HER MAJESTY THE QUEEN,
REASONS FOR JUDGMENT
 The Appellant is in
the business of constructing homes in and around Barrie, Ontario. During the taxation
years in issue, its shares were owned equally by two other corporations:
Bost Investments Inc. (Bost) and 1476577 Ontario Inc.
(147). The Appellant filed its tax returns for its taxation years ending
October 31, 2002 and October 31, 2003 on the basis that it was not
associated with Bost within the meaning of paragraph 256(1)(a) of
the Income Tax Act (R.S.C. 1985,
c. 1 (5th Supp.)) and, therefore, that it was entitled to claim the full
small business deduction under subsection 125(1) of the Act. The Minister of National Revenue
reassessed the Appellant to disallow its claim for the small business deduction
on the basis that the Appellant and Bost were associated corporations and that
the Appellant was not entitled to the small business deduction because Bost
controlled the Appellant directly or indirectly in any manner whatever.
 The Appellant is
appealing from those reassessments.
 The issue in this
appeal is whether Bost controlled the Appellant at any time during the
Appellant’s 2002 and 2003 taxation years either directly or indirectly in any
manner whatever as provided in paragraph 256(1)(a) of the Act,
thereby causing the two corporations to be associated for purposes of the Act.
 The parties filed a
partial agreed statement of facts, which reads as follows:
1. The Appellant, Brownco Inc., is a Canadian Controlled
Private Corporation (“CCPC”) and was incorporated under the laws of Ontario on
June 13, 2000 and is in the active business of constructing and selling
residential homes in the Barrie area of Ontario.
On incorporation Bost Investments Corp. (“Bost”) subscribed for
1 common share. Bost was controlled by Garo Bostajian (“Garo”), through a
During the fiscal years 2000 and 2001, by virtue of Bost’s
ownership of all of the shares in Brownco, Bost had de jure control. In
filing its 2000 and 2002 T2 Income Tax Return, Bost and
Brownco declared that they were associated corporations for income tax
4. In the 2002 and 2003 taxation years (the “material times”)
the Appellant carried on the business of residential construction using the
tradename Grandview Homes in Barrie, Ontario.
At all material times, the Appellant was part of a group of
companies operating in the business of property development and the
construction of residential homes most of which operated also under the
tradename Grandview Homes.
6. In the 2002 and
2003 taxation years, the corporate structure of the Bost Group of Companies was
as reflected in Tab 11 of Exhibit 1, being Joint Book of Documents Volume 1. (omitted)
Bost Investments Corp. (“Bost”) or Garo Bostajian, individually
or through a trust, owned at least 50% of the shares of each company that
Supplier of Lots
of Lots from
Lotco II Limited
of Lots from
& Land Development
Developer of Lots
Cambridge Centre Village Inc.
Doon Creek Ltd
Greengate Village Inc.
Dodge Drive Limited
Tepco Holdings Inc
Construction of Residential
of Residential Homes
Ridgeview Homes Inc.
Construction of Residential
Construction of Residential
Construction of Residential
Construction of Residential
1205584 Ontario Ltd.
Construction of Residential
1488533 Ontario Inc.
of Residential Homes
1517267 Ontario Inc.
of Residential Homes
1589855 Ontario Inc.
of Residential Homes
1136364 Ontario Ltd.
of Residential Homes
Real Estate Rental
Bost Properties Inc.
real estate rental properties
At all material times, Bost and 1476577 Ontario Limited (“147”),
both CCPC’s, each owned 50% of the issued and outstanding common shares of the
147 acquired its 50% interest in Brownco on October 31, 2001,
when Brownco issued 49 additional shares to Bost and 50 shares to 147.
The number and stated capital of the issued and outstanding
shares of Brownco during the years under appeal were:
50 Common Shares
50 Common Shares
The issued and outstanding shares of Bost were owned as follows:
Garo Bostajian Family Trust
1,000 Common Shares
Garo Bostaijan (“Garo”)
761,490 Class A Special Shares
Estate of Boghos Bostaijan
507,960 Class A Special Shares
Garo resides in Kitchener, in the Regional Municipality of Waterloo.
The number and stated capital of the issued and outstanding
shares of 147 consist of the following:
50 Common Shares
50 Common Shares
During the material times, Randy Brown (“Brown”) resided in Barrie,
Ontario with his spouse, Linda Brown.
Garo and Brown are not related to each other by blood
relationship, marriage or adoption.
From incorporation of Brownco, Garo held the office of Secretary
and Treasurer of the Appellant, with Brown holding the office of President.
Pursuant to the Unanimous Shareholders’ Agreement (“USA”) between
Brownco, Bost and 147 dated October 31, 2001, the activities of Brownco shall
be managed by a board of directors consisting of at least two directors. Bost
and 147 each had the right to elect and did elect a member of the Board of Directors.
At all material times, the board of directors of the Appellant
consisted of two directors, namely Garo (Bost’s nominee) and Brown (147’s
The nominee of Bost, Garo, was the Chairman of the Board of Directors.
The majority of the votes cast at a meeting of the Board of
Directors governed and in the event of a tie, the Chairman, Garo, held the
“Grandview Homes” is the marketing name developed by Bost. At all
material times, Brownco used the business name “Grandview Homes” in its
22. Bost enters into business arrangements with other
construction companies including Brownco. In these arrangements the
construction companies used the name Grandview Home for marketing purposes.
Bost’s arrangement with the other construction companies was similar to its
arrangement with Brownco: Bost would try and did arrange for the acquisition of
lots and financing and was responsible for certain administrative matters.
23. At all material times, Bost had the arrangement set out in
paragraph 22 with Brownco as well as with the construction companies that
included Ridgeview Homes Inc., Novelco Inc., 1205584 Ontario Ltd., 1488533
Ontario Inc., 1517267 Ontario Inc., and 1589855 Ontario Inc. Bost was a 50%
shareholder in each of these companies.
24. At all material times, Bost was a 50% shareholder in Tepco
Holdings Inc., Buildplus Inc., Doon Creek Ltd., Dodge Drive Limited, and
Greengate Village Inc. These companies were not in the house building business.
They were land development companies, none of which operated in the Barrie
25. Pursuant to the USA, the responsibilities of 147 in the
management of Brownco are the following:
vehicle and trailer
and dumping fees
and site phone
work under TARION (Ontario Home Warranty Program)
26. Pursuant to the USA, the responsibilities of Bost in the
management of Brownco are the following:
b) Use it best efforts to obtain building lots. Generally this
refers to Bost or related company entering into agreements with third parties
to purchase building lots.
27. Outside of the USA, management responsibilities of Bost in
the management of Brownco are the following:
a) Arranging letters of credit
b) GST remittances
c) Reviewing Workers Safety Insurance Board status for trades
d) Day-to-day banking
e) Payment of invoices
f) Day-to-day office administration
28. Pursuant to the USA, Brownco shall pay both 147 and Bost
$3,000 per residential unit completed and sold.
29. Pursuant to the USA, Brownco shall accrue and pay additional
management fees equally to each of 147 and Bost to reduce Brownco’s annual
taxable income to the annual small business limit as defined under the Income
30. Pursuant to the USA, the annual after-tax corporate income
is to be equally distributed by Brownco to 147 and Bost without impairing the
ability of Brownco to continue to carry on business.
31. At the beginning of the 2002 fiscal year (being
November 1, 2001) of Brownco, the balance sheet reported a debt owed to
Bost of $119,950. At the end of the 2002 fiscal year (being October 31, 2002),
the amount Brownco owed to Bost increased to $1,220,000.
revenue for fiscal year ending October 31, 2002 was $9,591,262.
33. For the fiscal year 2002, the accounting firm BDO Dunwoody
LLP reported in respect of Brownco:
a) Pre-tax income of
b) Management fee paid
c) Management fee paid
to Lotco Limited (connected with Bost)
d) Management fee paid
to Lotco II Limited (connected with Bost)
e) Management fee paid
to Buildcap Inc. (connected with Bost)
34. At the beginning of the 2003 fiscal year (being November 1,
2002), the opening balance of Brownco’s debt owed to Bost was $1,220,000 and at
the end of the fiscal year (being October 31, 2003) the debt was reduced
35. Brownco’s revenue for fiscal year ending October 31,
2003 was $9,102,229.
36. For the 2003 fiscal year, the accounting firm BDO Dunwoody
LLP reported in respect of Brownco:
a) Pre-tax income of
b) Management fee paid to
fee paid to Lotco II Limited (connected with Bost)
fee paid to Buildcap Inc. (connected with Bost)
37. Brownco filed its tax returns for fiscal years 2002 and 2003
on the basis that it was not associated with Bost and therefore entitled to the
small business deduction.
38. By Notices of Reassessment dated April 15, 2005, the
Minister reassessed Brownco’s tax liability in the 2002 and 2003 taxation years
by disallowing the small business deductions of $31,903 and $35,040
respectively on the basis that Brownco and Bost were associated corporations
within the meaning of Income Tax Act subsection 256(1) in combination
with subsection 256(5.1) of the Income Tax Act.
 Mr. Brown and Mr. Bostajian testified at the
hearing, along with Mr. Greg Weiler, an accountant at BDO Dunwoody
who was involved in the preparation of the Appellant’s financial statements.
 Mr. Bostajian is a civil engineer who began
building houses in the Kitchener area
in 1989. At some point he set up Bost which began using the trade name “Grandview Homes”
to market the houses in his business. According to the evidence, Grandview Homes
enjoyed a good reputation both among home buyers and the construction trades,
and Mr. Bostajian strove to maintain that reputation.
 A number of
construction companies in which Bost held an interest were set up over the next
several years (see paragraph 7 of the partial agreed statement of facts). Those
companies used the Grandview Homes tradename, and Bost arranged financing for
them as well as for the acquisition of lots. Bost was also involved in the
administration of those companies. Mr. Bostajian referred to these
companies as Bost’s “franchisee corporations.”
 According to Mr. Bostajian, except for Buildo
Inc. and Buildcap Inc., Bost held 50% of the shares of these corporations and
the franchisee held the remaining shares. Bost and the franchisee each
nominated one director and Bost’s nominee had a casting vote, as it did in the
 Mr. Brown began working in construction around
1988 and was a contract house builder when he met Mr. Bostajian in 1998. At
that time Mr. Brown was looking for new business opportunities in the
 Mr. Brown testified that, at their first meeting, Mr. Bostajian
proposed that Mr. Brown become a Grandview Homes franchisee, Mr. Bostajian,
on the other hand, said that he did not offer to make Mr. Brown a
franchisee right away but instead suggested that they work together on the
construction of a few houses in the Kitchener‑Waterloo area, in order for
Mr. Bostajian to satisfy himself that Mr. Brown was a good builder.
 In any event, as a result of their meeting, Mr. Brown
and Mr. Bostajian entered into a business relationship whereby Mr. Brown
built three houses in late 1998 and 1999 on lots purchased by Mr. Bostajian
or one of his companies. The profits from the sale of the houses were split
equally between Mr. Brown and Mr. Bostajian.
 Mr. Bostajian said that in late 1998, he told Mr. Brown
that he was interested in Mr. Brown starting a Grandview Homes
franchise in the Barrie area to build on lots which had
been acquired by one of Mr. Bostajian’s companies. Despite Mr. Bostajian’s
professed desire to have Mr. Brown become a franchisee, when Mr. Brown
moved to Barrie he ran the operations of one of Bost’s
existing companies, named Buildco Inc. Mr. Brown managed Buildco’s
operations in Barrie from 1998 to 2001.
 Eventually, on June 13, 2000, the Appellant was
incorporated with Bost as its sole shareholder. Bost provided the initial
capital of $120,000 in the form of a shareholder loan. Both Mr. Brown and
Mr. Bostajian became directors of the Appellant at the time of its
incorporation and Mr. Brown was made president and Mr. Bostajian the
 Both Mr. Brown and Mr. Bostajian testified
that when the Appellant was incorporated Mr. Brown was intended to be an
equal shareholder, but he was mistakenly not issued any shares.
 Mr. Bostajian said that the error was first
brought to his attention in early 2001 by someone from his accounting firm, and
that he was advised to wait until the end of the Appellant’s fiscal year to rectify
the error. On October 31, 2001, an additional 49 shares of the Appellant
were issued to Bost and 50 shares were issued to 147 to give them equal
shareholding. The Appellant filed its returns for its 2002 and 2003 taxation
years on the basis that it was not associated with Bost.
 At the same time the additional shares were issued on
October 31, 2001, Bost, the Appellant and 147 entered into the
Unanimous Shareholder Agreement (USA). It contained provisions dealing with the
management and corporate governance of the Appellant, restrictions on the
transfer of shares, the right of first refusal regarding the sale of shares,
and procedures to be followed in the event of a sale of shares pursuant to the
 The USA provided
that Bost and 147 would each appoint one director, and that in the event of a
tie in a vote of the directors, the Chairman would have the deciding vote. It
also set out that, unless otherwise agreed, the nominee of Bost would be the
Chairman of the Board of Directors. Mr. Bostajian and
Mr. Brown testified that this provision was included to protect the “Grandview
 The Appellant was
inactive until its fiscal year commencing November 1, 2000. At some point
after that date it began constructing homes. In 2002 and 2003 Lotco Ltd., which
was wholly owned by Bost, supplied most of the lots on which the
Appellant built. The evidence showed that Lotco supplied 253 lots to the
Appellant during this period, while the Appellant acquired 25 lots on its
own. Mr. Bostajian and Mr. Brown testified that Mr. Bostajian
consulted with Mr. Brown prior to Lotco purchasing the lots, and both
parties agreed on which lots Lotco would acquire for the Appellant. Other lots
acquired by Lotco were allocated to Novelco Inc., another company in which Bost
had a 50% interest and which operated in Barrie. During the period in issue, Lotco allocated
93 lots to Novelco.
 The cost to Lotco
for the lots allocated to the Appellant appear to be in the range of
$10 million to $15 million with cash required on closing between
$2 million to $3 million. Lotco gave the Appellant 100% financing for
the lots Lotco transferred to it. The costs of the lots that were acquired by
the Appellant on its own was $954,000 with cash on closing of $95,440. The
remainder of the purchase prices were financed with vendor take back mortgages.
