Minority shareholders may face challenges in having Opco be connected to their holding companies

It is common for unrelated shareholders of Opco to hold their shares through respective Holdcos in order to access the capital gains exemption on a subsequent sale of their Holdco shares. However, this requires that Opco be connected with Holdco. Assuming that each Holdco would not control Opco, as per s. 186(4)(a), connected status would require either that Holdco own shares of Opco representing more than 10% of the votes and value of Opco (as per s. 186(4)(a)(b)) or (under s. 186(2)) that Holdco, along with any other persons with which it did not deal at arm’s length, own at least 50% of the voting shares of Opco.

It may be difficult for minority shareholders to satisfy these tests. For example, suppose that Opco had two unrelated individual shareholders holding 85%, in the case of the majority shareholder, and 15% in the case of the minority shareholder, of its only outstanding shares, being common shares. Those individuals then exchanged their Opco common shares for frozen voting preferred shares. Each shareholder then established a family trust—the majority trust and the minority trust—which incorporated its own Holdco (“Majority Holdco” and “Minority Holdco”), with each Holdco subscribing a nominal amount for Opco common shares.

Neither Holdco would control Opco, and initially, neither Holdco would satisfy the votes and value test. However, Majority Holdco would not deal at arm’s length with the majority shareholder and, together with the majority shareholder, would own shares representing more than 50% of Opco’s voting rights, so that Majority Holdco would pass the s. 186(2) test.

The minority shareholder, which would deal at arm’s length with the majority shareholder, would fail the s. 186(2) test.

Neal Armstrong. Summary of David Carolin, Marissa Halil, and Manu Kakkar, “Not so connected for the capital gains exemption,” Tax for the Owner-Manager, Vol. 25, No. 4, October 2025, p. 4 under s. 186(4).