Canada: Tax Court Rules Against CRA Policy On Shareholder Control Of CCPC

In a decision1 released on April 12, 2012, the Tax Court of Canada ("Court") concluded that even if 70% of the voting shares of a corporation were owned by non-residents, de jure control could still be held by Canadian residents and the corporation could maintain its status as a Canadian-controlled private corporation ("CCPC"). This was possible due to the presence of a unanimous shareholder agreement ("USA") that restricted the ability of non-resident shareholders to elect a majority of the directors.

Pursuant to paragraph (b) of the CCPC definition in subsection 125(7) of the Income Tax Act (Canada) ("Act"), a corporation is not a CCPC if it would be controlled by a hypothetical "particular person" that owned each share of the capital stock of the corporation held by a non-resident person, a public corporation or a corporation a class of the shares of the capital stock of which is listed on a designated stock exchange. When such an event occurs, the corporation is deemed non-qualifying under subsection 127(9) and loses all claims and deductions associated with the CCPC status such as the refundable investment tax credit under subsection 127.1(1).  

During the 2004 and 2005 fiscal years, the Minister of National Revenue ("Minister") concluded that Bioartificial Gel Technologies (BAGTECH) Inc. ("Bagtech") did not meet the definition of CCPC under paragraph 125(7)(b) since 62.52% (2004) and 70.42% (2005) of its voting shares were owned by non-residents.

Bagtech appealed the reassessments and argued that the "particular person" did not control Bagtech, even if it did own more than 50% of the voting shares, since it was bound by the USA signed in 2003 that effectively prevented the "particular person" from electing the majority of the directors. The Minister argued that, for the application of paragraph (b), USAs should not be considered.

The Court thus had to determine who controlled Bagtech considering that the "particular person" owned 62% and 70% of the voting shares in 2004 and 2005 respectively.  The Court began its analysis by stating the general test for de jure control according to  Buckerfield's Ltd. v. M.N.R., that is, whether the majority shareholder enjoys "effective control" over the "affairs and fortunes" of the corporation, as manifested 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.

In Duha Printers2, the Supreme Court of Canada held that to determine whether such "effective control" exists, courts must consider the corporation's governing statute, the share register as well as "any specific or unique limitation on the majority shareholder's power to control the election of the board [...] as manifested in [...] any unanimous shareholder agreement."3

However, the Minister in Bagtech argued that in applying paragraph (b), USAs must not be considered since the "particular person" is not a party to the USA, nor is it deemed to be under the section.  The Minister supported its position by arguing that shareholders never considered the eventual inclusion of the "particular person" while drafting the USA and that unusual or undesirable results should be avoided. This position is consistent with the Canada Revenue Agency's ("CRA") public comments that it will ignore the presence of a USA despite the Duha Printers decision.4

The Court rejected the argument by stating that paragraph (b) must be read in its entire context and in its grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.  Furthermore, the Court stated that a legal fiction created by a deeming provision cannot modify reality.  That said, the Court found that the legal fiction that is the "particular person" is deemed to have the same rights and is bound by the same obligations as the non-resident shareholders of Bagtech.

The Court then proceeded to examine if every provisions in a USA must be considered for the purpose of a de jure control analysis. As the Minister pointed out, the definition of a USA under the Canada Business Corporations Act states that it must "restrict, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation."5 As a result, the Minister presented the argument that the USA should be severed and that only the provisions limiting the powers of the directors could bind new shareholders, including the "particular person." 

According to the Court, the question of whether an agreement is a USA, while only some of its provision restrict the powers of the directors, remains in dispute. The Court considered arguments from each side but ruled in favor of Bagtech by relying on the guidance of Duha Printers. As stated by the Supreme Court of Canada, the impact of USAs is not limited to the restrictions imposed on the board's power to manage the business and affairs of the company. Any restriction on the powers of the majority shareholder to control the election of the board, including restrictions in USAs, must also be considered in the du jure control analysis.   

In the case of Bagtech, section 3.2 of the USA, stated that the election of the directors was made by three groups: Group A, Group B and Group C. The shareholders were divided in those groups and the "particular person" was deemed to be a member of all three groups since each group included non-resident shareholders. Each group could only elect a fixed number of directors, and some individual shareholders within those groups also had the right to appoint their own representatives as directors.  According to the interpretation of the Court, only three of the seven directors could be elected by non-residents in 2004 and four of eight in 2005.

Thus, despite the fact that the "particular person" held more than 50% of the shares of Bagtech, its powers to elect directors was limited by the USA and thus, Canadian residents elected the majority of directors.  Therefore, the "particular person" could not, during the 2004 or 2005 taxation year, control Bagtech within the meaning of paragraph (b) of the definition of a CCPC in subsection 125(7) of the Act.

The decision in Bagtech is of significant importance since the Court went against the publicly declared policy of the CRA with respect to USAs and the CCPC definition. In doing so, the Court rejected the arguments put forward by the Minister to defend its position, which are identical to the ones presented by the CRA to explain the policy.6  The CRA has yet to issue public comments on the Bagtech decision.  Given that CRA's policy was adopted following the Supreme Court of Canada decision in Duha Printers, it is unclear whether the policy will be amended in light of the Tax Court of Canada decision in Bagtech.


1 R. c Price Waterhouse Coopers Inc (Bioartificial Gel Technologies (Bagtech) Inc), 2012 TCC 120 [Bagtech]

2 Duha Printers (Western) Ltd. v. Canada, [1998] 1 SCR 795

3 Ibid at para. 85.

4 Canada Revenue Agency Round Table, Report of the Proceedings of the Sixty-First Tax Conference, 2009 Conference Report, question 14 at pages 3:13-15.

5 Canada Business Corporations Act (R.S.C., 1985, c. C-44) at subsection 146(1).

6 Supra note 4 and CRA, Technical Interpretation 2008-0265902I7, "Canadian-Controlled Private Corporation" (May 6, 2008), at para 21.

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