.
- Whether the acquisition of a minority interest in a corporation results in an acquisition of its control by a new group of persons is generally determined based on such factors (set out in IT-302R3, para. 7) as who previously controlled the corporation, the number or percentage of shares purchased, the method of acquisition, common interests and concerted actions.
- At the 1984 CTF Roundtable, Q.42, regarding the same situation, CRA indicated that the two original shareholders would still be in a position to control the corporation after the disposition of the shares, but that to the extent that the two original shareholders would cease to act in concert to control the corporation, the disposition of the shares could result in the acquisition of control of the corporation. CRA now further commented that that it would be reasonable to consider there to be an acquisition of control by a group of which C was a member if A or B withdrew from control of Opco and that this “could also be the case if, after the disposition of the shares, it was determined that A, B and C formed a group of persons that controls Opco.”
Situation 2
A to D (being four unrelated individuals) each held 25% of the shares (being common shares) of Opco. Would the repurchase by Opco of D’s shares result in an acquisition of control of Opco?
CRA indicated that such repurchase would result in an acquisition of control by a group consisting of the three remaining shareholders unless the control group presumption could be rebutted by demonstrating, for instance, that control of Opco was exercised by the same group before and after (e.g., by the group consisting only of A to C).