15 November 1991 Administrative Letter 911716 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.

Dear Sirs:

Re: Subsection 249(4)

We are writing in response to your letter, dated June 24, 1991, in which you request an opinion as to whether there would be an acquisition of control for the purposes of subsection 249(4) of the Income Tax Act ("the Act") in the following hypothetical fact situation:

    A taxpayer owns less than 50% of the common shares of a corporation and deals at arm's length with the other shareholders of the corporation.  No shareholder or related group of shareholders owns more than 50% of the common shares.  Only the common shares have voting rights.  The taxpayer and a minority shareholder together possess the right to cast more than 50% of the votes on the common shares and, pursuant to a voting agreement, the minority shareholder agrees to vote its shares in the same way as the taxpayer votes its shares.  Also, pursuant to a shareholders agreement to which the corporation is not a party, the taxpayer is entitled to nominate a majority of the board of directors. Subsequently, the taxpayer or a corporation related to the taxpayer acquires additional common shares of the corporation resulting in the taxpayer or the taxpayer and the related corporation as the case may be, owning more than 50% of the common shares.

The opinion you have requested is whether the acquisition of the additional common shares by the taxpayer or by a corporation related to the taxpayer would constitute an acquisition of control for the purposes of subsection 249(4) of the Act.  You submit that there would not be an acquisition of control in these circumstances, because prior to the acquisition of the additional common shares: (1) the taxpayer had the right pursuant to the shareholders agreement to nominate a majority of the board of directors; and (2) the minority shareholder agreed pursuant to the voting agreement to vote its common shares in the same way as the taxpayer, with the result that more than 50% of the voting shares would be voted in the manner chosen by the taxpayer.  In your view the case of International Mercantile Factors Ltd. v. The Queen, 90 DTC 6390 (F.C.T.D.), which is under appeal, casts doubt on whether the Supreme Court of Canada's decision in International Iron & Metal Company Ltd. v. M.N.R. 72 DTC 6205, concerning the irrelevance of a shareholders agreement to the control of a corporation, is still good law. 

Opinion

It is Revenue Canada's view, as outlined in paragraph 13 of Interpretation Bulletin IT-64R2 that the word "control" in subsection 249(4) of the Act generally refers to the right of control that rests in the ownership of such a number of shares of the corporation as to give a majority of the voting power in the corporation.  This view is consonant with the common law meaning of "controlled" set out by President Jackett in Buckerfield's Limited et al v. M.N.R. [1965] 1 Ex.C.R. 299, at p.303, and adopted by the Supreme Court of Canada in M.N.R. v. Dworkin Furs (Pembroke) Ltd. et al [1967] S.C.R. 223, at p. 228:

    "[T]he 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."

More recently, in The Queen v. Imperial General Properties 85 DTC 5500 (S.C.C.), after citing Buckerfield's and Dworkin Furs, supra, with approval, the approach to the meaning of "control" followed in the majority judgment of the Court was expressly stated not to involve any departure from prior judicial pronouncements.

The subsequent acquisition of more than 50% of the common shares by the taxpayer or by a corporation related to the taxpayer, as the case may be, would result 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", within the meaning of President Jackett's statement in Buckerfield's, supra.  Accordingly, it is our view that the acquisition of the additional common shares would constitute an acquisition of control of the corporation for the purposes of subsection 249(4) of the Act.

It is also our view that the case of International Mercantile Factors Ltd., supra, cannot be said to put in doubt the Supreme Court's decision in International Iron & Metal Company Limited, supra.  Even apart from the legal conclusion which flows from the application of the principles of stare decisis, the Judge of the Trial Division was concerned in the Mercantile case with the meaning of the words "controlled, directly or indirectly in any manner whatever", as this broad definition of control is used for the purposes of the definition of a Canadian-controlled corporation in paragraph 125(7)(b) of the Act.  The Supreme Court was only concerned with the meaning of the word "control", and the trial judge was therefore at liberty to take account of larger considerations than those which were before the Supreme Court.  Those larger considerations would not be relevant in an interpretation of subsection 249(4) of the Act, having regard to the absence of the words "or indirectly in any manner whatever" from that provision.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch