Citation: 2013 TCC 12
Date: 20130124
Docket: 2009-1057(IT)G
BETWEEN:
LYRTECH RD INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
These are appeals from
assessments dated February 8, 2008, for the 2005 taxation year and July 9,
2008, for the 2006 and 2007 taxation years of the appellant, issued pursuant to
the Income Tax Act, R.S.C. 1985, c. 1 (5th Suppl.), as amended (the Act),
by the Minister of National Revenue (the Minister).
[2]
In the February 8,
2008, and July 9, 2008, assessments, the following changes were made to the
investment tax credit (ITC) and ITC refunds claimed by the appellant:
|
|
2005
$
|
2006
$
|
2007
$
|
|
Prior net income (net loss)
|
(-1,905,513)
|
(-4,453,027)
|
(-7,325,312)
|
|
R & D expenditures claimed
|
1,215,211
|
1,886,261
|
2,397,527
|
|
Revised R & D expenditures
|
1,046,328
|
1 626,415
|
2,611,237
|
|
Difference:
|
(-168,883)
|
(-259,846)
|
213,710
|
|
Revised net income (net loss)
|
(-2,074,396)
|
(-4,712,873)
|
(-7,111,602)
|
|
R & D credits claimed
|
387,922
|
697,419
|
806,599
|
|
R & D credits allowed
|
216,368
|
334,153
|
504,288
|
|
R & D credits disallowed
|
171,554
|
363,266
|
302,311
|
|
ITC refund claimed
|
384,812
|
663,130
|
742,640
|
|
ITC refund allowed
|
0
|
0
|
0
|
|
ITC carry-forward
|
216,368
|
550,521
|
1,054,809
|
[3]
In its notice of
appeal, the appellant does not dispute the Minister's changes regarding the scientific
research and experimental development (SR&ED) expenditures claimed by the
appellant.
[4]
The issue is whether
the appellant was a "Canadian-controlled private corporation", as
defined in subsection 125(7) of the Act, during the taxation years ending
December 31, 2005, 2006 and 2007. If the appellant was not a
"Canadian-controlled private corporation" during those taxation
years, it would not be entitled to the 15% addition to the investment tax
credit provided for in subsection 127(10.1) of the Act and would not be entitled
to an investment tax credit refund pursuant to subsection 127.1(1) of the Act,
since it would not be a qualifying corporation within the meaning of subsection
127.1(2) of the Act.
Respondent's position
[5]
The respondent submits
that for the taxation years ending December 31, 2005, 2006 and 2007, the
appellant was controlled, directly or indirectly in any manner whatever by
Lyrtech Inc. (Lyrtech), a public corporation within the meaning of subsection
89(1) of the Act, because Lyrtech had a direct or indirect influence that, when
exercised, resulted in the control in fact of the appellant within the meaning
of subsection 256(5.1) of the Act.
[6]
Alternatively, the
respondent submits that each of the beneficiaries of Fiducie Financière Lyrtech
(FFL), namely 4296621 Canada Inc. (4296621), 4296630 Canada Inc. (4296630) and
4296648 Canada Inc. (4296648), had a conditional right to the shares of the
appellant's capital stock such that each was deemed to control the appellant pursuant
to subparagraph 251(5)(b)(i) of the Act and thus had de jure
control of the appellant.
Appellant's position
[7]
Counsel for the
appellant submits there is no need to consider whether there was de facto
control of the appellant since FFL had de jure control of the appellant.
In the absence of any express and specific statutory provisions, de jure
control and de facto control cannot be analyzed simultaneously.
[8]
Counsel for the
appellant also submits that Lyrtech did not have de facto control of the
appellant because it could not influence the decisions of the appellant's board
of directors.
Partial agreed statement of facts
[9]
The parties produced a
partial agreed statement of facts dated April 13, 2011. I reproduce in its
entirety the section of the statement setting out the facts:
[translation]
Lyrtech Inc.
1. Technologies Lyre Inc. was
incorporated on June 26, 1991, under Part 1A of the Companies Act (Quebec), and specialized in developing, manufacturing and marketing digital electronic
circuits and analog circuits.
2. Technologies Lyre Inc. was involved in research and
developed, for its own benefit or for others, products based on digital signal
processors in the field of digital telecommunications and various other electro-optical
products.
3. Louis Bélanger and Louis Chouinard were the founders of Technologies
Lyre Inc.
4. Lyrtech Inc. (Lyrtech) was incorporated on March
9, 2000, under Part 1A of the Quebec Companies Act.
5. On September 1, 2000, Technologies Lyre Inc. acquired
control of Lyrtech Inc.
6. On September 1, 2000, Lyrtech Inc. merged with Technologies
Lyre Inc. and continued the latter’s activities.
7. Following a public offering by means of a prospectus filed on
October 4, 2000, Lyrtech became a public corporation that had a class of shares
of its capital stock listed on a designated stock exchange in Canada.
8. Before June 1, 2005, Lyrtech conducted R&D activities
and on that basis claimed investment tax credits.
9. As a public corporation, Lyrtech claimed against its tax
payable non-refundable investment tax credits at the rate of 20% of its
eligible R&D expenditure account. For its 2000 to 2004 taxation years, Lyrtech
was in a loss position. As a result, it could not benefit from the federal
investment tax credit because it was non-refundable.
Restructuring
10. In 2005, Lyrtech restructured its business in order to
transfer its R&D activities to a new corporation, the appellant.
11. On May 30, 2005, 4296621 Canada Inc. (4296621) was
incorporated. Lyrtech subscribed for 400 Class A shares of this new
corporation's capital stock for $400.
12. Miguel Caron and Louis Bélanger were appointed directors
of 4296621.
13. On May 30, 2005, 4296630 Canada Inc. (4296630) was
incorporated. 4296621 subscribed for 100 Class A shares of this new
corporation's capital stock for $100.
14. Miguel Caron and Louis Bélanger were appointed directors
of 4296630.
15. On May 30, 2005, 4296648 Canada Inc. (4296648) was
incorporated. 4296621 subscribed for 100 Class A shares of this new
corporation for $100.
16. Miguel Caron and Louis Bélanger were appointed directors
of 4296648.
17. On June 1, 2005, Fiducie Financière Lyrtech (FFL) was
created. This trust was set up by 4296621.
18. The income beneficiaries were 4296630, 4296648 and the
appellant, while the capital beneficiaries were 4296630, 4296648 and 4296621.
19. From June 1 to June 17, 2005, the trustees were Miguel
Caron, Vincent Bélanger and Louis Bélanger.
20. As of June 17, 2005, Miguel Caron and Louis Bélanger were
the trustees.
