24 March 2017 External T.I. 2016-0662381E5 F - Control - unanimous shareholders agreement

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125(7); 251(5)(b)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Issues: 1. Whether paragraph 251(5)(b) would apply to the situations described considering the different provisions of a shareholders’ agreement? If yes, how would paragraph 251(5)(b) be applied?
2. Where there is a unanimous shareholders’ agreement in which there is a provision stating that the group of Canadian residents will designate two directors and a non-resident will designate two directors, whether the non-resident may have the control if the non-resident is deemed to own more than 50% of the voting shares of the capital stock of a corporation.

Position: 1. In some situations, the non-resident would have a right described in paragraph 251(5)(b). In the situations described in which paragraph 251(5)(b) would apply, it appears appropriate to consider the rights with respect to the shares held by all the other shareholders of the corporation.
2. Following the decision in the Bagtech case, we would take into account a provision of designation and nomination of the directors that is included in an unanimous shareholders’ agreement to determine the effective control where a non-resident is deemed to own more than 50% but less than 100% of the voting shares of the capital stock of a corporation except in the situations where it is not appropriate. However, when the non-resident is deemed to own 100% of the shares, we would not take such a provision into account because the non-resident would be deemed to be the only shareholder of the corporation.

Reasons: 1. It depends on the facts and the provisions described in the agreement. 2. The Bagtech case.

XXXXXXXXXX						2016-066238
							Sylvie Labarre, CPA, CA
March 24, 2017

Dear Sir,

Subject: Canadian-controlled private corporation

This letter is in response to your letter dated August 12, 2016, in which you requested our views as to the qualification of a corporation as a "Canadian-controlled private corporation" within the meaning of subsection 125(7) of the Income Tax Act (hereinafter the "Act") in each of the following hypothetical situations.

Unless otherwise indicated, all legislative references in this letter are references to the provisions of the Act.

Hypothetical Situations

1. The only voting and participating shares of a Canadian corporation ("Opco") belong as to 50% to a "non-resident", as defined in subsection 248(1), and as to 50% in total (irrespective of distribution) by three Canadian residents.

2. There is a "unanimous shareholder agreement," as defined in the corporate statutes, under which the two groups of shareholders, the non-resident and the residents, agree that the board of directors of Opco will consist of four members, with two directors appointed by the non-resident, and two directors jointly appointed by the residents regardless of their number.

3. In the same agreement or in a second agreement that may or may not be a "unanimous shareholder agreement," reciprocal rights to purchase shares are granted by the non-resident and residents in the event of the "compulsory withdrawal" of one of the shareholders, with that expression including fraud, theft and similar events.

4. To the extent that the compulsory withdrawal event occurred for one of the resident shareholders (the "defaulted shareholder"), you would like to know the position of the Canada Revenue Agency (the "CRA") respecting the status of Opco as a "Canadian-controlled private corporation" in the following three hypothetical situations:

(a) Situation 1: the right of purchase granted to the non-resident would be suspended for a period of time, say 10 or 15 days, following the withdrawal event, during which other resident shareholders could acquire the shares of the defaulted shareholder. If the shares of the defaulted shareholder were thereby acquired by the other resident shareholders, the non-resident's rights could not be exercised and the agreement(s), including equal representation on the board, would continue to apply to the three remaining shareholders.

(b) Situation 2: the right of purchase granted to the non-resident would be suspended for a period of time, say 10 or 15 days, from the withdrawal event, during which time the remaining resident shareholders could acquire the shares of the defaulted shareholder. Resident shareholders would not proceed with their priority purchase right and the shares of the defaulted shareholder would instead be acquired by the non-resident. In this case, the agreement(s) would continue to apply to the remaining three shareholders, including the equal appointment of the four directors of Opco by the two groups, i.e., the non-resident who would own more than 50% of the voting and participating shares of Opco, and the two resident shareholders who together would own less than 50% of the voting and participating shares in the capital stock of Opco.

(c) Situation 3: the right of purchase granted to the non-resident would be suspended for a period of time, say 10 or 15 days, from the withdrawal event, during which the other resident shareholders could acquire the shares of the defaulting shareholder. If the defaulted shareholder's shares were not acquired by the other resident shareholders, they would be required to offer their own shares to the non-resident who could purchase them in addition to the shares of the defaulted shareholder.

