20 October 1989 Income Tax Severed Letter AC74266 - Control by a Significant Shareholder

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.

Stella M. Kotlar                              Specialty Rulings
Director                                      Directorate
Registered Pension and                        S. Leung
Deferred Income Plan Division                 957-2116
Registration Directorate                   

Attention:  A Richardson                      7-4266

Determination of Whether Significant Shareholders Control a Company File # HAU 8224-3-(d) HAU 8199-9

This memorandum is in response to yours, dated August 21, 1989 with respect to the above referenced subject matter. In particular, you have requested our opinion on

  (a)    the applicability of subsection 256(5.1) of the Income
         Tax Act (the Act) to paragraph 8(d) of Information
         Circular  72-13R8 (the IC);

  (b)    the administrative rules that you have been using to
         date to determine whether a significant shareholder
         controls a company; and 

  (c)    whether we agree with you that the shareholder in the
         following situation controls Co. A.  The individual owns
         30% of the voting shares of the parent of the parent
         corporation of Co. A.  He is the President and the
         Chairman of the Board of Directors of Co. A.  The Board
         resolution authorizing the establishment of a pension
         plan was passed by only two of the three directors,
         namely, the Chairman and the Secretary.  It is your
         opinion that the shareholder "controls" Co. A as the
         that term is used in paragraph 8(d) of the IC.

Subsection 256(5.1) of the Act has no application to the significant shareholder rule described in paragraph 8(d) of the IC as it is only applicable where the expression "controlled, directly or indirectly in any manner whatever"is used in the Act. However, since the position described in the IC is administrative we see no impediment to your using the concept of de facto control now found in subsection 256(5.1) of the Act in determining whether or not a significant shareholder controls a company.

16(1)(c).

The shareholder in the situation in the situation described in (c) above does not "control" Co. A. As you have noted, the word "control" is generally defined by the courts as the right of control that rests in 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. The individual at issue owns only 30% of the parent company of Co. A. Barring any unusual circumstances, he does not have a majority of votes in the election of the Board of Directors of Co. A.

With respect to the issue of whether the shareholder in question can be said to exercise de facto over Co. A, the information provided in your memorandum is insufficient to enable us to determine this point. While the factors which you have cited indicate that the shareholder has de facto of Co. A, they are not conclusive. In order to make such a determination we would require all of the relevant facts relating to the shareholder's dealing with Co. A as well as a description of the degree of influence that he exercises over the business and affairs of Co. A.

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