21. Under the trust deed, the trustees of FFL cease to be
trustees when they are no longer directors of Lyrtech, and the number of FFL
trustees cannot be greater than the number of directors of Lyrtech.
22. Under the trust deed, FFL must distribute all of its tax
revenue to its beneficiaries yearly. The distribution of revenue and capital among
the beneficiaries is discretionary.
23. On May 30, 2005, Lyrtech RD Inc. (the appellant) was
incorporated.
24. On June 1, 2005, 4296621 gave FFL $200.
25. On June 1, 2005, FFL subscribed for 100 Class E
shares of the capital stock of 4296630 for $100.
26. On June 1, 2005, FFL subscribed for 100 Class A shares
and 100 Class B shares of the appellant's capital stock, for $100 in
each case.
27. Miguel Caron and Louis Bélanger were appointed directors
of the appellant.
28. On June 1, 2005, 4296621 granted the appellant an option
to purchase at fair market value all of the shares of either 4296648 or
4296630. According to the appellant, this transaction was intended to ensure that
Lyrtech and the appellant were not at arm’s length, within the meaning of
section 251 of the Income Tax Act, for the purposes of section 7 of
that Act.
29. On June 1, 2005, the trustees of FFL, through a sole
shareholder declaration, withdrew all the powers held by the appellant's
directors and assumed them themselves, in accordance with subsection 146(2)
of the Canada Business Corporations Act.
30. On June 1, 2005, Lyrtech transferred to the appellant all
of its R&D assets (except intellectual property) at fair market value, as
well as the employees assigned to R&D activities, in consideration of the
issuance by the appellant of 1,016,437 Class C shares of its capital
stock.
31. On June 1, 2005, the appellant redeemed the Class C
shares of its capital stock held by Lyrtech. As consideration, the appellant
issued a demand promissory note to Lyrtech in the amount of $1,016,437.
32. Around June 1, 2005, Lyrtech subscribed for 1,016,437 Class A
shares of the capital stock of 4296621. The subscription price was paid by
delivery to 4296621 of the appellant's promissory note.
33. On June 1, 2005, 4296621 made a capital contribution to 4296630
by transferring to it the appellant's promissory note.
34. On June 1, 2005, 4296630 paid a dividend of $1,016,437 on
the Class E shares of its capital stock held by FFL. This dividend was
paid by delivery to FFL of the appellant's promissory note.
35. On June 1, 2005, Lyrtech granted the appellant a research
contract under which the appellant agreed to carry out all the R&D work in
order to pursue the development of the technologies patented or owned by Lyrtech
that Lyrtech might entrust to the appellant.
36. As consideration, the appellant obtained a share in future
income. The appellant was entitled to 10% of the income from sales of the
products resulting from the R&D work and 25% of the income from licences
granted with respect to those products.
37. The research contract is of indeterminate duration.
However, Lyrtech may, among other things, terminate the research contract on 60
days’ notice to the appellant.
38. The organization chart dated June 1, 2005, appended to the
Amended Reply to the Notice of Appeal, accurately represents the organizational
structure of Lyrtech and the appellant after the restructuring in stating the
following:
·
Louis Bélanger, Louis Chouinard and Société
Innovatech Qc and
Chaudière‑Appalaches
were not the sole shareholders of Lyrtech;
·
according to the information circulars from
Lyrtech's management, no Lyrtech shareholder held more than 10% of the Class A
shares of Lyrtech’s capital stock.
39. After the corporate restructuring, the appellant filed its
tax returns as a CCPC and claimed the refundable investment tax credit at the
rate of 35%.
Analysis of activities and of the relationships between Lyrtech and
the appellant
40. From the time it began operations, the appellant occupied
space in the same premises as Lyrtech.
41. These premises were rented by Lyrtech for $15,848 per
month, exclusive of taxes.
42. As of January 24, 2007, there was no written lease between
Lyrtech and the appellant.
43. From June 1 to December 31, 2005, the appellant did not
record any rental expenses.
44. In an allocation based on the number of employees, the
appellant would have been responsible for around $60,400 in rent ($15,848 X
7 months X 43/79).
45. Some individuals were members of the administrative personnel
of both Lyrtech and the appellant.
46. Miguel Caron was president of both Lyrtech and the
appellant.
47. Alain Landry was vice-president of finance and human
resources for both Lyrtech and the appellant.
48. Daniel Bellemare was the comptroller for both Lyrtech and
the appellant.
49. Sylvie Coulombe was the secretary for both Lyrtech and the
appellant.
50. The appellant assumed part of the Lyrtech's expenses
related to its business. These expenses appeared as accounting entries and were
mostly allocated according to the number of employees, that is, at a ratio of
43/79, and included the following:
(a) The appellant assumed part of the life insurance premium for some
directors, although Lyrtech was the sole beneficiary of the life insurance
policy.
(b) The appellant assumed part of the premium for the insurance covering
damage to equipment that belongs to both companies, although Lyrtech was the
sole beneficiary of the insurance policy.
(c) The appellant assumed part of the accounting fees related to the
audit of Lyrtech's consolidated financial statements.
(d) The appellant assumed part of the costs related to the director’s
fees paid to participants at meetings of Lyrtech's board of directors.
(e) The appellant assumed part of the remuneration paid to Pierre Lortie,
chairman of Lyrtech's board of directors.
51. For the year ending December 31, 2005, no royalty was paid
to the appellant by Lyrtech under the terms of the June 1, 2005, research
contract, and so the appellant had no income for that year.
52. For
the period at issue, the appellant had no line of credit.
53. Before March 2006, the appellant had taken out no bank
loan. In March 2006, the appellant obtained a credit facility with a banking institution,
benefiting from two loans made available to it to finance R&D credits.
54. Lyrtech
stood surety with respect to these loans.
55. During the period from June 1 to December 31, 2005,
Lyrtech transferred around $2,037,481 to the appellant.
56. For the year ending December 31, 2006, the business
expenses incurred by the appellant were determined to be around $224,000. These
expenses were initially paid by Lyrtech.
57. For the year ending December 31, 2006, Lyrtech owed the
appellant around $269,000 in royalties resulting from the research contract
between the companies.
58. In light of the facts noted in the two preceding
paragraphs, Lyrtech owed the appellant an amount of around $45,000, which was
never paid.
59. In its tax returns for the years ending December 31, 2006 and 2007, the
appellant declared no royalty income.
60. Mr. Bellemare, comptroller for Lyrtech and the appellant, made
the electronic transfers of funds between the various companies.
61. Mr. Bellemare performed the transfers of funds according
to the expenses incurred by the appellant.