 The Appellant had
revenue of $9,591,262 for its year ending October 31, 2002, and $9,102,229
for its year ending October 31, 2003. After the payment of management fees
to 147 and certain Bost group companies the Appellant had taxable income of
$213,249 in 2002 and $219,975 in 2003.
 Bost provided
financing for the Appellant’s operations through advances on a credit facility Bost
had set up with the Royal Bank of Canada in May 2001 for $5 million, repayable on demand.
The credit facility was used by Bost to finance the operations of a number of
other of the construction and land development companies in which Bost held an
interest. The credit facility was increased to $6 million in August 2002.
The Appellant guaranteed the full amount of the indebtedness of Bost under the
credit facility, as did the other Bost companies that used it.
 The maximum
amount of the advances from Bost to the Appellant from the credit facility do
not appear to have exceeded $2,291,585 in the years in issue.
 There was no
written financing agreement between Bost and the Appellant, but Mr. Bostajian
said that the Appellant was required to pay interest to Bost one half percent (½%)
above the rate the Royal Bank of Canada charged Bost.
 Subsection 256(1) of the Act
sets out the circumstances in which one corporation is associated with
another. The Minister, in reassessing the Appellant, relied on paragraph 256(1)(a)
Associated corporations -- For the purposes of this Act, one
corporation is associated with another in a taxation year if, at any time in
one of the corporations controlled, directly or indirectly in any manner
whatever, the other;
 The meaning to be attributed to the phrase “controlled
directly or indirectly or in any manner whatever” is given in subsection
256(5.1), which reads:
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.
 The Respondent says that Bost had de facto control
over the Appellant in a number of ways. Firstly, under the USA, the director nominated by Bost was given a casting
vote at any directors’ meeting. This secured Bost’s control over the
Appellant’s business activities and corporate governance. Secondly, the
Respondent says that Bost’s controlling influence stemmed from its role as the
dominant, if not the exclusive supplier of building lots (through a related
company) to the Appellant. Finally, Bost’s direct and indirect financing
of the Appellant’s activities “secured its economic dominance and controlling
influence over the financial affairs of the Appellant.”
 The Respondent also says that the Appellant is not
saved by the exception contained in subsection 256(5.1) because the
Appellant and Bost were not dealing at arm’s length, and because the USA was
not an agreement that is similar to those listed in the exception and its main
purpose was not to govern the manner in which the Appellant carried on its
 If it is found that the Appellant was not controlled in
fact by Bost, the Respondent argues in the alternative that the Appellant and
Bost are deemed to be associated by subsection 256(2.1) of the Act,
because one of the main reasons for their separate legal existence was to
access the small business deduction and therefore to reduce the amount of their
tax payable under the Act.
 Subsection 256(2.1) reads as follows:
Anti-Avoidance- For the purposes of this Act, where, in the case of two or more
corporations, it may reasonably be considered that one of the main reasons for
the separate existence of those corporations in a taxation year is to reduce
the amount of taxes that would otherwise be payable under this Act or to increase
the amount of refundable investment tax credit
under section 127.1, the two or more corporations shall be deemed to be
associated with each other in the year.
 The Appellant’s counsel argued that
the casting vote provision of the USA did not give Bost de facto control of the Appellant. He said the
test for de facto control was set out by the Federal Court of Appeal in Silicon
Graphics v. R., 2002 FCA 260, where it held 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.
Counsel asserted that Bost did not have the right and
ability to effect a significant change in the board of directors, and only gave
it very limited influence with respect to the activities of the corporation.
Furthermore, the casting vote was not operative at the meetings of the
shareholders and therefore Bost had no greater influence in the election of the
board of directors than did 147.
 The Appellant also contended that the casting vote
given to the director nominated by Bost did not give de facto control over
it to Bost because the latter was subject at all times to the fiduciary duties
of a director of a corporation, as set out in the Ontario Business Corporations Act,
R.S.O. 1990, c. B. 16.
 Counsel cited the decision of the
Supreme Court of Canada in People’s Department Store Inc. (Trustee of) v.
Wise  S.C.J. No. 64 (QL) regarding the duties imposed on a director
under the Canada Business Corporations Act, R.S.C., 1985, c. C-44, (identical to those in the OBCA)
where the Court said:
35 The statutory fiduciary duty requires directors
and officers to act honestly and in good faith vis‑à‑vis the
corporation. They must respect the trust and confidence that have been reposed
in them to manage the assets of the corporation in pursuit of the realization
of the objects of the corporation. They must avoid conflicts of interest with
the corporation. They must avoid abusing their position to gain personal
benefit. They must maintain the confidentiality of information they acquire by
virtue of their position. Directors and officers must serve the corporation selflessly,
honestly and loyally: see K. P. McGuinness, The Law and Practice of Canadian
Business Corporations (1999), at p. 715.
