Brulé T.C.J.:
1 The appellant, Multiview Inc. is appealing a reassessment of the Minister of National Revenue (the “Minister”) whereby the Minister disallowed the appellant's claim for the refundable Scientific Research & Experimental Development (“SR & ED”) credit in the amount of $505,830.00 in the 1994 taxation year.
Facts
2 The appellant was incorporated on January 5, 1990 pursuant to the Ontario Business Corporations Act, R.S.O. 1990, c. B.16.
3 990855 Ontario Inc. was incorporated on August 13, 1992 pursuant to the Ontario Business Corporations Act. During the 1994 taxation year, all the shares of 990855 Ontario Inc. were held by John Leslie (“Leslie”) and Duncan Campbell (“Campbell”) with each holding 50% of the shares.
4 In a letter from Campbell to Leslie there was set out facts of an agreement as to Multiview's equity ownership. The following are two excerpts from the letter written to Leslie from Campbell:
Our future ownership interests in Multiview Inc. (ie. the parent company) will be maintained in the same ratio as our current ownership percentages. Currently you own 25% of the Company while I own 15%. Therefore, in the future you will continue to own25/40or5/8ths of our combined holdings, while I will own15/40or3/8ths.
We both agree that each will have equal representation on the Board of Directors of all Multiview companies. Both Leslie and Campbell will need to be present to constitute a quorum for a duly constituted Board of Directors meeting for any Multiview company.
5 The letter was appropriately signed by both Leslie and Campbell.
Issue
7 Throughout the material taxation year was Multiview Inc. a Canadian-controlled private corporation so as to entitle it to claim the refundable SR & ED credit?
Analysis
8 Clearly, the status of 990855 Ontario Inc. is the key to determining Multiview's status as a Canadian-controlled private corporation (“C.C.P.C.”). If this Court can conclude that 990855 Ontario Inc. is a C.C.P.C., then, by definition, as explained below, Multiview is also a C.C.P.C. since it would be controlled by a Canadian resident individual and a Canadian-controlled private corporation.
9 Subsection 37(1) of the Income Tax Act (the Act) provides for a deduction in respect of current and capital expenditures made in Canada in respect of SR & ED incurred by a taxpayer who carried on business in Canada. The computation of the deduction is based on the taxpayer's “pool” of SR & ED, which is made up at any particular time of positive and negative amounts. In the relevant years, the applicable portions of subsection 37(1) of the Act reads as follows:
Section 37: Scientific research and experimental development
(1) Where a taxpayer carried on a business in Canada in a taxation year and files with the taxpayer's return of income under this Part for the year a prescribed form containing prescribed information, there may be deducted in computing the taxpayer's income from the business for the year such amount as the taxpayer may claim not exceeding the amount, if any, by which the total of
10 While subsection 37(1) of the Act permits the deduction of SR & ED expenditures in the calculation of income, subsection 127(5) of the Act makes it possible for a taxpayer to deduct an investment tax credit, from his taxes otherwise payable in respect of, among other things, SR & ED expenditures of a current nature. The phrase “investment tax credit” used in subsection 127(5) of the Act is in turn defined in subsection 127(9) of the Act.
11 Although a taxpayer's investment tax credit is subject to an annual investment tax credit limit, section 127.1 of the Act provides that any unused investment tax credits of certain taxpayers may be refunded in the year the expenditure is incurred. In this regard, the appellant will be entitled to a refundable investment tax credit if it falls within the definition, contained in subsection 127.1(2) of the Act, of “qualifying corporation” which reads in part as follows:
“qualifying corporation” for a particular taxation year means a corporation that is, throughout the particular year, a Canadian-controlled private corporation...
As such, in order to be a qualifying corporation the appellant must first qualify as a Canadian-controlled private corporation (“C.C.P.C.”). The definition of a C.C.P.C. is contained in subsection 125(7) of the Act which reads as follows:“Canadian-controlled private corporation” means a private corporation that is a Canadian corporation other than 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) or by any combination thereof;
As the name implies, a C.C.P.C. is a kind of private corporation that must also be a Canadian corporation. Definitions of “private corporation” and “Canadian corporation” are contained in subsection 89(1) of the Act. In addition, to qualify as a C.C.P.C., the corporation cannot be controlled, directly or indirectly in any manner whatever by non-residents of Canada or by public corporations.12 Prior to 1972 the words “control” and “controlled” were generally used without qualifying words. Although referred to in the Act, there is no generally applicable definition of “control” or “controlled”. As such, the meaning of control for income tax purposes is derived from the jurisprudence. Any review of the meaning of controlled when used without qualifying words must begin with the Exchequer Court decision in Buckerfield's Ltd. v. Minister of National Revenue (1964), 64 D.T.C. 5301 (Can. Ex. Ct.). In considering the meaning of the word “controlled” in section 39 of the former Act, Jackett P. stated at page 5303:
Many approaches might conceivably be adopted in applying the word “control” in a statute such as the Income Tax Act to a corporation. It might, for example, refer to control by “management”, where management and the Board of Directors are separate, or it might refer to control by the Board of Directors. The kind of control exercised by management officials or the Board of Directors is, however, clearly not intended by section 39 when it contemplates control of one corporation by another as well as control of a corporation by individuals (see subsection (6) of section 39). The word “control” might conceivably refer to de facto control by one or more shareholders whether or not they hold a majority of shares. I am of the view, however, that, in section 39 of the Income Tax Act, the word “controlled” contemplates the right of control that rests in ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the Board of Directors. See British American Tobacco Co. v. I.R.C., [1943] 1 A.E.R. 13, where Viscount Simon L. C., at page 15, says:
The owners of the majority of the voting power in a company are the persons who are in effective control of its affairs and fortunes.