62. The appellant could not operate without the advances of
funds from Lyrtech.
63. In 2005, when Lyrtech made loans to the appellant, Mr.
Bellemare circulated the funds through the subsidiaries 4296621, 496630 and
FFL. After that stage, the appellant returned the funds it received from FFL to
Lyrtech, which then returned them directly to the appellant. These last two
money transfers in fact cancel each other out.
64. Alain Landry, Miguel Caron and Daniel Bellemare are
authorized to sign cheques for Lyrtech and the appellant.
65. An external accounting firm consolidated the financial
statements of Lyrtech and the appellant on the basis of Canadian Institute of
Chartered Accountants (CICA) Guideline 15 that applies when an entity controls
another entity otherwise than by holding voting rights, namely through
contractual rights or other financial interests, as indicated in the
introductory paragraph (paragraph 1) of that guideline.
66. According to the external accounting firm, the main reason
for consolidating the appellant's activities with Lyrtech's had to do with the advances
of funds the appellant received from Lyrtech, either directly or through its subsidiaries
and FFL.
4296630, 4296648 and 4296621
67. For the period from June 1, 2005, to December 31, 2007, around
$11,850,000 moved between Lyrtech and the appellant, an
amount with respect to which adjustment resolutions were passed on March 6, 2008.
68. The corporate books for 4296630, 4296648 and 4296621 were
completed during the corporate restructuring, the transactions respecting which
are described at paragraphs 10 to 37 of this agreed statement; however, those
books have not been updated since then, except as regards the adjustment
resolutions mentioned in the preceding paragraph.
69. There are no 4296621 minutes regarding a subscription by
Lyrtech for shares of its capital stock totalling around $2,037,481.
70. There is no mention in 4296621’s shareholder register of a
subscription totalling around $2,037,481 for shares of its capital stock, but
this amount was recognized in 4296621’s financial statements.
71. There is no book or record that refers to the advances to 4296630’s
capital stock by 4296621.
72. The companies 4296648, 4296621 and 4296630 did not file
their tax returns for the 2006 and 2007 taxation years until July 30, 2009.
73. There is no information about the dividends 4296630 paid
on its Class E shares held by FFL.
[10]
The organization chart
dated June 1, 2005, showing Lyrtech’s and the appellant’s organizational
structure, appended to the Amended Reply to the Notice of Appeal, is reproduced
in the Appendix hereto.
Analysis
[11]
The relevant provisions
of the Act for the purposes of the present case are paragraph (a) of the
definition of "public corporation" in subsection 89(1), the
definition of "Canadian-controlled private corporation" in subsection
125(7), the definition of "non-qualifying corporation" in subsection 127(9),
subsection 127(10.1), the definition of "qualifying corporation"
in subsection 127.1(2), and subsections 248(25), 251(5), 256(5.1),
256(6.1) and 256(6.2). These provisions read as follows:
Definitions
89.
(1) In this subdivision,
. .
.
“public
corporation” at any particular time means
(a)
a corporation that is resident in Canada at the
particular time if at that time a class of shares of the capital stock of the
corporation is listed on a designated stock exchange in Canada,
125.
(7) In this section,
. .
.
“Canadian-controlled
private corporation” means a private corporation
that is a Canadian corporation other than
(a)
a corporation controlled, directly or indirectly in any
manner whatever, by one or more non-resident persons, by one or more public
corporations (other than a prescribed venture capital corporation), by one or
more corporations described in paragraph (c),
or by any combination of them,
(b)
a corporation that would, if each share of the capital
stock of a corporation that is owned by a non-resident person, by a public
corporation (other than a prescribed venture capital corporation), or by a
corporation described in paragraph (c)
were owned by a particular person, be controlled by the particular person,
(c)
a corporation a class of the shares of the capital
stock of which is listed on a designated stock exchange, or
(d)
in applying subsection (1), paragraphs 87(2)(vv) and (ww) (including, for greater
certainty, in applying those paragraphs as provided under paragraph 88(1)(e.2)), the definitions “excessive eligible
dividend designation”, “general rate income pool” and “low rate income pool”
in subsection 89(1) and subsections 89(4) to (6), (8) to (10) and 249(3.1), a
corporation that has made an election under subsection 89(11) and that has not
revoked the election under subsection 89(12);
127.
(9) In this section,
. .
.
“non-qualifying
corporation” at any time means
(a)
a corporation that is, at that time, not a
Canadian-controlled private corporation,
(b)
a corporation that would be liable to pay tax under
Part I.3 for the taxation year of the corporation that includes that time if
that Part were read without reference to subsection 181.1(4) and if the amount
determined under subsection 181.2(3) in respect of the corporation for the year
were determined without reference to amounts described in any of paragraphs
181.2(3)(a), (b), (d) and (f) to the extent that the
amounts so described were used to acquire property that would be qualified
small-business property if the corporation were not a non-qualifying
corporation, or
(c)
a corporation that at that time is related for the
purposes of section 181.5 to a corporation described in paragraph (b);
127.
(10.1) For the purpose of
paragraph (e) of
the definition “investment tax credit” in subsection (9), where a
corporation was throughout a taxation year a Canadian-controlled private
corporation, there shall be added in computing the corporation’s investment tax
credit at the end of the year the amount that is 15% of the least of
(a)
such amount as the corporation claims;
(b)
the amount by which the corporation’s SR&ED
qualified expenditure pool at the end of the year exceeds the total of all
amounts each of which is the super-allowance benefit amount for the year in
respect of the corporation in respect of a province; and
(c)
the corporation’s expenditure limit for the year.
127.1.
(2) In this section,
. .
.
“qualifying
corporation” for a particular taxation year that
ends in a calendar year means
(a)
a corporation that is a Canadian-controlled private
corporation throughout the particular year (other than a corporation associated
with another corporation in the particular year) the taxable income of which
for its immediately preceding taxation year (determined before taking into
consideration the specified future tax consequences for that preceding year)
does not exceed its business limit for that preceding year, or
(b)
a corporation that is a Canadian-controlled private
corporation throughout the particular year and associated with another
corporation in the particular year, where the total of all amounts each of
which is the taxable income of the corporation or such an associated
corporation for its last taxation year that ended in the preceding calendar
year (determined before taking into consideration the specified future tax
consequences for that last year) does not exceed the total of all amounts each
of which is the business limit of the corporation or such an associated
corporation for that last year;
248.
