[OFFICIAL ENGLISH TRANSLATION]
Date: 20030116
Dockets: 2000-2264(IT)G
2000-2266(IT)G
BETWEEN:
TRANSPORT M.L. COUTURE INC.,
9044-2807 QUÉBEC INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Archambault, J.T.C.C.
[1] The corporations 9044-2807
Québec inc. (ML1) and Transport M.L. Couture inc.
(ML2) challenge the assessments made by the Minister of
National Revenue (the Minister) for the 1995 and 1996
taxation years in the case of 9044-2807 Québec Inc. and
for the 1997 taxation year in the case of Transport M.L. Couture
Inc. The Minister determined that the two appellant corporations
were associated with Transport Couture et Fils inc. (Transport
Couture) during those taxation years (the relevant
period) and, consequently, neither appellant corporation was
able to obtain the full amount of the small business deduction
(SBD) in computing its tax. The Minister is of the opinion
that, according to subsection 256(5.1) of the Income Tax
Act (the Act), Transport Couture controlled ML1
and ML2 directly or indirectly during the relevant period.
Control is the only issue in dispute.
Facts
[2] Marie-Louis Couture was
the sole shareholder of ML1 during the relevant period. At the
time of the hearing, he was 85 years old and suffering from
Alzheimer's Disease.[1] It is for this reason that he was unable to testify in
person on that occasion. The testimony of his son,
Michel Couture, President and Chief Executive Officer of
Transport Couture, and the documents produced in evidence by the
appellants revealed the following: Marie-Louis Couture
had operated a trucking firm in the Beauce region since the early
1950s; he was then in his early thirties. Although the evidence
is uncertain on this point, it appears that the firm was always
of a modest size. At least, that is how it was when Marie-Louis
Couture, who was then 78, transferred it to ML1 in July 1995,
since at that time he owned only three trucks and three bulk
trucking permits. The permits allowed him to transport wood chips
to pulp and paper mills situated in Windsor (Quebec) and
Trois-Rivières. There was only a very limited number
of customers then. As for ML1, it had been in existence for a
number of years. In 1982, in particular, it was associated with
Transport Couture and was then known under the corporate name of
Location C.T.R. inc. Under the agreement between associated
corporations provided to the Minister in 1984, ML1 was allocated
$25,000 as its business limit for the 1982 taxation year. In
October 1994, that is, a few months before the transfer of
Marie-Louis Couture's business to ML1, his business' name was
changed to Transport M.L. Couture inc., a name that was again
changed on December 2, 1996, to its current name.
[3] Seventeen years before the
transfer of his business to ML1, that is, in 1978, Marie-Louis
Couture had transferred to the recently incorporated Transport
Couture an indeterminate number (probably one or two) of general
trucking permits. This kind of permit authorized the trucking of
goods other than bulk trucking. The five shareholders of
Transport Couture were the five children of
Marie-Louis Couture, who, through a holding company,
still hold an equal number of shares. Mr. Couture apparently
did not transfer his bulk trucking permit(s) at the same time
since, according to Michel Couture, this kind of permit
could not be transferred until the death of the holder.
[4] On November 15, 1995, or four
months after the transfer of the bulk trucking business to ML1,
Transport Couture and ML1 signed an agreement whereby Transport
Couture would provide management services to ML1 in return for 10
per cent of all revenues generated by the operations of ML1. In
addition, ML1 agreed to provide trucking services as a
subcontractor for Transport Couture. Under the agreement,
Transport Couture was to provide drivers' services for the trucks
belonging to ML1. Transport Couture was also required to train
those drivers. Every month, ML1 reimbursed the cost of
compensation for those drivers, plus 1 per cent. Transport
Couture promised to give ML1 at least 130,000 miles of trucking
per truck for a period of 12 months. However, the agreement is
silent regarding the terms and conditions of the compensation for
the trucking services. Although tables used in computing the
compensation in particular were referred to, none of those tables
was produced in evidence. Under the agreement, the tractors in
the possession of ML1 were to be painted with Transport Couture
colours and bear its logo. ML1 had the right to terminate the
agreement upon three months' notice.
