Words and Phrases - "control"
14 June 2010 Internal T.I. 2010-0366611I7 F - Determination of CCPC Status
At issue was whether a start-up Canadian private corporation engaged in SR&ED was a Canadian-controlled private corporation (“CCPC”). Shareholder1, Shareholder2 and Shareholder3, which were controlled by X (a non-resident of Canada), held less than 41% of the (Class A) voting shares of the Corporation, having a nominal economic value; and resident Canadian investors together with the trust (the “Trust) referred to below, held the balance of the Class A shares. Shareholder 1 (apparently, the main corporate vehicle for X), by virtue of directly (or indirectly) holding non-voting participating shares, had an equity interest in the Corporation of over 60%. The Trust (accepted by the Directorate as being a resident trust) held a sufficient number of the voting shares of the Corporation in order for the Corporation to qualify as not being controlled de jure by X and Shareholder1.
However, an agreement (the “Agreement”) among the shareholders accorded veto rights to Shareholder1 over most major decisions of the Corporation.
After indicating that it appeared doubtful (based on the tests of agency applied in Kinguk Trawl) that the trustees of the Trust held the Class A voting shares as agent for X, Headquarters went on to find that the Agreement appeared to not qualify as a unanimous shareholder agreement (“USA”), stating:
[T]he shareholders of a corporation governed by Part IA of the [Quebec] QCA can only restrict the powers of the directors by means of a USA by transferring the powers of the directors to the shareholders outright, so that the shareholders can exercise them themselves. …
Consequently, there is no provision in provincial legislation affecting Part IA corporations under the QCA for the power of shareholders to control the election of the board of directors to be limited or modified by way of a USA.
Furthermore, we understand that Article XXXXXXXXXX of the Agreement gives Shareholder1 a veto right on certain important corporate decisions. Therefore, this clause of the Agreement does not constitute a transfer of power from the directors to Shareholder1. Furthermore, there is no other clause in the Agreement that restricts the powers of the directors by transferring them to Shareholders.
Furthermore, even if the Agreement were a USA, the mere veto right was not tantamount to de jure control:
Shareholder1 did not acquire de jure control of the Corporation through its exclusive veto right with respect to important decisions. At most, it can block the decisions of the Board of Directors with respect to such matters without being able to decide unilaterally.
Furthermore …it should be noted that the number of votes required to elect the directors of the Corporation has not changed even though each group of shareholders has one designate. …
In addition, corporations controlled by X that hold the voting shares cannot appoint a majority of the directors and there is nothing in the documents you sent to us to indicate that the person designated by Trust is a person designated by X.
Headquarters went on to find that the Corporation was not a CCPC based on significant influence exercisable by the non-resident (X) as a factual matter.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) | sole beneficiary of a trust did not have a s. 251(5)(b) right to trust shares | 44 |
| Tax Topics - General Concepts - Agency | application of Kinguk Trawl test of agency | 165 |
| Tax Topics - Income Tax Act - Section 256 - Subsection 256(5.1) | non-resident shareholder with 60%+ economic interest, extensive veto rights and responsibility for future funding of R&D work had de facto control | 457 |
International Iron & Metal Co. Ltd. v. Minister of National Revenue, 72 DTC 6205, [1972] CTC 242, [1974] S.C.R. 898, aff'g 69 DTC 5445, [1969] CTC 668 (Ex Ct)
A corporation ("Burland") was owned by nine children of four fathers. The taxpayer ("International Iron") would have been indirectly controlled by the same children through their respective four holding companies but for the possible effect of an agreement among the four holding companies and the four fathers which provided that so long as the fathers were alive, they would be designated and elected as directors of the four holding companies, and the affirmative vote of a majority of those directors would be required for the effecting or validating of any acts of the four holding companies. In the Exchequer Court, Gibson J., in finding that International Iron and Burland were controlled by the same group of persons for purposes of s. 39(4) of the pre-1972 Act, stated (p. 5448):
"The fact that a shareholder in such a corporation may be bound under contract to vote in a particular way regarding the election of Directors (as in this case), is irrelevant to the said meaning of 'control' because the corporation has nothing to do with such a restriction."
