The concept of de facto control should not have an expansive meaning in the context of the s. 84.1(2.3) rules

The immediate intergenerational transfer rules in s. 84.1(2.31) require the parents to give up de facto control of the business immediately after the disposition time, while allowing them to retain “management” of the business for up to three years after the disposition time.

The enactment of s. 256(5.11) (effectively overruling McGillivray) could be regarded as effectively reinstating the broad concept of de facto control in IT-64R4, so that previously defunct factors, such as “day-to-day management and operation of the business” now carry weight in determining de facto control.

However, if the day-to-day management and operation of the business by an employee is tantamount to de facto control, parents would be required to give up day-to-day work in the business immediately after the share sale, which would contradict the legislative accommodation of their retention of management for three years. This inference that de facto control excludes day-to-day management and operational control of the business is consistent with Plomberie J.C. Langlois, which found that a 50% shareholder who had “an operational role, not a decision-making role” was not part of the de facto control of the corporation, whereas the other shareholder, who “[a]s the sole director … had the power that ensured him a dominant influence in the direction of the [corporation]” had de facto control.

In IT-64R4, CRA cited other factors which would appear to contradict the design of s. 84.1(2.3) if they established de facto control, e.g., the ownership of retractable preferred shares and the percentage of voting shares (whereas s. 84.1(2.3) rules establish their own code for determining what percentage of voting shares and retractable preferred shares parents are permitted to own) and “influence [of] a family member” (whereas in the context of s. 84.1 intergenerational transfers, the influence of family members will be a priori ubiquitous).

Neal Armstrong. Summary of Marissa Halil, David Carolin and Manu Kakka, “Are Section 84.1 Intergenerational Transfers (Mission) Impossible? The Meaning of “De Facto Control” in the Context of Subsection 84.1(2.31),” Tax for the Owner-Manager, Vol. 25, No. 1, January 2025, p. 1 under s. 84.1(2.31)(c).