[5] Unlike the firm of
Marie-Louis Couture, Transport Couture grew
considerably, especially in the 1990s. Michel Couture
referred to an "explosion" in his testimony. He and his brothers
were behind this success. In 1978, Transport Couture owned five
tractors and eight trailers. At the beginning of the relevant
period, i.e., in 1995, the number of tractors rose to thirty,
twenty-two of which were purchased in 1995. Eleven new tractors
were purchased in 1996, twelve in 1998 and nine in 1999. In 2002,
Transport Couture owned 110 tractors and 315 trailers.
Between 1994 and 1997, the number of employees varied from 75 to
100. During the 1996 financial year, ML1 purchased two new
tractors in November 1995 and nine in February 1996, bringing its
total to fourteen tractors.
[6] According to Michel Couture,
the competition in bulk trucking was fierce. This would explain,
at least in part, why the firm of Marie-Louis Couture
had not grown. In addition, this situation apparently forced
Marie-Louis Couture, and subsequently ML1, to offer
their services to Transport Couture, which had to [Translation]
"respond to the growing demand of its "customers".[2] According to the
testimony of Claude Rodrigue, the comptroller of
Transport Couture, 45 per cent of the revenues of ML1
came from general trucking in the financial year ending in August
1995, that is, less than two months after Marie-Louis Couture's
firm was transferred. In the following financial year, the share
of ML1's revenues from general trucking apparently rose to 85
or 90 per cent. However, as indicated in the accompanying notes
to the financial statements of August 31, 1995, prepared by
the accounting firm of Raymond, Chabot, Martin, Paré,
under the heading [Translation] "economic dependence"[3] ML1 provided its
services to only one customer. Moreover, under the heading
[Translation] "transactions entered into with associated
companies", 100 per cent of the turnover is indicated as well as
100 per cent of the costs of subcontracting, maintenance and
repair of rolling stock, insurance and computer processing.
[7] In view of the competition in bulk
trucking, it was apparently decided to sell the bulk trucking
permits to a corporation belonging to one Yvon Champagne. On
December 18, 1996, Marie-Louis Couture accordingly
transferred all of his shares of the capital stock of ML1 to
9017-7304 Québec inc. On this date, ML1 held
[Translation] "three (3) bulk trucking permits, three (3)
extra-provincial bulk trucking permits, one intra-provincial
trucking permit and one extra-provincial trucking permit...and
six (6) trailers". The sale price was $442,471.
[8] On the same day, that is, December
18, 1996, ML1 transferred all of its assets, with the exception
of the three bulk trucking permits and the six trailers, to ML2,
incorporated on December 5, 1996.[4] The sale price was $1,037,654 payable by ML2's
assuming $760,183 in debt, with the balance of $277,471 payable
in cash. This would give an approximate value of
$165,000 for the bulk trucking permits and six trailers
retained by ML1. According to Michel Couture,
Marie-Louis Couture had negotiated the sale price for
the bulk trucking permits.[5] However, it was Michel Couture who structured the
transaction with the assistance of his legal advisers and
accountants and who signed the contract for the sale of the
shares on behalf of his father (Exhibit I-1,
Tab 35). ML2 is held by two common shareholders: 90 per
cent by the spouse of Marie-Louis Couture,
Fleurette Hamel Couture, and 10 per cent by
Claude Rodrigue. These two people are the sole directors of
ML2. Before becoming Transport Couture's comptroller in January
1995, Mr. Rodrigue had been Transport Couture's external
auditor and Marie-Louis Couture's auditor.
[9] When
Marie-Louis Couture sold his shares in ML1 and the
majority of the shares of that corporation were subsequently
purchased by ML2,[6] Transport Couture and ML2 did not sign a new
management and subcontracting contract. However, the parties
behaved as if this agreement continued to exist.
Michel Couture affirmed that the compensation paid for the
trucking services provided by ML1 and ML2 represented the fair
market value of these services. This was the same compensation
that Transport Couture apparently paid its other
subcontractors. However, it appears that Transport Couture
did not use the services of these subcontractors until April
1997. There were fourteen of them on May 15, 1998. Most of the
subcontractors had one truck, but some had two or three trucks.
According to the model agreement[7] (Exhibit I-1, Tab 32) between
Transport Couture and its subcontractors, there was no obligation
to use the colours of the Transport Couture trucks. However, that
firm's logo and the information about the firm had to appear on
the subcontractor's truck. In order to benefit from the group
rebate, the subcontractor could purchase a truck and obtain
insurance through Transport Couture. Contrary to what
Michel Couture stated, the subcontractor was free to choose
his own insurer (clause 6.7).
