REASONS
FOR JUDGMENT
Boyle J.
[1]
The Appellant is a corporation that operates a Keg
restaurant in the City of Winnipeg. A majority of its shares are owned by Ruth
Howard. Mrs. Howard’s husband, Gordon Howard, owns the corporations which
operate the other two Keg restaurants in Winnipeg, one of which is the
Appellant’s landlord for its Keg restaurant, and one of which provides the financing
and management services to the Appellant. Mr. Howard was also the sole incorporator
and director of the Appellant and its President and Secretary at all relevant
times, and he owned 24% of its shares. He also was Operations Director and
General Manager for the three Keg restaurants and was responsible for operating
the Appellant’s Keg restaurant.
[2]
The tax issue in this case is whether, for the fiscal
years 2007 through 2009, the Appellant corporation which is controlled de
jure by Mrs. Howard, and the corporations wholly‑owned by her
husband were “controlled, directly or indirectly in any manner whatever, by the
same person or group of persons” for purposes of the associated corporations
rules in paragraph 256(1)(b) of the Income Tax Act (the “Act”)
and within the meaning of that phrase set out in subsection 256 (5.1).
This will determine whether the Appellant has to share the so‑called
small business deduction with Mr. Howard’s corporations or whether it is
entitled to its own $500,000 small business income limit.
[3]
The facts are not in dispute. The hearing did not involve
any witness testimony. It proceeded entirely based upon a Partial Agreed Statement
of Facts, Rule 100 read‑ins by the Crown from the examination for
discovery of Mr. Howard, and a two volume Agreed Book of Documents.
Facts
[4]
Mr. and Mrs. Howard were married in 1979. They each
have university degrees. Since their first child was born, Mrs. Howard has
worked primarily as a homemaker. Previously she had been an assistant manager
at The Bay and a trust officer with Montreal Trust.
[5]
Mr. Howard started working at a Keg restaurant as
a waiter in 1976. He became assistant manager at that restaurant the following
year and for the next 20 years remained a long‑term corporate
employee of Keg Restaurants Ltd. working in various capacities.
[6]
In late 1997, Keg Restaurants Ltd. franchised a
corporation wholly‑owned by Mr. Howard (“GRR”) to operate three Keg
restaurants in Winnipeg. The franchisee entered into a Restaurant Development Agreement
and three separate Franchise Agreements for restaurants at Garry Street, Portage Avenue and Pembina Highway locations.
[7]
The Restaurant Development Agreement provided that so
long as GRR operated at least three Keg restaurants in Winnipeg, neither Keg
Restaurants Ltd. nor any franchisee could open a Keg restaurant in the city of
Winnipeg unless GRR was given the right of first refusal option to open the new
location. GRR’s rights under this agreement were not assignable without the
consent of Keg Restaurants Ltd.
[8]
The Franchise Agreements (at least the one for the Pembina
Highway location in evidence) provided, among many other things, that the day‑to‑day
operation, management and supervision of the restaurant was to be at all times
under the complete, direct, exclusive, on‑premises control of a
management employee of the franchisee. The franchisee was required to keep the
franchisor informed of the identities of its management employees. It does not
appear that Mrs. Howard was such an employee. The franchisor’s approval was
required for the general manager of the restaurant. The Franchise Agreement
also precluded the issue or transfer of any shares of the franchisee GRR
without the consent of Keg Restaurants Ltd., and the GRR shares were required
to be endorsed with such restrictions. GRR was also required to keep the
franchisor Keg Restaurants Ltd. informed of its shareholders, officers and
directors. The Franchise Agreement could not be assigned by the franchisee GRR
without the consent of Keg Restaurants Ltd.
[9]
The three restaurants were initially in leased
premises. As time progressed and the businesses performed well, GRR bought a
new location on Portage Avenue, and built a new restaurant to replace the
original Portage Avenue location. Later, in about 2004, Mr. Howard wanted
to relocate the Pembina Highway location to the corner of McGillivray Boulevard
and Dovercourt Drive.