(25) For the purposes of this Act,
(a)
a person or partnership beneficially interested in a
particular trust includes any person or partnership that has any right (whether
immediate or future, whether absolute or contingent or whether conditional on
or subject to the exercise of any discretion by any person or partnership) as a
beneficiary under a trust to receive any of the income or capital of the
particular trust either directly from the particular trust or indirectly
through one or more trusts or partnerships;
(b)
except for the purpose of this paragraph, a particular
person or partnership is deemed to be beneficially interested in a particular
trust at a particular time where
(i)
the particular person or partnership is not
beneficially interested in the particular trust at the particular time,
(ii) because of the terms or conditions of the particular trust or any
arrangement in respect of the particular trust at the particular time, the
particular person or partnership might, because of the exercise of any
discretion by any person or partnership, become beneficially interested in the
particular trust at the particular time or at a later time, and
(iii)
at or before the particular time, either
(A)
the particular trust has acquired property, directly or
indirectly in any manner whatever, from
(I)
the particular person or partnership,
(II)
another person with whom the particular person or
partnership, or a member of the particular partnership, does not deal at arm’s
length,
(III)
a person or partnership with whom the other person
referred to in subclause (II) does not deal at arm’s length,
(IV)
a controlled foreign affiliate of the particular person
or of another person with whom the particular person or partnership, or a
member of the particular partnership, does not deal at arm’s length, or
(V)
a non-resident corporation that would, if the
particular partnership were a corporation resident in Canada, be a controlled
foreign affiliate of the particular partnership, or
(B)
a person or partnership described in any of subclauses
(A)(I) to (V) has given a guarantee on behalf of the particular trust or
provided any other financial assistance whatever to the particular trust; and
(c)
a member of a partnership that is beneficially
interested in a trust is deemed to be beneficially interested in the trust.
251.
(5) For the purposes of
subsection (2) and the definition “Canadian-controlled private corporation” in
subsection 125(7),
(a)
where a related group is in a position to control a
corporation, it shall be deemed to be a related group that controls the
corporation whether or not it is part of a larger group by which the
corporation is in fact controlled;
(b)
where at any time a person has a right under a
contract, in equity or otherwise, either immediately or in the future and
either absolutely or contingently,
(i)
to, or to acquire, shares of the capital stock of a
corporation or to control the voting rights of such shares, the person shall,
except 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, 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,
(ii)
to cause a corporation to redeem, acquire or cancel any
shares of its capital stock owned by other shareholders of the corporation, the
person shall, except 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, be deemed to have the same position in relation to
the control of the corporation as if the shares were so redeemed, acquired or
cancelled by the corporation at that time;
(iii)
to, or to acquire or control, voting rights in respect
of shares of the capital stock of a corporation, the person is, except where
the right is not exercisable at that time because its exercise is contingent on
the death, bankruptcy or permanent disability of an individual, deemed to have
the same position in relation to the control of the corporation as if the
person could exercise the voting rights at that time, or
(iv)
to cause the reduction of voting rights in respect of
shares, owned by other shareholders, of the capital stock of a corporation, the
person is, except where the right is not exercisable at that time because its
exercise is contingent on the death, bankruptcy or permanent disability of an
individual, deemed to have the same position in relation to the control of the
corporation as if the voting rights were so reduced at that time; and
(c)
where a person owns shares in two or more corporations,
the person shall as shareholder of one of the corporations be deemed to be
related to himself, herself or itself as shareholder of each of the other
corporations.
256.
(5.1) For the purposes of
this Act, where the expression “controlled, directly or indirectly in any
manner whatever,” is used, a corporation shall be considered to be so
controlled by another corporation, person or group of persons (in this
subsection referred to as the “controller”) at any time where, at that time, the
controller has any direct or indirect influence that, if exercised, would
result in control in fact of the corporation, except that, where the
corporation and the controller are dealing with each other at arm’s length and
the influence is derived from a franchise, licence, lease, distribution, supply
or management agreement or other similar agreement or arrangement, the main
purpose of which is to govern the relationship between the corporation and the
controller regarding the manner in which a business carried on by the
corporation is to be conducted, the corporation shall not be considered to be
controlled, directly or indirectly in any manner whatever, by the controller by
reason only of that agreement or arrangement.
. .
.
256.
(6.1) For the purposes of
this Act and for greater certainty,
(a)
where a corporation (in this paragraph referred to as
the “subsidiary”) would be controlled by another corporation (in this paragraph
referred to as the “parent”) if the parent were not controlled by any person or
group of persons, the subsidiary is controlled by
(i)
the parent, and
(ii)
any person or group of persons by whom the parent is controlled; and
(b)
where a corporation (in this paragraph referred to as
the “subject corporation”) would be controlled by a group of persons (in this
paragraph referred to as the “first-tier group”) if no corporation that is a
member of the first-tier group were controlled by any person or group of
persons, the subject corporation is controlled by
(i)
the first-tier group, and
(ii)
any group of one or more persons comprised of, in
respect of every member of the first-tier group, either the member, or a person
or group of persons by whom the member is controlled.
256.
(6.2) In its application to subsection (5.1), subsection
(6.1) shall be read as if the references in subsection (6.1) to “controlled”
were references to “controlled, directly or indirectly in any manner whatever”.
[12]
The first issue to
resolve is whether a simultaneous analysis of de jure control and de
facto control should be undertaken in the present circumstances. In my
opinion, de jure control and de facto control coexist simultaneously
for all provisions of the Act, without it being necessary for the Act to make
specific reference thereto.
[13]
The term
"control" is not defined in the Act and the courts have had to rule a
number of times on its meaning. The leading decision with regard to control is Buckerfield's
Ltd. v. Minister of National Revenue, [1965] 1 Ex. C.R. 299, in which
President Jackett stated the principle that the concept of control meant the
right of control that results from ownership of such a number of shares as confers
upon their holder a majority of votes in the election of the corporation’s board
of directors. This, of course, is de jure control.
[14]
In light of the case
law, Parliament has had to make many clarifications with respect to the concept
of control in order to reach specific legislative goals. Thus, since September
13, 1988, when subsection 256(5.1) was introduced, the Act is clear as to
which are the provisions that specifically refer to the concept of de jure
control as opposed to those that involve, rather, the application of de
facto control.
[15]
The use of the phrase
"controlled, directly or indirectly in any manner whatever"
specifically refers to de facto control, which exists when a dominant entity
has direct or indirect influence whose exercise would result in control in
fact. The phrase "controlled, directly or indirectly in any manner
whatever" is used in particular in subsection 125(7) in the definition of
"Canadian-controlled private corporation".
[16]
According to the Canada
Revenue Agency (CRA), when Parliament refers to the control of a corporation
and uses the phrase "directly or indirectly in any manner whatever", it
is indicating that control includes both de jure control and de facto
control (paragraph 19, Interpretation Bulletin IT-64R4 (Consolidated)).