5. Alternatively, the agreement would not accord any right to purchase shares to the non-resident in the event of a "compulsory withdrawal" of a resident shareholder, as described in paragraph 3, but rather provide for redemption rights/obligations and forced sales rights. You wish to know the CRA's position respecting Opco's "Canadian-controlled private corporation" status in the following four hypothetical situations:

(a) Situation 4: Opco would have the right, exercised by a decision of the Board, to purchase for cancellation the shares of the defaulted shareholder at a determined value ["valeur escomptée"]. If the right of redemption were exercised by Opco, the agreement(s) would continue to apply to the three remaining shareholders, including for the equal appointment of the four Directors of Opco by the two groups, i.e., by the non-resident shareholder who would own more than 50% of the voting and participating shares in the capital stock of Opco, and by the two resident shareholders who together would own less than 50% of the voting shares and participating shares in the capital stock of Opco.

(b) Situation 5: Opco would be obligated to purchase for cancellation the shares of the defaulted shareholder at a determined value. In such case, the agreement(s) would continue to apply to the three remaining shareholders, including for the equal appointment of the four directors of Opco by the two groups, i.e., by the non-resident who would own more than 50% of the voting and participating shares in the capital stock of Opco, and by the two resident shareholders who together would own less than 50% of the voting and participating shares in the capital stock of Opco.

(c) Situation 6: the resident shareholders would be entitled to purchase the shares of the defaulted shareholder. If they did not purchase the shares of the defaulted shareholder within 10 or 15 days of the withdrawal event, the non-resident would have the right to require the defaulted shareholder to sell the shares of the defaulted shareholder at a determined value to a Canadian resident not related to the non-resident and on which the non-resident did not exercise de facto control, and would have the right to require the remaining shareholders to approve this new shareholder. The non-resident would have the option of selecting and imposing this new "partner" on Opco.

(d) Situation 7: the resident shareholders would have the right to purchase the shares of the defaulted shareholder. If they did not purchase the shares of the defaulted shareholder within 10 or 15 days of the withdrawal event, the non-resident would have the right to require the three resident shareholders of Opco to purchase the shares of the non-resident at fair market value plus a premium, e.g., 5%.

Our Comments

This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

For the purposes of this letter, we have assumed that the shareholders resident in Canada would not be public corporations. We also have assumed that the non-resident would not have de facto control of Opco notwithstanding the clauses described above under "Hypothetical Situations."

In the situations provided, Opco would not be a Canadian-controlled private corporation if it were controlled directly or indirectly, in any way whatever, by the non-resident.

For the purpose of determining control, it is necessary inter alia to take into account any unanimous shareholder agreement. In your hypothetical situations, you indicated that there was a "unanimous shareholder agreement", as defined in the corporate laws. You also stated that under this agreement, the two groups of shareholders, the non-resident and the residents, agreed that the board of directors of Opco would be composed of four members, namely, two directors designated by the non-resident, and two directors jointly appointed by the residents, regardless of their number.

Following the decision of the Federal Court of Appeal in The Queen v. Bioartificial Gel Technologies (Bagtech) Inc., 2013 FCA 164, we accept, where appropriate, taking into account a directors' appointment and appointment clause in the unanimous shareholder agreement in determining whether a person controls a corporation. However, in certain situations, the CRA may consider that there exist avoidance transactions that would directly or indirectly result in an abuse of the provisions of the Act for the purposes of the application of subsection 245(2).

On the other hand, there may be other clauses in a unanimous shareholder agreement modifying the effective control of Opco through the actual or deemed holding of the voting shares in the capital stock of Opco. As we do not have information on such clauses, we will only consider the clause for the designation and appointment of directors for the current purposes.

In addition, for the purposes of the definition of "Canadian-controlled private corporation" under subsection 125(7), all relevant documentation should be reviewed to determine whether a person has a right referred to in subparagraph 251(5)(b)(i) or (ii) under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently. For the current purposes, we will consider more specifically whether paragraph 251(5)(b) applies to the non-resident.

