Yes. A contingent contractual right to reacquire the shares deems the seller to control the company for tax purposes, whether or not the right is ever exercised.
Short answer
Vendor-financing security is often structured as a right for the seller to reacquire the shares if the buyer defaults on the note. Section 251(5)(b) of the Income Tax Act treats that right as if it had already been exercised: where a person has a right “to, or to acquire, shares of the capital stock of a corporation…the person shall…be deemed to have the same position in relation to the control of the corporation as if the person owned the shares at that time.”
The subsection has one exception, and it is narrow: the deeming does not apply “where the right is not exercisable at that time because the exercise thereof is contingent on the death, bankruptcy or permanent disability of an individual.” An ordinary payment-default trigger is none of those three things, so a buyback right tied to missed loan payments falls squarely inside the deeming rule, not the exception. The consequence is usually associated corporations: if the seller owns any other active company, that company becomes associated with the one just sold for as long as the buyback right exists, and the two must share the $500,000 small business deduction limit — a real, ongoing tax cost with no exercise of the right required to trigger it. A share pledge or general security agreement gives a seller broadly the same practical protection on default without falling inside s.251(5)(b)’s language, because enforcing against pledged collateral is not a right to acquire the shares.
a buyback right that cost the seller control works the numbers: a routine vendor-financing buyback right associated the seller’s unrelated consulting company with the sold business, costing roughly $28,000 a year in lost small business deduction room until the security was replaced with a pledge.
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