[10]
GRR’s offer to purchase the McGillivray lot was in July
2004. The necessary consents were obtained from Keg Restaurants Ltd. to
relocate and for the new restaurant building to be built. It had been recommended
to Mr. Howard and decided by Mr. Howard, that the real property would
be held by a new corporation incorporated for this purpose (“MorCourt”), which
was wholly‑owned by Mr. Howard. MorCourt’s beneficial interest was
held through a numbered company also wholly‑owned by Mr. Howard. MorCourt
also became the owner of the Portage Avenue location’s real property. As with
GRR, Mr. Howard was the sole shareholder, sole director and the President
and Secretary of MorCourt.
[11]
At the same time it was also recommended to
Mr. Howard that the McGillivray location be operated by another new
corporation, the Appellant McGillivray Restaurant Ltd.
[12]
McGillivray Restaurant Ltd. was incorporated in 2005 by
Mr. Howard as incorporator. He was its first and only director and its President
and Secretary. The Articles of Incorporation required the unanimous consent of
the directors for any transfer of shares of the corporation. Mr. Howard was
elected the sole director by a resolution of the shareholders. By Director’s Resolution,
the number of directors was limited to one unless otherwise designated by the
directors. By Director’s Resolution, the President alone was appointed signing
officer for the Appellant’s banking. The share subscriptions in evidence
indicate that Mrs. Howard paid $76 for her 760 common shares and that
Mr. Howard paid $24 for the remaining 240 common shares. (The Partial
Agreed Statement of Facts says Mrs. Howard paid $100 ‑ the
difference is not material.)
[13]
Mr. Howard understood that it was important that
his wife have 76% of the common shares. His understanding was that, at that
level, the new corporation would be fully independent of the existing
corporations. At the same time his understanding was that, once incorporated
and organized, he would not need his wife’s approval to make any decision on
behalf of the Appellant.
[14]
According to Mr. Howard, he decided to proceed in
this recommended way after not much consultation with his wife. He told her
that “seeing that you’re somewhat involved through living with a restaurant
person” it was recommended that she become a 76% shareholder. She said it was
fine with her to own the stake he proposed to her. He assured her that she did
not have to do anything, that they would continue to operate as they always
had. Mrs. Howard did not accompany him to his advisors or to sign the
documents. Presumably she signed documents taken home to her.
[15]
The Franchise Agreement for the Pembina location was
assigned by GRR to the Appellant with the consent of Keg Restaurants Ltd. Keg
Restaurants Ltd. wanted to know the Appellant’s corporate structure and who
would actually be involved running the restaurant. Mr. Howard told them
that he would be running the Appellant. Mrs. Howard was never involved in,
or party to, any discussions with Keg Restaurants Ltd. Thereafter the terms of
the Franchise Agreement described above applied equally to, and in respect of,
McGillivray Restaurant Ltd.
[16]
The Pembina Highway location closed on December 2nd,
2005. The McGillivray location opened 10 days later. The restaurant
manager and management team had been told by Mr. Howard that they would
start working for the Appellant which was majority owned by his wife, but that
things would go on pretty much as they were except for increased sales. He
could not recall but, had anyone asked, he would have assured them that he
personally would continue to run things. Similarly, most of the non‑management
restaurant staff also moved to the McGillivray location and would have
understood that business would continue as usual but their pay cheques would
show the new name.
[17]
There does not appear to have been any evidence
regarding the mechanics of the transfer to the Appellant of any other of GRR’s
tangible or intangible assets relating to the Pembina Highway location.
[18]
According to Mr. Howard, the running and operation
of all three restaurants in fact remained the same, except that sales increased
at the new location as compared with the closed Pembina Highway location.
