Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: The simple existence of influence may be sufficient to result in de facto control. Can the CRA indicate to what extent the existence of such influence, even if not exercised, can confer control in fact? Can the CRA provide examples of circumstances which would permit one to conclude that sufficient influence exists, resulting in control in fact?
Position: The CRA mentions in paragraph 21 of Interpretation Bulletin IT-64R4 (Consolidated), "Corporations: Association and Control", that with respect to subsection 256(5.1) of the ITA, the existence of the influence of the "controller" would be sufficient to result in de facto control, even if this influence is not actually exercised. This position is based on the wording of subsection 256(5.1) of the ITA and is supported by case law. Up to the present, jurisprudence has established that control in fact of a corporation could generally result from three major types of influence, which is moral influence, economic influence and contractual influence. Furthermore, the CRA has formulated general comments in paragraphs 19 to 23 of Interpretation Bulletin IT-64R4 on the notion of control in fact which is mentioned in subsection 256(5.1) of the ITA. Particularly, paragraph 23 of Interpretation Bulletin IT-64R4, contains a non-exhaustive list of certain general factors that permits one to determine whether control in fact exists. Whether or not a "controller" has any direct or indirect influence that, if exercised, would result in control in fact of a corporation within the meaning of subsection 256(5.1) of the ITA, can be determined only after an analysis of all the facts and circumstances with respect to a given particular situation. Consequently, we do not believe that it is appropriate, under the circumstances, to formulate other general comments on the notion of control in fact.
Reasons: Wording of the Act and previous positions.
TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE
APFF - CONGRÈS 2008
Question 20
Concept d'influence aux fins de la notion de contrôle de fait
La notion de contrôle de fait, définie au paragraphe 256(5.1) L.I.R., est une règle anti-évitement qui s'applique à toutes les dispositions de la L.I.R. qui contiennent l'expression " contrôlée, directement ou indirectement, de quelque manière que ce soit ". Cette notion devient donc très importante et le praticien doit porter une attention particulière à l'application de cette notion dans les différentes planifications ou structures fiscales. Le paragraphe 256(5.1) L.I.R. renferme également un concept important pour son application, soit le concept d'influence. Toutefois, bien qu'il soit facile dans sa compréhension, ce concept s'avère parfois difficile lors de son application. Par ailleurs, l'ARC mentionne au paragraphe 21 du bulletin d'interprétation IT-64R4, "que l'influence de l'entité dominante sur la société, même si elle n'est pas exercée " pourrait conférer le contrôle de fait. La simple existence d'une telle influence serait donc suffisante pour entraîner un tel contrôle.
Questions à l'ARC
a) L'ARC peut-elle indiquer dans quelle mesure l'existence d'une telle influence, même si elle n'est pas exercée, peut conférer le contrôle de fait?
b) L'ARC peut-elle fournir des exemples de circonstances permettant de conclure à une influence suffisante pour qu'il y ait contrôle de fait?
Réponse de l'ARC
Tel qu'indiqué dans l'énoncé de la présente question, l'ARC indique au paragraphe 21 du bulletin d'interprétation IT-64R4 (consolidé), " Sociétés : association et contrôle ", que dans le contexte du paragraphe 256(5.1) L.I.R., l'existence de l'influence de l'" entité dominante " serait suffisante pour conférer le contrôle de fait, même si cette influence n'est pas effectivement exercée.
Cette position est fondée sur les termes mêmes du paragraphe 256(5.1) L.I.R. La version française de cette disposition législative indique entre autres ce qui suit :
Pour l'application de la présente loi, lorsque l'expression "contrôlée, directement ou indirectement, de quelque manière que ce soit," est utilisée, une société est considérée comme ainsi contrôlée par une autre société, une personne ou un groupe de personnes - appelé "entité dominante" au présent paragraphe - à un moment donné si, à ce moment, l'entité dominante a une influence directe ou indirecte dont l'exercice entraînerait le contrôle de fait de la société. ...
(Notre soulignement).
Pour sa part, la version anglaise du paragraphe 256(5.1) L.I.R. indique entre autres ce qui suit :
For the purposes of this Act, where the expression "controlled, directly or indirectly in any manner whatever," is used, a corporation shall be considered to be so controlled by another corporation, person or group of persons (in this subsection referred to as the "controller") at any time where, at that time, the controller has any direct or indirect influence that, if exercised, would result in control in fact of the corporation, ...
(Notre soulignement).
L'une des questions en litige dans la décision Avotus Corporation c. La Reine, 2006 CCI 505, était de déterminer si la société Avotus Corporation (ci-après " Avotus ") était une " société privée sous contrôle canadien " au sens de la définition édictée au paragraphe 125(7) L.I.R. et avait droit à la déduction accordée aux petites entreprises, pour les années d'imposition se terminant le 30 avril 1995, 1997, 1998 et 1999 respectivement. Durant la période pertinente, 50 % des actions émises et en circulation d'Avotus étaient détenues par un particulier non-résident. Ce particulier non-résident était l'un des deux administrateurs d'Avotus. De plus, le particulier non-résident était le président du conseil d'administration et, à ce titre, détenait une voix prépondérante en cas de partage des votes à une assemblée du conseil d'administration ou des actionnaires. Toutefois, le particulier non-résident prétendait ne pas être au courant de l'existence de cette voix prépondérante. Les paragraphes 68 à 70 de la décision reproduits ci-dessous sont particulièrement intéressants en ce qui a trait à la présente question :
[68] The Appellant admits that if Malone and Santoni had been aware of the casting vote provision in the bylaws, Malone would have had control in fact over the corporation. However, the Appellant argues that Malone could not have had any "influence" within the meaning of subsection 256(5.1) by virtue of the casting vote provision of the bylaws since he was unaware of its existence. The Appellant contends that awareness of the fact which gives one influence is a necessary precondition of having that influence. In the absence of that awareness, the alleged controller will never be in a position to influence the affairs of the corporation.
[69] Whether such influence exists would be a determination of fact, and the factors to be considered in assessing whether influence exists may vary from case to case. Judge Bowman (as he then was) in Société Foncière d'Investissement Inc. v. Canada, expressed the opinion that the addition of the words "directly or indirectly in any manner whatever" to the Act was intended to broaden the concept of control, and that the notion of controlling influence includes economic, contractual or moral control over a corporation's affairs. He went on to state: "It is hard to imagine words with a broader meaning".
[70] It is clear that there may be both objective and subjective elements that underlie the existence of controlling influence over a corporation. In the case of contractual control, the source of the control would be objective, while moral control would likely be based largely on subjective factors. In this case, the existence of Richard Malone's influence has been objectively established by means of the production of the corporate bylaws. The legal effect of the casting vote provision in the bylaws would not be negated by Malone's alleged ignorance of the provision. Whether he was aware of it or not, Malone had a power to control the Appellant. This is consistent as well with the fact that subsection 256(5.1) focuses on the potential to exercise influence and not upon the actual exercise of the power. In my view, therefore, the power to cast the deciding vote is a power which, "if exercised", would result in control in fact of the corporation as contemplated in subsection 256(5.1).
(Notre soulignement).
Ce passage de la décision Avotus confirme la position adoptée par l'ARC à l'effet que l'influence dont il est fait mention au paragraphe 256(5.1) L.I.R. peut exister sans avoir obligatoirement à être exercée.
Cette interprétation a également été adoptée par la Cour canadienne de l'impôt dans la décision Corpor-Air Inc. c. La Reine, 2006 CCI 75. Le paragraphe 27 de la décision indique ce qui suit :
La seule question en litige est de savoir si monsieur Stever avait, durant la période pertinente, une influence directe ou indirecte dont l'exercice aurait entraîné le contrôle de fait de l'appelante. Il convient immédiatement de souligner qu'il n'est pas nécessaire que la preuve établisse que monsieur Stever exerçait un contrôle de fait sur l'appelante ou que l'influence dominante était effectivement exercée. Il suffit de constater l'existence d'une telle influence.
(Notre soulignement).
Le paragraphe 30 de la décision Transport M.L. Couture inc. c. La Reine, 2003 DTC 134; [2003] 3 CTC 2882 (C.C.I.; confirmé par 2004 CAF 23), va dans le même sens :
Ici, il est clair que Transport Couture n'exerçait pas de contrôle de jure sur ML1 et de ML2 puisqu'elle ne détenait aucune action du capital-actions de celles-ci. Il faut donc déterminer si, par contre, Transport Couture exerçait sur elles un contrôle de facto, c'est-à-dire déterminer, tel que le requiert le paragraphe 256(5.1) de la Loi, si Transport Couture avait, durant la période pertinente, une influence directe ou indirecte dont l'exercice aurait entraîné le contrôle de fait de ML1 et de ML2. Comme le révèle le texte de la version anglaise de ce paragraphe, qui est, à mon avis, plus explicite, il faut déterminer si Transport Couture avait sur ML1 et ML2 une influence qui, si elle avait été exercée, aurait entraîné le contrôle de fait de ces dernières. Il n'est donc pas nécessaire que la preuve établisse que Transport Couture exerçait un contrôle de fait sur ML1 et ML2 ou que l'influence dominante de Transport Couture était effectivement exercée. Il suffit de constater l'existence d'une telle influence.
(Notre soulignement).
Jusqu'à présent, la jurisprudence a établi que le contrôle de fait d'une société pouvait généralement découler de trois grands types d'influence, soit l'influence morale, l'influence économique et l'influence contractuelle. Par ailleurs, l'ARC a formulé des commentaires d'ordre général sur la notion de contrôle de fait dont il est fait mention au paragraphe 256(5.1) L.I.R. aux paragraphes 19 à 23 du bulletin d'interprétation IT-64R4. Le paragraphe 23 du bulletin d'interprétation IT-64R4 contient notamment une liste non exhaustive de certains facteurs généraux permettant de déterminer s'il y a contrôle de fait.
La question de déterminer si une " entité dominante " a une influence directe ou indirecte dont l'exercice entraînait le contrôle de fait d'une société au sens du paragraphe 256(5.1) L.I.R. ne peut s'effectuer qu'après une analyse des faits et circonstances se rapportant à une situation donnée particulière. En conséquence, nous ne croyons pas qu'il soit opportun, dans les circonstances, de formuler d'autres commentaires d'ordre général sur la notion du contrôle de fait.
Stéphane Prud'Homme
(613) 957-8975
Le 10 octobre 2008
2008-028521
ROUND TABLE ON THE FEDERAL TAXATION
APFF - 2008 CONFERENCE
Question 20
Concept of Influence for the Purposes of the Notion of Control in Fact
The notion of control in fact, defined in subsection 256(5.1) of the ITA, is an anti-avoidance rule that applies to all the provisions of the ITA which contain the expression "controlled, directly or indirectly in any manner whatever". This notion thus becomes very important and the practitioner must give specific attention to the application of this notion in the various tax planning or structures. Subsection 256(5.1) of the ITA also contains an important concept for its application, being the concept of influence. Although easy to comprehend, this concept, however, sometimes proves difficult when it is applied. In addition, the CRA mentions in paragraph 21 of Interpretation Bulletin IT-64R4, that the influence of the controller on the corporation, "even if it is not actually exercised, would be sufficient to result in de facto control". The simple existence of such an influence would, therefore, be sufficient to result in such control.
Questions
a) Can the CRA indicate to what extent the existence of such influence, even if not exercised, can confer control in fact?
b) Can the CRA provide examples of circumstances which would permit one to conclude that sufficient influence exists, resulting in control in fact?
CRA Response
As indicated in this question, the CRA mentions in paragraph 21 of Interpretation Bulletin IT-64R4 (Consolidated), "Corporations: Association and Control", that with respect to subsection 256(5.1) of the ITA, the existence of the influence of the "controller" would be sufficient to result in de facto control, even if this influence is not actually exercised.
This position is based on the wording of subsection 256(5.1) of the ITA. The French version of this legislative provision states, among others, the following:
Pour l'application de la présente loi, lorsque l'expression "contrôlée, directement ou indirectement, de quelque manière que ce soit," est utilisée, une société est considérée comme ainsi contrôlée par une autre société, une personne ou un groupe de personnes - appelé "entité dominante" au présent paragraphe - à un moment donné si, à ce moment, l'entité dominante a une influence directe ou indirecte dont l'exercice entraînerait le contrôle de fait de la société. ...
(Emphasis added).
On the other hand, the English version of subsection 256(5.1) of the ITA states, among others, the following:
For the purposes of this Act, where the expression "controlled, directly or indirectly in any manner whatever," is used, a corporation shall be considered to be so controlled by another corporation, person or group of persons (in this subsection referred to as the "controller") at any time where, at that time, the controller has any direct or indirect influence that, if exercised, would result in control in fact of the corporation, ...
(Emphasis added).
