When Reorganizing Your Company, A Change In Control Has Tax Implications
By Nizam Shajani, CPA, CA, MBA, Partner
Oftentimes when a corporate reorganization is done without appropriate professional advice, the impact of a change in control is not fittingly considered. Acquisition of control of a corporation has a significant impact on tax filings. While a corporation retains its status as a separate legal entity – it does not in fact have a separate mind or decision making ability and therefore individual shareholders can exert their own economic interest on the corporation. As such, there is a change in economic interests that occur when there is a change in control of a corporation. And this change needs to be accounted for in tax filings.
Depending on who controls the corporation that corporations tax status may change in relation to being a Canadian controlled Private Corporation, a private corporation or a foreign affiliate corporation. And the controlling individual or individuals’ other corporate holdings also need to be considered to determine if the corporation is connected, associated, affiliated or related to other corporations.
Control is not defined in the tax act, however the case of Buckerfields v. MNR determined control to be ownership of shares that can vote in the majority of the Board of Directors. While a simple majority of the number of shares owned is a good basic test and a starting point – relevant cases since the Buckerfield ruling have complicated the matter with requiring taxpayers to take into consideration nuances such as unanimous shareholder agreements, voting privileges of minority and classes of shareholders as well as overall share construction of the entity to determine effective control of the board as well as any documents that limit the decision making powers of the board
While the above can conceivably be attributed to control of a corporation by an individual, the same considerations also need to be applied to groups acting in concert with a sufficient common connection. And where that applies – a change in that group would also result in a change in control.
The concerns of control and changes in control need to be considered in any corporate reorganization as the implication of such a change will affect your tax filing position immediately as well as into the future of the entity. When our team plans your corporate reorganization – issues around control are thoroughly investigated.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action.