30 November 1994 Internal T.I. 9427480 - CCPC

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.

1994 Canadian Tax Conference

Canadian-Controlled Private Corporation

The Income Tax Act ("the Act") provides favourable treatment to the taxation of Canadian-controlled private corporations ("CCPCs") and their shareholders. Two of the primary benefits of CCPC status are access to the small business deduction and enhanced refundable investment tax credits ("ITCs") for scientific research and experimental development (SR&ED) expenditures.

A CCPC is defined in subsection 125(7) of the Act to be:

"a private corporation that is a Canadian corporation other than a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation) or by any combination thereof."

As the definition indicates, the control test is a negative one. The test is whether the corporation is not controlled by one or more non-residents, by one or more public corporations or by any combination thereof.

The jurisprudence suggests that for a group of persons to be considered to control a corporation the members of the group must act together in some manner. However, the leading cases on the concept of group control have been in the context of the associated corporation rules in section 256 of the Act and not in the context of the CCPC definition. Furthermore, the definition of CCPC does not refer to control by a "group of persons", it refers to control by "one or more non-resident persons". This latter expression has not been considered by the courts. It is our view that since the expression does not refer to group control it was meant to mean ownership of a controlling block (i.e. over 50%) of shares of a company.

This view is supported from a policy perspective. It is our understanding that the main purpose underlying the tax advantages given to CCPCs is to encourage economic growth and increase employment in Canada. The tax advantages are restricted to CCPCs so that the tax system subsidizes the growth of primarily Canadian-owned small business, rather than primarily foreign-owned businesses.

A similar analysis would apply in situations where the majority of the shares of a corporation are owned by public companies. For example, take the situation where 80% of a corporation's shares are held equally be two large unrelated public companies. It would be clearly inappropriate to allow such a corporation to benefit from tax incentives such as the small business deduction and the enhanced ITCs on SR&ED that are intended to benefit Canadian-owned small business.

To summarize, it is our view that the control test referred to in the definition of Canadian-controlled private corporation in subsection 125(7) envisages situations where over 50% of the shares of a corporation are owned by one or more non-residents or by one or more public corporations regardless of whether a controlling group can be identified. This view is in accordance with the tax policy underlying access to the small business deduction and the enhanced ITCs for SR&ED.

Tim Bryant
November 30, 1994
942748