 The Appellant also referred to provisions of the OBCA
that prohibit self‑dealing by directors and require disclosure of conflicts.
The Appellant also referred to the OBCA provisions which empower a Court
to intervene to prevent oppression of the minority shareholders.
 Given these obligations to the corporation, the
Appellant’s counsel maintained that Bost’s nominee director could not exercise
control over the Appellant in Bost’s interest only.
 With respect to the question of Bost’s economic
influence over the Appellant, the Appellant argued that the Appellant’s
indebtedness during the years in appeal was not unduly large and could not be
taken to be repayable on demand since Bost was required by the USA to provide financing. This financing was not so
significant as to put Bost in de facto control of the Appellant.
 The Appellant’s reliance on Bost or its related
companies to supply it with building lots did not result economic dependence on
Bost, according to the Appellant. Apart from that fact that all of the
Appellant’s revenues were derived from third parties and not from Bost, the
Appellant argued that it could have obtained lots from other sources.
 Even if it is found that Bost had any influence that
could have resulted in it having de facto control of the Appellant,
it was argued that the Appellant was still not controlled by Bost, because the
conditions for the exception in subsection 256(5.1) were met. The
Appellant said that since the Respondent admitted in the Reply to Notice of
Appeal that Mr. Brown and Mr. Bostajian were dealing at arm’s length,
it should be found that the Appellant and Bost also dealt at arm’s length, thereby
fulfilling the first condition in subsection 256(5.1). Next, the Appellant
says that the agreement from which Bost derived any influence over the
Appellant was the USA, which was similar to a franchise,
license, lease, distribution, supply or management agreement. Finally, the
Appellant contended that the main purpose of the USA was to govern the
relationship between the Appellant and Bost regarding the manner in which the
business carried on by the Appellant was conducted and that the main purpose of
the casting vote provision in the USA was to protect the trademark “Grandview Homes”. The Appellant in
this case argued therefore that the USA was an integral part of the overall
franchise arrangements between the Appellant and Bost and was therefore an
agreement of the kind contemplated in subsection 256(5.1).
 The Appellant relied on the decision of this Court in Lenester
Sales Ltd. v. R., 2003
TCC 531. In that case the taxpayer had acquired a franchise from GTS Ltd.
to run a Giant Tiger
store. The Minister reassessed the taxpayer to deny its claim for the small
business deduction on the basis that the taxpayer was controlled by and
therefore associated with GTS. The Minister assumed that GTS controlled the
taxpayer, in part, as a result of terms of certain banking and financial arrangements
as well as terms in a shareholders’ agreement between the taxpayer and GTS. The
Minister took the position that the shareholders’ agreement and the financial
and banking arrangements did not fall under the wording of the exception in
 Although Bowman, A.C.J. (as he then was) held in Lenester
that GTS did not control the taxpayer, he went on to find that the banking and financing arrangements
and shareholders’ agreement fell within the exception in subsection 256(5.1)
on the basis that they were part of the overall franchise arrangements entered
into by the parties, and were “… all part
of the extremely broad range of contractual and financial arrangements between franchisors
and franchisees contemplated by subsection 256(5.1).”
 I will first consider whether
or not the casting vote given to the director nominated by Bost gave Bost de
facto control over the Appellant.
 It is clear from the case law that this kind of casting
vote arrangement (either at a meeting of shareholders or directors) will not
confer de jure control over the corporation on its holder (see for
example Alpine Drywall & Decorating Ltd. v. Minister of National
Revenue (1967) S.C.R. 223)).
 However, in the trial decision in the Alpine Drywall
case ( Ex.C.R. 1148), Cattanach, J. was clearly of the view
that a casting vote would be sufficient to give the holder de facto control
over the corporation. At page 1157, the Court said:
circumstances would vest control in Jager over the appellant for all practical
corporate purposes and for the purposes of the Alberta companies legislation …
The Supreme Court in Alpine Drywall appeared to
share this view stating (at p. 229) that the casting vote provision in
that case “might be said to confer de facto control” on its holder.
 Support for this
position is also expressed in “Associated Corporations”, Minor, R.B. 1983
Carswells, (at page 47):
Corporate statutes, articles or by-laws often
provide that the chairman of the meeting of shareholders or directors, in the
event of an equality of votes, is to have a casting or deciding vote in
addition to any vote or votes he may have by virtue of his share ownership.
Obviously, where a shareholder owns 50% of the voting shares of a corporation,
he is only one share short of controlling that corporation on the basis of the Buckerfield’s
test. If that same shareholder, by virtue of his chairmanship of the
meeting is entitled to a casting vote, he will for all practical purposes have
control of the corporation.
