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. Alternatively, the SA would provide for automatic redemption of the departing manager’s shares.

ensuring there is no right to acquire shares, or cause shares to be redeemed

CRA was asked whether Subsection 256(1.4) or Paragraph 251(5)(b) would apply in determining whether the franchisor is associated with, or related to, the franchise corporation. See VTN 411(7) for a discussion of these provisions.

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.