All About Estates

Control in the Valuation of Business Interests for Estate Planning

From time to time, I am asked to prepare, review or comment on structures for estate planning purposes with a mind to valuation issues.

A common valuation issue is control and whether or not the value of the business interest(s) in the estate plan should be discounted for lack of control or should have premium attached to it because the holder of the business interest(s) do(es) have control.

Valuators rely on objective analysis in the determination of control and often look at how the tax authorities administer control for tax purposes. Let’s face it – Estate planning often has a tax component to it.

There are provisions in the Income Tax Act which set out the definition of control referred to as de facto control for tax purposes, particularly in the application of the small business deduction between related companies. Up to recently, there were two competing interpretations for the test of de facto control resulting from previous Tax Court cases:

– The first is from a 2002 case provided that in order for there to be a finding of de facto control, a person or group of persons must have a clear right and ability to change the composition of the board of directors or to influence in a very direct way the shareholders who elect the board of directors, sometimes referred to as the “board control” test.

– The second from 2003 and 2006 cases considered broader powers of influence, such as economic, contractual or moral influence; economic dependence; and family relations, among others, sometimes referred to as the “operational control” test.

In a recent 2016 case, the Federal Court of Appeal (“FCA”) determined the test for de facto control should be concerned with control over the board of directors (the “board control” test) , not the day-to-day operations of the corporation (“operational control test”). While the FCA acknowledged that the list of factors to determine de facto control is open ended, it confirmed that any factor which does not include a legally enforceable right and ability to change the composition of the board of directors or to exert influence over a shareholder who has that ability is not to be considered.

This particular case did not end well for this taxpayer because, despite the narrower application of the “board control” test, the FCA found that the taxpayer had met the narrower control test, due to “unofficial” arrangements to control the Board with the other shareholder, being his spouse. As noted previously, the determination of “control” in a family business is another kettle of fish, so to speak.

Generally speaking, valuators have long held the view that control is directly tied to control over the Board of Directors and it appears that the tax authorities will be administering the control test in similar fashion for the time being.

Thanks for Reading

About Steven Frye
Baker Tilly WM LLP is a leading, independent audit, tax, and business advisory firm based in Vancouver and Toronto, serving clients across Canada. Drawing on well-trained teams across a variety of disciplines, we ensure the alignment of our professional’s skills and experience with client requirements, resulting in exceptional service and business outcomes.


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.