 With respect to the Appellant’s argument that Bost did
not have, in the words of the Federal Court of Appeal in Silicon Graphics Ltd. v. R., 2002 FCA
260, “the ability to effect a significant change in the board of directors or
the powers of the board of directors”, this ability would be unnecessary where the person’s
nominee director effectively has the majority of the votes at any directors’
 In my opinion,
for the purpose of determining de facto control of a corporation, it
should make no difference whether a shareholder controls the decision making of
the board of directors by virtue of being able to elect the majority of the
directors or by virtue of the fact that its nominee director is entitled to
cast the majority of the votes at a meeting of directors. The point at which
the control arises is perhaps different, but the same practical degree of de
facto control over the corporation exists in either situation.
 Also, the fiduciary duties imposed by the OBCA on
directors, which were referred to by the Appellant’s counsel, are not relevant
for the purpose of determining control of a corporation for the purposes of the
Income Tax Act because control can be held and exercised without
breaching these fiduciary duties.
 Since I have
found that Bost exercised de facto control over the Appellant, it is
necessary to determine whether the de facto control falls within the
exception contained in subsection 256(5.1). The wording of the exception
is as follows:
… 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.
 The first
requirement is that the corporation (the Appellant, in this case) and the
alleged “controller” (Bost) must deal with each other at arm’s length.
 As pointed out by
counsel for the Appellant, the Respondent admitted that Mr. Bostajian and
Mr. Brown were dealing at arm’s length. The Minister argues, however, that
Mr. Bostajian and Bost did not deal at arm’s length with the Appellant.
 In order for
dealings to be found not to be at arm’s length, the jurisprudence shows that
relevant factors to consider are:
the existence of a common mind
which directs the bargaining for both parties to the transaction;
parties to a transaction acting in
concert without separate interests; and
“de facto” control.
(see Peter Cundill & Associates Ltd. v. The
Queen 91 DTC 5543 (F.C.A.))
 In this case the
Respondent’s counsel argues that the first two of these factors are present
between Mr. Bostajian and Bost and the Appellant. He says that Bost
financed all of the Appellant’s set up costs and, the costs of acquiring costs.
He stated that Bost provided interest free loans to Brownco of up to $1.2
million, through a credit facility with the Royal Bank in Bost’s name.
 Counsel also said
that Garo caused the Appellant to provide a guarantee of the credit facility
although the same facility was also used by other “franchise” companies of Bost.
Counsel also suggested that the issuance of shares in the Appellant to 147 and
the allocation of Bost’s share of management fees from the Appellant to certain
companies in the Bost group were further evidence that Garo was the directing
mind of the Appellant.
 I note that,
contrary to the Respondent’s submissions, the evidence showed that the
Appellant was charged interest on the financing provided by Bost for the
purchase of lots as well as for house construction at a rate suggestive of
arm’s length dealings. I also note that the issuance of the Appellant’s shares
to 147 occurred prior to the years in issue, and at a point when the Appellant
admits that Bost had de jure control of the Appellant. The issue is
whether Bost’s ability to direct the Appellant extended past the point at which
147 acquired the shares.
 In this regard
the Respondent points to the payment of management fees to companies related to
Bost. However, the fees in question were equal to the management fees paid to
147, and were, according to the evidence, paid for services provided by the
Bost companies. Furthermore, the payments were made according to the
shareholder agreement, entered into by Bost and 147, who were not alleged to
have been acting at non-arm’s length. The manner of the payment of the
management fees therefore supports the contention that the Appellant, Bost and
Mr. Bostajian were dealing at arm’s length.
 It is true that
Bost provided the set up costs for the Appellant but these amounts were treated
as shareholder loans, which is also consistent with arm’s length dealings.
 The remaining
factor relied on by the Respondent was the Appellant’s guarantee of the credit
facility held by Bost, for which the total indebtness related to a number of
franchise companies in the Bost group as well as to the Appellant.
 No explanation
was given by Mr. Bostajian or Mr. Brown for this arrangement, nor was
the point dealt with by the Appellant’s counsel in argument.
 There was no evidence
that the Appellant received any benefit for guaranteeing the amount of the
credit facility in excess of its own needs or that the terms of the Appellant’s
borrowings from Bost were more favorable to it because the Appellant gave the
guarantee. To amounts advanced, the Appellant was taking on a risk on behalf of
unrelated parties. The fact that Bost and Mr. Bostajian caused the
Appellant to provide the guarantee apparently against its own interest, is
evidence of those parties’ role as directing minds of the Appellant. The
Appellant’s willingness to accept the risk in favor of other Bost companies can
only be explained by the existence of a common mind directing the bargaining
for the parties to the transaction.
 I find therefore
that the Appellant, Bost and Garo were not dealing at arm’s length, and that
the first condition in subsection 256(5.1) has not been met.
 I am also of the
view that the control given to Bost by virtue of the casting vote pursuant to
the USA is not “derived from a franchise, a license, 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 the business carried on by the
corporation is to be conducted” as required by to fall within the exception.