Situations 1 and 2

In our view, the non-resident would have a right referred to in subparagraph 251(5)(b)(i) in respect of the shares in the capital stock of the corporation. It would be deemed to be in the same position in relation to control of the corporation as if it were the holder of the shares at that time. In the circumstances, we consider it appropriate to consider this presumption in light of the rights of the non-resident in respect of the shares of all other holders. Thus, on that basis, the non-resident would have rights to all the shares because the non-resident would have rights to the shares of each of the resident shareholders if each of them became a defaulted shareholder. However, even if the non-resident was deemed to own 100% of the voting shares in the capital stock of the corporation, it would be necessary to determine whether the non-resident had effective control of Opco based on the unanimous shareholder agreement. In a situation where the non-resident would have been deemed to hold more than 50% but less than 100% of the voting shares, the clause for the designation and appointment of directors in the unanimous shareholders' agreement could prevent the non-resident from exercising control of the corporation (subject to the other clauses of the unanimous shareholder agreement and the review of all facts relating to the particular situation). However, given that the non-resident would be deemed to own 100% of the shares, we could conclude that this designation and appointment of directors or even the unanimous shareholder agreement would no longer apply in this situation. Therefore, Opco would not be a Canadian-controlled private corporation in these situations.

Situation 3

In our view, the non-resident would have a right referred to in subparagraph 251(5)(b)(i) in respect of the shares in the capital stock of the corporation. The non-resident would be deemed to be in the same position with respect to control of the corporation as if the non-resident were the owner of the shares at that time. The non-resident would be deemed to own 100% of the voting shares in the capital stock of the corporation. We also understand that the directors' designation and appointment clause in the unanimous shareholder agreement would no longer preclude the non-resident from exercising control of the corporation as it would be deemed to own 100% of the voting shares in the capital stock of Opco in the presented situation. Therefore, Opco would not be a Canadian-controlled private corporation in this situation.

Situation 4

Paragraph 251(5)(b) would not appear to apply to this situation taking into account only the clause referred to in paragraph 5(a) under "Hypothetical Situations." Therefore, the non-resident would not be deemed to control the corporation solely because of this clause, and subject to any other clause or agreement, the corporation would be a Canadian-controlled private corporation. On the other hand, there may be other clauses or agreements that could give the non-resident an additional right when there was an impasse in reaching a decision of the board of directors, so that the non-resident would have a right described in subparagraph 251(5)(b)(ii). If this were the case, our conclusion would be different taking into account that all the other shareholders could be defaulted shareholders.

Situation 5

In such a situation, it would be necessary to determine whether the non-resident had the right to require Opco to acquire or cancel the shares in its capital stock if it did not effect the required purchase for cancellation, or if the non-resident had control over the triggering of an event that would entail an obligation to purchase for cancellation. If so, paragraph 251(5)(b) would apply to Situation 5. The non-resident would be deemed to be in the same position with respect to the control of the corporation as if it were the holder of the shares at that time. The non-resident would be deemed to own 100% of the voting shares in the corporation's capital stock since all of the other shareholders could be defaulted shareholders. We also understand that the directors' designation and appointment clause in the unanimous shareholder agreement would no longer preclude the non-resident from exercising control of the corporation as it would be deemed to own 100% of the voting shares in the capital stock of Opco in the presented situation. Therefore, Opco would not be a Canadian-controlled private corporation in this situation.

Situation 6

Paragraph 251(5)(b) does not appear to apply to the presented situation solely as a result of the existence of the clause referred to in paragraph 5(c) under "Hypothetical Situations" section. Consequently, the non-resident would not be deemed to control the corporation solely as a result of this clause and, subject to any other clause or agreement, the corporation would be a Canadian-controlled private corporation.

Situation 7

Paragraph 251(5)(b) does not appear to apply to the situation presented solely as a result of the existence of the clause referred to in paragraph 5(d) under "Hypothetical Situations." Consequently, the non-resident would not be deemed to control the corporation solely because of this clause and, subject to any other clause or agreement, the corporation would be a Canadian-controlled private corporation.

We hope that our comments will be of assistance.

Urszula Chalupa, LL.B, M. Fisc.
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Branch

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Text of Severed Letter

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.

Principales Questions: 1. Whether paragraph 251(5)(b) would apply to the situations described considering the different provisions of a shareholders’ agreement? If yes, how would paragraph 251(5)(b) be applied?
2. Where there is a unanimous shareholders’ agreement in which there is a provision stating that the group of Canadian residents will designate two directors and a non-resident will designate two directors, whether the non-resident may have the control if the non-resident is deemed to own more than 50% of the voting shares of the capital stock of a corporation.

