Canadian Controlled Private Corporations

December 5, 2016

Canadian Controlled Private Corporations (“CCPC”) enjoy numerous tax benefits. For example, a sale of CCPC shares may qualify for the Lifetime Capital Gains Exemption, CCPCs enjoy a small business deduction and they may be eligible for the Scientific Research and Experimental Development (“SR&ED”) Tax Credits. Therefore, many seek to ensure their business falls within the definition of a CCPC.

A CCPC is defined as a private corporation controlled by Canadian residents. A CCPC cannot be controlled, either directly or indirectly, by non-residents and/or public corporations. Start up Canadian companies usually fall within the scope of a CCPC, as a single Canadian resident typically owns all the shares of the company. However, as the entrepreneur’s business grows and additional investors are brought in, care must be taken to ensure the business does not fall outside the boundaries of a CCPC.

To be regarded as a CCPC, it is important to determine whether non-resident(s) and/or public corporation(s) have “control” of the corporation. When determining control, there is a single hypothetical shareholder test. For that test, the question is whether non-residents and public corporations, considered together as a single shareholder, have the control of the company.

The case of The Queen v Bioartificial Gel Technologies (Bagtech) Inc. helped clarify our understanding of CCPCs. In that case, a tech company sought SR&ED refundable tax credits. However, the CRA stated they were ineligible, since non-residents held the majority of voting shares. In this circumstance, the tech company had previously entered into an agreement entitled “The Unanimous Shareholders Agreement” that stated the Canadian shareholders were entitled to elect a majority of the board of directors.

The Federal Court of Appeal had to decide whether the agreement qualified as a unanimous shareholders’ agreement (“USA”) under the Canada Business Corporation Act, and if so, whether the voting restrictions ought to be considered part of the USA.

The Federal Court of Appeal held that the voting restrictions did form part of the USA and therefore must be considered when determining whether resident Canadians had de jure control. In Bagtech, even though the majority of shareholders holding voting shares were non-residents, the USA’s voting restriction prevented the non-residents from having control. The court held that control was in fact held by Canadian resident shareholders.

The fact that control was restricted through a USA, and not a shareholders’ agreement or other similar agreement, is of vital importance. A USA is a constating document, easily accessible through the records of a corporation and kept at the corporation’s registered office.

Taxpayers should exercise caution when relying on Bagtech. The safest course of action for Canadian business owners is to ensure that no non-residents and public shareholder, either alone or together, own more than 50% of its voting shares. However, Bagtech will be an interesting case for companies going forward. Many tech companies in Canada rely heavily on investors from outside Canada. This Federal Court decision will provide some guidance for business owners when developing a corporate structure.

This decision will not eliminate the necessity of obtaining proper advice from legal and accounting professionals. If you need help developing or reorganizing a corporation structure for your business, contact Conduct Law.

ConductLaw is an Ottawa based business law firm with locations in Ottawa, Barrhaven and Kanata.  Our professionals are experienced business lawyers who can help with commercial real estate, liens, incorporations, trademarking or implementing corporate structures that manage tax obligations, whether as a corporation, partnership, family trust, testamentary trust, or any other type of legal entity.

Feel free to call or write one of our professionals at or 613.440.4888 for all of your business, commercial, real estate and estate planning needs.