 I do not accept
that the USA is similar to a franchise agreement. According to
Black’s Law Dictionary, a franchise agreement is:
The contract between a franchisor and franchisee
establishing the terms and conditions of the franchise relationship.
 The USA does not
mention the granting of a franchise to the Appellant and makes no mention of
the trade name “Grandview Homes” upon which the franchise supposedly granted to
the Appellant by Bost was based. In fact, I can see nothing in the USA that could be considered referable to the existence
of a franchise granted by Bost to the Appellant.
 Nor does the USA contain any clause dealing with the granting of a licence, or a lease of
property, or the distribution or supply of any product by or to the Appellant
or any other party to the agreement.
 However, clauses 2.2 and 2.4 to 2.7 of the USA deal
with the management of the Appellant and to this extent, the USA may be considered similar to a management
agreement. The relevant clauses of the USA read as follows:
The activities of the Corporation shall be managed
by a Board of Directors consisting of at least two directors. One director each
shall be appointed by each of Bost and 1476577 Ontario. The bylaws of Brownco
shall specify that:
(a) Either director may upon
30 days notice to Brownco and the other director, require a meeting of the
(b) A quorum shall consist of a minimum of 1
(c) A majority of the votes of
the directors cast at a director’s meeting shall govern. In the event of a tie,
the Chairman shall have the deciding vote.
(d) Unless otherwise agreed,
the nominee of Bost will be the chairman of the Board of Directors.
(e) Each shareholder shall
have reasonable access to the books and records of Brownco during normal
2.4 Construction Funds and Lots
Bost shall arrange bank financing for the activities
of the Corporation. The Corporation shall pay interest to Bost at the rate of
prime plus .5% for such bank financing. Bost shall use its best efforts to
obtain residential building lots for Brownco.
2.5 Brownco Sale of Houses
Brownco shall use its best efforts to sell
residential houses with a view to a profit.
2.6. Management Services by 1476577 Ontario
14766577 Ontario shall be responsible and pay for the following:
(a) Site vehicle and trailer
(b) Cleaning and dumping fees
(c) Site supervision
(d) Site Labour
(e) Lot cleaning
(f) Garbage removal
(g) Finishing cleaning
(h) Small tools
(i) Cell and site phone
(j) Miscellaneous finishing materials
(k) Service work such as screwing down of subfloors
(l) Maintenance under ONHWP coverage
Brownco shall pay 1476577 Ontario for
the above noted services a fee of $3,000.00 per unit plus the amount described
in section 2.8.
2.7. Management Services by Bost
Bost or an affiliated corporation of Bost shall
provide and pay for detailed bookkeeping and management services and use its
best efforts to provide building lots. For these services, Brownco shall pay
Bost or the affiliated company providing the service a fee of $3,000.00 per
unit plus the amount described in section 2.8.
 The main purpose of the USA then becomes relevant.
 In addition to the management provisions of the USA, there are terms dealing with the calculation of
bonuses to be paid to each shareholder for management services they provide,
the right of first refusal for the sale of shares and the requirement for approval
by the board of directors for any transfer of shares. Given the number of
rights and obligations dealt with in the USA,
it is impossible to say that its main purpose was to deal with any one
of these subjects rather than the others. Nothing in the agreement shows that
the parties considered any of the rights and obligations created by the
agreement to be of greater importance than the others. Given the statutory
requirement that “the main purpose” of the agreement be as set out in
subsection 256(5.1), the agreement in this case does not qualify.
 Even if the main purpose of the agreement
were the management provisions it contained, I would still have found that the
agreement did not qualify for the exception because the particular provisions
of the USA did not set out the manner in which the business carried on
by the Appellant was to be conducted as required by the wording of
subsection 256(5.1). The list of management duties assigned to each
shareholder sets out what each shareholder must do but does not specify how
those tasks are to be accomplished, or, more particularly, how the
business of the Appellant is to be conducted.
 Nor, in my view, was the main purpose of
the USA to govern the relationship between Bost
and the Appellant. By its own terms, the purpose of the USA was to govern the relationship between Bost and 147. The preamble of the USA sets out that:
Bost and 1476577 Ontario wish to establish certain
rights and obligations between themselves with respect to their shareholdings
in the Corporation; …
In his evidence, Mr. Brown agreed that this was the purpose of the USA.
 I do not agree with the Appellant that the
facts in this case are similar to those in Lenester Sales Ltd. v. The
Queen. In Lenester the banking and financial arrangements and
shareholders’ agreements that arguably gave de facto control to GTS were
found to be part of the overall franchise arrangements between the
taxpayer and GTS and part of the extremely broad range of contractual and
financial arrangements between the franchisors and franchisees contemplated by
 Lenester is distinguishable because in that case the parties
had entered into a written franchise agreement and the evidence showed that the
banking and financial arrangements and shareholders’ agreements in issue were
entered into in furtherance of the franchise agreement.