[10] The names of ML1 and ML2 do not appear
on the list of Transport Couture's subcontractors.
Michel Couture's explanation was that he took ML1 and ML2's
participation for granted because Transport Couture and those
corporations [Translation] "were an old couple". For
Mr. Rodrigue, the fact that ML1 and ML2 are not indicated on
this list is a mere oversight. Their names also do not appear on
the computer printout for the subcontractors, which shows
information regarding the compensation paid to the various
subcontractors[8]
and the expenses incurred by the subcontractors that were to be
reimbursed by Transport Couture.
[11] According to Michel Couture, his
father, who was 55 to 57 years old at the time, still drove a
truck between 1972 and 1974. He had always been involved in ML1,
except in the last two years because of his illness. On
cross-examination, Michel Couture explained that his father came
to the garage every day and spent five or six hours there. He
took part in some manual activities, such as truck maintenance.
According to Claude Rodrigue, Marie-Louis Couture did not
come into the offices of Transport Couture: [Translation]
"He took care of his trucks."
[12] As for Fleurette Hamel Couture,
Mr. Rodrigue said that he met with her once a month to bring
her up to date on ML2's business affairs. However, Ms. Couture's
signature does not appear on the general borrowing by-law of the
corporation-only Mr. Rodrigue's signature. Furthermore, Ms. Hamel
Couture did not testify at the hearing. Michel Couture said
that his mother came to the office once a month at most.
[13] Since Transport Couture provided all of
the management services, it is not surprising to note that ML1
and ML2 carried on their business in the same establishment as
Transport Couture. Generally speaking, it was Yvan Couture
who negotiated the truck purchases while Michel Couture
handled the financing contracts. Michel Couture said that he had
inadvertently signed some documents, such as ML1's statement of
annual operating duties for 1995 and 1996. [Translation] "I
signed too fast; I felt dizzy", he explained.[9] The same is true with
respect to some applications for safety certificates sent to the
Société de l'assurance automobile du
Québec (SAAQ) and signed by Michel Couture.
The documentary evidence produced by the respondent includes
correspondence relating to the extra-provincial bulk trucking
permits sent by ML1's counsel to Michel Couture.[10]
[14] With the exception of diesel and
management costs, which were invoiced each month, the expenses
incurred by Transport Couture were invoiced to ML1 or ML2 as they
arose.
Relevant provisions
[15] The following provisions of the
Act are relevant to resolving the issue raised by these
appeals:
125. Small business
deduction.
(1) There may be deducted from the tax otherwise
payable under this Part for a taxation year by a corporation that
was, throughout a taxation year, a Canadian-controlled private
corporation, an amount equal to 16% of the least
of
(a) the amount, if any, by which the total of
(i) the total of all amounts each of which is the
income of the corporation for the year from an active business
carried on in Canada (other than the income of the
corporation for the year from a business carried on by it as a
member of a partnership), and
(ii) ...
exceeds the total of
(iii)the total of all amounts each of which is a loss of the
corporation for the year from an active business carried on in
Canada (other than a loss of the corporation for the year from a
business carried on by it as a member of a partnership), and
(iv) ...
(b) the amount, if any, by which the corporation's
taxable income for the year exceeds the total of
...
(c) the corporation's business limit for the
year.
(2) Interpretation of "business limit". For the
purposes of this section, a corporation's "business limit"
for a taxation year is $200,000 unless the corporation is
associated in the year with one or more other
Canadian-controlled private corporations in which case, except as
otherwise provided in this section, its business limit for the
year is nil.
(3) Associated corporations. Notwithstanding
subsection (2), if all of the Canadian-controlled private
corporations that are associated with each other in a taxation
year have filed with the Minister in prescribed form an
agreement whereby, for the purposes of this section, they
allocate an amount to one or more of them for the taxation year
and the amount so allocated or the total of the amounts so
allocated, as the case may be, is $200,000, the business
limit for the year of each of the corporations is the amount so
allocated to it.
256. Associated corporations (1). For the purposes of
this Act, one corporation is associated with another in a
taxation year if, at any time in the
year,
(a) one of the corporations controlled, directly or
indirectly in any manner whatever, the other;
...