Position Adoptée: 1. In some situations, the non-resident would have a right described in paragraph 251(5)(b). In the situations described in which paragraph 251(5)(b) would apply, it appears appropriate to consider the rights with respect to the shares held by all the other shareholders of the corporation.
2. Following the decision in the Bagtech case, we would take into account a provision of designation and nomination of the directors that is included in an unanimous shareholders’ agreement to determine the effective control where a non-resident is deemed to own more than 50% but less than 100% of the voting shares of the capital stock of a corporation except in the situations where it is not appropriate. However, when the non-resident is deemed to own 100% of the shares, we would not take such a provision into account because the non-resident would be deemed to be the only shareholder of the corporation.

Raisons: 1. It depends on the facts and the provisions described in the agreement. 2. The Bagtech case.

XXXXXXXXXX						2016-066238
							Sylvie Labarre, CPA, CA
Le 24 mars 2017

Monsieur,

Objet : Société privée sous contrôle canadien

La présente est en réponse à votre lettre du 12 août 2016 dans laquelle vous nous demandez notre opinion quant à la qualification d’une société à titre de « société privée sous contrôle canadien » au sens du paragraphe 125(7) de la Loi de l’impôt sur le revenu (ci-après la « Loi ») dans chacune des situations hypothétiques suivantes.

À moins d’indication contraire, tous les renvois législatifs dans la présente sont des renvois aux dispositions de la Loi.

Situations hypothétiques

1. Les seules actions votantes et participantes d’une société canadienne (« Opérante ») appartiendraient à hauteur de 50 % à un « non-résident », au sens donné à cette expression au paragraphe 248(1), et à hauteur de 50 % à trois résidents canadiens, quelle que soit la répartition entre eux.

2. Il existerait une « convention unanime des actionnaires », au sens donné à cette expression par les lois corporatives, aux termes de laquelle les deux groupes d’actionnaires, soit le non-résident et les résidents, conviendraient que le conseil d’administration d’Opérante serait composé de quatre membres, soit deux administrateurs désignés par le non-résident et deux administrateurs désignés conjointement par les résidents, peu importe leur nombre.

3. Dans la même convention ou dans une seconde convention qui pourrait être ou non une « convention unanime des actionnaires », des droits réciproques d’achat d’actions seraient consentis par le non-résident et les résidents advenant le « retrait des affaires » de l’un des actionnaires, telle expression incluant la fraude, le vol et autre événement semblable.

4. Dans la mesure où l’événement de retrait des affaires se produirait à l’égard de l’un des actionnaires résidents (« l’actionnaire défaillant »), vous désirez connaître la position de l’Agence du revenu du Canada (« ARC ») quant au statut d’Opérante à titre de « société privée sous contrôle canadien » dans les trois situations hypothétiques suivantes :

a) Situation 1 : le droit d’achat conféré au non-résident serait suspendu pendant un certain temps, disons 10 ou 15 jours de l’événement de retrait, période durant laquelle les autres actionnaires résidents pourraient acquérir les actions de l’actionnaire défaillant. Si les actions de l’actionnaire défaillant étaient ainsi acquises par les autres actionnaires résidents, le droit du non-résident ne pourrait être exercé et la ou les conventions, incluant la représentation égale au conseil, continuerait(ent) de s’appliquer à l’égard des trois actionnaires restants.

b) Situation 2 : le droit d’achat conféré au non-résident serait suspendu pendant un certain temps, disons 10 ou 15 jours de l’événement de retrait, période durant laquelle les autres actionnaires résidents pourraient acquérir les actions de l’actionnaire défaillant. Les actionnaires résidents ne procèderaient pas avec leur droit d’achat prioritaire et les actions de l’actionnaire défaillant seraient plutôt acquises par le non-résident. Dans ce cas, la ou les conventions continuerait(ent) de s’appliquer à l’égard des trois actionnaires restants, incluant la nomination égale des quatre administrateurs d’Opérante par les deux groupes, soit le non-résident qui possèderait plus de 50 % des actions votantes et participantes d’Opérante et les deux actionnaires résidents qui ensemble possèderaient moins de 50 % des actions votantes et participantes du capital-actions d’Opérante.

c) Situation 3 : le droit d’achat conféré au non-résident serait suspendu pendant un certain temps, disons 10 ou 15 jours de l’événement de retrait, période durant laquelle les autres actionnaires résidents pourraient acquérir les actions de l’actionnaire défaillant. Si les actions de l’actionnaire défaillant n’étaient pas acquises par les autres actionnaires résidents, ceux-ci devraient offrir leurs actions au non-résident qui pourrait les acheter en plus des actions de l’actionnaire défaillant.