[17]
Following the decision
by the Federal Court of Appeal in Parthenon Investments Limited v. M.N.R.,
97 DTC 5343, which granted control of a corporation to the corporation that had
ultimate control rather than to an intermediary corporation, Parliament adopted
subsections 256(6.1) and (6.2) to make clear the existence of the concept
of simultaneous control that in fact already seemed implicit in the Act.
[18]
According to Nicole
Prieur, associate professor, HEC Montréal, the adoption of subsections 256(6.1)
and (6.2) clearly shows that [translation]
"simultaneous control applies naturally to all the relevant provisions of
the Income Tax Act without it being necessary for the text to make specific
reference thereto" (Nicole Prieur, "L’utilisation législative du
concept de contrôle de droit" ["Statutory use of the concept of de
jure control"], 2nd quarter 2009, CCH, 2011, page 8).
[19]
In Rosario Poirier Inc.
v. Canada, [2002] T.C.J. No. 255, counsel for the appellant argued that
there could not be simultaneous control of Trab Inc. by Rosario Poirier Inc. and
by Luc Poirier, as Luc Poirier had de jure control of 100% of the voting
shares in Trab Inc. Judge Archambault did not accept this interpretation and
made the following comments:
29 In my view, paragraph 256(1)(a) is clear and precise and
leaves no doubt as to its meaning. Once one corporation controls another
directly or indirectly in any manner whatever, those two corporations are
associated with one another. The fact that another taxpayer had control in law
of Trab is irrelevant here since RPI had control in fact under paragraph
256(1)(a) of the Act.
30 Furthermore, under
subparagraph 256(1.2)(b)(ii) of the Act, there is nothing to prevent one
from concluding that a corporation (RPI) has control in fact of another (Trab)
within the meaning of paragraph 256(1)(a) of the Act, even if another
person (Luc Poirier) exercises control in law over the latter corporation.
Subparagraph 256(1.2)(b)(ii) of the Act clearly applies to paragraph
256(1)(a). In other words, it is not necessary for subsection 256(1.2)
of the Act to refer to subsection 256(5.1). Reference to subsection 256(1) is
sufficient.
[20]
More recently, in Avotus
Corporation v. Canada, 2006 TCC 505, which was essentially an analysis of de
facto control, Paris J. indicated in obiter dictum that in his
opinion one of the shareholders had de jure control of the appellant. As
chairman of the board of directors, that shareholder had the right to cast the deciding
vote, which right was granted by an amalgamation agreement and the appellant's
articles of incorporation. This decision shows that the control analysis can be
done simultaneously for de jure control and de facto control, one
not excluding the other.
[21]
In the case at bar, all
the Class A shares of the appellant, that is, the only voting shares, were held
by FFL. In such a situation the Supreme Court of Canada stated in M.N.R. v.
Consolidated Holding Co., [1974] S.C.R. 419, that, in addition to the
corporation's shareholders’ register and articles of incorporation, it was
necessary to look at the trust instrument to determine how the voting rights
attaching to the shares could be exercised. In that decision, the trustee
shareholders were required to vote as a unit. If they were not unanimous, they
could not exercise the shares’ voting rights.
[22]
For the period at issue,
except the period of June 1 to June 17, 2005, the trustees were Miguel
Caron and Louis Bélanger. Pursuant to the trust deed, the decisions made
by the trustees were to be majority decisions. None of the trustees could
therefore have sole de jure control of the appellant. Tardif J. came to
the same conclusion in Létourneau v. Canada, 2007 TCC 91, in stating
that two of the three trustees of the trust could not have de jure control
because decisions regarding the corporation always had to be made unanimously under
the terms of the trust deed.
[23]
Here, it must be noted
that, in addition to the shareholders’ register, the appellant's articles of
incorporation and FFL's trust deed, one should also consider the sole
shareholder’s statement whereby the trustees of FFL withdrew all powers held by
the appellant's directors and assumed them themselves, in accordance with
subsection 146(2) of the Canada Business Corporations Act. Subsection 146(2)
reads as follows:
146(2)
If a person who is the beneficial owner of all the
issued shares of a corporation makes a written declaration that restricts in
whole or in part the powers of the directors to manage, or supervise the
management of, the business and affairs of the corporation, the declaration is
deemed to be a unanimous shareholder agreement.
[24]
In the recent decision
in Price Waterhouse Coopers Inc., Acting in the Capacity of Trustee in
Bankruptcy of Bioartificial Gel Technologies (Bagtech) Inc. v. The Queen,
2012 TCC 120, Bédard J. held, at paragraph 85, "that, as a general rule, a
clause in a unanimous shareholders' agreement that restricts the ability of the
majority shareholders to elect the directors must be taken into account in the
determination of the de jure control of a corporation". It should
be noted that this decision has been appealed.
[25]
In the present case,
the effect of the declaration by the appellant's sole shareholder was simply to
confirm that de jure control of the appellant truly belonged to the
shareholders who were trustees of FFL.
Analysis of de facto control of the
appellant
[26]
In each situation it is
the relevant facts that enable one to determine whether a person has de
facto control of a corporation. Certain relevant general factors in this
regard are listed in paragraph 23 of Interpretation Bulletin IT-64R4 (Consolidated):
(a) the
percentage of ownership of voting shares (when such ownership is not more than
50 per cent) in relation to the holdings of other shareholders;
(b) ownership
of a large debt of a corporation which may become payable on demand (unless
exempted by subsection 256(3) or (6)) or a substantial investment in
retractable preferred shares;
(c) shareholder
agreements including the holding of a casting vote;
(d) commercial
or contractual relationships of the corporation, e.g., economic dependence on a
single supplier or customer;
(e) possession
of a unique expertise that is required to operate the business; and
(f) the
influence that a family member, who is a shareholder, creditor, supplier, etc.,
of a corporation, may have over another family member who is a shareholder of
the corporation.
. .
.
In
addition to the general factors described above, the composition of the board
of directors and the control of day-to-day management and operation of the
business would be considered.
[27]
These factors were quoted
by Judge Lamarre in Mimetix Pharmaceuticals Inc. v. Canada, [2001] T.C.J.
No. 749 and she concluded, at paragraph 52 "that the appellant was in fact
controlled by Mimetix, the non-resident shareholder, in 1996, and consequently
was not a CCPC in that year, within the meaning of subsections 125(7) and
256(5.1)". That decision was affirmed by the Federal Court of Appeal, 2003
FCA 106.