(1.2) Control, etc. For the purposes of this subsection
and subsections (1), (1.1) and (1.3) to (5),
...
(b) for greater certainty,
(i) ...
(ii) a corporation may be controlled by a
person or a particular group of persons notwithstanding
that the corporation is also controlled or deemed to be
controlled by another person or group of persons;
...
(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.
[Emphasis added.]
Position of the parties
[16] Counsel for the appellant corporations
submitted that the scope of subsection 256(5.1) is very
broad but that it should clearly be restricted. In his pleadings,
he referred to Interpretation Bulletin IT-64R4 and cited,
inter alia, paragraphs 21 and 23, which I reproduce
here:
21. De facto control goes beyond de jure control
and includes the ability to control "in fact" by any
direct or indirect influence. De facto control
may exist even 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. The existence of any such influence, even if it is not
actually exercised, would be sufficient to result in de
facto control.
...
23. 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, 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.
Although the degree of influence in (f) 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. Generally, these persons must demonstrate
their economic independence and autonomy before escaping
presumptions of fact which apply to related persons. However,
with respect to siblings, unless the facts indicate otherwise,
generally one sibling would not be considered to have influence
over another.
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.
[Emphasis added.]
[17] Counsel for the appellants also cited
the decision of the Federal Court of Appeal in Silicon
Graphics Limited v. The Queen, [2002] F.C.A. 260, 2002 D.T.C.
7112, [2002] 3 C.T.C. 527. Paragraphs 66 to 68 are reproduced
below:
[66]
The
case law suggests that in determining whether de facto
control exists it is necessary to examine external
agreements (Duha Printers, supra at 825); shareholder
resolutions [[11]] (Société
Foncière d'Investissement Inc. v. Canada,
[1996] T.C.J. No. 1568, para. 10 (T.C.C.)); and whether any party
can change the board of directors or whether any
shareholders' agreement gives any party the ability to
influence the composition of the board of directors
(International Mercantile Factors Ltd. v. The Queen
(1990), 90 DTC 6390 at 6399 (F.C.T.D.), aff'd (1994), 94 DTC
6365 (F.C.A.); and Multiview Inc. v. The Queen
(1997), 97 DTC 1489 at 1492-93 (T.C.C.)).
[67]
It
is therefore my view that in order for there to be a finding of
de facto control, a person or group of persons must have
the clear right and ability to effect a significant change in the
board of directors or the powers of the board of directors or
to influence in a very direct way the shareholders who would
otherwise have the ability to elect the board of
directors.
[68]
The
Respondent has adduced no evidence which would satisfy these
criteria. There is no evidence that Silicon US as a creditor
ever exercised operational control of Alias. It simply loaned
money to Alias and took steps to make sure that money was only
spent with a view to protecting its position as a lender.
Further, the $5,000,000 bridge financing agreement
lasted for only seven weeks and was repaid by the end of
Alias' 1992 taxation year. Additionally, there is evidence
that Silicon US did not want to be in control of Alias because it
did not want to be viewed as partisan to other customers who were
competitors of Alias. Silicon US never tried to install a person
in management or as a director.
[Emphasis added.]
[18] Counsel for the appellants argued that
Transport Couture exercised no influence either over the
shareholders of ML1 or over those of ML2. The sole shareholder of
ML1 was Marie-Louis Couture and nothing in the evidence indicates
that he was under the influence of Transport Couture or its
shareholders, namely, the children of Mr. Couture. The two
shareholders of ML2 were Ms. Hamel Couture
and Claude Rodrigue. Ms. Couture was regularly informed
of what was going on by Mr. Rodrigue. She could therefore make
the decisions that she considered appropriate.
[19] As for the economic dependence factor
discussed in paragraph 23(d) of Interpretation
Bulletin IT-64R4, counsel for the appellants stated
that, in the case at bar, such economic dependence was completely
relative, that Marie-Louis Couture could have found work
for ML1 elsewhere and that the operation of this firm did not
require extensive knowledge since it was not a highly specialized
business. Counsel did not make the same argument for ML2 but
merely said that Ms. Couture was a person who was involved
in the decision-making. Finally, he emphasized the fact that the
contractual relations between Transport Couture, on the one
hand, and ML1 and ML2, on the other hand, were those of parties
dealing at arm's length. He also emphasized the fact that
Transport Couture did not confer any economic benefit on the ML1
and ML2 corporations since the rate demanded for management costs
and transportation costs was reasonable.
[20] As for the issue of operational
control, the fact that the signatures of Michel Couture and
Claude Rodrigue were on certain documents was of minor
significance given the lack of importance of these documents.
[21] In the alternative, counsel for the
appellants contended that there could be no de facto
control of a corporation where a person controls it de
jure. In this case, Marie-Louis Couture held all of the
shares of ML1 and Ms. Hamel Couture held 90 per cent of
the shares of ML2. In subparagraph 256(1.2)(b)(ii) of the
Act, there is no reference to subsection 256(5.1),
and therefore this subparagraph does not apply in this case.
[22] Counsel for the respondent argued that
Transport Couture directly or indirectly controlled ML1 and
ML2 by reason of Transport Couture's exercise of operational
control over the two corporations and because of the economic
dependence in which the two corporations found themselves in
relation to Transport Couture. In support of his first
argument, he noted many facts and, in particular, the fact that
Michel Couture signed the contract whereby
Marie-Louis Couture sold the shares of ML1 to a
company held by Yvon Champagne. The names of
Michel Couture and his brother Yvan Couture are found
in the context of major operations carried out by the ML1 and ML2
corporations, including the purchase and financing of trucks.
Their names are also found on the statements of annual operating
duties addressed to the Commission des transports du
Québec (CTQ) and in correspondence concerning a
decision of the CTQ in issuing the trucking permits for ML1.
[23] To illustrate the economic dependence
of the ML1 and ML2 corporations, counsel for the respondent noted
that they did not have their own establishment and they had not
hired any employees. All of the work was done by
Transport Couture. According to counsel for the respondent,
if Transport Couture had terminated the management contract and
ceased to use the trucking services of ML1 and ML2, both these
corporations would have been in serious financial difficulties
since not only did they have no employees, but they also had no
expertise in management that would have allowed them to make
their many trucks profitable. Finally, counsel cited my decision
in Rosario Poirier Inc. v. The Queen, 2002 CarswellNat
1174, 2002 CarswellNat 1445, 2002 D.T.C. 1770 and
2002 D.T.C. 1940, which, according to him, presented
many facts similar to those in the case at bar.
Analysis
[24] The sole question at issue is whether
Transport Couture controlled ML1 and ML2 directly or
indirectly in any manner whatever during the relevant period. If
such a control existed, Transport Couture, ML1 and ML2 would
have been associated corporations during that period and should
then share the $200,000 business limit. In that case, the
Minister's assessments should be confirmed. If not, ML1 and
ML2 would be entitled to the full amount of the SBD claimed by
them.
[25] Before analysing the concept of de
facto control and examining its application to the facts of
these appeals, it is worth recalling the legislative context in
which the matter arises. Through the SBD, the Act allows
Canadian-controlled private corporations (CCPC) to benefit
from a reduced federal tax rate (12 per cent instead of 28
per cent) applicable to revenues from an active business.[12] However, this rate
applies only to the first $200,000 of profits from the business.
To prevent taxpayers from multiplying CCPCs, the Act
establishes anti-avoidance rules partly set out in
subsections 125(2) and 125(3) of the Act.
Essentially, associated corporations must share the $200,000
business limit among themselves.
[26] It is section 256 of the
Act that defines associated corporations. Paragraph
256(1)(a) states that two corporations are associated
where one corporation controlled, directly or indirectly in any
manner whatever, the other. Prior to the enactment of subsection
256(5.1), which was applicable to taxation years beginning after
1988, the Act did not define what constituted control of a
corporation. The courts decided that control meant de jure
control, namely, the fact of owning enough voting shares to have
a majority in the directors of a corporation. The classic
decision was rendered by Jackett, President of the Exchequer
Court of Canada, in Buckerfield's Limited et al. v.
M.N.R., 64 DTC 5301. This is what he wrote 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.
[Emphasis added.]
[27] That interpretation has been confirmed
by the Supreme Court of Canada in M.N.R. v. Dworkin Furs
(Pembroke) Ltd. et al., 67 DTC 5035, and more recently in
Duha Printers (Western) Ltd. v. Canada, [1998] 1
S.C.R. 795, ([1998] S.C.J. No. 41 and 98 D.T.C. 6334).
