Section 251.2

Subsection 251.2(2)

Paragraph 251.2(2)(a)

See Also

Birchcliff Energy Ltd. v. The Queen, 2017 TCC 234

proxy which accorded no discretion to a class of shareholders did not render them a group
replaces the judgement in 2015 TCC 232 which was nullified by 2017 FCA 89

A newly-launched public corporation ("Birchcliff") sought to access the losses and credits of a lossco ("Veracel"). A substantial subscription receipt offering by Veracel closed about one month before the implementation of a Plan of Arrangement under which the subscription receipts were converted into Class B common shares and then immediately converted on the amalgamation of Vercel with Birchcliff into common shares of the amalgamated corporation. As these investors received a majority voting equity interest in Amalco, the loss streaming rules otherwise engaged by ss. 256(7)(b)(iii)(B) and 111(5)(a) were avoided.

In rejecting a Crown submission that the Class B shareholders, by subscribing to buy those shares and by giving a proxy to a promoter of the transaction, formed a group of persons having acquired control of Veracel immediately prior to the amalgamation, Jorré J stated (at paras 107 and 110):

…[T]he entire structure of the transaction makes it impossible to exercise the proxy for Class B shares since those shares are replaced at the same time as they are created. …

At the most, the proxy links them as Class B shareholders to assist in implementing the plan of arrangement; it does not give them the ability to change the direction of Veracel and it does not give them control of Veracel.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham ephemeral transactions under a Plan of Arrangement were not a sham 215
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) series of transactions found to be an avoidance transaction 306
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) raising share equity through a lossco immediately before its amalgamation was abusive 278

Administrative Policy

15 June 2022 STEP Roundtable Q. 6, 2022-0928191C6 - Acquisition of control

rebuttable presumption that all the trustees of a trust form a control group

A Canadian corporation is wholly owned by a trust, which is a discretionary trust, so that s. 256(7)(i) does not apply. Is there an acquisition of control of the corporation if:

(a) The sole trustee resigns and is replaced by a related trustee,

(b) The same as (a) except that the replacement trustee is unrelated.

(c) The trust has two trustees, who are required by the trust deed to make their decisions unanimously. One of them (E) resigns and is replaced by an individual related to E.

(d) The same as (c) except that the replacement is unrelated to E.

(e) The trust has three trustees, H, I and J. The trust requires majority decision making. J resigns and is replaced by K. Each of H, I, J and K are not related.

CRA indicated that, based on Consolidated Holding, where the majority of the voting shares of the corporation are held by a trust, it is the trustees of the trust who have legal ownership of the shares, who have the right to vote those shares, and who therefore control the corporation. Where a trust has multiple trustees, the determination as to which trustee or group of trustees controls the corporation can only be made after a review of all the pertinent facts including the terms of the trust documents.

CRA considers there to be a rebuttable presumption that all of the trustees would constitute a group that controls the corporation so that there would be an acquisition of control in situations (b), (d) and (e) of the question. For situations (a) and (c), s. 256(7)(a)(i)(A) may apply to deem there to be no acquisition of control where the shares are acquired by a person related to the former trustee provided that the replacement trustee is appointed concurrently with the resignation of the former trustee.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(a) - Subparagraph 256(7)(a)(i) - Clause 256(7)(a)(i)(A) application of s. 256(7)(a)(i)(A) where trustee is replaced by related trustee 202

2021 Ruling 2020-0874931R3 F - Post-mortem Pipeline

replacement of an executor resulted in an acquisition of control of subsidiaries

The statement of facts indicated (at para. 35) that the resignation and replacement of the executor of an estate resulted in a deemed taxation year end for the corporations controlled by the estate.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2) pipeline using a joint Newco of children and estate 415

3 April 2019 Internal T.I. 2018-0787561I7 - Partnership and the Meaning of "Related"

partnership agreement illuminates which partners control a corporation held by the partnership

