All About Estates


Control is an important concept for applying certain income tax rules and valuation issues (amongst others) when dealing with corporations, with serious implications to current and future (and estate) planning scenarios.

De jure control refers to legal control of a corporation, which requires a look at shareholdings. Control in fact, or “de facto control”, (“DFC”) is a broader concept that focuses on influence rather than legal control. As a result, other factors need to be considered when determining who has de facto control of a corporation.

The 2017 federal budget introduced broader tests which might apply to the determination of de facto control. The change proposed that all factors that are relevant to the determination of de facto control in a particular situation must be taken into consideration. The determination will not be limited to, nor does it need to include, consideration of whether a taxpayer has a legally enforceable right or ability to effect a change in the board of directors of the corporation, or the board’s powers, or to exercise influence over the shareholder(s) who have that right or ability.

In addition to the above, the exit provisions in shareholders agreements can also create DFC. More specifically, depending on the nature of the exit provision rights, the application of DFC could deem a person to control a corporation that otherwise would not be controlled by that person with the result that the corporation would be deemed to be related and acting at non-arm’s length with the person.

When applicable, The Income Tax Act will deem “a person” to actually hold corporate securities and rights in which the person only has contingent interests, and, depending on the nature of those rights this deeming rule could impact the tax status and/or the persons who are related and non-arm’s length with a corporation. These provisions could also seriously affect the determination of other planning outcomes.

Some provisions that are commonly found in shareholders agreements to control or regulate shareholder exits are: shotgun rights; rights of first refusal; tag along or piggy back rights; drag along rights; put/call options; mandatory buy-out rights; and pre-emptive rights.

The Canada Revenue Agency (”the CRA)”) has administratively not applied DFC to rights of first refusals in the past. However, the CRA’s has provided very little publicly as to its position on DFC as it may apply to other typical put and call rights, for example, such as are typically found in other exit rights and options found in shareholder agreements.

As shareholder agreements play such an important role in the planning for the present and future of a business, it is really important to get the appropriate professional advice particularly with issues such as those briefly discussed here.

Happy 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.


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