A recent decision of the Federal Court of Appeal in Canada v.Bioartificial Gel Technologies (Bagtech) Inc. (“Bagtech”) has shed new light on the criteria that applies to the concept of control of a corporation and to the effect of a unanimous shareholder agreement (“USA”) in assessing a corporation’s status as a Canadian-controlled private corporation (“CCPC”) under the Income Tax Act (“ITA”).
In that case, Bagtech sought to qualify as a CCPC in order to obtain an additional tax credit of 15% on its research and development expenses, and to make it eligible for a refundable tax credit. In fact, the majority of Bagtech’s shareholders were not residents of Canada.
However, the ITA requires that, in order for a corporation to claim the status of a CCPC, a test of de jure control must be met, namely, the ability to elect a majority of the corporation’s directors. Thus, if each share belonging to non-residents or listed companies were held by one and the same person (the “particular person”), where a corporation is under the de jure control of this person, it would be disqualified.
However, in the case of Bagtech, a USA stipulated that the majority of the directors were to be elected by resident Canadian shareholders.
At first instance, the court found that the particular person was deemed to be a party to the USA, a conclusion which was not called into question on appeal. Then, the Federal Court of Appeal, relying on the decision of the Supreme Court in Duha Printers (Western) Ltd. v.Canada, held that once a shareholders’ agreement qualifies as a USA, all the clauses restricting the power to elect the board of directors are relevant for purposes of determining de jure control of the corporation. As a result, thanks to its USA, Bagtech was able to qualify as a CCPC, even though the majority of its shareholders were non-residents.
Thus, unless legislative measures are introduced to counter the effect of the Bagtech decision, it is possible for a corporation held by a majority of non-residents or a listed company to adopt a USA that would enable it to qualify as a CCPC. By doing so, such a corporation can obtain a number of tax benefits, including the small business deduction, enhanced research and development expenses and credits, and access to the capital gains deduction for Canadian shareholders.