Words and Phrases - "de jure 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 |
11 May 2017 Internal T.I. 2016-0665931I7 - Related to participating employer
Respecting where two unrelated individuals each held exactly 50% of the (voting common) shares of their employer corporation, the Directorate first noted:
According to the Court in Duha, to determine whether effective control exists, one must consider:
a) the corporation’s governing statute;
b) the share register of the corporation; and
c) any specific or unique limitation on either the majority shareholder’s power to control the election of the board or the board’s power to manage the business and affairs of the company, as manifested in either:
i. the constating documents of the corporation; or
ii. any unanimous shareholder agreement.
The Directorate then noted that as “the determination of whether a person exercises de jure control … must also take into consideration whether any specific or unique limitation on a shareholder’s power to control the election of the board or the board’s power to manage the business and affairs of the company, is manifested in either the constating documents of the corporation, or any unanimous shareholder agreement,” it followed that either individual could have de jure control and be related to the employer under s. 251(2)(b)(i).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 8000 - Subsection 8300(1) - Individual Pension PLan | two unrelated 50% shareholders potentially could both be related to the corporation based on Duha USA rights and s. 251(5)(b) rights | 295 |
| Tax Topics - Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) | s. 251(5)(b) deemed control does not undercut actual de jure control | 161 |