[28]
According to the
Supreme Court of Canada decision in Duha Printers (Western) Ltd. v. Canada,
[1998] 1 S.C.R. 795, external agreements, such as the trust deed and any
agreement that might influence the exercise of voting rights and the
composition of the appellant's board of directors, are relevant for determining
de facto control. According to FFL's trust deed, all of Lyrtech's
directors were automatically eligible to be trustees, but only those who signed
the acceptance form with regard to acting as a trustee and who submitted that
form to the trust could be elected or appointed as trustees by the existing
trustees. Under the sole shareholder declaration, all the powers held by the
appellant's directors were withdrawn and transferred to the trustees so that
they could exercise them themselves.
[29]
As a result, it can be concluded
that the appellant was indirectly controlled by the two non-independent directors
among the seven members of Lyrtech's board of directors. Miguel Caron was
appointed director of Lyrtech on April 22, 2003, and he remained in that
position until November 20, 2007. He also held the position of president and
chief executive officer. Louis N. Bélanger had been a director of Lyrtech since
March 15, 2000, and held various positions including vice-chairman of the board
of directors and head of technology.
[30]
In addition to being trustees
of FFL, as of June 8, 2005, Miguel Caron and Louis N. Bélanger were the two
sole directors of the appellant, 4296621, 496630 and 496648. Miguel Caron was
also the president of each of these companies while Louis N. Bélanger was their
secretary.
[31]
The many facts set out
in paragraphs 40 to 73 of the partial agreed statement of facts show that Lyrtech’s
power and influence over the appellant was not limited to being able to change
the composition of the appellant's board of directors. The analysis of
activities and of the relationships existing between Lyrtech and the appellant
prepared by the CRA auditor clearly shows that Lyrtech exercised significant
influence over the appellant and that the appellant was economically dependent
on Lyrtech. Among the main elements the auditor noted, the following are worth
mentioning:
·
the same people were the
directors or executive officers of all the entities in the group;
·
the unreasonable allocation
of expenses between Lyrtech and the appellant;
·
the fact that only one person
could transfer funds among all the entities in the group;
·
the transfers of funds among
Lyrtech, 4296621, FFL, FFL's beneficiary corporations and the appellant;
·
the appellant had no royalty
income and was dependent on Lyrtech for the financing of its activities. The
appellant's income was $0, $77, and $14 for 2005, 2006 and 2007 respectively; for
the latter two years, it was interest income;
·
Lyrtech stood surety
with respect to credit facilities for the appellant;
·
the October 2006
organization chart shows the complete integration of the appellant into Lyrtech;
·
the consolidation of
Lyrtech's and the appellant's financial statements;
·
the fact that the
appellant was paid on the basis of sales and not according to the expenses it
incurred.
[32]
Taking all these facts
into consideration, I find that Lyrtech exercised a dominant economic influence
over the appellant. The appellant was not an independent profit centre and
could not survive or continue its activities without the financial support of Lyrtech.
To satisfy oneself of this, one need only review the terms and conditions of
the research contract between Lyrtech and the appellant. This contract was of
indeterminate duration but Lyrtech could terminate it on 60 days' notice without
providing any reason. Lyrtech determined what research work the appellant was
to conduct, and the intellectual property resulting from this research work
belonged to Lyrtech. For its research work, the appellant was entitled to receive
only 10% of the royalties Lyrtech collected on the sale of products resulting
from the research work and 25% of the proceeds from licences granted by Lyrtech.
The appellant was thus paid on the basis of the income generated by the
research work and not according to the expenses it incurred. The appellant was
undercapitalized and could not assume the costs of its research expenses itself
while at the same time deferring its income. The appellant could not finance
itself without Lyrtech's help.
[33]
In L.D.G. 2000 Inc. v.
Canada, [2002] T.C.J. No. 659, Judge Angers held that there was de facto
control of a corporation because the effect of the financial, contractual and
commercial arrangements was to make the corporation economically dependent on
another corporation. Judge Angers stated the following:
51 Because the appellant had only two customers, had no receivables and
was dependent on Bermex for the sale of nearly all its production, it was
impossible for it to obtain financing. Consequently, Bermex provided it with
the financing necessary for its operations, which financing was described by
Richard Darveau as being advances relating to Bermex's accounts payable to the
appellant. Regardless of how this financing is described, the appellant's
activities were financially supported by Bermex. In addition, the appellant
guaranteed in part Bermex's $4 million line of credit for the financing of its
activities as a whole. The appellant's sales to Bermex were grossed up by 15%
representing administrative expenses, and the transactions between it and
Bermex were adjusted at the end of the year to ensure that profit to the
appellant. These adjustments were only possible in the case of the appellant,
because, according to Richard Darveau, the same could not be done with Bermex's
other subcontractors.
52 The effect of these financial, contractual and commercial
arrangements was, in my opinion, to make the appellant economically dependent
on Bermex. It also seems clear to me that the know-how and influence of the
directors of Gestion and Bermex were behind the appellant's economic revival
and its profitability, and this put the appellant under their control.
[34]
Considering all of the
facts, I find that during the three years at issue Lyrtech controlled the
appellant directly or indirectly in any manner whatever within the meaning of
subsections 125(7) and 256(5.1) of the Act. Since there was a non‑arm’s
length relationship between Lyrtech and the appellant after 4296621 granted the
appellant an option to purchase all the shares of either 4296648 or 4296630 at
fair market value (paragraph 28 of the partial agreed statement of facts), the
exception under subsection 256(5.1) for agreements between corporations having
an arm's length relationship does not apply in this case.
Alternative argument
[35]
Counsel for the
respondent also claim that Lyrtech had, in addition to de facto control,
indirect de jure control of the appellant pursuant to subparagraph 251(5)(b)(i)
and subsection 248(25) of the Act.
[36]
Subparagraph 251(5)(b)(i)
of the Act provides that, for the purposes of the definition
"Canadian-controlled private corporation", where a person has a right
under a contract, in equity or otherwise, either immediately or in the future, and
either absolutely or contingently, to shares of a corporation or to acquire
such shares or to control the voting rights of such shares, 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.
[37]
Paragraph 248(25)(a)
of the Act provides that a person beneficially interested in a trust includes any
person who has any right (whether immediate or future, whether absolute or
contingent or whether conditional on or subject to the exercise of any
discretion by any person) as a beneficiary under a trust to receive any of the
income or capital of the trust, either directly from the trust or indirectly
through one or more trusts or partnerships.
