ARCHIVED - Status of Corporations
DATE: September 14, 1992
SUBJECT: INCOME TAX ACT
Status of Corporations
REFERENCE: Paragraphs 89(1)(f) and (g) and sections 4800 and 4803 of the Income Tax Regulations
This bulletin cancels and replaces Interpretation Bulletin IT-391 dated August 29, 1977. Current revisions are designated by vertical lines.
The tax treatment of corporations depends not only on the type of income earned by a corporation and the method of distribution to shareholders, but also on whether the corporation is classed as private or public. This bulletin discusses the definitions of private corporation and public corporation. The issue of corporate residence is also discussed, since both the definitions of private corporation and public corporation require that the corporation be resident in Canada. Although a corporation is generally either a private corporation or a public corporation, there are circumstances where it may be neither.
Discussion and Interpretation
1. A "private corporation" is defined in paragraph 89(1)(f) to be a corporation that is:
(a) resident in Canada (see 15 and 16 below);
(b) not a public corporation; and
(c) not controlled by:
(i) one or more public corporations (other than prescribed venture capital corporations after July 13, 1990);
(ii) one or more prescribed federal Crown corporations after July 13, 1990; or
(iii) any combination of (i) and (ii).
For the purposes of (i) and (ii) above, prescribed venture capital corporations are described in section 6700 of the Regulations and prescribed federal Crown corporations are listed in section 7100 of the Regulations.
2. In order for a corporation to be a public corporation it must be resident in Canada (see 15 and 16 below) at the time of determination. It may then qualify as a public corporation under paragraph 89(1)(g) if it:
(a) has a class or classes of shares listed on one of the following prescribed stock exchanges (section 3200 of the Regulations): Alberta, Montreal, Toronto, Vancouver and Winnipeg;
(b) elects on Form T2073 to be a public corporation (89(1)(g)(ii)(A));
(c) is designated to be a public corporation (89(1)(g)(ii)(B)); or
(d) is a public corporation anytime after June 18, 1971 (e.g. it was formerly listed on a prescribed stock exchange) (89(1)(g)(iii)).
To qualify as a public corporation by election or designation ((b) and (c) above), the corporation must comply with the prescribed conditions listed in subsection 4800(1) of the Regulations regarding the number of its shareholders, dispersal of ownership of it shares, public trading of it's shares and the size of the corporation. A corporation may also elect (Form T2067), or be designated, not to be a public corporation if it meets the prescribed conditions listed in subsection 4800(2) of the Regulations. When filing an election under clause 89(1)(g)(ii)(A) (to be a public corporation) or under clause 89(1)(g)(iii)(A) (not to be a public corporation), the requirements of subsection 4800(4) of the Regulations must be met.
3. A special election is available to certain new corporations under the post-amble to paragraph 89(1)(g). If a new corporation becomes a public corporation on or before the time when it must file the T2 return for its first taxation year, the election (which is filed with that return) deems the corporation to have been a public corporation since its date of incorporation. As there is no prescribed form for this election, a letter or similar attachment setting out that an election under paragraph 89(1)(g) is being made, is sufficient.
4. Subsections 4800(1) and (2) of the Regulations require that the number of shareholders be determined for the purpose of paragraph 89(1)(g). The names of the shareholders and other relevant information for identification should be readily available to support such a determination. In determining the shareholdings of the corporation, the emphasis is on beneficial ownership. For example, where an agent or bare trustee holds shares of a corporation on behalf of a number of principals, this should not be counted as one shareholder, but rather the number of such principals would be so considered. In the case of a pension fund or holding company, each fund or company counts as one shareholder.
5. The term "public corporation" does not necessarily apply to a large corporation which is a public company in the general sense. For example, a large Canadian corporation, which is a subsidiary of a foreign company with shares that are publicly traded on stock exchanges around the world, does not itself qualify as a public corporation for Canadian tax purposes if it fails to meet the requirements of paragraph 89(1)(g). Similarly, despite the general meaning of the word "public", a corporation owned by the federal government, or a provincial or municipal government in Canada is not a public corporation if it does not meet the requirements of paragraph 89(1)(g). Such a corporation may qualify as a "private corporation" as defined in paragraph 89(1)(f) and may be entitled to relief from Part IV tax on taxable dividends as provided under subsections 227(14) and (16).
6. Sometimes, a public corporation is controlled by a private corporation but, by definition, a private corporation cannot be controlled by a public corporation. However, if the parent of a Canadian resident subsidiary corporation is not resident in Canada, the parent cannot be a public corporation no matter how widely its shares are publicly traded, even if they are also traded on Canadian stock exchanges. Therefore, it is possible for the Canadian resident subsidiary to qualify as a private corporation since it is not controlled by a public corporation.
7. In certain cases, it is possible for a Canadian resident corporation to be neither a private corporation nor a public corporation. For example, a Canadian resident corporation falls into this category if it fails to meet the requirements for qualification as a public corporation under paragraph 89(1)(g) and it is also disqualified as a private corporation because it is controlled by a public corporation. Such a corporation is therefore not entitled to any special treatment that applies to private corporations or to public corporations.
8. The Act contains various deeming provisions regarding the status of corporations. For instance, certain federal Crown corporations are deemed not to be private corporations pursuant to subsection 27(2). However, unless they otherwise qualify as public corporations, the deeming provision does not by itself cause them to be public corporations for tax purposes. Certain non-resident-owned investment corporations are deemed by section 134 not to be private corporations except for the purposes of sections 87, 212.1 and 219 and subsection 88(2). Credit unions, cooperative corporations and general insurers that otherwise would be private corporations are similarly deemed not to be private corporations by subsections 137(7) and 136(1), and section 141.1, respectively, except for certain purposes of the Act including the small business deduction under section 125. Here again, these corporations do not necessarily become public corporations even though they are deemed not to be private corporations.
9. On the other hand, mortgage investment corporations (as defined under subsection 130.1(6)) and life insurers (as defined in subsection 248(1)) that are resident in Canada, are deemed to be public corporations by virtue of subsection 130.1(5) and section 141 respectively.
10. For a corporation to qualify as an investment corporation under subsection 130(3) or as a mutual fund corporation under subsection 131(8) it must be a public corporation. Ordinarily, closed-end mutual fund companies are not public corporations and therefore do not qualify as mutual fund corporations.
11. A corporation that ceases to be a private corporation will no longer be able to elect for the payment of capital dividends under subsection 83(2). In addition, the source of such dividends, the capital dividend account as defined in paragraph 89(1)(b), will be lost for this purpose, to the extent that it was not used up prior to the change of status.
12. An election for the payment of capital gains dividends under subsection 131(1) is available to a corporation in a year only if it is a mutual fund corporation throughout the taxation year in which a dividend became payable. However, in order to be a mutual fund corporation throughout a taxation year, the corporation must also be a public corporation throughout the taxation year.
13. The bankruptcy of a corporation does not by itself change the status of a corporation as private or public, as the case may be.
14. If a public corporation acting as an executor or trustee acquires control of a private corporation on the death of an individual, the private corporation's status will not change provided there is no undue delay in disposing of the shares.
15. The common law has generally established that a corporation is resident in the country in which its central management and control is exercised (DeBeers Consolidated Mines Limited v. Howe, (1906) A.C. 455). Usually management and control exists where the members of the Board of Directors meet and hold their meetings. However, if the Board of Directors of a company does not in fact exercise its powers, and the management and control of the company is actually exercised by some other party, such as the directors of its parent company or its principal shareholder, who are resident in another country, the company will be resident in that other country (Unit Construction Co. Limited v. Bullock, (1960) A.C. 351).
16. If a corporation is not resident in Canada by virtue of the central management and control test discussed in 15 above, it may nevertheless be resident in Canada by virtue of the deeming provisions in subsection 250(4). A corporation is generally deemed to be resident in Canada throughout a taxation year if:
(a) it was incorporated in Canada after April 26, 1965, or
(b) it was incorporated in Canada before April 27, 1965 and, during any taxation year ending after April 26, 1965, it
(i) was resident in Canada under the common law principles (see 15 above); or
(ii) carried on business in Canada.
Subsection 250(4) also deems certain corporations, incorporated before April 9, 1959, that were, on June 18, 1971, foreign business corporations (within the meaning of section 71 as it read in its application to the 1971 taxation year) that were controlled by a corporation resident in Canada, to be resident in Canada if certain other conditions described in that subsection have been met.
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