5. Alternativement, la convention ne prévoirait aucun droit d’achat d’actions au non-résident en cas d’un « retrait des affaires », tel que décrit au paragraphe 3, d’un actionnaire résident, mais plutôt des droits/obligations de rachat et des droits de vente forcée. Vous désirez connaître la position de l’ARC quant au statut d’Opérante à titre de « société privée sous contrôle canadien » dans les quatre situations hypothétiques suivantes :

a) Situation 4 : Opérante aurait le droit de procéder à l’achat et à l’annulation des actions de l’actionnaire défaillant à une valeur escomptée, droit qui s’exercerait par une décision du conseil. Si le droit de rachat était exercé par Opérante, la ou les conventions continuerait(ent) de s’appliquer à 1’égard des trois actionnaires restants, incluant la nomination égale des quatre administrateurs d’Opérante par les deux groupes, soit le non-résident qui possèderait plus de 50 % des actions votantes et participantes du capital-actions d’Opérante et les deux actionnaires résidents qui ensemble possèderaient moins de 50 % des actions votantes et participantes du capital-actions d’Opérante.

b) Situation 5 : Opérante aurait l’obligation de procéder à l’achat et à l’annulation des actions de l’actionnaire défaillant à une valeur escomptée. Dans un tel cas, la ou les conventions continuerait(ent) de s’appliquer à 1’égard des trois actionnaires restants, incluant la nomination égale des quatre administrateurs d’Opérante par les deux groupes, soit le non-résident qui possèderait plus de 50 % des actions votantes et participantes du capital-actions d’Opérante et les deux actionnaires résidents qui ensemble possèderaient moins de 50 % des actions votantes et participantes du capital-actions d’Opérante.

c) Situation 6 : les actionnaires résidents auraient le droit d’acheter les actions de l’actionnaire défaillant. S’ils n’achetaient pas les actions de l’actionnaire défaillant dans les 10 ou 15 jours de l’événement de retrait, le non-résident aurait le droit de forcer l’actionnaire défaillant à vendre ses actions à valeur escomptée à un résident canadien non lié au non-résident et sur lequel le non-résident n’exercerait pas de contrôle de facto et aurait le droit de forcer les actionnaires restants à accepter ce nouvel actionnaire. Le non-résident aurait l’option de choisir et d’imposer son nouvel « associé » dans Opérante.

d) Situation 7 : les actionnaires résidents auraient le droit d’acheter les actions de l’actionnaire défaillant. S’ils n’achetaient pas les actions de l’actionnaire défaillant dans les 10 ou 15 jours de l’événement de retrait, le non-résident aurait le droit de forcer les trois actionnaires résidents ou Opérante à acheter les actions du non-résident à la juste valeur marchande plus une prime, par exemple 5 %.

Nos commentaires

La présente interprétation technique offre des commentaires généraux sur des dispositions contenues dans la Loi et d’autres lois connexes, le cas échéant. Elle n’a pas comme but de confirmer le traitement fiscal relativement à une situation donnée mettant en cause un contribuable en particulier, mais plutôt de vous aider à le déterminer. Notre Direction ne confirme le traitement fiscal relatif aux opérations données d’un contribuable en particulier que dans le cadre d’une demande de décision anticipée en matière d’impôt sur le revenu présentée de la façon décrite dans la circulaire d’information IC 70-6R7, Décisions anticipées et interprétations techniques en matière d’impôt.

Aux fins de la présente, nous prenons comme hypothèse que les actionnaires résidents du Canada ne seraient pas des sociétés publiques. Nous prenons également comme hypothèse que le non-résident n’aurait pas le contrôle de fait d’Opérante et ne l’aurait pas non plus malgré les clauses mentionnées dans la section « Situations hypothétiques ».

Dans la présente situation, Opérante ne serait pas une société privée sous contrôle canadien si elle était contrôlée directement ou indirectement, de quelque façon que ce soit, par le non-résident.

Aux fins de la détermination du contrôle, il faudrait, entre autres, tenir compte de toute convention unanime des actionnaires. Dans vos situations hypothétiques, vous nous indiquez qu’il existerait une « convention unanime des actionnaires », au sens donné à cette expression par les lois corporatives. Vous mentionnez également qu’aux termes de cette convention, les deux groupes d’actionnaires, soit le non-résident et les résidents, conviendraient que le conseil d’administration d’Opérante serait composé de quatre membres, soit deux administrateurs désignés par le non-résident et deux administrateurs désignés conjointement par les résidents, peu importe leur nombre.

À la suite de la décision rendue par la Cour d’appel fédérale dans l’affaire La Reine c. Bioartificial Gel Technologies (Bagtech) Inc., 2013 FCA 164, nous acceptons, lorsqu’approprié, de tenir compte d’une clause de désignation et nomination des administrateurs faisant partie de la convention unanime des actionnaires pour déterminer si une personne contrôle une société. Cependant, dans certaines situations, l’ARC pourrait considérer qu’il existe des opérations d’évitement qui entraîneraient, directement ou indirectement, un abus des dispositions de la Loi pour les fins d’appliquer le paragraphe 245(2).

Par contre, il pourrait y avoir d’autres clauses dans une convention unanime entre actionnaires modifiant le contrôle effectif d’Opérante par rapport à la détention réelle ou présumée des actions votantes du capital-actions d’Opérante. Comme nous n’avons pas d’information sur de telles clauses, nous tiendrons compte uniquement de celle portant sur la désignation et la nomination des administrateurs aux fins de la présente.

Par ailleurs, pour l’application de la définition de « société privée sous contrôle canadien » au paragraphe 125(7), il faudrait examiner tous les documents pertinents pour savoir si une personne, en vertu d’un contrat, en equity ou autrement, a un droit, immédiat ou futur, conditionnel ou non visé à l’un des sous-alinéas 251(5)b)(i) ou (ii). Aux fins de la présente, nous allons considérer plus spécifiquement si le non-résident est visé par l’alinéa 251(5)b).

Situations 1 et 2

À notre avis, le non-résident aurait un droit visé au sous-alinéa 251(5)b)(i) à l’égard des actions du capital-actions de la société. Il serait réputé occuper la même position relativement au contrôle de la société que s’il était propriétaire des actions à ce moment. Dans les circonstances, il nous apparaît approprié de considérer cette présomption en tenant compte des droits du non-résident à l’égard des actions de tous les autres détenteurs. Ainsi, sur cette base, le non-résident aurait des droits sur la totalité des actions car il aurait des droits sur les actions de chacun des actionnaires résidents si chacun de ces derniers devenait un actionnaire défaillant. Cependant, même si le non-résident était réputé être propriétaire de 100 % des actions votantes du capital-actions de la société, il faudrait voir s’il a le contrôle effectif d’Opérante en raison de la convention unanime entre actionnaires. Dans une situation où le non-résident aurait été réputé détenir plus de 50 % des actions votantes mais moins de 100 % de celles-ci, la clause de désignation et nomination des administrateurs de la convention unanime des actionnaires aurait pu l’empêcher d’exercer le contrôle de la société (sous réserve des autres clauses de la convention unanime des actionnaires et de l’examen de tous les faits relatifs à une situation donnée). Cependant, étant donné qu’il serait réputé propriétaire de 100 % des actions, nous pourrions conclure que cette clause de désignation et nomination des administrateurs ou même la convention unanime entre actionnaires ne s’appliqueraient plus dans la présente situation. Donc, Opérante ne serait pas une société privée sous contrôle canadien dans ces situations.

Situation 3

Situation 4

L’alinéa 251(5)b) ne semble pas s’appliquer à la présente situation du seul fait de l’existence de la clause mentionnée au paragraphe 5a) de la section « Situations hypothétiques ». Par conséquent, le non-résident ne serait pas réputé contrôler la société uniquement en raison de cette clause et sous réserve de toute autre clause ou entente, la société serait une société privée sous contrôle canadien. Par contre, il pourrait exister d’autres clauses ou ententes qui pourraient donner au non-résident un droit supplémentaire lorsqu’il y a impasse de la décision du conseil d’administration de manière à ce que ce soit le non-résident qui ait le droit prévu au sous-alinéa 251(5)b)(ii). Si tel était le cas, notre conclusion serait différente en tenant compte du fait que tous les autres actionnaires pourraient être des actionnaires défaillants.

