7 May 1991 Income Tax Severed Letter - Acquisition of 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.

B.C. TAX STUDY GROUP ROUND TABLE QUESTION 16

Acquisition of Control

Revenue Canada has commented at various times as to the meaning of the expression "acquisition of control by a person or group of persons" within subsections 111(4) and 111(5). However, Revenue Canada has to date provided only general tests as to what constitutes a controlling group, i.e. what facts indicate that shareholders have a "common link or interest" or "act together to control a corporation". Has there been any expansion or refinement of Revenue Canada's general tests as to what constitutes a "common link or interest" or "acting together", especially with respect to the interrelationship between shareholders of small, closely-held corporations? Further, please comment on whether control would be considered to be acquired by a "group" of persons for the purposes of subsections 111(4) and (5) in the following situations:

• (a) If an arm's-length lender acquires shares of a corporation for the purpose of securing a loan, when would the lender be considered to be part of a "group" controlling the corporation?
• (b) If the members of a management group, no one of which owns more than, say, 10% of the shares of the corporation, deal with each other at arm's length but have a "common interest" to make a profit on operations of the corporation, would these individuals constitute a "group" which has acquired control of the corporation?
• (c) If there are two arm's-length shareholders of a corporation, each of whom owns 50% of the shares of a corporation, and a third arm's-length shareholder acquires shares of the corporation so that all three own a 33 1/3 interest, and the shareholders enter into a shareholder agreement setting out how the respective shares are to be voted, has control of the corporation been acquired by a "group" of persons? Is the existence of a shareholder agreement enough to prima facie satisfy the "acting together" test or is more required?
• (d) A Co and B Co are two arm's-length corporate shareholders of Opco, each of whom owns 50% of the shares of Opco. Control of B Co is acquired by C Co. Would control of Opco be acquired by a "group" of persons?
• (e) Can a person be a member of a "group" controlling a corporation if that individual owns no shares of the corporation? What if the person owns only non-voting (i.e. preference) shares?

There has been no expansion or refinement of the department's position, as set out in our responses to question 42 at the 1984 Round Table and questions 40 and 43 at the 1988 Round Table.

In response to your specific questions:

• (a) Whether the lender would be considered to be part of a group that controls the corporation would depend on the circumstances of the particular situation, including the percentage of shares owned by the lender, who the other shareholders are, the relationship between the lender and the other shareholders, etc.
• (b) In determining whether a number of individuals that make up the management of a corporation constitute a group that controls the corporation, there must exist a common interest between them, which must involve more than their mere status as shareholders.
• (c) In our view, the existence of a shareholder agreement would not always be prima facie evidence that the shareholders that are party to the agreement constitute a group. Whether the parties to the agreement constitute a group that controls the corporation would depend upon the terms of the agreement and any other relevant factors.
• (d) If A Co and C Co act in concert to control Opco, they would be considered to be a group of persons that had acquired control of Opco.
• (e) Yes, a person can be a member of a group that controls a corporation if that individual owns no shares of the corporation because, in our view, control could be indirect. For instance the individual could own shares of a corporation that owned shares of the corporation in question.

In our view, if a person owns only non-voting shares of a corporation, he would ordinarily not be a member of a group that controls the corporation. However, this determination would depend upon all of the circumstances, including for example, any special rights or privileges attaching to the non-voting shares, such as a right of conversion or exchange.

The above comments deal with control for purposes of subsections 111(4) and (5), and not with extended concepts such as those in subsections 251(5) or 256(5.1).