[19]
Mrs. Howard had never been much involved with any of
the restaurants’ operations according to Mr. Howard, and this did not
change with the McGillivray location operations. According to him, her
involvement with the restaurants consisted of hearing about them from him,
especially on big things, offering her opinion from time‑to‑time, offering her advice on running the steakhouse from a
woman’s point of view, and being his confidante with respect to bank security
over their personal assets. She had always been responsible for plants on the
restaurants’ patios, and during the taxation years in question she was responsible
for hiring the people responsible for the plants. Mr. Howard said his wife
was involved in the office to a certain extent, but not much. (The head office
of the Appellant, GRR and MorCourt in the taxation years in issue was on the
second floor of the McGillivray location building. The Appellant leased the
first floor from MorCourt for its restaurant.) This was the same as before the
incorporation of the Appellant and the opening of the McGillivray location. Her
employment remained with GRR and her only T4 income was her salary from GRR
until December 2010. He described her as being employed by GRR in a small way
in the years in question. Her GRR work for the restaurants was done at the
office and in restaurants. Mr. Howard explained that dining was work in
the restaurant business. He estimated she typically spent a few hours a week
assisting all three restaurants by evaluating serving staff, food, decor and
atmosphere, coordinating patio decor, observing and following up on standards,
and evaluating competitor restaurants.
[20]
The administration, accounting, head office and similar
functions for the McGillivray location restaurant were all provided to the Appellant
by GRR for which a management fee was charged. There was no written management
agreement in the years in question. The Appellant’s day to day bookkeeping was
done by an employee of GRR. The Appellant’s books and records, including the
recording of all revenue and expenses, were prepared by a GRR employee. Certain
expenses of Mr. Howard were split equally by the three restaurants and the
Appellant’s share was allocated to it at year‑end.
[21]
The Appellant had opened its own bank account after it
was incorporated. However, it remained dormant and was never used. GRR’s bank
account was used for all three restaurants including the Appellant’s. Cheques
were approved and signed by Mr. Howard.
[22]
GRR’s 2007 through 2009 Combined Financial Statements
were put in evidence. These Combined Financial Statements indicate they were
prepared for the purpose of GRR’s bank and include the accounts of the Appellant,
related by virtue of related party ownership, and MorCourt, related by virtue
of common ownership. It appears from these financial statements that GRR’s
operations on such a combined basis were financed with a sizable GRR bank line
and a significant loan from GRR’s shareholder, Mr. Howard. There
was no information in evidence on the allocation of GRR’s consolidated debt or
GRR’s own debt used to finance the Appellant and/or its business, including the
operating debt.
[23]
The Appellant’s 2007 through 2009 Financial Statements
were put in evidence. The significant amounts due to or from GRR are recorded
as amounts due to or from a related party. By the end of 2009 the Appellant’s
advances to GRR had increased from somewhat less than $1 MM to somewhat
more than $1.2 MM at the end of the fiscal year. These advances were non
interest bearing, had no set repayment terms, and were unsecured. GRR and MorCourt
were identified as related parties for the Appellant’s financial statements
purposes by virtue of related party ownership. The Appellant’s financial
statements note that the Appellant provided an unlimited guarantee of all of
GRR’s debt to CIBC (in excess of $2 MM at the end of the 2007 and 2008
fiscal years and nil at the end of the 2009 fiscal year). It appears from the
note to GRR’s Combined Financial Statements that the Appellant’s guarantee was
also supported by a General Security Agreement in favour of the bank. The Appellant
was not reimbursed by GRR for the risk assumed.
[24]
According to the Appellant’s 2009 financial statements, its retained
earnings were in excess of one million dollars. Mrs. Howard had bought her
76% share ownership for no more than $100 just a few years earlier. There was
no evidence that she ever provided any further financing or financial support
directly or indirectly to the Appellant other than her personal guarantee to
Keg Restaurants Ltd.
[25]
Mr. and Mrs. Howard were both guarantors of the
liabilities of the Appellant and GRR to Keg Restaurants Ltd. It appears from
GRR’s Combined Financial Statements that only Mr. Howard personally
guaranteed GRR’s bank debt and that was limited to $500,000. There was no
evidence of Mrs. Howard’s net worth, other assets, or other sources of
income, so the potential exposure and value of her guarantee remains unknown.
[26]
None of the financial statements were ever reviewed by
Mrs. Howard. She would know from her husband if things were going well.
