Section 251.2

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.

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.

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.

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… .

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.

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).

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 … .

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.