Within the recently unveiled Budget of the 2017 Liberal federal government, legislation was proposed to determine which corporations will be able to qualify for an SR&ED tax credit. This legislation could clear up issues surrounding factual control of corporations, and whether or not that control exists. Whether or not a corporation is entitled to access tax benefits, such as the SR&ED tax credit is implied in this proposed legislation. Affected is the limit on qualifying expenditures relating to the refundable 35 percent SR&ED tax credit.
Amendments to the Income Tax Act are proposed in response to a recent court case, which could have reduced the scope of factors used to determine whether or not factual control exists.
The Differences Between Factual and Legal Control
There are two types of control of a corporation in the Act: legal and factual. Factual control is a much broader concept, and these types of control make sure that the tax system isn’t abused.
The factual control test is used to determine if two or more Canadian-controlled private corporations are associated with each other. These associations must be considered together to ensure that certain tax advantages can be obtained.
Factual control exists where someone has “indirectly or indirectly in any manner whatever” influence that could impact control of the corporation. Therefore, a number of factors have to be looked at in order to determine if someone has factual control of a corporation.
Legal control implies that a person has the right to elect most of their board of directors.
The recent court decision “McGillivray Restaurant Ltd. v. The Queen” found that a factor to be considered in whether or not factual control exists, an individual must have “a legally enforceable right and ability to effect a change to the board of directors or its powers, or to exercise influence over the shareholder or shareholders who have that right and ability.” The court rejected consideration of factors related to operational control in making its decision.
What Does This Mean For SR&ED?
In its budget documents, the federal government suggests that this court decision’s interpretation is not broad enough. Thus, the Liberal federal government intends to amend the Income Tax Act to establish that all factors need to be taken into account when determining factual control. However, this could introduce more uncertainty as to whether someone has factual control of a corporation.
As a result, it remains to be seen if this proposed amendment will help or hinder corporations from accessing tax benefits, such as the SR&ED tax credit. Nevertheless, this amendment, once made, will apply to all taxation years beginning after when the Budget was tabled on March 22, 2017.