[27]
Mr. Howard’s T4 income in 2006 and in 2007 was all
from GRR. In 2008 approximately 10% of his T4 income was from the Appellant.
[28]
Mr. Howard was the sole director and the President
and Secretary of the Appellant; as such, he had control of the day‑to‑day
management and operations of the Appellant.
[29]
Mr. Howard was the Operations Director and General
Manager for all three Keg restaurants. The general manager of the McGillivray
location reported to Mr. Howard.
[30]
Mr. Howard did not require Mrs. Howard’s
approval for any of his actions on behalf of the Appellant.
[31]
Mr. Howard could and did execute contracts,
conduct banking, borrow money, provide guarantees, and appoint agents on behalf
of the Appellant in the years in question.
[32]
Mrs. Howard could, as majority shareholder, have terminated
Mr. Howard as director, President and/or Secretary of the Appellant at any
time had she wished. She did not. She would, of course, have to make sure the Appellant
complied with its obligations to Keg Restaurants Ltd. relating thereto. There
may also have been potential consequences to consider with respect to the Appellant’s
related party financing transactions and contracted management and other
services. She might also have had to consider her personal guarantee to Keg
Restaurants Ltd. She might also have had to consider the possible impact of
such a step on the value of her shares in the Appellant and on her employment
by GRR.
Law
|
256(1) Associated
corporations -- For the purposes of this Act, one corporation is
associated with another in a taxation year if, at any time in the year,
|
256(1) Sociétés
associées -- Pour l'application de la présente loi, deux sociétés sont
associées l'une à l'autre au cours d'une année d'imposition si, à un moment
donné de l'année :
|
|
(…)
|
[…]
|
|
(b)
both of the corporations were controlled, directly or indirectly in any
manner whatever, by the same person or group of persons;
|
b)
la même personne ou le même groupe de personnes contrôle les deux sociétés,
directement ou indirectement, de quelque manière que ce soit;
|
|
(…)
|
[…]
|
|
(1.2) Control, etc. -- For the
purposes of this subsection and subsections (1), (1.1) and (1.3) to (5),
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(1.2) Précisions sur les
notions de contrôle et de propriété des actions -- Pour l'application du
présent paragraphe et des paragraphes (1), (1.1) et (1.3) à (5) :
|
|
(…)
|
[…]
|
|
(b) for greater certainty,
|
b) il est entendu :
|
|
(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;
|
(ii)
d'autre part, qu'une personne ou un groupe donné de personnes peut contrôler
une société même si une autre personne ou un autre groupe de personnes
contrôle aussi ou est réputé contrôler aussi la société;
|
|
(…)
|
[…]
|
|
(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, …
|
(5.1) Contrôle de fait
-- Pour l'application de la présente loi, lorsque l'expression
« contrôlée, directement ou indirectement, de quelque manière que ce
soit, » est utilisée, une société est considérée comme ainsi contrôlée
par une autre société, une personne ou un groupe de personnes — appelé « entité
dominante » au présent paragraphe — à un moment donné si, à ce
moment, l'entité dominante a une influence directe ou indirecte dont
l'exercice entraînerait le contrôle de fait de la société. …
|
Analysis
[33]
In Duha Printers Ltd. (Western) Ltd. v. Her
Majesty the Queen), [1998] 1 S.C.R. 795, Justice Iacobucci of the
Supreme Court of Canada wrote the following on the meaning of control in the
Act prior to the amendments which extended control to include de facto
control for associated corporation purposes:
[35] It has
been well recognized that, under the Income Tax Act, "control"
of a corporation normally refers to de jure control and not de facto
control. This Court has repeatedly cited with approval the following test, set
out by Jackett P. in Buckerfield's, supra, at p. 507:
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 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 former
section dealing with associated companies], 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. [Emphasis added.]
Cases in which this
Court has applied the foregoing test have included, inter alia, Dworkin
Furs, supra, and Vina-Rug (Canada) Ltd. v. Minister of National
Revenue, [1968] S.C.R. 193.
