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 a particular corporation is a CCPC.
Position: Yes.
Reasons: Law.
December 14, 2010
XXXXXXXXXX TSO - Appeals HEADQUARTERS
XXXXXXXXXX IT Rulings Directorate
Appeals Officer Guy Goulet CA, M.Fisc.
XXXXXXXXXX (613) 946-3323
XXXXXXXXXX
2010-037935XXXXXXXXXX ('Opco")
XXXXXXXXXX
We are writing in response to your memorandum of August 30, 2010, wherein you have requested our views on the interpretation of subsection 125(7) of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended ("Act"), in the circumstances described below. We also acknowledge receipt of additional information contained in the subsequent submissions dated September 21, 2010 and November 23, 2010.
All statutory references in this letter are references to the provisions of the Act.
IDENTIFICATION OF THE PARTIES
In this letter, unless otherwise expressly stated:
a) "ACO" means XXXXXXXXXX , a non-share capital corporation incorporated under the XXXXXXXXXX .
b) "BCO" means XXXXXXXXXX , a corporation incorporated under the laws of the Province of XXXXXXXXXX .
c) "CCO" means XXXXXXXXXX , a corporation incorporated under the laws of Canada.
d) "DCO" means XXXXXXXXXX , a corporation incorporated under the laws of the Province of XXXXXXXXXX .
e) "Opco" means XXXXXXXXXX , a corporation amalgamated under the laws of the Province of XXXXXXXXXX .
BACKGROUND
1. Opco is a "private corporation", a "Canadian corporation" and a "taxable Canadian corporation" as defined in subsection 89(1).
2. The authorized capital of Opco consists of Class A shares, Class B shares, Class C shares and Class D shares. The Class A, C and D shares are fully voting and participating. The Class B shares are participating and voting except with respect to the election of directors of Opco. There are no Class D shares issued.
On XXXXXXXXXX , the issued share capital of Opco is held as follows:
Shareholder Class A Class B Class C % of outstanding shares
ACO XXXXX XXXXX XXXXX %
BCO XXXXX XXXXX %
CCO XXXXX XXXXX XXXXX XXXXX %
DCO XXXXX XXXXX XXXXX %
Total XXXXX XXXXX XXXXX XXXXX %
On XXXXXXXXXX , the outstanding fully voting shares of Opco were owned as follows:
Shareholder Class A Class C % of outstanding fully voting shares
ACO XXXXX XXXXX %
BCO XXXXX XXXXX %
CCO XXXXX XXXXX XXXXX %
DCO XXXXX XXXXX XXXXX %
Total XXXXX XXXXX XXXXX %
3. ACO is a tax-exempt entity pursuant paragraph 149(1)(o.2). ACO is neither a "public corporation" as defined in subsection 89(1) nor a non-resident person.
4. You did not provide us any information with respect to the status of BCO and CCO. In our analysis, we assume that those two corporations were wholly-owned subsidiaries of two "public corporations" as defined in subsection 89(1).
5. DCO is a "Canadian-controlled private corporation" as defined in subsection 125(7).
6. ACO, BCO, CCO, DCO and Opco signed on XXXXXXXXXX , a shareholders agreement (Agreement) that was still valid on XXXXXXXXXX .
7. According to article XXXXXXXXXX of the Agreement, each Opco shareholder shall be entitled to nominate for election as directors of Opco a certain number of individuals (XXXXXXXXXX for ACO, XXXXXXXXXX for BCO, XXXXXXXXXX for CCO and XXXXXXXXXX for DCO).
8. According to article XXXXXXXXXX of the Agreement, some matters require unanimous approval.
9. According to article XXXXXXXXXX of the Agreement, BCO and DCO shall be entitled to buy from ACO and CCO some of their Opco shares provided that following such sale the percentage of issued and outstanding shares of Opco owned by each of BCO and DCO, as the case may be, shall not exceed XXXXXXXXXX %.
10. Article XXXXXXXXXX of the Agreement contains a "right of first refusal" clause for each shareholder.
ISSUE
The issue is whether Opco was on XXXXXXXXXX , a "Canadian-controlled private corporation" as defined in subsection 125(7).
A "Canadian-controlled private corporation" (CPCC) is defined in subsection 125(7) as a "private corporation" that is a "Canadian corporation" that is not controlled, directly or indirectly in any manner whatever, by one or any combination of "public corporations" (other than "prescribed venture capital corporations") or non-resident persons. However, even if those conditions are met, paragraph (b) of the definition introduces an "hypothetical shareholder test" that prevents a corporation from being a CCPC when over 50 % of its shares are owned by one or more non-residents or by one or more "public corporations".
The expression "controlled, directly or indirectly in any manner whatever" that is found in the definition of CCPC in subsection 125(7) refers to both de jure control and de facto control (i.e., control in fact).
De jure control:
De jure control (or voting control) is not defined in the Act. The general test for de jure control was established by the Exchequer Court of Canada in Buckerfield's Limited et al. v. MNR, 64 D.T.C. 5301, to be whether the shareholder enjoys "effective control" over the affairs and fortunes of the corporation, as manifested in the 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 ("Board"). The test in Buckerfield's was confirmed by the Supreme Court of Canada in Duha Printers (Western) Ltd. v. The Queen, 98 D.T.C. 6334. In determining who is in effective control of the affairs and fortunes of a corporation, the Court concluded that one must consider whether the constating documents of the corporation, including any unanimous shareholders agreement, impose specific limitations on the majority shareholder's power to control the election of the Board, or the Board's power to manage the business and affairs of the corporation.
In the present situation, ACO owned XXXXXXXXXX % of the outstanding shares of the capital stock of Opco. However, the Class B shares of capital stock of Opco are not "fully voting" shares (could not be voted with respect to the election of Opco's Board). Accordingly, we are the view that, in the determination of the de jure control of Opco, its Class B shares should be excluded. As such, none of ACO, BCO, CCO or DCO owned on XXXXXXXXXX , a sufficient number of fully voting shares that carried with it the right to a majority of the votes in the election of the Opco's Board and, consequently, we are the view that none of them had de jure control of Opco at that moment.
Finally, the Agreement could qualify as a "unanimous shareholder agreement" XXXXXXXXXX because it restricts, in whole or in part, the powers of the directors to manage or supervise the management of the business and affairs of Opco. However, we are the view that none of the "restrictions" contains in the Agreement have a determinative effect in making a de jure control determination in the present situation.
De facto control:
A corporation is considered by subsection 256(5.1) to be "controlled, directly or indirectly in any manner whatever," where another corporation, person or group of persons has any direct or indirect influence that, if exercised, would result in de facto control of the corporation. De facto control goes beyond de jure control and includes the ability to control "in fact" by any direct or indirect influence. Case law has generally determined that de facto control may exist even without the ownership of any shares. It can take many forms, e.g., the ability of a person to change the board of directors or reverse its decisions, to make alternative decisions concerning the actions of the corporation in the short, medium or long term, to directly or indirectly terminate the corporation or its business, or to appropriate its profits and property. The existence of any such influence, even if it is not actually exercised, would be sufficient to result in de facto control.
In the present situation, we are not aware of any circumstances that could lead to the conclusion that a person or group of persons had any direct or indirect influence that, if exercised, would result in de facto control of Opco on XXXXXXXXXX . Since we did not analyze all the relevant facts, legal documentation and information at that time, we can not provide you with a definitive conclusion on this issue.
Options and other rights:
Paragraph 251(5)(b) provides special rules in determining whether or not a corporation qualifies as a CCPC. In summary, this paragraph applies to treat a taxpayer who has a right under a contract, in equity or otherwise, to acquire shares of a corporation as being in the same position in relation to the control of the corporation as if the taxpayer owned the shares.
BCO has a right to acquire shares of Opco under article XXXXXXXXXX of the Agreement. If BCO owned those shares, it would not, by itself, make OPCO to be controlled by BCO. The rational is that the number of shares that BCO can acquire under this right is limited and the percentage of issued and outstanding shares of Opco that would be owned by BCO shall not exceed XXXXXXXXXX %.
The article XXXXXXXXXX of the Agreement provides the shareholders of Opco with a "right of first refusal". Although the wording in paragraph 251(5)(b) may be broad enough to include almost any buy-sell agreement, our longstanding position is to normally not apply this paragraph solely because of a "right of first refusal".
Hypothetical shareholder test:
The control test referred to in the definition of CCPC 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 or not a controlling group can be identified. To that end, paragraph (b) of the definition of a CCPC clarifies that a corporation is prevented from being a CCPC if the corporation would, if each share of the capital stock of a corporation that is owned by a non-resident person or a "public corporation" (other than a prescribed venture capital corporation) were owned by a particular person, be controlled by that particular person.
In the present situation, the shares of the capital stock of BCO and CCO were owned by "public corporations" on XXXXXXXXXX . If those shares had been owned by a particular person at that moment, Opco would not have been controlled by that particular person. This would also be the case if we considered BCO's right contained in article XXXXXXXXXX of the Agreement and paragraph 251(5)b).
Conclusion:
Provided that control of Opco did not exist by virtue of the holding of a right under paragraph 251(5)(b) other than those provided in the Agreement or by the existence of de facto control, we are the view that Opco was a CCPC on XXXXXXXXXX , because it was neither controlled by non-residents, public corporations nor a combination of non residents and public corporation and it would not, if a share of the capital stock of a corporation that was owned by a non-resident person or by a "public corporation" (other than "prescribed venture capital corporation") were owned by a particular person, be controlled by that particular person.
There is anecdotal evidence in the public domain which indicates that ACO controls Opco. We have no evidence of that in our de jure / de facto analysis. Notwithstanding that, our conclusion on the Opco CCPC status would be the same if it were controlled, directly or indirectly in any manner whatever, by ACO.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
We trust that these comments will be of assistance.
Yours truly,
Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
c.c.: XXXXXXXXXX
Large case manager
XXXXXXXXXX TSO
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