CRA - Sale of franchise - Could right to locate a purchaser for a departing partial owner cause association issues?

In an October 7, 2016 French Technical Interpretation (2016-0652971C6, Gladu, Guylaine), CRA addressed the impact of clauses in shareholders’ agreements (SA) in a franchise arrangement. Each franchise is held in a corporation owned equally by the franchisor and the manager of the franchise. Where the manager ceases employment, the SA would provide for the franchisor to arrange a sale of the manager’s shares to a third party, who cannot be the franchisor or an associate of the franchisor. 

CRA confirmed that the proposed right to locate a purchaser for the manager’s shares would not be considered a right for the franchisor to acquire the shares. Similarly, an automatic redemption would not be considered a right of the franchisor to force a redemption provided that the franchisor cannot control the event that would cause the redemption. As such, the proposed clauses would not cause the corporations to become associated or related.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 428