The concept of control recognized by the courts rejected any
concept of de facto control. According to
Judge Iacobucci in Duha Printers, at
paragraph 58 : "The de factoconcept was
rejected because it involves ascertaining control in fact,
which can lead to a myriad of indicators which may exist apart
from these sources." In addition, he said in
paragraph 52: "If the distinction between
de jure and de facto control is to be eliminated at
this time, this should be left to Parliament, not to the
courts."
[28] It just so happens that this is what Parliament did in
1988 by enacting subsection 256(5.1) of the Act. For
the purposes of the rule of associated corporations, inter
alia, the concepts of de jure control and de
facto control must thus now be used. Moreover,
subparagraph 256(1.2)(b)(ii) of the Act
expressly provides that a corporation may be controlled by a
person notwithstanding that the corporation is also controlled or
deemed to be controlled by another person. Judge Bowman (as
he then was) commented as follows on the enactment of subsection
256(5.1) of the Act in Société
foncière d'Investissement Inc. v. Canada, [1995]
T.C.J. No. 1568, 1995 CarswellNat 1504:
8 Since these decisions, [[13]] other words have been added
for the clear purpose of broadening the concept of control, in
particular the words "directly or indirectly in any manner
whatever". So far as I know, the point has not been decided,
but I would have thought that it could reasonably be argued that
these words necessarily include the idea of de facto control of a
corporation in the case of a person who does not hold more than
50 per cent of the shares but has a controlling influence,
whether economic, contractual or moral, over a corporation's
affairs. It is hard to imagine words with a broader
meaning.
9 Apparently, the Parliament of Canada feared that the
words "directly or indirectly in any manner whatever"
did not go far enough. It therefore tried to reinforce their
effect by means of paragraph [sic] 256(5.1).
[Emphasis added.]
[29] In addition, it is worth quoting from
the explanatory notes accompanying the 1988 bill (which provided
for the addition of subsection 256(5.1)) for a statement of
the policy pursued by the Minister of Finance in proposing this
amendment[14] to
Parliament:
New subsection 256(5.1) provides that, for the purposes of the
Act, a corporation shall be considered to be controlled, directly
or indirectly in any manner whatever, by another corporation, a
person or a group of persons (the "controller")
where the controller has any direct or indirect influence
that, if exercised, would result in control in fact of the
corporation. An exception is provided where the corporation
and the controller are dealing at arm's length and the
controller's influence is derived from an agreement or
arrangement - such as a franchise, license, lease, distribution,
supply or management agreement - the main purpose of which is to
govern the relationship between the parties regarding the manner
in which a business carried on by the corporation is to be
conducted.
New subsection 256(5.1) expands the concept of control
for certain provisions of the Act to include what is often
referred to as de facto control. Under the existing
rules, control of a corporation generally exists by reason of the
ability to elect a majority of the directors of the corporation -
de jure control. An example of de facto control
might be a situation where a person held 49% of the voting
control of a corporation and the balance was widely dispersed
among many employees of the corporation or was held by persons
who could reasonably be considered to act in respect of the
corporation in accordance with his wishes. Whether a person
can be said to be in actual control of a corporation,
notwithstanding that he does not legally control more than 50% of
its voting shares, will depend in each case on all of the
circumstances.
The exception in subsection 256(5.1) distinguishes between
control of the corporation and control over the business
carried on by the corporation and clarifies that the de
facto control test provided for therein will not be
applicable in arm's length situations where the
controller's influence derives only from an 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
conducted. Thus, for example, a franchise agreement or lease
which provides to the franchisor or lessor a measure of control
over the products sold by the corporation or the hours during
which it conducts its business, would not in itself result in the
franchisor or lessor having control over the corporation.
[Emphasis added.]
[30] In the case at bar, it is clear that
Transport Couture did not exercise de jure control over
ML1 and ML2 since it held no shares of their capital stock.
Therefore, it must be determined whether, on the other hand,
Transport Couture exercised de facto control over
them, i.e., whether, as subsection 256(5.1) of the
Act requires, Transport Couture had, during the relevant
period, a direct or indirect influence that, if exercised, would
have resulted in control in fact of ML1 and ML2. Based on the
English version of this subsection, which in my opinion is more
explicit than the French version,[15] it must be determined whether
Transport Couture had an influence over ML1 and ML2 that, if
exercised, would have resulted in control in fact of those two
corporations. The evidence, therefore, does not need to establish
that Transport Couture exercised control in fact over ML1
and ML2 or that Transport Couture's influence as a controller was
in fact exercised. It is sufficient to note the existence of such
influence.
