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 benefits; and
- 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 straightforward transactions.
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.
Bennett Jones