7 June 1988 Income Tax Severed Letter 5-5658 - []

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.

XXXX A.A. Cameron (613) 957-2116

XXXX

June 7, 1988

Dear Sirs:

Re: Unanimous Shareholder Agreements and Control

We are writing in response to your letter of February 26, 1988 in which you requested our opinion as to the impact that a unanimous shareholders agreement (an "Agreement") under subsection 140(2) of the Canada Business Corporations Act (the "CBCA") has in determining whether a taxpayer controls a corporation or has acquired control of a corporation for the purposes of the Income Tax Act (the "Act").

Specifically, you have asked the following questions: i) Where an Agreement has been made (to which the corporation is also a party) which provides that all shareholder decisions require the vote of more than 2/3 of the issued and outstanding shares of the corporation, would we consider that the result of the Agreement (all other things being equal) would be to prevent a shareholder who held not more than 2/3 of the shares of the corporation from being considered to control it?

ii) Would an Agreement in the manner described in question i) above prevent an acquisition of control from occurring for the purposes of section 111 of the Act when one of three shareholders who each own 1/3 of the shares of a corporation, purchases all the shares of one of the other shareholders?

In general, an Agreement under subsection 140(2) of the CBCA is one which "... restricts, in whole or in part, the powers of the directors to manage the business and affairs of the corporation...". In our opinion such Agreements will not affect control of a corporation for the purposes of the Act since the Courts have held that the right of control rests in ownership of a sufficient number of shares to give a majority of the voting power in a corporation. An Agreement which simply restricts the powers of the directors to manage a corporation's business would not in itself affect control of the corporation.

The Courts have differentiated between the effect on control of restrictive provisions embodied in the Articles of Association of a corporation and those contained in written agreements between shareholders. In our view the Supreme Court's decision in International Iron and Metal Co. Ltd. v. M.N.R. (72 DTC 6205) supports the position that the latter type of restrictions are generally not relevant to determining who controls a corporation. In our opinion the fact that the particular corporation was also a party to the Agreement would not alter this view.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch