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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Steps to be taken to have a corporation maintain its CCPC status.
Position TAKEN: - Generally a question of fact and provided brief discussion of defacto control.
Reasons FOR POSITION TAKEN: - Would have to review all of the facts before being able to conclude whether corp is a CCPC
XXXXXXXXXX M.P. Sarazin
July 28, 1994
Re: Canadian-Controlled Private Corporation
This is in reply to your fax transmittal memo dated June 24, 1994 wherein you requested our comments with regards to whether a particular corporation would maintain its status as a Canadian-controlled private corporation ("CCPC"), within the meaning assigned by paragraph 125(7)(b) of the Act in the following situation.
All of the voting preferred shares of a holding corporation ("Holdco") are owned by an individual ("Mother") who is resident in Canada for purposes of the Act. Mother has three adult children and each of the children owns one non-voting common share of Holdco. Two of the three children are not resident in Canada for purposes of the Act.
Mother is contemplating selling or gifting the preferred shares of Holdco to her children. In order maintain Holdco's status as a CCPC, Mother is prepared to sell or gift 50% of her preferred shares of Holdco to the child that resides in Canada and to sell or gift 25% of her preferred shares of Holdco to each of the non-resident children.
In the determination of whether the Department may consider the non-resident children to have de facto control of Holdco in the proposed situation, paragraph 19 of Interpretation Bulletin IT-64R3 states:
"Although the degree of influence is always a question of fact, close family ties (between parents and children or between spouses) especially lend themselves to the development of significant influences. Generally, these persons must demonstrate their economic independence and autonomy before escaping presumptions of fact which apply naturally to related persons."
You have requested clarification with respect to the meaning of the expression "economic dependence and autonomy" in the determination of whether Holdco would maintain its status as a CCPC for purposes of the Act. In addition, you have requested our comments with regards to the steps that can be taken to ensure that Holdco does in fact retain its status as a CCPC.
It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Where, however, the issue to be considered involves a question of fact, the Department will not rule unless all of the relevant facts are known. Nevertheless, we can offer the following general comments.
Unless otherwise stated all references to a statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993 (the "Act").
A corporation will be a CCPC provided it is not "...controlled, directly or indirectly in any manner whatever, by one or more non-resident persons...". Pursuant to the provisions of subsection 256(5.1) of the Act, the expression "controlled, directly or indirectly in any manner whatever" will include any situation where a person has de facto control of the corporation. Paragraph 19 of IT-64R3 provides some of the general factors that the Department will use in determining whether de facto control exists in any particular situation.
In order to determine whether or not there exists direct or indirect influence that, if exercised, would result in control of a corporation, it would be necessary to review all of the facts in each situation to identify any influences that may result in de facto control of a corporation. In addition to the factors expressed in paragraph 19 of IT-64R3, the Department would also consider the composition of the board of directors, the control of day to day management and operation of the business and the ownership of a large debt of the corporation in the determination of whether any influences exist.
In the case of related persons, the Department has stated that it would look at a person's ability to demonstrate their economic independence and autonomy in determining whether there exists significant influence over a family member who is a shareholder of the corporation. Where a shareholder has no source of income and relies on the income of a related person, we may conclude that the related person providing the financial support may have influence over that shareholder which may ultimately result in de facto control of the corporation. You will note that paragraph 19 cites two examples where such economic independence and autonomy may not exist; the first example is between parents and children and the second example is between spouses. However, with respect to siblings, unless the facts of a particular case indicate otherwise, we would not generally expect one sibling to be dependent on another.
Provided that the non-resident shareholders do not have de facto control over a particular corporation, we would generally conclude that a corporation will be a CCPC in the situation where 50% of the voting shares are held by individuals resident in Canada and the other 50% of the voting shares of the corporation are owned by non-resident persons.
We trust that the above comments will be of assistance.
Reorganizations and Foreign Division
Policy and Legislation Branch
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