One of the questions under litigation in Avotus Corporation v. The Queen, 2006 TCC 505, was to determine if Avotus Corporation (hereafter "Avotus") was a "Canadian-controlled private corporation" within the meaning assigned by subsection 125(7) of the ITA and was entitled to the small business deduction, for taxation years ending April 30, 1995, 1997, 1998 and 1999, respectively. During the relevant period, 50% of the issued and outstanding shares of Avotus were held by a non-resident individual. This non-resident individual was one of two directors of Avotus. Moreover, the non-resident individual was the chairman of the board, and as such, held a casting vote in the event of a split in the votes at meetings of the board of directors or of the shareholders. The non-resident individual, however, alleged that he was unaware of the existence of this casting vote. Paragraphs 68 to 70 of the decision, which are reproduced below, are particularly interesting with respect to this question:
[68] The Appellant admits that if Malone and Santoni had been aware of the casting vote provision in the bylaws, Malone would have had control in fact over the corporation. However, the Appellant argues that Malone could not have had any "influence" within the meaning of subsection 256(5.1) by virtue of the casting vote provision of the bylaws since he was unaware of its existence. The Appellant contends that awareness of the fact which gives one influence is a necessary precondition of having that influence. In the absence of that awareness, the alleged controller will never be in a position to influence the affairs of the corporation.
[69] Whether such influence exists would be a determination of fact, and the factors to be considered in assessing whether influence exists may vary from case to case. Judge Bowman (as he then was) in Société Foncière d'Investissement Inc. v. Canada, expressed the opinion that the addition of the words "directly or indirectly in any manner whatever" to the Act was intended to broaden the concept of control, and that the notion of controlling influence includes economic, contractual or moral control over a corporation's affairs. He went on to state: "It is hard to imagine words with a broader meaning".
[70] It is clear that there may be both objective and subjective elements that underlie the existence of controlling influence over a corporation. In the case of contractual control, the source of the control would be objective, while moral control would likely be based largely on subjective factors. In this case, the existence of Richard Malone's influence has been objectively established by means of the production of the corporate bylaws. The legal effect of the casting vote provision in the bylaws would not be negated by Malone's alleged ignorance of the provision. Whether he was aware of it or not, Malone had a power to control the Appellant. This is consistent as well with the fact that subsection 256(5.1) focuses on the potential to exercise influence and not upon the actual exercise of the power. In my view, therefore, the power to cast the deciding vote is a power which, "if exercised", would result in control in fact of the corporation as contemplated in subsection 256(5.1).
(Emphasis added).
This excerpt from the Avotus decision confirms the position adopted by the CRA to the effect that the influence mentioned in subsection 256(5.1) of the ITA can exist without having to be inevitably exercised.
This interpretation was also adopted by the Tax Court of Canada in Corpor-Air Inc. v. The Queen, 2006 TCC 75. Paragraph 27 of the decision indicates as follows:
The only issue is whether, during the relevant period, Mr. Stever had any direct or indirect influence that, if exercised, would have resulted in control in fact of the Appellant. It should be immediately emphasized that it is not necessary for the evidence to establish that Mr. Stever held control in fact of the Appellant or that dominant influence was actually exercised. It is enough to find that such influence existed.
(Emphasis added)
Paragraph 30 in Transport M.L. Couture Inc. v. The Queen, 2003 DTC 134; [2003] 3 CTC 2882 (TCC; confirmed by 2004 FCA 23), goes in the same direction:
In the case at bar, it is clear that Transport Couture did not exercise de jure control over ML1 and ML2 since it held no shares of their capital stock. Therefore, it must be determined whether, on the other hand, Transport Couture exercised de facto control over them, i.e., whether, as subsection 256(5.1) of the Act requires, Transport Couture had, during the relevant period, a direct or indirect influence that, if exercised, would have resulted in control in fact of ML1 and ML2. Based on the English version of this subsection, which in my opinion is more explicit than the French version, it must be determined whether Transport Couture had an influence over ML1 and ML2 that, if exercised, would have resulted in control in fact of those two corporations. The evidence, therefore, does not need to establish that Transport Couture exercised control in fact over ML1 and ML2 or that Transport Couture's influence as a controller was in fact exercised. It is sufficient to note the existence of such influence.
(Emphasis added)
Up to the present, jurisprudence has established that control in fact of a corporation could generally result from three major types of influence, which is moral influence, economic influence and contractual influence. Furthermore, the CRA has formulated general comments in paragraphs 19 to 23 of Interpretation Bulletin IT-64R4 on the notion of control in fact which is mentioned in subsection 256(5.1) of the ITA. Particularly, paragraph 23 of Interpretation Bulletin IT-64R4, contains a non-exhaustive list of certain general factors that permits one to determine whether control in fact exists.
Whether or not a "controller" has any direct or indirect influence that, if exercised, would result in control in fact of a corporation within the meaning of subsection 256(5.1) of the ITA, can be determined only after an analysis of all the facts and circumstances with respect to a given particular situation. Consequently, we do not believe that it is appropriate, under the circumstances, to formulate other general comments on the notion of control in fact.
Stéphane Prud'Homme
(613) 957-8975
October 10, 2008
2008-028521
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