A corporation that meets the definition of “Canadian-Controlled Private Corporation” (“CCPC”) in the Income Tax Act is entitled to a number of tax benefits, including a reduction in corporate income tax on active business income. Because of these tax advantages, the question of whether or not a corporation qualifies as a CCPC is often an important one.
In general terms, a CCPC is a private corporation that is controlled by Canadian residents. This means that if a corporation is controlled directly or indirectly by a public corporation or by a non-resident, or a combination of the two, it won’t qualify as a CCPC.
The main difficulty in determining whether or not a corporation is a CCPC relates to the issue of control. Although in most cases it may be obvious who controls a corporation, there are some situations where this isn’t as clear. For example, the share register of a corporation might show that a non-resident (or a group of non-residents) owns 75% of the voting shares, but an agreement between the shareholders may provide that the Canadian resident shareholders have the power to appoint the majority of the board of directors. In this case, who controls the corporation for the purposes of the CCPC definition?
This was the issue (or at least a simplified version of the issue) in Bioartificial Gel Technologies (Bagtech) Inc. v. R. In this case, the Federal Court of Appeal confirmed that if a private agreement between shareholders includes restrictions on the ability to elect directors, the agreement can be taken into account in determining CCPC status, as long as the agreement qualifies as a unanimous shareholder agreement (USA) under the applicable corporate statute. If the agreement is a USA (which it was in Bagtech), then it is relevant to consider the agreement because it has the special nature of a constating document. Note that since the Business Corporations Act in British Columbia doesn’t recognize the concept of a USA, for an agreement between shareholders to impact the CCPC analysis, it would need to be contained in the articles of the corporation.
Recently, the Canada Revenue Agency indicated that they will adopt the views of the Court in Bagtech in determining which shareholder or group of shareholders has effective control a corporation, reversing their earlier position on the interpretation of the CCPC definition.