17 November 2011 External T.I. 2011-0415831E5 - Definition of shareholder per subsection 15(1)

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.

Principal Issues: Whether member of a provincial society or non-share capital corporation is a shareholder for purposes of subsection 15(1).

Position: Yes

Reasons: Wording of the relevant provisions and application of prior positions.

XXXXXXXXXX
							2011-041583
							Ryan Lay

November 17, 2011

Attention: XXXXXXXXXX

Dear XXXXXXXXXX :

This is in reply to your letter of July 20, 2011, wherein you requested our views with respect to the application of subsection 15(1) of the Income Tax Act (the "Act") to a member of a society incorporated (or continued) under the Canada Not-for-profit Corporations Act, under Part II of the Canada Corporations Act, or under a provincial societies Act or equivalent provincial legislation

You also described a factual scenario in which a corporation incorporated by members of a family either as a provincial society or under Part II of the Canada Corporations Act acquires a vacation property. The family members pay dues to the corporation, which the corporation uses to maintain and pay expenses of the vacation property, and the corporation gives the family members the right to access and use the vacation property.

As stated in paragraph 22 of Information Circular 70-6R5, the Income Tax Rulings Directorate only provides written confirmation of the tax consequences arising from a specific proposed transaction by way of an advance income tax ruling. We are nevertheless prepared to provide the following comments in respect of the issues that you raised. Please note, however, that the following comments are of a general nature only and are not binding on the CRA.

The definition of 'shareholder' in subsection 248(1) reads as follows:

"shareholder" includes a member or other person entitled to receive payment of a dividend;

This definition expands the generally understood meaning of that term to include a member or other person entitled to receive payment of a dividend.

Your view is that the entitlement to receive payment of a dividend is the determining factor that is necessary to be considered a 'shareholder' under this definition. Thus, where an entity incorporated under the above mentioned acts is prevented from making distributions to its members, its members could not be considered shareholders pursuant to subsection 248(1) of the Act, hence not subject to the application of subsection 15(1) of the Act.

The federal and provincial not-for-profit acts and other equivalent provincial legislation that we have consulted refer to the persons who have an interest in a society as 'members' of that society and prevent the incorporated society from distributing profits or property to such members. Our view is that excluding those members from the definition of 'shareholder' in subsection 248(1) of the Act on the basis that they cannot receive dividends would make the reference to 'members' in that same definition meaningless. If the entitlement to receive a dividend is the determining factor, the reference in the definition to a member would be unnecessary since a member entitled to receive a dividend would also be a person entitled to receive a dividend. We also note that interpreting the definition of "Shareholder" in subsection 248(1) of the Act as including members of an entity formed under Part II of the Canada Corporations Act is consistent with former subsection 157(3) of the Canada Corporations Act which required the term "shareholder" in the provisions of Part I of that statute that were relevant to the application of Part II to be read as a reference to a member of an entity incorporated under Part II of that statute. That provision and Part II of the Canada Corporations Act were repealed by SC 2009, c. 23, which enacted the Canada Not-for-profit Corporations Act. However, the definition of "shareholder" in subsection 248(1) of the Act was not modified as the Canada Not-for-profit Corporations Act also makes reference to members and similarly provides that the corporation cannot distribute profits or property to its members.

As a result, our view is that a member of a society incorporated or continued under the Canada Not-for-profit Corporations Act, under Part II of the Canada Corporations Act, under a provincial societies Act or equivalent provincial legislation would generally be considered a shareholder under subsection 248(1), and therefore subject to the application of subsection 15(1) of the Act, notwithstanding that the society or corporation is prohibited from paying dividends to its members.

This view is consistent with previous positions taken by the Canada Revenue Agency. See, for example, document 2006-0200451e5 where we concluded that the members of a syndicate constituted under Section 1039 of the Civil Code of Quebec were 'shareholders' as that term is defined in subsection 248(1) of the Act. In CRA document 2011-0397881, which describes a factual scenario that appears similar to the one that you describe, we also set out our view that subsection 15(1) of the Act could apply to the shareholders of a corporation that met the conditions in paragraph 149(1)(l).

The foregoing comments represent our general views with respect to the subject matter of your email and, in accordance with Information Circular 70-6R5, are not binding on the Canada Revenue Agency.

Yours truly,

Yves Moreno
Manager
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch