We understand the specialized markets in which you operate and provide tailored solutions to meet your unique business needs.
Our comprehensive suite of business services combines industry expertise, market knowledge and professional insights.
MNP is a leading national accounting, tax and business consulting firm in Canada.
Suite 2000, 330 5th Ave. S.W.
Submit an RFP
MNP careers are Different by Design. As an entrepreneurial firm, we truly believe there are no limits to where your career can go.
Following changes to control as interpreted under the new subsection 256(5.1) of the federal Income Tax Act, there is now an increased risk of a corporation losing its Canadian controlled private corporation (CCPC) status and imbibing a tax structure of its creditor.
This can be a nasty surprise for an owner-managed business.
Implications for Technology and Start-Up Companies
What can the test for a de facto control determination by the Canada Revenue Agency (CRA) mean to a technology or a start-up company?
As noted in Part One of this series, control of a corporation is either via a legal shareholder agreement leading to a legal control, “de jure” control, or by virtue of factual control, leading to "de facto" control with a broader interpretation for control of a corporation.
With the expanded de facto control test, in a debt capitalization scenario the CRA can consider the following from the creditor's perspective:
Muddying the Investment Waters
Clearly, we have the following disadvantages (list is suggestive but not limiting):
New Risks and Challenges
The overall consequence of the new broadened test for de facto control can result in the CRA audit examinations to now consider operational level factors -this opens up a case for subjective interpretation. It has been evident that in many cases of the CRA audits, especially when related to investment tax credits such as in Scientific Research and Experimental (SR&ED) Tax credits, claimants have voiced the subjectivity of the CRA audits.
This has also resulted in a number of court cases and rulings trying to limit the subjectivity. In other words, it remains to be seen how the tax courts will handle the expanded new legislation for de facto control.
In respect to an owner-managed business, this imposes an additional new burden and additional due diligence when undertaking market capitalization – a task that was already not an easy one. In addition, there is also an increased level of risk for a creditor (such as in a debt financing) to not be involved in the operational level of the business.
We recommend that with the advent of the new legislation for de facto control, Canadian companies, and especially owner-managed technology corporations that are raising market capitalization, perform due diligence on the impact to their CCPC status and on their investment tax credits, especially SR&ED.
The new ruling can result in additional compliance and costs from inadvertent changes to share structures from the introduction of new investors – a de facto new Pandora's Box!
For more information, contact Balaji Katlai, Manager, Canadian Corporate Tax, at 514.228.7858 or
Related Topics:Income Tax; Technology; Entrepreneurs
Suite 2000, 330 5th Ave. S.W.
Find an office near me