19 April 2001 External T.I. 2001-0068175 - NON-ARM'S LENGTH

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether a shareholder that owns less than 50% of the voting shares of a corporation deals at arm's length with that corporation.

Position: Generally, yes but ultimately it is a question of fact.

Reasons: Where a shareholder does not control a corporation, and is otherwise not related to it, the general presumption is that the shareholder deals at arm's length with that corporation.

		2001-006817
XXXXXXXXXX 	A. Seidel, CMA
(613) 957-2058
April 19, 2001

Dear XXXXXXXXXX:

Re: Non-arm's Length

This is in reply to your letter dated January 19, 2001, in which you requested our views as to whether certain shareholders deal at arm's length with the corporation of which they are shareholders.

The particular circumstances in your letter on which you have asked for our views relate to a factual situation involving specific taxpayers and completed transactions. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on completed transactions involving specific taxpayers. You should submit all the relevant facts and documentation to the appropriate district tax services office for their views. However, we are prepared to offer the following general comments concerning the issue of dealing at arm's length which may be of assistance.

The Employment Insurance Act (the "EI ACT") provides that a claimant is entitled to benefits thereunder by reference to the "insurable earnings" of the claimant. In general terms, the EI Act determines "insurable earnings" by reference to "insurable employment". Subsection 5(1) of the EI Act describes various types of insurable employment and includes "employment in Canada by one or more employers, under any express or implied contract of service or apprenticeship, written or oral, whether the earnings ... are received from the employer or some other person and whether the earnings are calculated by time or by the piece, or partly by time and partly by the piece, or otherwise".

Subsection 5(2) of the EI Act describes employment that is not considered to be "insurable employment". Paragraph 5(2)(b) of the EI Act provides that insurable employment does not include the employment of any person by a corporation where that employee controls more than 40% of the voting shares of the corporation. Further, paragraph 5(2)(i) of the EI Act provides that insurable employment does not include any employment where the employer and the employee are not dealing with each other at arm's length. Finally, paragraph 5(3)(a) of the EI Act provides that the question of whether persons are not dealing with each other at arm's length shall be determined in accordance with the provisions in the Income Tax Act (the "Act").

Subsection 251(1) of the Act states that related persons are deemed not to deal with each other at arm's length and that it is a question of fact whether persons not related to each other are at a particular time dealing with each other at arm's length. Paragraph 251(2)(b) of the Act defines "related persons" to include:

(i) a person who controls a corporation, if it is controlled by one person;

(ii) a person who is a member of a related group that controls the corporation; and

(iii) any person related to a person described in (i) or (ii).

In the situation where no single shareholder owns more than 50% of all of the issued and outstanding voting shares of a corporation, there is no person that controls that corporation. It then becomes a question of fact whether a minority shareholder is dealing at arm's length with the corporation.

As stated in paragraph 24 of Interpretation Bulletin IT-419R, where a shareholder does not control a corporation, and is not otherwise related to the corporation, there is a general presumption that the shareholder deals at arm's length with the corporation.

On the other hand, where a sufficient number of minority shareholders "act in concert" in order to direct the affairs of a corporation, they may be considered not to be dealing at arm's length with the corporation. "Acting in concert" generally includes a predetermined agreement between the shareholders to act in a certain manner and would be evaluated on an ongoing basis. This is supported by the following comments of Cattanach, J. in Don Fell Limited, Gordon Fell Limited and Lawrence Fell Limited v. Her Majesty The Queen, 81 DTC 5282 (FC-TD):

"A corporation being a fictitious person can only act through natural persons. Some of these persons in the company are merely employees who do the day to day routine work. They do not represent the mind or will of the corporation. It is the directors of a corporation who are its directing mind and will and who control what the corporation does. The state of mind of the board of directors of a corporation is the state of mind of the corporation and is treated in law as such. Thus the intention of a corporation is the intention of its board of directors normally evidenced by resolutions passed."

In addition, whether or not a minority shareholder has a direct management influence in a corporation may also be relevant in assessing that shareholder's relationship with the particular corporation.

The publications referred to in this letter may be obtained from your local tax services office or from our Internet web site (www.ccra-adrc.gc.ca).

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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