Question 1
In a technical interpretation,[Footnote 23] the CRA states that a unanimous shareholder agreement is not relevant in applying the test summarized in paragraph (b) of the definition “Canadian-controlled private corporation” (CCPC) in subsection 125(7).
The wording in paragraph (b) of the definition is as follows:
“Canadian-controlled private corporation” means a private corporation that is a Canadian corporation other than . . .
(b) a corporation that would, if each share of the capital stock of a corporation that is owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation described in paragraph (c) were owned by a particular person, be controlled by the particular person.”
Does the CRA agree that paragraph (b) of the CCPC definition refers to de jure control (since it does not say “controlled, directly or indirectly in any manner whatever”)?
Response 1
Yes.
Question 2
Why should a unanimous shareholder agreement not be considered in applying paragraph (b) of the CCPC definition when the Supreme Court indicated in Duha Printers (Western) Ltd. v. The Queen [Footnote 24] that unanimous shareholder agreements are constating documents of a corporation and should thus be taken into account in determining de jurecontrol?
Response 2
Paragraph (b) of the CCPC definition in subsection 125(7) mainly deals with situations where the shares of a corporation are held by more than one public corporation or non-resident, but no person or group of persons controls. The Department of Finance technical notes which accompanied the paragraph’s introduction read as follows:
“A corporation the voting shares of which are distributed among a large number of persons is usually not considered to be controlled by any group of its shareholders, provided the shareholders do not act together to exercise control. . . . Paragraph (b) requires non-residents’ and public corporations’ shareholdings—not only of the corporation in question, but of all corporations—to be notionally attributed to one hypothetical person. If that person would control the corporation, then the corporation is not a CCPC.”[Footnote 25]
In Duha, the Supreme Court said that
“[t]he general test for de jure control is that enunciated in Buckerfield’s, supra: 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.”[Footnote 26]
If the consolidation of all public corporation or non‑resident shareholdings in the hands of a particular person, in accordance with paragraph (b) of the CCPC definition, would result in the particular person having the right to “a majority of the votes in the election of the board of directors,” the particular person would control the corporation in a situation where no one else controls it.
In Duha, the Supreme Court said:
“[T]o recognize the USA as affecting de jure control begs the question of how much power must be removed from the directors before one may safely conclude that the majority voting shareholder no longer has de jure control.”[Footnote 27]
The court also said:
“In my view, it is possible to determine whether de jure control has been lost as a result of a USA by asking whether the USA leaves any way for the majority shareholder to exercise effective control over the affairs and fortunes of the corporations in a way analogous or equivalent to the power to elect the majority of the board of directors.”[Footnote 28]
Where Canadian residents do not own enough shares to elect the majority of the board of directors, the objective and effect of the presumption in paragraph (b) of the CCPC definition is to treat the hypothetical person as having the ability to exercise effective control over the affairs and fortunes of the corporation in a way analogous to the power to elect the majority of directors. That is so because the hypothetical person is not party to a unanimous shareholder agreement nor is that person deemed to be a party to it. In our view, it would be contrary to both the text and the purpose of the provision to consider that the fiction of control created by the application of paragraph (b) of the CCPC definition could be diluted by an agreement that restricts the powers of the directors of a corporation to allocate them to shareholders that would never include the hypothetical shareholder.