Kruger Wayagamack – Tax Court of Canada finds that USA restrictions on a majority shareholder’s ability to take strategic decisions negatived de jure and de facto control

Kruger Inc. was the 51% shareholder of the taxpayer and was entitled under the unanimous shareholders agreement between it and the other shareholder (SGF) to appoint three of the five directors – so that it obviously controlled de jure the taxpayer.

Not so fast! Jorré J found that such a wide range of decisions were specified in the USA to require unanimous director (or shareholder) approval – to the point that he characterized Kruger as having control of only operating, and not strategic, decisions – that Kruger did not have de jure control.

Kruger also did not have de facto control, notwithstanding that is was appointed the manager and marketing agent for the taxpayer under long-term agreements.

However, the taxpayer was associated with Kruger under s. 256(1.2)(c) as the Kruger bloc had more that 50% of the fair market value of all the shares. The 49% bloc might have had a greater value to SGF than that of the 51% bloc to Kruger because of a contingent put right accorded to SGF under the USA. However, since this put could not be assigned to any third-party purchaser, it did not affect the shares' FMV.

Neal Armstrong. Summary of Kruger Wayagamack Inc. v. The Queen, 2015 TCC 90 under s. 256(1)(a) and s. 256(1.2)(c).