[31] Subsection 256(5.1) of the Act
does not describe the circumstances on the basis of which it may
be concluded that there is such influence. However, an analysis
of this subsection shows that such influence can derive from a
franchise, licence, lease, distribution, supply or management
agreement or other similar agreement or arrangement. The
enactment explicitly provides that the mere existence of such an
agreement should not result in control in fact of a corporation
provided two conditions are satisfied. First, there must be an
arm's length relationship between the corporation and the
controller. Second, the main purpose of the agreement from which
the influence is derived must be to govern the relationship
between the corporation and the controller regarding the manner
in which the business carried on by the corporation is to be
conducted. On the other hand, the existence of a distribution,
supply or management agreement regarding the manner in which a
business is to be conducted that is binding on parties not
dealing at arm's length could be a relevant factor for
establishing whether an influence is exercised by the
controller.
[32] It should be explained that the Court
is not limited to merely considering whether there is a similar
agreement or arrangement in order to determine whether an entity
has an influence that would result in control in fact of a
corporation. Each case must be analysed on its facts and, while
it might be desirable, an exhaustive list of all of the relevant
factors cannot be provided. It is worth recalling the words of
Judge Bowman who, in Société foncière
d'investissement (supra), spoke of an economic,
contractual or moral influence over a corporation's affairs.
Finally, I would add that the statement in paragraph 23 of
Interpretation Bulletin IT-64R4 appears to me to be a
reasonable statement of the factors that are relevant in
determining whether there is an influence that, if exercised,
could result in control in fact of a corporation.
[33] In my opinion, the evidence adduced in
these appeals reveals that there was a direct or indirect
influence by Transport Couture that, if exercised, would
have resulted in the control in fact of ML1 and ML2. The three
most important factors that support a finding that there was such
influence are: (i) the economic dependence of the two
corporations on Transport Couture; (ii) the operational control
of ML1 and ML2's businesses; and (iii) the family relationship
between the shareholders of all these corporations.
[34] In many respects, the facts of these
appeals are very similar to those of Rosario Poirier Inc.
(supra), a case that I heard. In the case at bar, ML1 and
ML2 are economically dependent on Transport Couture, a
dependence similar to the one I found in that case. Not only was
Transport Couture the only customer of ML1 and ML2, but it
was also the only one to provide management for those two
corporations. Not only did it supply them with all management
services, but it also provided the services of all the drivers
needed for the transport trucks belonging to the two
corporations. Not only did ML1 and ML2 not have any employees,
but they also had no establishment separate from that of
Transport Couture.
[35] Another fact that reveals the existence
of economic dependence is that the business operated by
Marie-Louis Couture before its transfer to ML1 ceased to exist a
few months after the transfer: the three tractors and trailers
that Mr. Couture owned were quickly sold. The business of
Mr. Couture was essentially a bulk trucking business, i.e,
the transportation of wood chips to pulp and paper mills. This
was a business that operated in a very competitive market and
that never expanded. Furthermore, I am far from convinced as to
the merits of Mr. Rodrigue's testimony that 45 per cent of
ML1's turnover in the first financial year ending after the
transfer of Mr. Couture's trucking business came from general
trucking. I find more probative value in the financial
statements, which reveal that 100 per cent of ML1's turnover
during that financial year came from Transport Couture.
Transport Couture, in fact, did only general trucking.
Furthermore, as Mr. Rodrigue acknowledged, nearly 90 per cent of
ML1's revenues in the following financial year came from general
trucking. Consequently, the business operated by ML1 was no
longer the business that Mr. Couture had carried on for a great
part of his life, that is, bulk trucking, but was rather an
extension of the general trucking business of
Transport Couture. Under the management (and under the
control) of Transport Couture, ML1 purchased nine tractors for
general trucking. Those tractors could even have been purchased
by Transport Couture. This would certainly have caused fewer
administrative complications than maintaining the separate
existence of ML1. Obviously, some tax benefits would then have
been lost, particularly, the benefit of multiplying the SBDs.
