Control

Definitions of control are found in the federal, provincial and territorial corporate statutes, the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) and in applicable securities laws. Control generally refers to who has the ability to influence the decisions and actions of a business organization. Those that have the power to appoint the majority of a corporation's board are considered to have control over a corporation incorporated under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 or Ontario Business Corporations Act, R.S.O. 1990, c. B.16. This type of control is called de jure control (or legal control). For de jure control to exist, one shareholder, or a group of shareholders working together, must hold at least 50.1% of the issued and outstanding voting shares of a corporation enabling the shareholder(s) to elect a majority of directors to the corporation's board.

The Income Tax Act does not contain a general definition of the word “control”. The courts have held that “control” for purposes of the Income Tax Act means de jure control unless a provision of the Act specifically provides otherwise. For example, for the purposes of certain rules, the Income Tax Act provides that a taxpayer or group of taxpayers may be considered to control a corporation by virtue of having either de jure or de facto control of the corporation.

De facto control (also called "control in fact") is defined in section 256(5.1) of the Income Tax Act and applies whenever a provision uses the phrase, "controlled directly or indirectly in any manner whatever." The term is quite broadly defined as any form of direct or indirect control. De facto control of a corporation is not tied to the number of shares a person holds or its ability to appoint a majority of directors to a corporation's board. Other than setting out what types of relationships do not cause de facto control over a corporation (parties are operating at arm's length and the influence is derived from a franchise, licence, lease, distribution, supply or management agreement, or other similar agreement or arrangement), the definition found in the Income Tax Act does not provide any guidance as to when de facto control exists.

Courts will use a fact-based analysis when determining whether de facto control exists. While there are no set factors for a court to consider, for a court to determine that de facto control exists, the facts must show that decision-making power over the corporation does not lie with those who have de jure control (Transport M.L. Couture Inc. c. R., 2004 CarswellNat 140 (F.C.A.), at paragraph 24).

Section 256(5.11) clarifies that, for the purposes of the Income Tax Act, the determination as to whether a taxpayer (or group of taxpayers) has de facto control of a corporation must take into consideration all factors that are relevant in the circumstances and must not be limited to whether the taxpayer (or group) has a legally enforceable right or ability to effect a change in the board of directors of the corporation or to exercise influence over the shareholder(s) who have that right or ability.