There are a number of tax benefits offered to Canadian-controlled Private Corporations (“CCPCs”) and their owners, including small business deductions, an additional month to pay certain taxes each year, enhanced investment tax credits and potential refunds for scientific research and development, and tax deferrals for employees’ taxable benefits arising from the exercise of stock options. Additionally, the shareholders of CCPCs may also be entitled to capital gains exemptions of up to $800,000 on the disposition of their shares (provided such shares are qualified small business corporation shares).
Not every Canadian business is a CCPC; a corporation is only a CCPC if it meets all of the following requirements at the end of the applicable tax year:
- it is a private corporation – meaning it is not publicly traded;
- it is resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the applicable tax year;
- it is not controlled directly or indirectly by one or more non-resident persons;
- it is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation);
- it is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada; and
- it is not controlled directly or indirectly by any combination of persons described above.
As the world becomes increasing integrated, it is often the case that a number of shareholders of a given corporation are non-residents. Traditionally, if the majority of voting shares of a corporation were held by shareholders resident outside of Canada, that corporation would automatically be disqualified as a CCPC, based on the test above.
With the decision of the Tax Court of Canada in Price Waterhouse Coopers Inc. acting in the capacity of Trustee in Bankruptcy of Bioartificial Gel Technologies (Bagtech) Inc. v Her Majesty the Queen (“Bagtech”), it is now possible for a company to qualify as a CCPC, even if the majority of the voting shares are issued to non-residents. In order to obtain this result, the corporation and its shareholders would have to contractually change the balance of control through the use of a shareholders’ agreement.
The Court in Bagtech stated that in determining control, the test is whether the shareholder has de jure control (or control in law). The Court then when on to say that “if an agreement can be considered to be a unanimous shareholders’ agreement (USA) within the meaning of the Canada Business Corporations Act (the CBCA), it must be taken into consideration just like the corporation’s constating documents in order to determine de jure control”. Ultimately if the resident shareholders have the ability to elect a majority of directors (even if such resident shareholders do not hold a majority of the voting shares of the corporation), de jure control is deemed to reside with the resident shareholders, in which event, the subject corporation will be deemed to be a CCPC.
In light of the Court’s decision in Bagtech, a carefully constructed shareholders’ agreement which limits the de jure control of non-resident shareholders may help to ensure that the corporation qualifies as a CCPC despite the fact that more than 50% of the voting shares of the corporation may be owned by non-residents. Once the corporation qualifies as a CCPC the business and its shareholders can focus their efforts on doing what is necessary to ensure that they are in a position to take advantage of the tax benefits offered to Canadian Controlled Private Corporations.
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