[38]
The respondent contends
that the subsidiaries of Lyrtech, namely 4296621, 4296630 and 4296648, all had
a future and conditional right, in equity or otherwise, to all the shares of the
appellant's capital stock as beneficiaries of FFL’s capital. Under paragraphs
9.1 and 9.2 of the trust deed, the trustees had absolute discretion to
eventually distribute all the shares of the appellant's capital stock to one or
more beneficiaries. Paragraphs 9.1 and 9.2 of the trust deed read as follows:
9. CAPITAL
DISTRIBUTIONS
9.1 During
the term of the Trust, the Trustees may, in their absolute and uncontrolled
discretion, at any time, withdraw from the capital of the Trust and make payments
of such withdrawal to one, the other or any combination of Capital
Beneficiaries, in the proportions that the Trustees may determine in their
absolute and uncontrolled discretion.
9.2 At
the Time of Division, the Trustees shall deliver the remaining capital for the
Trust and accumulated income of the Trust to one, the other or any combination
of Capital Beneficiaries, in the proportions that the Trustees may determine,
in their absolute and uncontrolled discretion.
[39]
The CRA is of the
opinion that paragraph 251(5)(b) of the Act applies to
beneficiaries of a discretionary trust holding shares of the capital stock of a
corporation, unless it is clearly shown in the trust deed that they will never be
entitled to become owners of these shares or to control the voting rights
attached to the shares. The CRA stated in the following terms, in external
interpretation 2007‑0246721E5 dated February 20, 2008, its position regarding
related companies, at page 6:
[translation]
There
is no consensus, however, on the application of paragraph 251(5)(b) in a
trust context. Some feel that discretionary beneficiaries of a trust have no
right to trust property as long as the trustees' discretion is not exercised in
their favour. On the other hand, others consider the wording of paragraph 251(5)(b)
broad enough that it could in fact apply to a discretionary beneficiary of a
trust’s capital.
It
should be noted that in a technical interpretation (F9730395), we have already
stated that paragraph 251(5)(b) could apply to beneficiaries of a trust.
We did specify, however, that paragraph 251(5)(b) could not apply to
beneficiaries of a trust who held shares in a corporation if, under the terms
of the trust agreement, the beneficiaries could never obtain ownership of the
corporation’s shares or control the voting rights attached to these shares.
[40]
The appellant for its
part submits that the beneficiaries of an entirely discretionary trust do not possess
a right referred to in paragraph 251(5)(b) of the Act as they do a right
of first refusal or a right resulting from a forced purchase/sale provision
("shotgun arrangement") included in a shareholder agreement.
[41]
The appellant's
position is based on paragraphs 10.1 and 10.2 of the trust deed, which state
that the persons designated as beneficiaries are only potential beneficiaries
of the trust and that until they have received some part of the revenue or
capital of the trust, they have no right, either pursuant to a statute or under
the trust deed, as beneficiaries of the trust. Paragraphs 10.1 and 10.2 of
the trust deed state the following:
10.1 For
greater certainty, it is specified that the persons designated as Beneficiaries
are merely potential beneficiaries of the Trust.
10.2
As a result, insofar as they shall not have
received any part of the Revenue or the Capital of the Trust, a person
designated in subparagraph 1.1(a) shall have no right, either by law or
pursuant to the terms of the present Agreement, as a beneficiary of a trust,
including, without limiting the generality of the foregoing, the right of
supervision and control over the Trust, the right to examine the trust records,
the right to require the Trustee to furnish any account, report or information,
the right to examine the books and vouchers relating to the administration of
the Trust and the right to ask for or to obtain a final accounting.
[42]
FFL was created under
the laws of Quebec and the respondent does not dispute its validity. The
language used in paragraphs 10.1 and 10.2 of the trust deed is intended precisely
to avoid the application of subsection 248(25) of the Act.
[43]
In an article entitled
"Strangers in Strange Lands: The Hidden Traps of Offshore Trusts",
published by the Canadian Tax Foundation in the 1999 annual conference report
at pages 40:1 et seq., Guy Fortin reviewed the doctrine and case law related to
the application of subsection 248(25) of the Act to the interest of a
beneficiary under a discretionary trust. His study showed that the two following
conclusions were inescapable: (a) first, the right held by a beneficiary of a
discretionary trust is in the nature of a limited personal right as opposed to a
proprietary right in the trust property and only entitles the beneficiary to be
considered as a potential beneficiary of the trust, the beneficiary’s only
recourse being against the trustee or trustees if they committed a breach of
duty in exercising their discretion; (b) second, despite the legal nature of a beneficiary's
right under a discretionary trust, the wording of a statutory provision may be
very broad so as to include the personal right of a beneficiary under a
discretionary trust. The following excerpt from page 40:12 of Mr. Fortin's
article clearly sets out the findings of his study:
Under
a discretionary trust, where the trustee is obliged to distribute the whole of
the income (or capital or both) among the potential beneficiaries in the manner
that he or she sees fit, the interest of the beneficiary cannot be described as
a proprietary right. It is merely a limited personal right to be considered as
a potential beneficiary that can be exercised only against the trustee. The
right of a beneficiary under a non-exhaustive discretionary trust is even more
limited in that, under such a trust, the trustee can choose whether and to what
extent a distribution is to be made at all. However, it appears from an
examination of the doctrine and jurisprudence on this issue that despite the
legal nature of the interest of a beneficiary under a discretionary trust, in
practice the language of a particular statutory provision may be drafted in a
manner that is broad enough to bring within its ambit the non-proprietary
interest referred to above. In the context of tax law, the result may well be
that the non-proprietary interest of a beneficiary under a discretionary trust
could be covered by the definition.
. .
.
[44]
In an article entitled
"Discretionary Trusts: Civil Law Perspectives", published in the Canadian
Tax Journal (2003), Vol. 51, No. 4, pages 1647 et seq., Marilyn Piccini
Roy describes the nature of the rights of a beneficiary of a discretionary
trust governed by the Civil Code of Québec as follows, at pages 1670
and 1671:
The
beneficiaries' rights are personal in nature and may therefore be exercised
only against the trustees. . . .
. .
.
It
follows that the right of beneficiaries under a discretionary trust is not a
right to receive income or capital under the trust. It is a limited right that
entitles them to make a claim against the trustees if the trustees refuse to
exercise their discretion or if the discretion is exercised improperly.
By
contrast, the holder of a power of appointment is not subject to such control.
The principal reason is that a power of appointment does not revolve around the
notion of predetermined beneficiaries; it merely confers upon a potential
appointee the opportunity to become a beneficiary. . . .
. .
.
. .
. The beneficiaries and the amounts of the entitlement are not fixed until the
trustees have appointed the beneficiaries and indicated the extent of the
benefit. . . . until their appointment, they have no claim or
right except to force the trustees judicially to perform their obligation to
exercise their discretion.
