In McGillivray Restaurant Ltd. v. R., the
Federal Court of Appeal (FCA) recently provided welcome news to the
Canadian tax community concerning the appropriate legal test for
determining whether a person has "de facto
control" (control in fact) over a corporation for tax
purposes. The FCA's clarification in McGillivray
should have the practical effect of providing a higher level of
certainty and comfort to taxpayers seeking advice on this important
and pervasive issue in a variety of circumstances.
Control is a fundamental concept relevant to many corporate,
individual and withholding tax issues, including:
whether the corporation will qualify as a
"Canadian-controlled private corporation" (CCPC), which
itself has many significant implications to both the corporation
and shareholders (including the availability of favourable
corporate income tax rates/credits);
whether the corporation will be "associated" with
other corporations for purposes of having to share certain tax
the availability of an exemption from Canadian withholding tax
on interest paid to a non-resident creditor.
Control can generally be based either in law (de jure
control) or fact (de facto control). Whereas de
jure control is determined based on the right to appoint the
majority of the board of directors of a corporation and is often a
relatively straightforward analysis in many circumstances, de
facto control (i.e., effective control in the absence
of clear de jure control) can be significantly more
challenging to assess in practice. Prior court decisions have
suggested that any number of ambiguous and subjective factual
considerations relating to the day-to-day management, operations
and finances of the corporation may be relevant to the
determination of de facto control. In many cases this can
result in an unnecessary level of uncertainty in understanding the
applicable tax implications and planning otherwise relatively
In McGillivray, the FCA confirmed that a much narrower
and practical test must be applied in assessing de facto
control. In this respect, the only relevant factors are those
founded on a legally enforceable right and ability to effect a
change to the board of directors or its powers, or to exercise
influence over the shareholder or shareholders who have that right
and ability. In other words, factual operational control is
irrelevant in the absence of a right to undertake actions that are
otherwise within the exclusive purview of the shareholders who have
legal (de jure) control the board. This straightforward
and practical clarification cuts through much of the confusion
created by prior case law and should simplify the de facto
control analysis in many common situations going forward.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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