CRA finds that a USA stripped away voting control of a parent over its wholly-owned subs so that it was not closely related to them for ETA purposes

In 18 March 2019 Interpretation 186839, all the shareholders of a corporation (the “Corporation”) entered into a unanimous shareholders agreement (USA) that stripped away all the management powers of the board of the Corporation and its subsidiaries, with all those powers instead exercised by majority vote of the shareholders. CRA accepted that included in the powers taken away from the Corporation’s board under the USA was the right to exercise the voting rights attached to the shares of the wholly-owned subsidiaries of the Corporation.

In CRA’s view, this then engaged ETA s. 128(4), which provides that for qualifying voting control purposes, a person is not considered to own shares if another person (other than a closely-related person) has voting rights over those shares described in similar terms to ITA s. 251(5)((b)(i), e.g., a “right under a contract … to control the voting rights attached to the share.” Since the corporation (which was not closely related to any of its shareholders) thus was deemed not to have voting control of its subsidiaries, they were not closely related to it.

CRA was now asked to consider the effect a variation of the above structure under which the USA, as before, removed all powers of the directors of the Corporation with respect to the management of the business and affairs of the Corporation in favour of its shareholders, but did not remove the power of the directors of the Subsidiaries with respect to the management of their business and affairs. However, crucially, in the view of CRA, the decisions made by the shareholders under the USA included the exercise of the voting rights attached to the shares held by the Corporation in its subsidiaries for the purpose of, inter alia, appointing the directors of the subsidiaries. CRA found that, on this basis, ETA s. 128(4) continued to apply as in the first scenario, so that the corporation was not considered to be closely related to its wholly-owned subsidiaries.

Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 14, 2020-0852261C6 F under ETA s. 128(4).