[45]
In Sachs v. Canada,
[1980] F.C.J. No. 611, paragraph 26, Heald J.A. of the Federal Court of Appeal described
as follows the right of beneficiaries of a discretionary trust to receive trust
capital:
. .
.
. .
. The situation of a beneficiary under a discretionary trust was described by
Lord Wilberforce in the case of Gartside et al. v. Inland Revenue Commissioners
as follows:
No
doubt in a certain sense a beneficiary under a discretionary trust has an
"interest": the nature of it may, sufficiently for the purpose, be
spelt out by saying that he has a right to be considered as a potential
recipient of benefit by the trustees and a right to have his interest protected
by a court of equity. . . .
. .
.
[46]
Despite the personal
nature of the right of the beneficiaries of FFL's capital and the precariousness
of this right, it seems to me that subsection 248(25) is broad enough to apply
thereto.
[47]
In Propep Inc. v.
Canada, [2009] F.C.J. No. 1155, Noël J.A. of the Federal Court of Appeal
clearly states at paragraph 22 that a taxpayer is deemed to be "beneficially
interested" when that taxpayer has a right, "whether absolute or
contingent", to receive income or capital from a trust. In that case, the
right of a beneficiary to receive income or capital from a discretionary trust
was conditional on the winding up of a company.
[48]
According to counsel
for the respondent, a "conditional right" is broad enough to include
cases where a discretionary power must be exercised in order for a fact to
arise. The exercise of a discretionary power is a future and uncertain event
that may or may not happen.
[49]
Once it has been
determined that each beneficiary of FFL’s capital was "beneficially
interested" within the meaning of subsection 248(25), it should be
considered whether they were also "beneficially interested" for the
purposes of subparagraph 251(5)(b)(i).
[50]
The expression
"beneficially interested" does not appear in paragraph 251(5)(b),
but in Propep Inc., supra, Noël J.A. held that the expression
"beneficially interested" applied for the purposes of provisions
dealing with associated corporations, namely paragraph 256(1)(c) and subsections
256(1.2) and 256(1.3), even though the expression "beneficially
interested" was not used in any of these provisions. At paragraph 24 of the
decision, Noël J.A. stated the following:
With
respect, the expression “beneficially interested” does not have to be
reproduced in each provision where it is likely to be applied. This concept
applies each time the question arises whether a person is “beneficially
interested” in a particular trust. A person who has a contingent right to the
capital or income of a trust is “beneficially interested” for the purposes of
the Act.
[51]
Moreover, it must be
noted that the rights referred to in paragraph 251(5)(b) are not limited
to those resulting from a contract. As Mahoney J. of the Federal Court indicated
in Lusita Holdings Limited v. The Queen, [1983] 1 F.C. 439, paragraph 3,
affirmed on appeal [1984] F.C.J. No. 414 (QL), they could also be, as in the
present case, rights held "in equity or otherwise". Collier J. of the
Federal Court also adopted this approach in Rostal Sales Agency Ltd. v.
Canada, [1982] F.C.J. No. 153, at paragraphs 13 and 14.
[52]
The wording of paragraph
251(5)(b) is very broad in scope such that a person who, under a
contract or otherwise, has a future right to shares or to acquire shares, is
deemed to be in the same position in relation to the control of the corporation
as if the person owned the shares at that time.
[53]
The fiction in
paragraph 251(5)(b) relates to the concept of ownership of shares and
not the concept of control of shares. Malone J.A. of the Federal Court of
Appeal stated the matter in the following terms in Sedona Networks Corp. v.
Canada, 2007 FCA 169 at paragraph 27:
In my analysis, the legal fiction created by the
paragraph 251(5)(b) is directed at the concept of ownership, not
control. Once it is determined that a person has an option to acquire treasury
shares that falls within the scope of paragraph 251(5)(b), it is
necessary to assume that the option is exercised and the related shares are
actually acquired by the holder of the option. . . .
[54]
The question to be
determined at this stage is whether the beneficial interest of each beneficiary
of FFL’s capital is a right within the contemplation of paragraph 251(5)(b).
[55]
I do not believe that
the beneficial interest of each beneficiary of FFL’s capital is a right within
the contemplation of paragraph 251(5)(b), considering the wording,
context and object of that paragraph. It seems to me that the nature of the
beneficial interest of each beneficiary of FFL’s capital is too aleatory, uncertain
or indirect to be a right to the appellant's shares under paragraph 251(5)(b).
The beneficial interest in question here does not confer any right on the
holder of that interest to acquire shares in the appellant.
[56]
I highly doubt that
Parliament's intent was for subsection 248(25) to apply to paragraph 251(5)(b)
because the concept of beneficial interest is far too broad in scope and much
too vague for it to apply to the concept of de jure control for the
purposes of the definition of "Canadian-controlled private
corporation".
[57]
If Parliament had
intended that the beneficiaries of the income and capital of a discretionary
trust be deemed owners of the shares that are part of the trust property, it
would have clearly expressed that intent, as it did by introducing paragraph
256(1.2)(f) into the Act for the purposes of the rules concerning
associated corporations. Paragraph 256(1.2)(f) reads as follows:
Control,
etc. — For the purposes
of this subsection and subsections (1), (1.1) and (1.3) to (5):
. .
.
(f)
where shares of the capital stock of a corporation are
owned, or deemed by this subsection to be owned, at any time by a trust,
. .
.
(ii)
where a beneficiary’s share of the accumulating
income or capital therefrom depends on the exercise by any person of, or the
failure by any person to exercise, any discretionary power, those shares shall
be deemed to be owned at that time by the beneficiary . . .
. . .
[58]
To achieve such an end,
Parliament could simply have reproduced the concept from paragraph 256(1.2)(f)
for the purposes of subsection 251(2) and the definition of
"Canadian-controlled private corporation", as it did in subsection
256(1.4), a provision similar to paragraph 251(5)(b).
[59]
Parliament's inaction
in not reproducing the concept from paragraph 256(1.2)(f) for the
purposes of de jure control of corporations whose shares are held by
discretionary trusts tends to confirm that the rule laid down by the Supreme
Court of Canada in M.N.R. v. Consolidated Holding Co., [1974] S.C.R. 419—i.e.
that control of a corporation, the majority of the shares of which belong to a
trust, is in the hands of the trustees who can bind the trust—is satisfactory
and adequate.
[60]
For all these reasons,
the appeals are dismissed with costs.
Signed at Ottawa, Canada, this 24th day of January 2013.
"Réal Favreau"
Translation
certified true
on this 30th day
of May 2013.
Erich Klein, Revisor
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