[36] Thus, de
jure control has emerged as the Canadian standard, with the test for such
control generally accepted to be whether the controlling party enjoys, by
virtue of its shareholdings, the ability to elect the majority of the board of
directors. However, it must be recognized at the outset that this test is
really an attempt to ascertain who is in effective control of the affairs and
fortunes of the corporation. That is, although the directors generally have, by
operation of the corporate law statute governing the corporation, the formal
right to direct the management of the corporation, the majority shareholder
enjoys the indirect exercise of this control through his or her ability to
elect the board of directors. Thus, it is in reality the majority shareholder,
not the directors per se, who is in effective control of the corporation. This
was expressly recognized by Jackett P. when setting out the test in Buckerfield's.
Indeed, the very authority cited for the test was the following dictum of
Viscount Simon, L.C., in British American Tobacco Co. v. Inland Revenue
Commissioners, [1943] 1 All E.R. 13, at p. 15:
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.]
[37] Viewed in
this light, it becomes apparent that to apply formalistically a test like that
set out in Buckerfield's, without paying appropriate heed to the reason
for the test, can lead to an unfortunately artificial result. The task before
this Court, then, is to determine whether, just prior to the amalgamation, Marr's
was in effective control of the affairs and fortunes of Duha No. 2 by
virtue of its majority shareholdings.
[34]
Clearly, the Supreme Court stresses that, in
approaching the issue of de jure control, the objective is to determine
who was in effective control as a question of law.
[35]
Subsequent to the introduction of the de facto
control language for associated corporations, the Federal Court of Appeal wrote
the following in Silicon Graphics Limited v. Her Majesty the Queen, 2002
FCA 260, which has been previously described by the former Chief Justice of
this Court in Lenester Sales Ltd. v. Her Majesty the Queen, 2003 TCC 531,
affirmed 2004 FCA 217, as the classic statement on the meaning of de facto
control:
[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 (Société Foncière d'Investissement Inc. v. Canada,
[1995] 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.
[36]
In Transport M.L. Couture Inc. v. Her Majesty the
Queen, 2004 FCA 23, the Federal Court of Appeal wrote:
[24] It is not
possible to list all the factors which may be useful in determining whether a
corporation is subject to de facto control (Duha Printers, [1998]
1 S.C.R. 795, para. [38]). However, whatever factors are considered, they must
show that a person or group of persons has the clear right and ability to
change the board of directors of the corporation in question or to influence in
a very direct way the shareholders who would otherwise have the ability to
elect the board of directors (Silicon Graphics, [2002] FCA 260, para.
[67]). In other words, the evidence must show that the decision-making power of
the corporation in question in fact lies elsewhere than with those who have de
jure control.
[25] The trial
judge relied primarily on the operational control exercised by Transport
Couture, the economic dependence on it of ML1 and ML2 and the family relations
between the shareholders as a basis for concluding that Transport Couture in
fact controlled ML1 and ML2. The appellant did not challenge the relevance of
the factors considered by the trial judge. However, it argued that the evidence
did not allow the trial judge to conclude that operational control of ML1 and
ML2 was in the hands of Transport Couture or that ML1 and ML2 were economically
dependent on Transport Couture.
[26] In my
view, the evidence amply supports the trial judge's decision. As he indicated
at paragraph 36 of his reasons, if Transport Couture had decided not to renew
its management contract and no longer to retain the services of ML1 and ML2,
neither Louis-Marie Couture in the case of ML1 nor his wife in the case of ML2
would have been in a position to pursue the activities of those corporations.
(…)
[28] On the
question of operational control, the evidence showed that it was the Couture
brothers and Claude Rodrigue, manager of Transport Couture, who took all the
important decisions and who negotiated truck purchases, loans and financing.
Louis-Marie Couture's involvement was nil and that of his wife was limited to
one information session a month.
(…)
[30] On the
last factor considered by the trial judge (the family relationship between
shareholders), the following passage from the reasons indicates the relevance
and force of that factor in the context of the case at bar (paragraph 38):
... 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 ...
