14 May 1992 Income Tax Severed Letter 9203565 - Shareholders Agreement and Control

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.

SUBJECT: SHAREHOLDERS AGREEMENT AND CONTROL SECTION: 251,
256]

5-920356
XXX D. Watson
(613)957-2121

Attention: XXX

May 14, 1992

Dear Sirs:

Re: Unanimous Shareholder Agreements and Control

We are writing in response to your letter of January 29, 1992 in which you requested our opinion on e effect of a Unanimous Shareholders Agreement, as permitted by the Alberta Business Corporations Act (the "ABCA"), on the determination of control for the purposes of the Income Tax Act (the "Act").

Specifically, you have asked if control is acquired in the following hypothetical situation:

• 1. Two shareholders, who deal at arm's length with each other, own 75% and 25% of a corporation, respectively.
• 2. The two shareholders and the corporation enter into a Unanimous Shareholder Agreement (the "Agreement") as permitted by paragraph 140(1) of the ABCA. In particular the Agreement provides that the two directors of the corporation be elected by the unanimous consent of both shareholders.

Opinion

It is Revenue Canada's view that the word "control" as used in the Act generally refers to the right of control that rests in the ownership of such a number of shares of the corporation as to give a majority of the voting power in the corporation. This view is consonant with the common law meaning of "controlled" set out in Buckerfield's Limited et al v. M.N.R. [[1964] C.T.C. 504] (1965) 1 Ex.C.R. 299, at p.303, and adopted by the Supreme Court of Canada in M.N.R. v. Dworkin Furs (Pembroke) Ltd. et al [[1967] C.T.C. 50] (1967) S.C.R. 223, at p. 228:

• "(T)he word 'controlled' contemplates 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."

In addition to the enunciation of this precept, the Courts have considered the effect on control of restrictive provisions embodied in the articles of association of a corporation and those contained in written agreements between shareholders. In Aaron's Ladies Apparel Limited et al v. MNR. [[1967] C.T.C. 50] (67 DTC 5035), where the articles of association were amended such that all motions put before any meeting of shareholders required their unanimous consent, no one controlled the corporation regardless of the fact that two related persons together owned more than 50% of the shares. In International Iron & Metal Company Limited v. MNR, [[1972] C.T.C. 242] (72 DTC 6205), a shareholder agreement was not considered relevant to the determination of control. As a result of these and other court decisions, it is the Department's position that a shareholder agreement, regardless of whether or not it is pursuant to a specific statute and includes the corporation, does not affect the determination of control for purposes of the Act.

Although an Agreement is not relevant to the determination of de jure control, it may be a determining factor in ascertaining whether a person or persons has de facto control of a corporation pursuant to subsection 256(5.1) of the Act.

Our comments in this letter represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. Our comments in this letter are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978, are not binding on the Department.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch