The Tax Court of Canada (the "Court") recently rendered a decision in the case of PricewaterhouseCoopers Inc. agissant ès qualité de syndic à la faillite de BioArtifi cial Gel Technologies Inc. (Bagtech) c. Sa Majesté la faillite de BioArtificial Gel Technologies Inc. (Bagtech) c. Sa Majesté La Reine1 on the impact of a unanimous shareholders' agreement ("USA") on the status of a corporation as a "Canadian controlled private corporation" ("CCPC") within the meaning of the Income Tax Act (Canada) ("ITA").
The central issue before the Court was to determine what impact Bagtech's USA had on its status as a CCPC (under subsection 125(7) ITA). More specifically, the Court had to decide whether the provisions of the USA, which provided that the non-resident shareholders could not elect a majority of the members of the corporation's board of directors, were sufficient for Bagtech to be considered a CCPC despite the fact that its non-resident shareholders held a majority of the voting shares during the taxation years in question.
The Court concluded, for purposes of the definition of CCPC, that the clauses of a USA governing the election of a corporation's directors must be taken into account in determining the de jure control of the corporation. Relying on the decision of the Supreme Court of Canada in Duha Printers, the Court found that any restriction under a USA on the power of the majority shareholders to elect members of the board of directors must be taken into account for purposes of determining de jure control. Having so found, the Court concluded that Bagtech was a CCPC for the taxation years in question because the majority of the directors were appointed by resident Canadian shareholders according to the terms of the USA, despite the fact that the non-resident shareholders held a majority of the voting shares.
This decision is particularly interesting because of the new possibilities it creates for corporations having a majority of nonresident shareholders. For example, the conclusion by a corporation's shareholders of a USA with similar provisions to that in Bagtech will enable the corporation to claim refundable investment tax credits, among other things. This is a much simpler way of qualifying for tax incentives as compared with some of the other structures which have been developed over the years to get around the definition of CPCC. However, it should be noted that this decision has been appealed to the Federal Court of Appeal.
Footnotes
1 Decision dated April 12, 2012, file 2009-3734(IT)G.
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