Maintaining CCPC Status with Non-Resident Investors

A corporation that qualifies as a CCPC enjoys a number of benefits under the Act. One has to do with the right to claim refundable ITCs in respect of qualified scientific and experimental research activities. If the corporation is funded in part by non-residents, CCPC status may be lost if the non-residents acquire control of the corporation.

In a recent case, Price Water House Coopers Inc. agissant es qualite de syndic a la faillite de Bioartificial Gel Technologies (Bagtech) Inc. c La Reine,2012 CCI 120, the issue was a claim by the corporation for refundable SR&ED tax credits. More than 50 % of the voting equity of the corporation was held by a number of non-residents. All the shareholders were party to an Unanimous Shareholders Agreement under which the Canadian resident shareholders had the right to elect a majority of the directors. The corporation argued that, as a consequence of the USA, de jure control rested with the Canadians. The Crown argued that the USA was irrelevant because of the provisions of paragraph 127(7)(b). Under that paragraph, all of the shares held by the non-resident s are deemed to be held by a single hypothetical person for purposes of determining control. Because this hypothetical person could not be a party to the USA, the Crown said the USA was irrelevant and, applying the paragraph, the corporation was controlled by the non-residents.

The Tax Court agreed with the corporation, holding that the USA applied. This interpretation of paragraph 127(5)(b) will assist in structuring equity investments in corporations that benefit from CCPC status, where the equity percentage held by non-residents exceeds 50% of the outstanding shares, but a USA gives the Canadian shareholders the right to control through the right to elect a majority of the directors. It is not known as of writing (May 16, 2012) whether the Crown will appeal.