In the course of a routine response, CRA noted its position that “when a partnership owns shares in a corporation … [t]he partnership agreement and the equity interest of the members must be examined to determine which member(s) of the partnership can exercise voting rights in respect of the shares of the corporation. In the case of a limited partnership … it is usually the general partner that can exercise these rights.” 2000-0038055 F and 2013-0484031E5 are similar.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(2) - Paragraph 251(2)(c) - Subparagraph 251(2)(c)(i) partnership agreement consulted to determine whether partner controls a corporation held by the partnership 134

15 October 2014 External T.I. 2014-0547551E5 F - Acquisition of Control

shrinking of CCPC control group likely was AOC if sufficiently material

The common shares of Opco are held as follows: A-20%; B-9%; C-10%; D-25%; E-10%; F-13%; G-13%. A, B and C are a related group as are E, F and G. D is unrelated to the others. All the shareholders act in concert to control Opco.

Will there be an acquisition of control of Opco if: (i) A acquires the shares of E, F and G; (ii) such shares instead are acquired by a Holdco wholly-owned by A; or (iii) A, B, C and D acquire the shares of E, F and G in proportion to their respective existing percentage ownership? CRA responded (TaxInterpretations translation):

[B]y acquiring the common shares…held by E, F and G, A would hold 56% of the common shares of Opco. Consequently, A would control Opco. In these circumstances, the jurisprudence recognizes that control by one person excludes simultaneous control by a group [citing Southside and Emory]… .

Respecting your second question…the control of Opco also would have been acquired by A. With his direct and indirect (through Holdco) interest in Opco, A would control Opco after the share transfer. …

Respecting your last question, the described acquisition of the shares … of Opco by A, B and C and would establish respective interests of 31%, 14%, 16% and 39%. …[T]he related group comprising A, B and C would have an interest of 61%... .That could ["pourrait"] represent a sufficient common link to indicate that a new group controlled Opco. In such determination, it also is necessary to take into account that a significant number of the shareholders of Opco (three out of seven) would cease to be such and the total interest of the departing shareholders would represent a significant percentage (36%) of the totality of the shares of Opco. This situation differs significantly from the case of a departing shareholder with little or no common link or common interest with the other shareholders with which it did not act in concert, and thus did not form part of the control group. …[I]t is quite likely ["fort probable"] that there would be a resulting acquisition of control of Opco… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 249 - Subsection 249(4) reduction in CCPC shareholders from 7 to 4 likely would result in AOC 287

18 December 2013 External T.I. 2013-0511101E5 F - Substantial interest - Part VI.1

no acquisition of control where votes pass from trust to an estate with the same individuals as executors

An inter vivos trust (Trust), with three individual trustees holds Class A non-voting common shares and C special voting shares of Corporation. An estate (the “Succession”), whose three executors are the same individuals, holds non-voting Class B preferred shares. In order to convert the estate's interest into a substantial interest for Part VI.1 purposes, they cause Corporation to redeem the Class C voting shares which, in turn, causes the Class B preferred shares to become voting pursuant to s. 48(2) of the Quebec Business Corporations Act (a provision which effectively deems all shares to become voting whenever none is voting).

In finding that “there will be no acquisition of control upon the redemption of the Class C Shares of the capital stock of Corporation,” CRA stated:

[T]he same persons (D, F and G) controlled Corporation before and after the redemption of the Class C shares of the capital stock of Corporation because the trustees of Trust who controlled Corporation before the redemption were the same persons as the executors of Succession that controlled Corporation after the redemption.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 191 - Subsection 191(3) creation of substantial interest through redemption of special voting shares 414
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition no disposition of shares that became voting by operation of law (due to cancellation of voting shares) 171
Tax Topics - Income Tax Act - Section 249 - Subsection 249(4) voting rights shifted to 2nd trust with same trustees: no control change 179

5 October 2012 APFF Roundtable, 2012-0454111C6 F - Power of attorney and acquisition of control

power of attorney in event of capacity is an external document which, when judically approved, does not effect a change of control

Mr. X, who is the sole shareholder of XYZ Inc., signs a mandate (power of attorney) in favour of his accountant (with whom he deals at arm's length) to become effective in the event of his incapacity.

