2 November 2010 External T.I. 2010-0382381E5 - De Facto Control, Subsection 256(5.1)

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 a corporation would have de facto control over another corporation in a particular situation.

Position: General comments provided only.

Reasons: It is always a question of fact whether or not a person or a group of persons can be said to have any direct or indirect influence that, if exercised, would result in control in fact of a corporation.

XXXXXXXXXX
									2010-038238
            							U.Chalupa

November 2, 2010

Dear XXXXXXXXXX :

Re: De Facto Control

This is in reply to your email dated October 1, 2010 in which you requested Canada Revenue Agency's (hereinafter "CRA") comments on the potential application of paragraph 256(5.1) of the Income Tax Act (the "Act") in a particular case.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.

Facts:

In your email, you briefly described the facts of a situation as follows:

• Company A is a Canadian-controlled private corporation (hereinafter "CCPC") that carries on a "specified investment business" as defined in subsection 125(7). It is wholly-owned by an individual ("Parent").
• Company B is a CCPC owned as follows:
  • XXXXXXXXXX % by Company A;
  • XXXXXXXXXX % by Company C;
  • XXXXXXXXXX % by an employee of Company A ("Employee");
  • XXXXXXXXXX % by a third party not related to either Parent, the child of Parent ("Child") or Employee.
• Company C is a CCPC carrying on a specified investment business and is wholly-owned by Child.
• Employee is not related to Parent or Child.
• Parent, Child and Employee are employees of Company A.

In the circumstances described above, you asked whether the CRA would consider Company A to have de facto control of Company B.

Our comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The particular situation outlined in your letter appears to be a factual one, involving specific taxpayers and completed transactions. Accordingly, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we offer the following general comments.

The notion of control in fact is defined in subsection 256(5.1) and applies to all the provisions of the Act which contain the expression "controlled, directly or indirectly in any manner whatever". The CRA has formulated general comments in paragraphs 19 to 23 of Interpretation Bulletin IT-64R4 on the notion of control in fact mentioned in subsection 256(5.1). Paragraph 23 of this Bulletin contains a list of certain general factors that may be relevant to determine whether control in fact exists. This paragraph reads as follows:

23. Whether a person or group of persons can be said to have de facto control of a corporation, notwithstanding that they do not legally control more than 50 per cent of its voting shares, will depend on each factual situation. The following are some general factors that may be used in determining whether de facto control exists:

(a) the percentage of ownership of voting shares (when such ownership is not more than 50 per cent) in relation to the holdings of other shareholders;

(b) ownership of a large debt of a corporation which may become payable on demand (unless exempted by subsection 256(3) or (6)) or a substantial investment in retractable preferred shares;

(c) shareholder agreements including the holding of a casting vote;

(d) commercial or contractual relationships of the corporation, e.g., economic dependence on a single supplier or customer;

(e) possession of a unique expertise that is required to operate the business; and

(f) the influence that a family member, who is a shareholder, creditor, supplier, etc., of a corporation, may have over another family member who is a shareholder of the corporation.

Although the degree of influence in (f) 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 to related persons. However, with respect to siblings, unless the facts indicate otherwise, generally one sibling would not be considered to have influence over another.

In addition to the general factors described above, the composition of the board of directors and the control of day-to-day management and operation of the business would be considered.

For example, in Taber Solids Control (1998) Ltd. v. The Queen, 2009 DTC 1343, the Tax Court of Canada took into account factors such as operational control, economic dependence and family relations to conclude that de facto control existed in the context of the associated corporations rules.

In addition, as explained in document 2008-285211C6, "(...) the jurisprudence has established that control in fact of a corporation could generally result from three major types of influence, which is moral influence, economic influence and contractual influence". De facto control may even exist without the ownership of any shares.

Consequently, it is always a question of fact whether or not a person or a group of persons can be said to have any direct or indirect influence that, if exercised, would result in control in fact of a corporation. This can be determined only after an analysis of all the facts and circumstances relating to a particular situation.

Based on the limited information provided with your request, we are unable to provide you with more comments on the potential application of subsection 256(5.1) in your particular situation.

We trust that the foregoing will be of assistance to you.

Yours truly,

Stéphane Prud'Homme, LL.B, M. Fisc.
Manager
Mergers and Acquisitions Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch