The federal government is proposing legislation in Budget 2017 that would clarify the factors involved when determining whether the factual control of a corporation exists, an important consideration with implications for a corporation's ability to access certain tax benefits, such as the small-business deduction.
The amendments to the Income Tax Act (ITA) have been proposed to address the decision in a recent court case, which may have limited the scope of factors used to determine factual control.
The ITA recognizes two forms of control of a corporation: legal and factual. The concept of factual control is broader than legal control and is generally used to ensure that certain corporate tax preferences are not accessed inappropriately.
For example, the factual control test is used for the purpose of determining whether two or more Canadian-controlled private corporations are "associated corporations." Associated corporations must be considered together in determining whether certain thresholds are met, including the $500,000 small-business deduction limit.
A person may have factual control of a corporation even though that person does not have legal control of the corporation. Legal control of a corporation generally entails the right to elect the majority of the board of directors. Factual control of a corporation exists where a person has "directly or indirectly in any manner whatever" influence that, if exercised, would result in control in fact of the corporation. In each situation, consideration of all the relevant factors is required in determining whether there's factual control of a corporation.
A recent court decision held that in order for a factor to be considered in determining whether factual control exists, it must 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." This requirement limits the scope of factors that may be taken into consideration in determining whether factual control of a corporation exists.
In budget documents, the government indicated that it is not its policy perspective that the factual control test be dependent on the existence of such a legally enforceable right, or that factors that do not include such a right ought to be disregarded.
To ensure taxpayers do not inappropriately access certain tax preferences, the government is proposing legislation to clarify the factors that determine whether the factual control of a corporation exists.
"The proposed change would legislate that the concept of factual control is not limited to what was defined in that court case," says Debbie Pearl-Weinberg, executive director of tax and estate planning with Canadian Imperial Bank of Commerce's wealth-strategies group in Toronto.
This measure will apply in respect of taxation years that begin on or after Budget Day.
Read: Budget 2017