Durocher – Tax Court of Canada finds that any potential illegality of an option to acquire control of a private corporation did not nullify the option, so that the corporation was not a CCPC

A financial institution, which was controlled by a non-resident, acquired an option to subscribe at a future date for the majority of the equity of a holding company for an Opco which, if actually exercised by it, would have violated a prohibition in the Act respecting financial services (Quebec) against it or related persons acquiring greater than a 20% stake in the company. Rip J found that the option itself did not violate the statute and that, even if it did, a provision in the Civil Code apparently stipulating nullity of an illegal contract should not be applied where a regulatory body (here, the AMF) was accorded responsibility for sanctioning breaches of the statute - and, in any event, Quebec jurisprudence indicated that the absolute nullity sanction should be applied “with restraint and diligence.”

As the option was valid, the corporation in question was not a Canadian-controlled private corporation, so that subsequent sale of shares in a grandparent corporation by individuals did not qualify for the capital gains exemption.

Neal Armstrong. Summary of Durocher v. The Queen, 2015 TCC 297, under s. 125(7) – Canadian-controlled private corporation.