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Will Recent CCPC Case Result in Policy Amendment?
In a decision released on 12 April 2012, the Tax Court of Canada (Court) concluded that even if 70% of the voting shares of a corporation were owned by non-residents, de jure control could still be held by Canadian residents and the corporation could maintain its status as a Canadian-controlled private corporation (CCPC). This was possibly due to the presence of a Unanimous Shareholder Agreement (USA) that restricted the ability of non-resident shareholders to elect a majority of the directors. Taxand Canada examines a recent court case and assesses what its outcome means for Canadian taxpayers.
Pursuant to paragraph (b) of the CCPC definition in subsection 125(7) of the Income Tax Act, a corporation is not a CCPC if it is controlled by a hypothetical 'particular person' that owns each share of the capital stock of the corporation held by a non-resident person, a public corporation or a corporation a class of the shares of the capital stock of which is listed on a designated stock exchange. When such an event occurs, the corporation is deemed non-qualifying and loses all claims and deductions associated with the CCPC status such as the refundable investment tax credit.
During the 2004 and 2005 fiscal years, the Minister of National Revenue concluded that Bioartificial Gel Technologies Inc. (Bagtech) did not meet the definition of the CCPC since 62.52% (2004) and 70.42% (2005) of its voting shares were owned by non-residents.
Bagtech appealed the reassessments and argued that the 'particular person' did not control the organisation, even if it did own more than 50% of the voting shares, since it was bound by the USA signed in 2003. This effectively prevented the 'particular person' from electing the majority of the directors. The Minister argued that, for the application of paragraph (b), USAs should not be considered.
Taxand Canada delves deeper into the issue of shareholder control of CCPC
The decision in the Bagtech case is of significant importance since the Court went against the publicly declared policy of the CRA, with respect to the USA and the CCPC definition. In doing so, the Court rejected the arguments put forward by the Minister to defend its position, which are identical to the ones presented by the CRA to explain the policy. The CRA has yet to issue public comments on the Bagtech decision. Given that CRA's policy was adopted following the Supreme Court of Canada's decision in Duha Printers, it is unclear whether the policy will be amended in light of the Tax Court of Canada decision in Bagtech.
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