4 June 2024 STEP Roundtable Q. 3, 2024-1003471C6 - Acquisition of Control

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: Is there an acquisition of control of a corporation where a person acts on the shareholder’s behalf under a power of attorney as a consequence of the incapacity of the shareholder?

Position: No.

Reasons: See below.

2024 STEP CRA Roundtable – June 4, 2024

QUESTION 3. Acquisition of Control of a Corporation

If a controlling shareholder of a corporation becomes incapable and an unrelated person (or persons) starts acting on the shareholder’s behalf under a power of attorney, does that constitute a loss restriction event for the corporation?

If there is a change of attorney in the future, will there be another loss restriction event?

Further, can a loss restriction event be prevented if the unrelated attorney is one of three attorneys, two of which are related to the incapable shareholder?

CRA Response

Paragraph 251.2(2)(a) of the Act states in part:

For the purposes of this Act, a taxpayer is at any time subject to a loss restriction event if

(a) the taxpayer is a corporation and at that time control of the corporation is acquired by a person or group of persons;

In Buckerfield’s Ltd et al v MNR, [1964] CTC 504, the central question before the Exchequer Court of Canada was the meaning of “control” of a corporation as the term is used in the Act. In concluding that control contemplates 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 (i.e., de jure or effective control), Jackett, P. stated at page 507:

Many approaches might conceivably be adopted in applying the word "control" in a statute such as the Income Tax Act to a corporation. It might, for example, refer to control by "management", where management and the Board of Directors are separate, or it might refer to control by the Board of Directors. The kind of control exercised by management officials of the Board of Directors is, however, clearly not intended by section 39 when it contemplates control of one corporation by another as well as control of a corporation by individuals (see subsection (6) of section 39). The word "control" might conceivably refer to de facto control by one or more shareholders whether or not they hold a majority of shares. I am of the view, however, that in section 39 of the Income Tax Act, the word "controlled" contemplates the right of control that rests in 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. See British American Tobacco Co. v. I.R.C., [1943] 1 A. E. R. 13, where Viscount Simon L. C., at page 15, says:

The owners of the majority of the voting power in a company are the persons who are in effective control of its affairs and fortunes.

In Duha Printers (Western) Ltd. v. Canada, [1998] S.C.R. 795 (SCC), Iacobucci, J., speaking for the Supreme Court of Canada, provided the following guidance on the approach to determining control:

[40] The general approach to the determination of control, as I have already noted, has been to examine the share register of the corporation to ascertain which shareholder, if any, possesses the ability to elect a majority of the board of directors and, therefore, has the type of power contemplated by the Buckerfield's test, supra. The case law seems to point only to limited circumstances in which other documents may be examined, and then only to a narrow range of documents which may be considered.

Iacobucci, J. later summarized, at paragraph 85, which documents or agreements are relevant to determining de jure or effective control of a corporation:

(1) …

(2) The general test for de jure control is that enunciated in Buckerfield's, supra : whether the majority shareholder enjoys "effective control" over the "affairs and fortunes" of the corporation, as manifested in "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".

(3) To determine whether such "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.

(4) Documents other than the share register, the constating documents, and any unanimous shareholder agreement are not generally to be considered for this purpose.

(5) …

Thus, an agreement that is not an unanimous shareholder agreement would not generally be considered in determining de jure control of the corporation. One exception is where the shares of a corporation are held by a trust. At paragraphs 48 - 49 of Duha Printers, Iacobucci, J. made the following comments with respect to trusts:

Equally distinguishable, in my view, are Consolidated Holding, supra, and The Queen v. Lusita Holdings Ltd., 84 D.T.C. 6346 (F.C.A.), two cases in which the courts considered documents other than the constating documents only because the majority of the shares in the companies in question were held by trustees. It was therefore necessary to examine the trust instruments in order to determine what, if any, limitations existed on the trustees’ powers to vote the shares. As it happened, in both cases, the trustees could be constrained in their voting of the shares by the actions of their co-trustees: in Consolidated Holding, the will of the deceased shareholder provided that “the views, discretion or direction of any two of my trustees shall be binding upon the other of my trustees” (p. 422), while in Lusita Holdings it was found as a fact by Stone J.A. that “[t]he right to control the voting rights resided in the co-trustees and not in either of them” (p. 6348)

These factors, in my view, clearly demonstrate the distinction between a trust instrument and other external documents for the purposes of assessing de jure control. A trust imposes upon the trustee a fiduciary obligation to act within the terms of the trust instrument and for the benefit of the beneficiary. That is, the trustee is not free to act other than in accordance with the trust document, and if the trust document imposes limitations upon the capacity of the trustee to vote the shares then these must accordingly be taken into account in the de jure control analysis. By contrast, any limitations which might be imposed by an outside agreement are limitations freely agreed to by the shareholders, and not at all inconsistent with their de jure power to control the company. In other words, limitations on the voting powers of trustees must be seen as limitations on their capacity as free actors in the circumstances. No such limitations encumber the ordinary shareholder in his or her exercise of de jure control, even if an outside agreement exists to limit actual or de facto control.

In our view, a power of attorney under which a designated attorney exercises the voting rights of the controlling shareholder of a corporation as a consequence of the incapacity of the shareholder (who continues to be the legal and beneficial owner of the shares), would not constitute an external document that is to be taken into consideration in determining de jure control of the corporation. Our views in this respect confirm our response to question 17 at the 2012 APFF Conference - Federal Roundtable (CRA document 2012-0454111C6).

It is worth noting that a power of attorney may be relevant in applying paragraph 251(5)(b) of the Act, which sets out rules that apply in determining whether persons are related and for the purposes of the definition “Canadian-controlled private corporation”, and in applying subsection 256(1.4) of the Act, which sets out rules for determining whether a corporation is associated with another corporation. In this respect, see CRA documents 2000-000825, 9814370 and 9726535.

Patrick Prescott
2024-100347