Canada v. Bioartificial Gel Technologies (Bagtech) Inc.

The Income Tax Act (ICT) provides exclusive advantages to companies that qualify as Canadian-controlled private corporations (CCPC). The Tax Act states that a corporation will be a CCPC if it is not controlled by non-residents or public corporations. This piece focuses on a case law that reveals two types of controls in relation to SR&ED tax:

• Control in law (de jure control); and
• Control in fact (de facto control)

Control in law is the right of control that is based on the ownership of the majority voting shares in the election of the Board of Directors. De jure control analysis must take into account paragraph 125 (7)(b) which provides that all non-resident and publicly owned voting shares are deemed to be owned by a single person.

A decision by the Federal Court of Appeal’s decision in The Queen v. Bioartificial Gel Technologies (Bagtech) Inc. (2013 FCA 164) presents a perfect opportunity for corporations to qualify as CCPC’s notwithstanding that public corporations or non-residents hold more than 50 percent of the voting shares. In the case of Bagtech, the non-residents owned more than 60 percent of the voting shares. However, Bagtech had executed an agreement that gave the Canadian shareholders the power to elect a majority of the company’s directors. In the tax court, the company simply argued that although it seemed like the voting rights were owned by the non-residents, it is actually the Canadian shareholders who did the voting. The court then had to dismiss the appeal by the government and in the process confirming that the CRA must consider rights and restrictions under an agreement in the process of determining a corporation’s CCPC status.

This decision provides an opportunity for companies to achieve CCPC status and get enhanced SR&ED tax credits among other benefits.