1 September 1995 External T.I. 9503925 - C.C.P.C.

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.

5-950392
XXXXXXXXXX J. Teixeira
(613) 957-8953

Attention: XXXXXXXXXX

September 1, 1995

Dear Sirs:

Re: Canadian-controlled Private Corporation

This is in reply to your letter of January 12, 1995 in which you requested our opinion as to whether a corporation described in your particular fact situation would qualify as a "Small Business Corporation" as defined in subsection 248(1) of the Income Tax Act (the "Act").

The situation described in your letter relates to an operating company incorporated under the laws of Ontario ("Opco"). All of Opco's issued and outstanding voting common shares are held as to 60% by a non-resident and 40% by a resident of Canada. A shareholders' agreement requires that decisions on certain matters, as described in your letter, be taken only with the consent of at least 61% of the holders of the voting common shares.

It is your opinion that Opco is a Small Business Corporation because:

(1)Opco is a private corporation;

(2)Opco is not controlled directly or indirectly in any manner whatever by one or more non-resident persons, by one or more public corporations or by any combination thereof; and

(3)all or substantially all of the fair market value of the assets of Opco is attributable to assets that are used principally in an active business carried on primarily in Canada by Opco.

Our Comments

As discussed in our telephone conversation on May 4, 1995, the situation in your letter appears to relate to an actual fact situation. To the extent that you require assistance in determining the tax status of the taxpayers involved, you should contact the District Office where the taxpayers file their income Tax returns.

However, we will provide general comments on certain of the issues raised in your letter. For a corporation to qualify as a Small Business Corporation, it must be a Canadian-controlled private corporation as defined in subsection 125(7) of the Act. In your particular situation, it is your opinion that the shareholders' agreement would give each shareholder equal voting control of Opco because various changes described in your letter require the consent of 61% of the holders of the voting common shares. In fact, most of these changes would be fundamental changes which can only be authorized by a special resolution, requiring 66 2/3 of the votes to pass, pursuant to subsection 168(5) of the Business Corporations Act (Ontario).

Generally, it is the Department's view that "control" as used in the Act refers to "de jure" control which has been interpreted by the Courts to mean the ownership of such a number of shares of the corporation so as to give a majority of the voting power in the corporation. The definition of a Canadian-controlled private corporation in subsection 125(7) of the Act contains the phrase "controlled directly or indirectly in any manner whatever" which extends the definition of control to include "de facto" control within the meaning of subsection 256(5.1) of the Act.

The issue of whether a shareholders' agreement affected de jure control was considered in International Iron & Metal Co. Ltd. v M.N.R. 72 DTC 6205. In that case, the Supreme Court's decision was that a shareholder's agreement was not relevant to the determination of de jure control. Rather, the relevant fact was who controlled the majority of the voting power in the corporation. Therefore, Opco is not a Canadian-controlled private corporation, as a non-resident holds more than 50% of its voting common shares.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada.

Yours truly,

for Director
Reorganization and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch