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.
Principal Issues:
If 2 of 3 members of a related group control a corporation, is the corporation a CCPC?
Position TAKEN:
The corporation is a CCPC.
Reasons FOR POSITION TAKEN:
The wording of the definition of CCPC only requires that the corporation not be controlled in fact by non-residents. There is no such control in the situation.
5-941905
XXXXXXXXXX D. Yuen
Attention: XXXXXXXXXX
December 8, 1994
Dear Sirs:
Re: Canadian-controlled Private Corporation Subsection 125(7) of the Income Tax Act (Canada)1
We are writing in response to your letter of July 25, 1994 wherein you requested an interpretation of whether a corporation would be a Canadian-controlled private corporation where shares of the corporation are held by non-resident persons in the following situation. The term "Canadian-controlled private corporation", as used here and subsequently, has the meaning assigned by subsection 125(7).
Situation
Xco is a company which is authorized to issue voting common shares and voting preferred shares. Xco is a private corporation which has the meaning assigned by subsection 89(1).
The voting common shares have the right to vote (one vote per share) and the right to fully participate in dividends and growth and are entitled to the residual value of Xco in a winding-up.
The voting preferred shares have the right to vote (one vote per share), have a discretionary, non-cumulative dividend and are redeemable and retractable for their issue price. The shares have first priority in a winding-up to the redemption value of the shares and thereafter have no rights to participate in the assets of Xco.
A is an individual resident in Canada who owns 100 voting preferred shares of Xco. B and C are individuals not resident in Canada who each own 50 voting common shares of Xco.
Xco's board of directors consists of A, B and D. D is resident in Canada and is not related to A, B or C.
Your Questions
If all the shareholders are related, is Xco controlled by a related group consisting of A, B and C for purposes of paragraph 251(5)(a) ?
If the related group consisting of A, B and C controls Xco, is Xco a Canadian-controlled private corporation ?
Does the fact that the voting preferred shares have limited rights of participation in the profits of Xco preclude Xco from qualifying as a Canadian-controlled private corporation ?
Since all the shareholders are related, each group (A, B and C; A and B; and A and C) would be a related group as defined in subsection 251(4) and would be deemed to control Xco pursuant to paragraph 251(5)(a).
Provided that the provisions of subsection 256(5.1) and paragraph 251(5)(b) are not applicable and that neither B nor C, individually, nor B and C, jointly, has legal or effective control over the board of directors of Xco in a manner similar to that described in the case of International Mercantile Factors Ltd. v. Her Majesty the Queen (F.C.T.D.) 90 DTC 6390, it is our view that Xco would be a Canadian-controlled private corporation since Xco is not controlled by one or more non-resident persons, by one or more public corporations or by any combination thereof.
The determination of whether a corporation is a Canadian-controlled private corporation depends on who controls or is deemed to control the corporation. The limited rights to participate in the profits of a corporation do not appear to affect the voting attributes of the shares. The existence of such limited rights would generally not affect the determination of de jure or legal control of the corporation which is based on the voting rights of the shares; however, the courts have looked to share attributes other than voting power in determining control of a corporation (for example, see Her Majesty The Queen v. Imperial General Properties Ltd. (S.C.C.) 85 DTC 5500). The limited participation rights may also be a factor in determining the de facto or effective control of the corporation under subsection 256(5.1). As the determination of control depends on the facts and circumstances of the particular situation, we are unable to comment on whether the limited participation rights of its preferred shares would affect the status of Xco as a Canadian-controlled private corporation. If A holds his shares primarily for the purpose of enabling Xco to meet the definition of Canadian-controlled private corporation, it is our view that the provisions of section 245 may be applicable.
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
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch
1 All statutory references in this letter are to the Income Tax Act, R.S.C. 1985 (5th Supp.) c. 1, as amended.
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