In affirming this finding, Hall J. in the Supreme Court stated (p. 6207):
"The meaning of 'control' in s. 39(4)(b) ... means the right of control that is vested in the owners of such a number of shares in a corporation so as to give them the majority of the voting power in the corporation."
Buckerfield's Ltd. v. MNR, 64 D.T.C 5301, [1964] CTC 504 (Ex Ct)
Two companies that were vigorous competitors (Pioneer and Federal) each owned one-half of the shares of two other companies (Buckerfield's and Green Valley). In finding that Buckerfield's and Green Valley were associated corporations pursuant to s. 39(4)(b) of the pre-1972 Act by virtue of their control by the same group of persons, Jackett P. stated (at p. 5303):
Many approaches might conceivably be adopted in applying the word "control" in a statute such as the Income Tax Act to a corporation. It might, for example, refer to control by "management", where management and the board of directors are separate, or it might refer to control by the board of directors. ... The word "control" might conceivably refer to de facto control by one or more shareholders whether or not they hold a majority of shares. I am of the view, however, that in Section 39 of the Income Tax Act [the former section dealing with associated companies], the 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.
Jackett P. further stated (at pp. 5303-5304) that "the word 'group' in its ordinary meaning ... can refer to any number of persons from two to infinity".
Plomberie J.C. Langlois Inc. c. La Reine, 2006 DTC 2997, 2004 TCC 734, aff'd supra.
The taxpayer and its 50% corporate shareholder were found to be subject to the de facto control of the same person (an individual who was the sole shareholder of the 50% shareholder) given that that individual was the sole director and the president of the taxpayer. Lamarre Proulx J. stated (at paras. 38-39):
"The decision-making role belongs to the director of a corporation, and it is the one that is associated with the notion of control in fact of a corporation."
Cornu, dir., Vocabulaire juridique, 2d ed. (Paris: Presses universitaires de France, 1990) defines the word "[control]" in a manner that I find interesting, at p. 207:
[TRANSLATION]
- 3 Dominion over the management of a business or organization; power ensuring the one who has it a dominant influence in the direction of a group, a corporation, etc., or the orientation of its future.
Hudson's Investment Co. (London) Ltd. v. MNR, 68 DTC 83 (TAB)
An individual (Shapiro) was the shareholder of all the shares of Richard Shapiro Limited ("RSL") and of one-half of the common shares of the taxpayer. Most of the balance of the shares of the taxpayer were held by the Canada Trust Company under a voting trust agreement pursuant to which the common shares were held for the benefit of nieces and nephews of Shapiro and their father was designated as the voting trustee. Because under the terms of the voting trust agreement, the voting trustee was required to act on the advice of Shapiro and could be replaced if he refused to do so, Shapiro had the right to control the voting rights held pursuant to the voting trust agreement, i.e., the right "to have or exercise the power of direction or command" in respect of those voting rights. Accordingly, the taxpayer and RSL were associated corporations.
Scandia Plate Ltd. v. The Queen, 83 DTC 5009, [1982] CTC 431 (FCTD)
Ownership of the shares of an alleged Canadian-controlled private corporation was not acquired by a Canadian resident from a Swedish company before the date of closing of the written agreement of purchase and sale, rather than on the earlier effective date of that agreement when an alleged oral executory agreement was in place. Accordingly, the requirement that the company have been a Canadian-controlled private corporation "throughout the year" was not met. Cattanach J. stated (at p. 5012): "[W]hen there is a preliminary contract in words which is afterwards reduced into writing, or where there is an executory contract to be carried out by a deed afterwards executed, the rights of the parties are covered in the first case entirely by the writing, and in the second case entirely by the deed." In addition, any evidence that the Swedish company held its shares as a trustee for the Canadian resident until the time of execution would not assist the taxpayer, because the test of control rests on registered ownership, not beneficial ownership, of the shares.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Effective Date | 100 | |
| Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Canadian-Controlled Private Corporation | 28 |