3 October 1988 Income Tax Severed Letter 7-2938 - []

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.

DATE OCT 3 1988

TO Publications Division W.B. Blanche Acting Director

FROM Specialty Rulings Directorate A.A. Cameron 957-2115

SUBJECT: Paragraph 25 of Interpretation Bulletin IT-64R2

We are writing to you concerning a matter which arose from a recent technical interpretation request concerning the effect of unanimous shareholder agreements under subsection 140(2) of the Canada Business Corporations Act upon the determination of who has de jure control of a corporation.

In that request it was argued that such agreements could be utilized to prevent de jure control from being considered to have been acquired. For example, if the agreement required that actions of the corporation be approved by a vote of more than two-thirds of all votes while a particular shareholder owned more than 50% but less than 66 2/3% of the voting shares of the corporation, that shareholder would not control the corporation. As support for this argument reference was made to the inclusion in the first sentence of paragraph 25 of Interpretation Bulletin IT-64R2 of "...written restrictive agreements between shareholders..." as a potentially determining factor in ascertaining who has de jure control of a corporation.

As is noted in paragraph 13 of IT-64R2 , the Courts have traditionally held that the word "controlled" as used in the Income Tax Act (the "Act") "...contemplates the right of control that rests in ownership of such a number of shares as to give a majority of the voting power in the corporation." The Courts also have differentiated between the effect of restrictive provisions embodied in the constituting documents 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 basically not relevant in determining de jure control of a corporation.

With the recent enactment of subsection 256(5.1) of the Act such written shareholder agreements could well be a determining factor in ascertaining whether a corporation is "controlled, directly or indirectly in any manner whatever" (de facto control) by a person. However, the determination of who would have de jure control is not affected by this provision and would still be made on the basis detailed above.

A review of the Interpretation Bulletin back-up files indicates that paragraph 25 of IT-64R is identical to the like-number paragraph in original IT-64 which appears to have been a direct quotation from the former Assessing Guide. However, further rationale for those comments is not evident from the files.

In our view paragraph 25 of IT-64R2 is confusing and tends to imply that written agreements should be given more weight in the determination of de jure control than the Courts have given to them. Consequently, you may wish to reconsider the comments in this paragraph when IT-64R2 is updated for changes contained in Bill C-139.

Yours truly,

Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch