19 March 1990 Ministerial Correspondence 59494 F - 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.

March 19, 1990

Dear Sirs:

Re:  Acquisition of Control

We are writing in response to your letter of January 23, 1990 wherein you requested our opinion as to whether there would be an acquisition of control for purposes of subsections 111(5) and 249(4) of the Income Tax Act (the "Act") in the following hypothetical situation outlined in your letter.

Situation

1.     Each of Mr. A and Mr. B, who are not related to each other, owns 50% of all of the shares of a corporation ("Canco").

2.     Canco is a private corporation within the meaning assigned by paragraph 89(1)(f) of the Act.

3.     There is no shareholders' agreement between Mr. A and Mr. B relating to the holding or sale of their shares of Canco.

4.     Mr. C wishes to purchase and Mr. B wishes to sell all of the shares of Canco held by Mr. B.

5.     Mr. C is not related to either Mr. A or Mr. B.

6.     After the purchase described in paragraph 4, Mr. A and Mr. C will enter into a shareholders' agreement which will include the following items:

(i)     a "buy-sell" provision to be effective upon the death, bankruptcy or permanent disability of either of the shareholders;

(ii)     a "right of the first refusal";

(iii)     a preemptive right for either shareholder to purchase any new shares that might be issued by Canco so as to maintain his proportionate share of Canco;

(iv)     a "shotgun clause";

(v)     a non-competition clause; and

(vi)     a clause that restricts the powers of the directors regarding share transfers, issuance or acquisition of shares and declaration of dividends. (These powers will be  exercised by the shareholders).

7.     No shareholder will have the power to cause the winding-up of Canco.

8.      Each shareholder will have equal representation on the board of directors and will be involved in the day to day operations of the business.

Comments

The situation outlined in your letter appears to involve actual proposed transactions with identifiable taxpayers.  Assurance as to the tax consequences of actual proposed transactions can only be given by the Department in the context of an advance income tax ruling.  The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R dated December 18, 1978 issued by Revenue Canada, Taxation and the related Special Release thereto.  However, we can offer the following general- comments which, in accordance with paragraph 24 of the aforementioned Information Circular, are not binding on the Department.

Generally, for purposes of subsections 111(5) and 249(4) of the Act, a group of persons will be considered to have acquired control of a corporation where there is evidence that they have a common link or interest or that they act together to control the corporation.  In the situation outlined in your letter, it is a question of fact whether or not control of Canco will have been acquired by a group of persons.  If Mr. C will act together with Mr. A to control Canco, control will have been acquired for purposes of subsections 111(5) and 249(4) of the Act.  Please refer to answers to Questions 40 to 43 of the 1988 Revenue Canada Round Table.

It is also our view that the word "control" as expressed in both subsections 111(5) and 249(4) of the Act generally means the right of control that rests in ownership of such number of shares of a corporation as to give a majority of the voting power in the corporation.  In addition none of subsection 256(5.1), subsection 256(1.4) or paragraph 251(5)(b) of the Act would apply for purposes of determining whether there is an "acquisition of control for the purposes of sub-sections 111(5) and 249(4) of the Act. Consequently, it appears that the terms of the shareholders' agreement as described in paragraphs 6 to 8 above would not, in and by themselves, result in "de jure" control of Canco having been acquired by either Mr. A or Mr. C for the purposes of subsections 111(5) and 249(4) of the Act.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch