CRA finds that a large term note owing by a child’s purchaser corporation to the parents would not by itself give the parents de facto control under s. 84.1(2.31)(c)

A corporation controlled by an adult child acquires all the shares of a subject corporation from the child’s parents, who cease involvement in its 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.

Regarding whether the parents’ holding of the note by itself would result in them having de facto control of the purchaser for purposes of the s. 84.1(2.31)(c) rule, CRA first noted 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 then stated:

[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.

It further noted that the personal guarantee would not generally result in de facto control assuming that the purchaser had the capacity to service the note.

Neal Armstrong. Summary of 18 February 2025 External T.I. 2024-1038891E5 under s. 256(5.1).