Situation 5

Dans une telle situation, il faudrait voir si le non-résident a le droit d’obliger Opérante à acquérir ou annuler les actions de son capital-actions si cette dernière ne procédait pas à l’achat et annulation obligatoire ou si le non-résident a le contrôle sur le déclenchement d’un événement qui entraînerait l’obligation d’achat et d’annulation. Dans l’affirmative, l’alinéa 251(5)b) s’appliquerait à la situation 5. Le non-résident serait réputé occuper la même position relativement au contrôle de la société que s’il était propriétaire des actions à ce moment. Le non-résident serait réputé propriétaire de 100 % des actions votantes du capital-actions de la société puisque tous les autres actionnaires pourraient être des actionnaires défaillants. Nous comprenons également que la clause de désignation et nomination des administrateurs de la convention unanime des actionnaires ne pourrait plus l’empêcher d’exercer le contrôle de la société puisqu’il serait réputé détenir 100 % des actions votantes du capital-actions d’Opérante dans la présente situation. Donc, Opérante ne serait pas une société privée sous contrôle canadien dans cette situation.

Situation 6

L’alinéa 251(5)b) ne semble pas s’appliquer à la présente situation du seul fait de l’existence de la clause mentionnée au paragraphe 5c) de la section « Situations hypothétiques ». Par conséquent, le non-résident ne serait pas réputé contrôler la société uniquement en raison de cette clause et sous réserve de toute autre clause ou entente, la société serait une société privée sous contrôle canadien.

Situation 7

L’alinéa 251(5)b) ne semble pas s’appliquer à la présente situation du seul fait de l’existence de la clause mentionnée au paragraphe 5d) de la section « Situations hypothétiques ». Par conséquent, le non-résident ne serait pas réputé contrôler la société uniquement en raison de cette clause et sous réserve de toute autre clause ou entente, la société serait une société privée sous contrôle canadien.

Nous espérons que nos commentaires vous seront utiles.

Urszula Chalupa, LL.B, M. Fisc.
pour le directeur
Division des réorganisations
Direction des décisions en impôt
Direction générale de la politique législative et
des affaires réglementaires

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) - Subparagraph 251(5)(b)(i)

highly contingent secondary call right of a non-resident on shares of minority residents undercuts for CCPC purposes their USA right to appoint half the board

The only voting and participating shares of a Canadian corporation ("Opco") are held 50% by a non-resident, and 50% by three Canadian residents. A unanimous shareholder agreement (USA) provides that the four directors will consist of two members appointed by the non-resident, and two directors jointly appointed by the residents (even if their aggregate shareholding falls well below 50%.) It also was agreed that on specified events such as fraud or theft and similar events, a resident shareholder (a "defaulted shareholder") would be required to withdraw and, in the case of a resident defaulted shareholder, that would give rise to a right of the non-resident to acquire the defaulted shareholder’s shares.

Situation 1

The non-resident’s right of purchase would be suspended for, say, 15 days, following the withdrawal event, during which other resident shareholders could acquire the shares of the defaulted shareholder, in which case, the non-resident's purchase rights and the agreement respecting equal board representation would continue to apply.

Situation 2

Same as Situation 1 except that resident shareholders would not exercise their priority purchase right, so that the defaulted shareholder’s shares would instead be acquired by the non-resident (but with the equal representation agreement still applying).

Situation 3

The same as Situation 1 except that if the defaulted shareholder's shares were not acquired by the other resident shareholders, they would be required to offer their own shares to the non-resident who could purchase them in addition to the shares of the defaulted shareholder.

Situation 6

If the resident shareholders did not exercise their entitlement to purchase the shares of the defaulted shareholder, the non-resident could require the defaulted shareholder to sell its shares at a determined value to an unrelated Canadian resident selected by the non-resident

Situation 7

If the resident shareholders did not purchase the shares of the defaulted shareholder within 15 days of the withdrawal event, the non-resident could require them to purchase the non-resident’s shares at fair market value plus a 5% premium.

Would Opco qualify as a CCPC?

CRA Response

After stating that, “following…Bagtech…we accept, where appropriate, taking into account a directors' appointment and appointment clause in the [USA] in determining whether a person controls a corporation,” CRA addressed the particular Situations.

