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

Abstract

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.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. 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.