[31] Ultimately,
the evidence was that, motivated by the relationship of trust which they had
with their five sons, Louis-Marie Couture and his wife relied on Transport
Couture and relegated to it all the decision-making powers they held as
shareholders of ML1 and ML2.
[32] In my
opinion, therefore, the trial judge properly concluded that Transport Couture
was in a position to exercise de facto control over ML1 and ML2 during the
relevant period and that ML1, ML2, Transport Couture and 1864 Québec inc. were
therefore associated companies within the meaning of subsection 256(1).
[37]
The Federal Court of Appeal upheld the decision of Justice
Lamarre of this Court in Mimetix Pharmaceuticals Inc. v. Her Majesty the
Queen, 2001 TCJ No. 749, affirmed 2003 FCA 106, in which in
considering de facto control, this Court looked to economic controlling
influence, control of day‑to‑day operations, controlling the
corporation’s fortunes by making all the decisions, who was in an economic
position to exert the kind of pressure that would enable him to have his will
prevail with respect to that business, and who was authorized to sign all the
cheques.
[38]
The Federal Court of Appeal upheld the decision of
Justice Lamarre‑Proulx of this Court in Plomberie J.C. Langlois Inc.
v. Her Majesty the Queen, 2004 TCC 734, affirmed 2006 FCA 113, wherein this
Court decided that in the particular circumstances, where two non de jure
controlling unrelated 50‑50 shareholders appointed one of them as
sole director, that director had de facto control of the corporation.
This court had regards to a legal dictionary definition of control as “dominion
over the management of a business or organization; power ensuring the one who
has it a dominant influence in the direction of a group, a corporation etc., or
the orientation of its future”. Justice Lamarre‑Proulx then decided:
[40] In my opinion,
Mr. Simoneau exercised such dominion over the appellant. As the sole
director, he had the power that ensured him a dominant influence in the
direction of the appellant. The other shareholder, being an equal shareholder,
had the power to remove this authority from him, but did not do so during the
years in issue. In conclusion, during those years, Mr. Simoneau exercised
control in fact of the appellant within the meaning of subsection 256(5.1)
of the Act. As far as the parties were concerned, this was the only point that
I had to decide in the instant case.
[39]
In Société Foncière D’Investissement Inc. v. Her Majesty the Queen,
[1995] T.C.J. No.1568, former Chief Justice Bowman of this Court wrote:
[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 256(5.1).
[10] I am
persuaded that the resolutions adopted by the other shareholders had the effect
of giving Mr. Allain practically absolute control over the affairs of S.F.I.
During the years in which the resolutions were in effect, he had complete
authority to manage all aspects of the corporation's commercial and financial
dealings. I admit that the other shareholders had the power to divest him of this
authority, but as long as he was permitted to exercise it he was in a position
of unlimited control.
[11] The
exception contained in the second part of paragraph 256(5.1) demonstrates the
breadth of this provision. That exception exists when the control is derived
from certain commercial agreements where the "controller"
(Mr. Allain) and the corporation are dealing with each other at arm's
length. There was no arm's length dealing between Mr. Allain and the
corporation, not only because of the fact that he had very close ties with the
corporation he was managing but also because of the fact that the two majority
shareholders were his daughters.
[12] The
appeals are accordingly dismissed.
The Scope of Silicon
Graphics:
[40]
The Federal Court of Appeal is clear in Silicon
Graphics in 2002 that, in order for there to be a finding of de facto
control, a person or persons must have the clear right and ability to:
1.
Effect a significant change in the board or directors or the
powers of the board of directors; or
2.
Influence in a very direct way the shareholders who would
otherwise have the ability to elect the board of directors.
[41]
In Transport Couture the
trial judge looked to facts concerning operational control, economic dependence
and family relations, and referred to Société Foncière’s consideration
of the economic, contractual and moral influence over a corporation’s affairs.
However, the Federal Court of Appeal in upholding Justice Archambault in its
2004 decision specifically noted that the appellant had not challenged the
relevance of the factors considered by the trial judge.