[36] It must be remembered that the sole
shareholder of ML1, Marie-Louis Couture, was
approximately 78 when he transferred his trucking business to
this corporation and that, in all probability, he was suffering
the harmful effects of Alzheimer's Disease. Even if
Mr. Couture may still have had the intellectual faculties
required to run ML1, the evidence does not show that he had
played an important role in the administration of this
corporation. As the testimony of Mr. Rodrigue indicates, Mr.
Couture never came to the office. [translation] "He took care
of his trucks." It is easy to imagine that this almost
eighty-year-old man who had worked all his life driving trucks
did not want to stay home doing nothing but wanted to continue
being involved with his trucks. However, the business that was
being operated at that time was no longer the business that he
had carried on all his life. If Transport Couture had
decided not to renew its management contract and to stop using
the services of the ML1 and ML2 corporations, neither
Mr. Couture nor subsequently his spouse, when ML2 replaced
ML1, would, in all probability, have been able to operate the
fourteen trucks owned by ML1 and the nine owned by ML2 at a
profit. Transport Couture had an influence then that, if
exercised, would have resulted in control in fact of ML1 and ML2,
or, to use the words of Judge Sexton, in paragraph 67
of the decision in Silicon Graphics Ltd. (supra),
it could "influence in a very direct way the shareholders
who would otherwise have the ability to elect the board of
directors" of these two corporations.
[37] In addition to the facts already
mentioned, which also reveal Transport Couture's operational
control over ML1 and ML2, there is the conduct adopted by
Transport Couture in the management of ML1 and ML2. In
particular, we might mention that the terms and conditions of the
contract of management and trucking between
Transport Couture and ML1 and ML2 contained nothing in
comparison to the detailed terms and conditions found in
Transport Couture's other subcontracting contracts. No written
management agreement had been considered necessary when ML1 was
replaced by ML2. As Michel Couture said so eloquently,
Transport Couture and the ML1 and ML2 corporations
[Translation] "were an old couple". It was not necessary
to provide for detailed terms and conditions to govern
contractual relations between these companies since
Transport Couture controlled in fact the operations of ML1
and ML2. It would have been completely pointless to stipulate the
same terms and conditions as those set out in the contracts of
Transport Couture with its other subcontractors.
[38] The family relationships between the
shareholders of that corporation and those of ML1 and ML2 are
another indication of the existence of the controlling influence
of Transport Couture. The five shareholders of Transport Couture
were the sons of Marie-Louis Couture, the sole
shareholder of ML1, and of Fleurette Hamel Couture, who
held 90 per cent of the shares of ML2.[16] The evidence reveals only the age
of Mr. Couture, who was between 78 and 81 years of age during the
relevant period. Given Ms. Hamel Couture's minimal
involvement in the administration of ML2 and Mr. Couture's lack
of involvement in ML1, it is reasonable to believe that Mr. and
Ms. Couture counted on their children to take sufficient care of
their investments in these two companies. Given their situation
as retired persons and Mr. Couture's health, it is reasonable to
conclude that they were under the influence of their five sons,
who together held all of the shares of Transport Couture
through a management company.
[39] I have no hesitation in concluding in
the case at bar not only that Transport Couture had a direct
or indirect influence on the ML1 and ML2 corporations but also
that, on the facts, Transport Couture had control in fact of the
other two.
[40] As for the alternative argument raised
by counsel for the appellants, namely, that there could be no
control in fact of ML1 and ML2 where there was control
de jure of these corporations, I will note here, as I
concluded in the Rosario Poirier Inc. decision[17] (supra), that
subparagraph 256(1.2)(b)(ii) of the Act
expressly provides that one person may control a corporation even
if another controls it also. The fact that
subsection 256(1.2) does not refer to
subsection 256(5.1) of the Act does not preclude the
simultaneous existence of de jure control by one
person and de facto control by another. These two
concepts are found in subsection 256(1) of the Act.
In other words, subsection 256(1.2) of the Act does
not have to refer to subsection 256(5.1). The reference to
subsection 256(1) suffices.
[41] Consequently, the appeals of ML1 and
ML2 are dismissed, with costs to the respondent.
Signed at Drummondville, Quebec, this 16th day of January
2003.
J.T.C.C.
Translation certified true
on this 28th day of April 2003.
Sophie Debbané, Revisor
Email this Content