As alluded to in the decision in Buckerfield's (supra) the Act contemplates two types of control, de jure control and de facto control. De jure control means control that is exercised through legal means whereas de facto control means control which arises for all practical purposes, but not through legal means. As such, Jackett P. held that control meant de jure control and not de facto control with de jure control meaning the right of control derived from owning enough shares to carry a majority of the votes in the election of the directors of the corporation. The Buckerfield's (supra) definition of control was adopted by the Supreme Court in Dworkin Furs (Pembroke) Ltd. v. Minister of National Revenue (1967), 67 D.T.C. 5035 (S.C.C.).13 Where however, non-residents do not have de jure control of a private corporation, but do have de facto control, the de facto control will suffice to deny the corporation the status of a C.C.P.C. Subsection 256(5.1) of the Act provides for de facto control and in the process elevates “controlled directly or indirectly in any manner whatever” to the status of a defined term. Subsection 256(5.1) reads as follows:
Section 256(5.1): Control in fact
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.
14 At issue in the instant case is whether Leslie who is a non-resident has de jure or de facto control of the appellant. The gist of this argument focuses on the shares of the appellant held by 990855 Ontario Ltd. In this regard, the Minister takes the position that upon taking into consideration the 50% shareholding that Leslie possesses in 990855 Ontario Ltd. combined with his own shareholding in the appellant, that the appellant is controlled, directly or indirectly in any manner whatever, by a non-resident person.
15 In determining whether Leslie had de facto control over the appellant, it is useful to examine Revenue Canada's position on such an issue as set out in their interpretation bulletins. While not definitive legally, interpretation bulletins do however provide guidance to taxpayers. Revenue Canada's views are set out in paragraphs 17 and 19 of Interpretation Bulletin IT-64R3:
17. De facto control consists of all forms, other than de jure control, by which a person may exercise control over a corporation. De facto control may even exist without the ownership of any shares. It can take many forms, e.g. the ability of a person to change the Board of Directors or reverse its decisions, to make alternative decisions concerning the actions of the corporation in the short, medium or long term, to directly or indirectly terminate the corporation or its business, or to appropriate its profits and property. A potential influence, even if it is not actually exercised, would be sufficient to result in de facto control.
19. Whether a person or group of persons can be said to have de facto control of a corporation, notwithstanding that they do not legally control more than 50 per cent of its voting shares, will depend on each factual situation. The following are some general factors that may be used in determining whether de facto control exists:
(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, for example, 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.
Although the degree of influence is always a question of fact, close family ties (between parents and children or between spouses) especially lend themselves to the development of significant influences...
16 Such a factual examination was done in International Mercantile Factors Ltd. v. R. (1992), 94 D.T.C. 6365 (Fed. C.A.), where the court held that the company was not a C.C.P.C. Here, the company was owned 50% by a private company and 50% by two public companies. However, the shareholders' agreement prevented a change in the composition of the Board of Directors and it was such that the public companies had a majority of nominees on the Board of Directors during the relevant period. As such, the Court held that the public companies had legal and effective control of the company, thus disallowing it from being a CCPC.
17 In a letter of September 27, 1994 from Deloitte and Touche to Revenue Canada, there is the following paragraph:
The relationship between John Leslie and Duncan Campbell (and their respective shareholdings in Multiview Inc. and 990885 Ontario Inc.) has throughout been based upon equality of control. They have had and continue to have equal representation on the boards of Multiview Inc. and 990885 Ontario Inc. Leslie and Campbell had a clear oral agreement with each other to the effect that all decisions regarding Multiview Inc. or the numbered company would be made on an equal basis by them. In an effort to reduce that agreement to writing, they entered into a letter agreement dated August 21, 1992 pursuant to which they agreed to have equal representation on all Multiview companies which necessarily includes 990885 Ontario Inc. This letter agreement also provides for mediation as a conflict resolution mechanism. Obviously, this would not be necessary if John Leslie already controlled the corporation. The day-to-day management of the corporation clearly supports this conclusion. John Leslie and Duncan Campbell act as equals in all major decisions affecting Multiview Inc.
18 Upon examination of the factual evidence presented in the instant case, it is the Court's opinion that the appellant was not controlled directly or indirectly in any manner whatsoever by a non-resident. At no time did Leslie control enough of the shares of the appellant to elect a majority of the Board of Directors nor did he possess direct or indirect influence that if exercised would result in him controlling the appellant. For at no time did any shareholder agreement provide that Leslie possessed a casting vote in 990855 Ontario Inc. nor did Leslie possess any other mechanism that would result in him controlling the voting shares of 990855 Ontario Inc. It is the Court's opinion that based on the various factors as outlined in paragraph 19 of IT-64R3 and other surrounding circumstances, that Leslie, a non-resident, did not have control of the appellant during all material times. Such factors as were present in International Mercantile (supra) to demonstrate de facto control just do not exist in the present case. As such, the appeal is allowed with costs to the appellant.
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