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

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

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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.

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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

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