A corporation (the purchaser) controlled by an adult child acquires all the shares of another corporation (the subject corporation) from the child’s parents, who cease involvement in the day-to-day operations. Although there is some external financing, the parents accept a vendor take-back promissory note for a substantial portion of the purchase price. This note requires regular principal payments over 15 years, does not bear interest absent default and is guaranteed by the child.
Will the parents’ holding of the note by itself result in them having de facto control of the purchaser for purposes of the s. 84.1(2.31)(c) rule; and would the answer change is the note were payable on demand rather than having scheduled repayments?
After noting that whether there was such de facto control would depend on all the circumstances including, in relation to the note, the relative portion of the financing that it provided, its terms of repayment, any guarantees and the purchaser’s access to alternative financing in the event of a demand for repayment, CRA went on to state:
[A] non-interest-bearing promissory note payable over a commercially reasonable period of time would not, in itself, provide the holder with the type of influence that is indicative of de facto control. Further … a personal guarantee of the amount owing under a vendor take-back promissory note by the controlling shareholder of the purchaser corporation would not, where the purchaser corporation has the capacity to make the scheduled payments under the promissory note (and absent any other factors indicative of de facto control), result in the holder having de facto control of the purchaser corporation.