 In this case there is no written franchise
agreement, and the evidence falls short of showing the existence of an oral
franchise agreement between Bost and the Appellant. Mr. Bostajian and Mr. Brown’s
testimony lacked any detail of the terms and conditions of the alleged franchise
agreement, and no explanation why the agreement was not reduced to writing was offered.
Without satisfactory evidence of the existence of a franchise agreement, there
is no basis for finding that the USA was part of a franchise arrangement.
 Furthermore, the casting vote provision in
the USA is not limited to giving Bost control in
votes at directors’ meetings that would involve issues affecting the goodwill
associated with the “Grandview Homes” trade name. The casting vote was
available to Bost for any purpose and gave Bost a controlling influence over
the Appellant that extended well beyond the purpose of the provision as stated
by Mr. Bostajian.
 For these reasons I am not convinced that
the casting vote provision was included in the USA
in furtherance of any alleged franchise agreement.
 In summary, the circumstances in which the de
facto control of the Appellant is granted to Bost in this case does not
meet the conditions specified in the exception contained in
 Had it been
necessary to address the Respondent’s argument that the Appellant is deemed to
have been associated with Bost by virtue of subsection 256(2.1) of the Act,
I would have found that one of the main reasons for the Appellant’s separate
existence in the years in issue was the reduction of tax.
 Although both
Mr. Brown and Mr. Bostajian testified that they never discussed any
tax matters when setting up the Appellant, the circumstances surrounding the
Appellant’s incorporation lead me to conclude that tax saving was a major
reason for setting up the corporation and for its continuing existence.
 The reasons given by
Mr. Brown and Mr. Bostajian for the incorporation of the Appellant
were to create a Grandview Homes franchise company in which Mr. Brown
could have an interest, and to limit Bost’s and Mr. Bostajian’s liability.
 With respect to the
first reason, it appears that even before the Appellant was set up,
Mr. Brown and one of the Bost companies were already splitting equally the
profit from building houses together. This was the case with the homes built in
Kitchener, Waterloo, in 1998 as
well as with the homes built by Buildco in Barrie up to 2001. The division of
responsibilities between Mr. Brown and the Bost companies in the
earlier years also appears to mirror the division of responsibilities in the
Appellant between Bost and 147.
 It was not explained how the creation of the Appellant
benefited Mr. Brown, since the goodwill created by it would have accrued
to the “Grandview Homes” tradename rather than to the Appellant. The
control over the transfer of shares in the Appellant pursuant to the USA is another indication that the creation of the
Appellant was of limited benefit to Mr. Brown.
 The lack of a formal written franchise agreement, the
fact that all of the agreements and legal documents relating to the Appellant
were prepared by Bost’s lawyers and were signed by Mr. Brown without any
independent legal advice and the unrestricted nature of Bost’s nominee
director’s veto power also cause me to doubt that the major motivation of
Mr. Brown and Mr. Bostajian was simply to set up a franchise
corporation to be operated by Mr. Brown.
 I am also unconvinced that Mr. Bostajian, who
admitted that he was the one who decided on the use of the 50/50 shareholding
structure for the Appellant and Bost’s other “franchise” companies, was not aware
of the tax consequences of these arrangements. Bost had professional advisors,
both accountants and lawyers who assisted it in creating these corporations,
and tax planning is apparent in the provisions in the USA dealing with the payment of management fees by the
 Tax planning is also evident in the case of two other
Bost franchise construction companies, Ridgeview Homes Ltd.
and 1205584 Ontario Inc. Bost originally held 51% of the shares of each
corporation and the other shareholder had 49% and each corporation had two
directors (one nominated by each shareholder). On October 31, 2001
additional shares in each corporation were issued to the 49% shareholder to
create equal shareholdings, and Bost’s nominee director was given a casting
vote. Mr. Bostajian’s reason for these changes was that he needed to have
the same shareholding structure for all his franchisee companies, and that he
wanted all his franchisees to feel as important as he was by giving them a 50%
vote. In the absence of an explanation as to why Bost needed to have the same
shareholding structure for these corporations as for the other corporations,
and in light of the fact that Bost’s casting vote in effect gave Bost control
over these corporations, neither reason given by Mr. Bostajian for the
change is plausible. It is more likely than not that the adjustment of the
shareholdings was done to circumvent the associated corporations rules under
 I am also unable to accept that in setting up the
Appellant, Mr. Bostajian was motivated by concerns about legal liability
to himself or Bost. No such concerns arose during the three years
Mr. Brown had been building houses for Bost or Buildco without a
corporation, and it was not apparent why the matter would have arisen in 2001.
 Overall, I am satisfied that the evidence shows that in
the absence of the tax motivation, it is unlikely that the Appellant would have
been incorporated or would have continued to exist in the years in issue.
 For all of these reasons, the appeal is dismissed, with
Signed at Ottawa, Canada, this 25th day of January 2008.