[42]
In Lenester Sales Ltd. the trial judge referred
to the classic statement of the Federal Court of Appeal on de facto
control in Silicon Graphics Ltd. and concluded that Giant Tiger Stores
Ltd. had no such rights over its licencee and franchisee, the appellant Lenester
Sales. The trial judge went on to say:
[33] Even
applying the somewhat broader interpretation suggested in some cases, such as Société
Fonçière D'Investissement Inc. v. R. and Transport M.L. Couture Inc. v.
R., it is clear that GTS had no direct or indirect influence that would
result in control in fact of Lenester or Sushi.
He went on to
decide that, in any event, the franchise exception language in subsection 256(5.1)
clearly applied. In its 2004 decision the Federal Court of Appeal said in its
oral reasons that the trial judge had considered both tests found in the
jurisprudence and concluded the corporations were not controlled by Giant Tiger
Stores under either test.
[43]
Considering only Silicon Graphics, Transport Couture and Lenester
Sales, it could be argued that the scope of what can or need be considered
when applying the Silicon Graphics definition/test is unclear as it
arguably permits of a broad or narrow interpretation, and therefore the
potential relevance of economic, contractual or moral influence, operational
control, economic dependence, family relations etc. is unsettled.
[44]
However, the Federal Court of Appeal’s 2003 decision in Mimetix
Pharmaceuticals appears very clear as it upheld the trial judge with brief
oral reasons from Justice Rothstein and concluded she did not make any error of
law when it was clear from her reasons that she decided based on considerations
of who controlled day‑to‑day operations, who made all the
decisions, who signed all the business agreements invoices and cheques, and who
was in a position to exert economic pressure in order to have its will prevail
with respect to the business and with respect to the corporation (not just over
the de jure control shareholder).
[45]
Most recently the Federal Court of Appeal in 2006 upheld this Court’s
decision in Plomberie Langlois wherein Justice Lamarre‑Proulx had
placed considerable emphasis on fact that one of the two unrelated non‑controlling
50‑50 shareholders was the sole director and had the last say in any
decisions to be made, whereas the other shareholder only had an operational
role not a decision‑making role. Justice Noël (as he then was) concluded
the Federal Court of Appeal reasons with:
[18] I believe that the evidence
allowed the trial judge to conclude that, in spite of the equal division of the
appellant's share capital, Mr. Simoneau was the "controller" of the
appellant within the meaning of subsection 256(5.1) and exercised de facto control
over it.
[46]
After considering Plomberie Langlois and Mimetix
Pharmaceuticals, the issue appears to have been very clearly addressed and
settled by the Federal Court of Appeal in a manner that this Court is not free
to reconsider. I will therefore be considering such broader manners of
influence in applying the Silicon Graphics meaning of de facto
control to the particular facts of this case. I have no doubt that this is the
correct approach.
[47]
The Supreme Court of Canada in Duha Printers emphasized that,
when considering and applying the de jure control test, it is important
to recognize at the outset that the de jure test is really an attempt to
ascertain who was in effective control, in law, of the affairs and fortunes of
the corporation. I see no reason for this mandated approach to de jure
control to not similarly apply to de facto control, such that, in
considering and applying the de facto control test, factors and
considerations, this Court should be attempting to determine who is, in fact,
in effective control of the affairs and fortunes of the corporation.
Application to the facts
[48]
I am satisfied that, on the evidence in this case, Mr. Howard had
and exercised de facto control over the Appellant corporation
throughout, notwithstanding that his wife had de jure control of the
Appellant. The result is that the Appellant is associated with the two
corporations GRR and MorCourt over which Mr. Howard had de jure
control. The appeal must therefore be dismissed.
[49]
Firstly, overall it is simply hard to imagine how Mr. Howard could
have had anymore effective de facto day‑to‑day control, or
greater long‑term control, over the management and operation of the
Appellant and its business than he enjoyed. Similarly, it is hard to imagine
how Mrs. Howard could have had or exercised much less effective de facto
control. Indeed, the evidence of Mr. Howard is that this is precisely what
was intended from the outset and throughout.