In stating that there is no acquisition of control when the power of attorney is homologated (becomes effective following such incapacity), CRA stated, after referring to Duha:

...[N]otwithstanding the homologation of this power of attorney governed by the Quebec Civil Code, the ownership of that number of shares conferring a majority of the votes for the election of the board of directors is part of the patrimony of Mr. X. Furthermore, we are of the view that a power of attorney granted with a view to incapacity should be considered to be an "external document" (in relation to the constating documents of the corporation) in the determination of the de jure control of a corporation.

It is emphasized however that the rights of an attorney (“mandataire”) pursuant to a power of attorney in contemplation of incapacity could, in certain circumstances, engage paragraph 251(5)(b) and subsection 256(1).

8 October 2010 Roundtable, 2010-0373131C6 F - Présomption d'action concertée

Q of fact re whether 3 or more CCPC shareholders form a group

What is the basis for the presumption that the three unrelated shareholders of a private corporation will act together to control the corporation, given that it can be demonstrated that no one individually controls the corporation and that the decision-making process is not deadlocked? What if there are 4 or 5 shareholders? CRA responded:

[Although] the CRA effectively presumes that the three shareholders are acting together to control the corporation and therefore form a controlling group … the CRA may consider that the three shareholders do not form a group of persons who control the corporation if it is demonstrated that there is no common bond or interest between the three shareholders or that they are not acting together for the purpose of controlling the corporation.

Whether a group of unrelated persons controls a corporation and, if so, the composition of that group, in situations where a private corporation has more than three unrelated shareholders, none of whom individually controls the corporation, is a question that the CRA generally determines after a review and analysis of all the facts, legal documents and circumstances … .

21 March 2005 Internal T.I. 2005-0119961I7 F - CCPC STATUS

moving from one shareholder to 2 equal shareholders generally entails an acquisition of control unless there is deadlock

USco disposed of 50% of the shares of Canco to another corporation ("Holdco" – that was a Canadian-owned Canadian corporation), "retroactive" to a particular date. After commenting on the effectiveness or not of the stated effective date, the Directorate went on to address whether there was a resulting acquisition of control, stating:

[T]his disposition would likely have resulted in an acquisition of control of Canco. Indeed, prior to the disposition of the shares, Canco would appear to be controlled by a single person, namely USco. From the disposition of the shares, Canco would appear to be controlled by a group of persons consisting of USco and Holdco. The CRA's position on this point is that in almost all cases where the voting rights in a corporation are exercised equally by two shareholders, the corporation will be controlled by the group composed of those two shareholders. To rebut this presumption of control by the group, it would be necessary to show that no shareholder controls the corporation and that the decision-making process in the corporation is effectively deadlocked. Such a situation would be very exceptional. It could, however, occur when the two shareholders cannot agree on how to manage the corporation and therefore go to court to authorize the dissolution of their corporation.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date effective date of transfer of shares (entailing acquisition of control) cannot precede determination of essential contract elements 145

Subsection 251.2(3)

Paragraph 251.2(3)(b)

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.

Application where trustees vest all interests of a beneficiary (pp. 154-155)

Paragraph 251.2(3)(b) provides that variations or amendments to a trust and the exercise or failure to exercise a power do not give rise to a loss restriction event for the trust, provided that each majority-interest beneficiary or member of a majority-interest group of beneficiaries is affiliated with the trust immediately before the variation, amendment, or failure to exercise a power. This exception should apply when the trustees of a discretionary trust vest all of the income or capital interests in a beneficiary, because the trust is affiliated with the discretionary beneficiary immediately before the exercise of discretion pursuant to paragraph 251.1(4)(d).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(3) 374
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(d) 437
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(g) - Subparagraph 251.1(1)(g)(ii) 115
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) 141
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2) 331
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(1) 144
Tax Topics - Income Tax Act - Section 252.2 - Subsection 252.2(2) 115
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(i) 176
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(d.1) 161
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 1201
Tax Topics - Treaties - Income Tax Conventions - Article 29B 239
Tax Topics - Income Tax Act - Section 248 - (2)-(41) 157
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) 199
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.2) 59
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.3) 38
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(6) 174
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) 164
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) 163
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) 91
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(18) 49
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.01) 66
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(19) 311
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) 125
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) 144
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2) 379