This post explores how Canadian business owners who are considering relocating—whether to Israel, the U.S., or elsewhere—may maintain the Canadian-Controlled Private Corporation (“CCPC”) status of their company.

 

Key benefits of the CCPC designation are more clearly outlined in Part 1 of this series. Here, we’ll get deeper into some governance tools that may allow companies to preserve their CCPC designation even when non-resident shareholders hold significant voting power.

 

Note: The following is not and should not be construed as legal or tax advice.

 

Bagtech, Unanimous Shareholders Agreements, and the De Jure Canadian Control Test

 

Per ss. 125(7) of the Income Tax Act (the “Act”), a CCPC is a private corporation resident in Canada that is not controlled, directly or indirectly, in any manner whatsoever, by one or more non-residents or public corporations.

 

In assessing whether a corporation is a CCPC, the Canada Revenue Agency (“CRA”) will first apply the de jure Canadian control test. The test focuses on who has the legal right to elect the company’s board of directors, which is typically determined by:

 

  • Voting share ownership;

  • Share classes and voting rights; and

  • Restrictions in constating documents (i.e., the company’s articles, partnership and shareholders agreements, among others)

This test is the CRA’s default when assessing CCPC status. 

In The Queen v. Bioartificial Gel Technologies (Bagtech) Inc. (“Bagtech”), non-residents held between 62.5% and 70% of the company’s voting shares (the majority). However, an internal Unanimous Shareholders Agreement (“USA“) granted the Canadian-resident shareholders alone the right to elect a majority of the company’s Board.

 

While originally denied CCPC status by the CRA, the Tax Court and the FCA maintained that CCPC status should not be denied on the sole basis of voting power. If a USA legally restricts how voting rights can be exercised, these restrictions will inform the de jure control analysis, and a company may remain a CCPC even where non-residents hold a majority of voting shares.

 

For business owners relocating to Israel or America, Bagtech signals that non-residency does not necessarily mean the end of CCPC status.

 

 

A Word of Caution: De Facto Control Still Matters

 

While, thanks to Bagtech, a carefully drafted USA can support a finding of de jure Canadian control, the CRA (and the courts in Canada) will ultimately evaluate who actually runs the company via the Act’s de facto Canadian control test.

Potential red flags for the Canadian authorities include:

  • Board meetings that simply ratify previous decisions;

  • Major negotiations conducted exclusively by non-resident founders; and

  • Any evidence that Canadian directors are acting on the instruction of non-resident shareholders.

If these sorts of alarm bells are raised, the CRA may examine Board minutes, email records, and/or the practical flow of decision-making, in order to assess where foreign influence amounts to “control.”

 

 

Conclusion: Preserving CCPC Status While Living Abroad

 

For founders planning Aliyah, U.S. expansion, or any international move, corporate structure and substance must align. While a carefully drafted USA is useful, it cannot compensate for a company that is not in fact Canadian.