[50]
Mr. Howard was the sole director and President and Secretary of the
Appellant. He was the Operations Director and General Manager of all three
restaurants including that of the Appellant. The General Manager of the
Appellant’s restaurant reported to him. He did not need to obtain his wife’s
approval or consult with her to make any decisions in these capacities.
[51]
Mr. Howard was the person who had all of the discussions,
negotiations and communications with Keg Restaurants Ltd., the franchisor,
concerning the Appellant’s franchise restaurant. He alone had a decades long
history with Keg Restaurants Ltd. He alone had experience running, managing and/or
operating a Keg or any other restaurant.
[52]
Mr. Howard alone sought the needed business‑related advice on
behalf of the Appellant. The advice was given to him. He decided on the
recommended course of action after minor and limited communication and
consultation with his wife, and he alone implemented it.
[53]
Mr. Howard had his companies arrange for the Appellant’s banking
and financing. He had his companies provide the Appellant’s management,
accounting and head office services and functions. The Appellant’s finances
were integrated into GRR. The Appellant only ever used GRR’s bank account.
[54]
Mr. Howard sought and obtained Keg Restaurants Ltd.’s consent to
the assignment of GRR’s franchise to the Appellant. He obtained this only after
he assured them nothing would change with the management, operations and
running of the Appellant and its restaurant.
[55]
Mr. Howard owned the company that owned the McGillivray location
land and building, and was the Appellant’s landlord for it sole premises for
its sole business. The agreed rent charged and paid was set by Mr. Howard.
[56]
Mr. Howard did not deal at arms length with the controlling
majority shareholder. They were related. The Howards had been married for
decades and remained married and living together.
[57]
Mrs. Howard did not have any other source of income disclosed in
the evidence except her employment income from GRR. There is no evidence of her
capital assets. Among other things, this brings into question the value of her
personal guarantee as well as the extent of her dependence on the continued
success of her husband in running these three restaurant businesses.
[58]
Mrs. Howard could not sell her controlling interest to anyone else
without obtaining Keg Restaurants Ltd.’s consent. Had she been able to that,
and sell the shares to anyone other than her husband, this would result in the
husband’s company losing its exclusivity rights because they were no longer
operating three restaurants. This could be expected to negatively affect the
value of her shares of the Appellant and the value of her husband’s companies.
[59]
Secondly, Mr. Howard also had considerable influence when
Mrs. Howard appointed him as sole director upon acquiring her 76% interest
in the Appellant. GRR’s exclusivity rights would have precluded the company she
controlled from opening a Keg Restaurant without the full support of her
husband’s GRR. Mr. Howard proposed to Mrs. Howard, based upon the
advice he received, that she could acquire the 76% interest in the new company
on the recommended terms, which included that nothing else change. That
certainly makes it appear that her opportunity to acquire shares was dependent
upon him being the sole director etc. It was that offer which she agreed to
accept. The evidence also makes it appear that their jointly owned new company,
the Appellant, was only going to get the Franchise Agreement to run the new
restaurant location if Mr. Howard was the sole director etc. That was the
proposal he had put to Keg Restaurants Ltd. and that was the proposal he had
made to his wife which she accepted and agreed to.
[60]
This all constitutes very significant influence held and exercised by
Mr. Howard over Mrs. Howard’s decision to appoint him as sole director.
[61]
Thirdly, while Mrs. Howard could have replaced Mr. Howard as
the Appellant’s sole director, she did not.
Had she wanted to, she would have had to be concerned about, and influenced by,
the effect that would have under the Franchise Agreement. If she considered
doing it against Mr. Howard’s wishes, she would have had to consider, and be
influenced by, the fact that the Appellant leased its business premises from
his company and obtained all of its management and related services from his
company.
[62]
Had Mrs. Howard ever wanted to turn her mind to selling her shares or
replacing her husband as sole director, or appointing additional directors, she
clearly would have been influenced by several factors relating to her husband’s
positions with the Appellant.
[63]
The Appeal is dismissed, with costs.
Signed at Ottawa, Canada, this 28th day of November 2014.
“Patrick Boyle”
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