11 May 2017 Internal T.I. 2016-0665931I7 - Related to participating employer

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: Whether an individual is related to a participating employer for purposes of the definition of an “individual pension plan” under subsection 8300(1) of the Income Tax Regulations in two different hypothetical scenarios?

Position: Question of fact.

Reasons: The statutory rules for determining when a corporation and a person will be considered related persons for purpose of the Act are set out in paragraph 251(2)(b). As such there could be circumstances that arise where a shareholder of a corporation who is not related to any other shareholder of the corporation and holds 50% or less of the voting shares of the capital stock of the corporation and does exercise de jure or effective control of the corporation. In addition, the corporation and persons may be related pursuant to the application of paragraph 251(5)(b).

							May 11, 2017

							HEADQUARTERS
Registered Plan Directorate			Income Tax Rulings
							  Directorate
Attention: Jeff Boxer				W. Doiron

							2016-066593

Individual Pension Plans – related persons

This is in response to your email of September 13, 2016 in which you request our views on whether an individual is related to an employer for purposes of the definition of an “individual pension plan” under subsection 8300(1) of the Income Tax Regulations (“Regulations”).

For illustration purposes we will use the following two scenarios in addressing the question you posed:

1. Scenario 1:

Two individuals, Individual A and Individual B, are related;

Individual A and Individual B are employees of a corporation (the “Employer”);

The Employer’s issued and outstanding shares consist of 100 common shares;

Individual A and Individual B each own 50 common shares of the capital stock of the Employer; and

The Employer is a participating employer in a registered pension plan (“RPP”) that contains a defined benefit provision. Individual A and Individual B are the only members of the plan.

2. Scenario 2:

The facts are the same as in Scenario 1, except that Individual A and Individual B are not related.

Unless otherwise stated, all statutory references in this memorandum are references to the provisions of the Income Tax Act (the “Act”).

Our Comments

The term “individual pension plan” (“IPP”) is defined in subsection 8300(1) of the Regulations as an RPP that contains a defined benefit provision if, at any time in the year or a preceding year, the plan (a) has fewer than four members and at least one of them is related to a participating employer in the plan or (b) is a designated plan and it is reasonable to conclude that the rights of one or more members to receive benefits under the plan exist primarily to avoid the application of (a).

The term “related persons” is defined in subsection 251(2). Pursuant to paragraph 251(2)(b), an individual member will be related to a participating corporate employer if the individual controls the corporation, the individual is a member of a related group that controls the corporation, the individual is related to a person that controls the corporation, or the individual is related to a person who is a member of a related group that controls the corporation. The term “related group” is defined in subsection 251(4) as a group of persons each member of which is related to every other member of the group.

For purposes of subsection 251(2), the term “control” means “de jure” control. The term “control” is not defined under the Act, however the general test for de jure control was established by the Exchequer Court of Canada in Buckerfield's Limited et al. v. MNR, 64 DTC 5301, [1964] C.T.C. 504, to be whether the shareholder enjoys “effective control” over the affairs and fortunes of the corporation, as manifested in the ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the board of directors. The test in Buckerfield's was confirmed by the Supreme Court of Canada in Duha Printers (Western) Ltd. v. The Queen, 98 D.T.C. 6334, [1998] 3 C.T.C. 303. According to the Court in Duha, to determine whether effective control exists, one must consider:

a) the corporation’s governing statute;

b) the share register of the corporation; and

c) any specific or unique limitation on either the majority shareholder’s power to control the election of the board or the board’s power to manage the business and affairs of the company, as manifested in either:

i. the constating documents of the corporation; or

ii. any unanimous shareholder agreement.

Given this, it is possible that such a limitation could exist, as contemplated by item (c) above, such that an individual, despite not owning a majority of the voting shares, could exercise effective control over the affairs and fortunes of the corporation, and therefore possess de jure control of the corporation. Where an individual possesses de jure control of the corporation, the individual would be related to the corporation under subparagraph 251(2)(b)(i).

It is also possible that an individual could be deemed to have control of the corporation through the application of paragraph 251(5)(b). For example, where a person has a right (contingent or otherwise) to acquire shares of a corporation, or to control the voting rights of such shares, the person shall be deemed under paragraph 251(5)(b) to have the same position in relation to the control of the corporation as if the person owned the shares. Therefore, it is possible that an individual could possess such a right, such that the individual would be deemed to own sufficient shares to control the corporation under paragraph 251(5)(b) and as a result be related to the corporation under subparagraph 251(2)(b)(i).

Note that if paragraph 251(5)(b) does apply, it is possible for each of two unrelated persons to be regarded, for the purposes of subsection 251(2), as having control of the same corporation at the same time. While paragraph 251(5)(b) does not deny that actual control is held by the person who has the direct ownership of shares, another person could have control simultaneously as a result of the application of one of the rules in paragraph 251(5)(b).

Scenario 1

In this scenario, Individual A and Individual B are related and together have sufficient ownership of voting shares of the Employer to elect a majority of the board of directors. As such, Individual A and Individual B form a related group that controls the Employer and are both related to the Employer pursuant to paragraph 251(2)(b). (endnote 1) As a consequence of Individual A and Individual B being related to the Employer, the definition of IPP in subsection 8300(1) of the Regulations is satisfied.

Scenario 2

In this scenario, Individual A and Individual B are not related and each own 50% of the common shares of the capital of the Employer and therefore neither individual has sufficient ownership of voting shares of the Employer to elect a majority of the board of directors.

However, as is apparent from Duha, the determination of whether a person exercises de jure control is not limited to a review of the voting rights of the issued and outstanding shares amongst the shareholders based on share ownership alone but must also take into consideration whether any specific or unique limitation on a shareholder’s power to control the election of the board or the board’s power to manage the business and affairs of the company, as manifested in either the constating documents of the corporation, or any unanimous shareholder agreement.

Therefore, it is possible that despite Individual A or Individual B not owning a majority of the voting shares, Individual A or Individual B could nevertheless, depending on the facts, exercise effective control over the affairs and fortunes of the Employer, and therefore possess de jure control of the Employer and be related to the Employer under subparagraph 251(2)(b)(i).

It is also possible that Individual A or Individual B could be deemed to have control of the Employer through the application of paragraph 251(5)(b). If Individual A or Individual B possessed a right such that the individual would be deemed to own sufficient shares to control the Employer under paragraph 251(5)(b), then the individual would be related to the Employer under subparagraph 251(2)(b)(i).

Whether an individual and a corporation are related is always a question of fact. If it is determined that the Individual is related to the Employer, the RPP would be an “individual pension plan” as defined in subsection 8300(1) of the Regulations.

We trust our comments will be of assistance.

Mary Pat Baldwin, CPA, CA
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

ENDNOTES

1 In the majority of cases, the individuals will be related to the Employer pursuant to subparagraph 251(2)(b)(ii). However, where the constating documents of the Employer or any unanimous shareholder agreement provide for any specific limitations on either Individual A’s or Individual B’s power to control the election of the board or the board’s power to manage the business and affairs of the Employer, the individuals will nevertheless continue to be related to the Employer by virtue of subparagraphs 251(2)(b)(i) and (iii).