Canada: Broadening the de facto control test could impact cross-border transactions

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Canada: Broadening the de facto control test could impact cross-border transactions

intl-updates-small.jpg

Proposed changes to the Income Tax Act (Canada) included in the 2017 Federal Budget expand the relevant factors to be used in determining when de facto control of a corporation exists.

diep.jpg
marshall.jpg

Nancy Diep

Steve Marshall

De facto control, in contrast to de jure control, which focuses on the legal control of a corporation, is determined by looking at whether a taxpayer has any direct or indirect influence that, if exercised, would result in control in fact of a corporation. De facto control is relevant, for example, in determining whether corporations are associated, and whether a corporation will be considered to be a Canadian-controlled private corporation.

The proposed amendment overrides a recent court decision (McGillivray Restaurant Ltd v R, 2016 FCA 99) that held that only factors that include 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, should be relevant in determining de facto control. This effectively dismissed operational control of a corporation as a relevant factor, because operational control does not concern the ability to effect a change to the board of directors or its powers.

Proposed subsection 256(5.11) will require that all factors that are relevant in the circumstances be considered when determining if a taxpayer has any direct or indirect influence that, if exercised, would result in control in fact. The proposal goes as far as to state that the factors to be considered are not limited to, nor do they even need to include, whether the taxpayer has a legally enforceable right or ability to effect a change of the board of directors.

The proposed amendments apparently do not extend control to circumstances where a person or group of persons merely has control over day-to-day operations, but parties should consider reviewing their corporate structures to evaluate what sort of operational control or influence is actually being exerted over corporations, and to ensure that prior conclusions relating to de facto control will not be affected by this proposed change. These amendments are proposed to apply to taxation years beginning on or after March 22 2017.

Nancy Diep (nancy.diep@blakes.com) and Steve Marshall (steve.marshall@blakes.com)

Blake, Cassels & Graydon LLP

Tel: +1 403 260 9779 and +1 403 260 9631

Website: www.blakes.com

more across site & shared bottom lb ros

More from across our site

Awards
Submit your nominations to this year's WIBL Americas Awards by January 23
Recent changes in UK tax rules and cross-border requirements are generating high demand for specialist advice, according to MHA
Hany Elnaggar examines how Gulf Cooperation Council countries are internalising transfer pricing norms within evolving fiscal systems shaped by both Islamic and international influences
Where a TP study of comparables produces an arm’s-length range, and the taxpayer’s filed position is outside that range, HMRC will adjust to the median by default
EY, KPMG, Deloitte, and PwC have all seen a decrease in public sector contracts since the scandal – it is understood
Consoli, a tax partner at Brazilian law firm Martinelli Advogados, tells ITR about the importance of staying at the coalface and constantly learning
Despite legislative gridlock, international investors should be wary of legal precedents set by recent court rulings, which could substantially alter the Spanish tax environment
The new outfit, Ashurst Perkins Coie, will bring together around 3,000 lawyers across 23 countries
As World Tax unveils its much-anticipated rankings for 2026, we highlight the two Brazilian firms that had a standout year of tier promotions
ITR understands that UK Chancellor Rachel Reeves will announce a consultation on the proposed financial reward scheme, which had left advisers fretting
Gift this article