Broad Test Applies for De Facto Control

July 13, 2017

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Control is an important concept for applying certain income tax rules when dealing with corporations. De jure control refers to legal control of a corporation, which requires a look at shareholdings. Control in fact, or “de facto control”, 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.

Since the concept of “control in fact” was added to the Income Tax Act, there has been a significant amount of case law that has considered which factors are relevant for the purpose of determining whether de facto control exists. The decisions of the courts have often focused on one of two types of influence.

Certain court decisions have focused on the influence of control at the shareholder level. Based on this type of influence, de facto control may exist if a person or group of persons has the ability to affect the composition or the powers of the board of directors (as the board of directors are elected by the shareholders). The other focus of the courts has been on operational influence, where de facto control may exist if a person or group of persons has the ability to affect the operations of the corporation, based on day-to-day management decisions and/or economic dependence.

As discussed in our 2016-10 Tax Factor article “De Facto Control—Federal Court of Appeal Relies on a Narrower Approach”, the March 2016 decision in the McGillivray Restaurant case narrowed the approach to essentially focus only on influence at the shareholder level. In that case, the Federal Court of Appeal decision rejected the assertion that the test for de facto control is based on “operational control”.

Note that this decision was not in line with Canada Revenue Agency’s guidance, which has taken the approach of looking at both shareholder influence and operational influence in making a de facto control determination.

In response to the McGillivray Restaurant case decision, a change was announced in the 2017 federal budget to clarify that a broader test will apply for determining de facto control. The change proposes that all factors that are relevant to the determination of de facto control in a particular situation must be taken into consideration. As well, based on the proposal, 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. This proposed clarification applies for taxation years that begin on or after March 22, 2017.

With this clarification, the narrow test set out by the Federal Court of Appeal in the McGillivray Restaurant case does not apply. Therefore, it continues to be important to consider the broader manners of influence when determining whether de facto control exists. This can be particularly relevant for family situations where it may be necessary to look beyond legal control of a corporation when applying certain corporate tax rules.

If you have any questions about determining whether de facto control of a corporation exists, contact your local BDO advisor.


The information in this publication is current as of July 5, 2017.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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