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Wednesday, April 21, 2010

CCPC Status and Non-Resident Shareholders

CCPC Status and Non-Resident Shareholders


CCPC Status and Non-Resident Shareholders

In Ekamant Canada Inc. (2009 TCC 408), the issue was whether the CRA had properly disallowed the taxpayer's claim of the small business deduction for its 2000-2003 taxation years on the basis that it was not a Canadian-controlled private corporation (CCPC). Under the definition of a CCPC in subsection 125(7) of the Act, a taxpayer is not a CCPC (1) if it was controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, or (2) if it would, if each of its shares that is owned by a non-resident person were owned by a particular person, be controlled by the particular person.

During the relevant period, a Canadian resident (Mr. C) and three individual US residents (Mr. F and his son and daughter) each held 25 percent of the common voting shares of the taxpayer, a company incorporated under the CBCA. By irrevocable power of attorney, the son and daughter had each given Mr. F the authority to attend and vote for the grantor at any shareholders' meeting to be held in Quebec (including the right to vote for the election of directors). By a revocable proxy, Mr. F gave to Mr. C the same powers that had been given under the powers of attorney.

The taxpayer and its shareholders were parties to a shareholders' agreement that was dated October 26, 2006 ("the 2006 agreement") but had been executed after the start of the CRA audit. The 2006 agreement terminated a 1994 shareholders' agreement and stated that its purpose was to formalize in writing new administrative agreements and rules that had been put in place since the earlier shareholders' agreement. The 2006 agreement also provided that while Mr. C was a shareholder he would be a director and the president, and that he would make all decisions regarding the taxpayer's activities and the application of the 2006 agreement. Mr. C testified that he made all the decisions regarding the taxpayer. However, the TCC viewed Mr. C's testimony "with circumspection."

The appellant argued that Mr. C had legal control of the company because he had the right to acquire the shares of the other shareholders and because of subparagraph 251(5)(b)(i) of the Act; therefore, his legal control precluded control by another group. The appellant also submitted (1) that the non-resident group did not have de facto control because of Mr. C's management role and his powers under Mr. F's proxy (which, it was argued, appointed Mr. C proxy for the two children), and (2) that the effect of the proxy and power of attorney documents was similar to that of a unanimous shareholders' agreement. Therefore, on the basis of Duha Printers (Western) Ltd. ([1998] 1 SCR 795) (and paragraph 36 in particular), Mr. C had effective control of the company and the US residents did not. Accordingly, the US resident could not control the company even if paragraph (b) of the definition of CCPC applied.

The Crown argued that the US residents controlled the company under paragraph (a) of the definition of CCPC; that the proxy and power of attorney documents did not constitute a unanimous shareholders' agreement; that two distinct groups could simultaneously control a corporation; and that the US residents formed a related group and, on the basis of the FCA decision in Silicon Graphics Limited (2002 DTC 7112), were able to exercise control over the appellant.

Archambault J, relying on the decisions of the Exchequer Court in Viking Food Products Ltd. (67 DTC 5067) and the SCC in Vina-Rug (Canada) Ltd. (68 DTC 5021), rejected the appellant's submission that the deeming rules in paragraph 251(5)(b) precluded control by the legal shareholders. Archambault J agreed with the Crown and held that the three non-resident family members together controlled the appellant because they owned enough shares to exercise a majority of votes in an election of the directors. The family relationship and the powers of attorney given by the children supported the conclusion that the three US residents acted in concert.

Archambault J rejected the appellant's argument that the proxy and power of attorney documents were akin to a unanimous shareholders' agreement. The proxy of Mr. F was not irrevocable and did not restrict the powers of the directors. Further, even if the proxy and the powers of attorney were combined, Mr. C was not a party to them and could not be considered a signatory to a unanimous shareholders' agreement. Finally, Archambault J held that the 2006 agreement was not in force during the years in question.

In the end, the court held that the appellant was not a CCPC by virtue of paragraphs (a) and (b) of the definition of CCPC. With respect to paragraph (b), since control of the board of directors was not suspended, the "particular person" referred to in that paragraph would have sufficient votes to control the appellant.

This case illustrates how CCPC status is determined when non-residents are involved. A corporation whose non-resident shareholders have voting control will be a CCPC if a unanimous shareholders' agreement ousted the powers of the board of directors and gave those powers to a Canadian resident. This finding is consistent with the decision of the SCC in Duha Printers. If, however, advisers wish to use a unanimous shareholders' agreement to cause a corporation to be a CCPC, the agreement must be properly drafted to give effective control to the person who is intended to have that control.

Philip Friedlan
Friedlan Law
Toronto and Markham, Ontario