Canada: Broadening the de facto control test could impact cross-border transactions

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Canada: Broadening the de facto control test could impact cross-border transactions

intl-updates-small.jpg

Proposed changes to the Income Tax Act (Canada) included in the 2017 Federal Budget expand the relevant factors to be used in determining when de facto control of a corporation exists.

diep.jpg
marshall.jpg

Nancy Diep

Steve Marshall

De facto control, in contrast to de jure control, which focuses on the legal control of a corporation, is determined by looking at whether a taxpayer has any direct or indirect influence that, if exercised, would result in control in fact of a corporation. De facto control is relevant, for example, in determining whether corporations are associated, and whether a corporation will be considered to be a Canadian-controlled private corporation.

The proposed amendment overrides a recent court decision (McGillivray Restaurant Ltd v R, 2016 FCA 99) that held that only factors that 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, should be relevant in determining de facto control. This effectively dismissed operational control of a corporation as a relevant factor, because operational control does not concern the ability to effect a change to the board of directors or its powers.

Proposed subsection 256(5.11) will require that all factors that are relevant in the circumstances be considered when determining if a taxpayer has any direct or indirect influence that, if exercised, would result in control in fact. The proposal goes as far as to state that the factors to be considered are not limited to, nor do they even need to include, whether the taxpayer has a legally enforceable right or ability to effect a change of the board of directors.

The proposed amendments apparently do not extend control to circumstances where a person or group of persons merely has control over day-to-day operations, but parties should consider reviewing their corporate structures to evaluate what sort of operational control or influence is actually being exerted over corporations, and to ensure that prior conclusions relating to de facto control will not be affected by this proposed change. These amendments are proposed to apply to taxation years beginning on or after March 22 2017.

Nancy Diep (nancy.diep@blakes.com) and Steve Marshall (steve.marshall@blakes.com)

Blake, Cassels & Graydon LLP

Tel: +1 403 260 9779 and +1 403 260 9631

Website: www.blakes.com

more across site & shared bottom lb ros

More from across our site

If the US doesn't participate in pillar two then global consensus on the project can’t be a reality, tax academic René Matteotti also suggests
If it gets pillar two right, India may be the ideal country that finds a balance between its global commitments and its national interests, Sameer Sharma argues
As World Tax unveils its much-anticipated rankings for 2026, we focus on EMEA’s top performers in the first of three regional analyses
Firms are spending serious money to expand their tax advisory practices internationally – this proves that the tax practice is no mere sideshow
The controversial deal would ‘preserve the gains achieved under pillar two’, the OECD said; in other news, HMRC outlined its approach to dealing with ‘harmful’ tax advisers
Former EY and Deloitte tax specialists will staff the new operation, which provides the firm with new offices in Tokyo and Osaka
TP is a growing priority for West and Central African tax authorities, writes Winnie Maliko, but enforcement remains inconsistent, and data limitations persist
The UK tax agency has appointed six independent industry specialists to the panel
The two tax partners have significant experience and expertise in transactional and tax structuring matters
Katie Leah’s arrival marks a significant step in Skadden’s ambition to build a specialised, 10-partner London tax team by 2030, the firm’s European tax head tells ITR
Gift this article