Situations 1 and 2

CRA considered that the non-resident would have rights to all the Opco shares because the non-resident would have rights to the shares of each of the resident shareholders upon becoming a defaulted shareholder. As the deemed 100% shareholder, the clause for the designation and appointment of directors would no longer apply, so that Opco would not be a CCPC.

Situation 3

As in Situations 1 and 2, the directors' designation and appointment clause in the unanimous shareholder agreement would no longer preclude the non-resident from exercising control of the Opco as it would be deemed to own all the Opco shares.

Situations 6 and 7

S. 251(5)(b) would not apply solely as a result of the existence of the indicated clauses, so that Opco would be a CCPC.

Summary Under

Tax Topics - Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) - Subparagraph 251(5)(b)(ii)

no application if non-resident under USA cannot control board decision to redeem residents’ shares – applies if automatic redemption requirement

CRA addressed the application of s. 251(5)(b)(i) to a number of scenarios respecting a contingent right of the non-resident to acquire the shares of a defaulted shareholder. In addition, CRA was asked about the following scenarios.

Situation 4

Opco would have the right, exercised by a decision of the Board, to purchase for cancellation the shares of the defaulted shareholder at a determined value, in which case the equal board representation agreement would continue to apply (notwithstanding that the two resident shareholders would together would own less than 50% of the voting shares.)

Situation 5

Same as Situation 4 except that Opco would be obligated to purchase for cancellation the shares of the defaulted shareholder at the determined value.

Would Opco qualify as a CCPC?

CRA Response

After stating that, “following… Bagtech …we accept, where appropriate, taking into account a directors' appointment and appointment clause in the [USA] in determining whether a person controls a corporation,” CRA addressed these Situations.

Situation 4

S. 251(5)(b) would not apply taking into account only the indicated clause, so that Opco would be a CCPC.

Situation 5

[I]t would be necessary to determine whether the non-resident had the right to require Opco to acquire or cancel the shares in its capital stock if it did not effect the required purchase for cancellation, or if the non-resident had control over the triggering of an event that would entail an obligation to purchase for cancellation. … The non-resident would be deemed by s. 251(5)(b) to own 100% of the Opco voting shares (since the other shareholders could be defaulted shareholders), so that the directors' designation and appointment clause would no longer preclude the non-resident from exercising control of Opco. Thus, Opco would not be a CCPC.

Summary Under

Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Canadian-Controlled Private Corporation

non-resident would control notwithstanding USA board appointment right of residents due to its secondary call right on their shares or right to require corp to honour automatic redemption clause

A mooted Canadian-controlled private corporation (Opco) had its voting common shares held 50-50 by a single non-resident, and by three Canadian residents. CRA accepted (following Bagtech) that a clause in the unanimous shareholder agreement that gave the three residents the right to jointly appoint two of the four directors would have avoided de jure control by the non-resident even if their collective shareholding fell below 50%.

However, CRA found that a contingent right of the non-resident to acquire the shares of a “defaulted shareholder” (e.g., on the discovery of fraud or theft) disqualified Opco as a CCPC (even though this (secondary) call right was exercisable only after failure of the other resident shareholders to exercise their first call right following the default): this represented a contingent right to acquire each resident shareholder’s shares, so that the non-resident was deemed by s. 251(5)(b)(i) to be a 100% shareholder. As a deemed sole shareholder, it no longer would be subject to the board representation clause, so that it would have an unfettered right (in this remote scenario) to appoint a majority of the board.

S. 251(5)(b)(ii) refers to a right of a shareholder (here, in the context of an alternative scenario, the non-resident) “to cause” the corporation (Opco) to redeem the shares of another shareholder (i.e., the shares of a defaulted shareholder). CRA considered that s. 251(5)(b)(ii) would apply even where there was an automatic USA requirement on Opco to redeem shares of a defaulted shareholder (rather than only as required by the non-resident) because the non-resident would have the right to require Opco to do so if it did not fulfill its obligation to do so automatically.

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24 March 2017 External T.I. 2016-0662381E5 F - Control - unanimous shareholders agreement

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Situation 1

Situation 2

Situation 3

Situation 6

Situation 7

CRA Response

Situations 1 and 2

Situation 3

Situations 6 and 7

Situation 4

Situation 5

CRA Response

Situation 4

Situation 5