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11 October 2013 APFF Roundtable, 2013-0495811C6 F - De Facto Control
Principal Issues: In a particular situation, the voting shares of a corporation are divided evenly between two shareholders. Section 188 of the QBCA provides that unless otherwise provided in the by-laws, in the case of a tie, the chair of the meeting casts the tie-breaking vote. Whether in the particular situation, the chair of the meeting has de facto control of the corporation pursuant to paragraph 256(5.1)?
Position: General comments provided.
Reasons: According to the law and previous positions.
APFF - 2013 CONFERENCE
De facto control where there is a tie-breaking vote of the Chair of the meeting
Federal Interpretation Bulletin IT-64R4, dated June 26, 2001, states in paragraph 16:
Where the voting shares of a corporation are divided evenly between two persons, the fact that the chairperson of a shareholder's meeting may have the right to cast a deciding vote does not give that person de jure control of the corporation where the deciding vote is conferred on that person as chairperson of the meeting and not by ownership of voting shares (see Aaron's (Prince Albert) Ltd. et al. v. MNR, also known as Allied Business Supervisions Ltd. v. MNR, 66 DTC 5244,  CTC 330 (Ex.Ct.)—confirmed in MNR v. Dworkin Furs (Pembroke) Ltd., 67 DTC 5035,  CTC 50 (S.C.C.)). (However, the holding of a “casting vote” in the above circumstances may constitute de facto control as defined in subsection 256(5.1).)
Section 188 of the Quebec Business Corporations Act (hereinafter "the QBCA") states:
"Unless otherwise provided in the by-laws, in the case of a tie, the chair of the meeting casts the tie-breaking vote."
Question to the CRA:
In the situation where a corporation is held equally between two shareholders and section 188 of the QBCA applies, i.e. the chair has a tie-breaking vote, because there is no provision to the contrary in the by-laws or articles of incorporation, does the CRA consider that the chair has de facto control of the corporation under subsection 256(5.1)?
With respect to the situation briefly described in the question, we do not believe that section 188 of the QBCA, respecting the conduct of an annual shareholders meeting, automatically confers de facto control of a corporation on the person occupying the post of Chair of the meeting and having a tie-breaking vote.
In this regard, we note that section 188 of the QBCA provides that "Unless otherwise provided in the by-laws, the president of the corporation chairs a shareholders meeting," and that the Chair, in general, is elected by the directors of the corporation.
The determination of de facto control for the purposes of subsection 256(5.1) remains a question of fact that can only be determined after an examination of all the facts surrounding a particular situation.
For example, we note that in Brownco Inc. v. The Queen, 2008 DTC 2591 (TCC) and Avotus Corp. v. The Queen, 2007 DTC 215 (TCC), the Court recognized that the right to a tie-breaking vote attaching to the position of Chair of the board of directors or of the shareholders' meeting accorded, to a shareholder holding 50% of the voting shares of a corporation, an influence whose exercise would result in de facto control of the corporation. The Court concluded that the particular shareholder therefore held de facto control of the corporation under subsection 256(5.1).
October 11, 2013
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