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Citation: 2005TCC701
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Date:20051027
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Dockets: 2003-1710(IT)G
2003-1712(IT)G
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BETWEEN:
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TIMCO HOLDINGS LTD.,
W.C.D. DEVELOPMENTS LTD.,
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Appellants,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little J.
A. FACTS:
[1] The appeals were heard together on common evidence.
Re: W.C.D. Developments Ltd. ("Developments")
[2] Developments is a corporation incorporated under the Company Act (B.C.).
[3] In 1999 and 2000 Developments was controlled by Mr. Wolfgang Duntz who held more than 50% of the issued voting shares of Developments. Mr. Duntz was the President and principal shareholder of Developments.
[4] Developments owns land on Bowen Island and carried on the business of real estate rentals and the subdivision and sale of real estate.
Re.: Timco Holdings Ltd. ("Holdings")
[5] Holdings is a corporation incorporated under the Company Act (B.C.). Holdings owns land on Bowen Island. Holdings carries on the business of real estate rentals and the subdivision and sale of real estate.
[6] Mr. Uwe-Hans Timm who is a resident of Germany and not a resident of Canada owns 50% of the issued voting shares of Holdings. Developments owns 50% of the issued voting shares of Holdings.
[7] Developments and Holdings carry on most of their business through a Joint Venture.
[8] The members of the Joint Venture are:
Developments 38%
Holdings 30%
Moon Valley Holdings Ltd. 32%
[9] Mr. Duntz and Mr. Timm are not "related persons" as defined by the Income Tax Act (the "Act").
[10] The evidence before the Court indicated that since Mr. Timm is not a Canadian resident he made arrangements for Mr. Duntz to act as a director and serve as the President of Holdings in order to expedite the signing of documents re. the financing, purchase, sale or leasing of land.
[11] By Notice of Assessment dated July 18, 2002 the Minister of National Revenue (the "Minister") assessed Developments since it was associated with Holdings pursuant to paragraph 256(1)(b) of the Act. The basis of the assessment was that Mr. Duntz had "de facto control" of Holdings in the 1999 and 2000 taxation years.
[12] In the Notification of Confirmation dated February 4, 2003 the Minister confirmed the Assessments on the following basis:
Timco Holdings Ltd. and W.C.D. Developments Ltd. are associated corporations pursuant to paragraph 256(1)(b) of the Income Tax Act. W.C.D. Developments Ltd. and Timco Holdings Ltd. are controlled by the same person.
B. ISSUE:
[13] The issue to be decided is whether Mr. Duntz had "de facto control" of Holdings in the 1999 and 2000 taxation years.
C. ANALYSIS:
[14] Sections 256(5.1) of the Act reads as follows:
(5.1) 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.
[15] The question of "de facto control" has been considered by Canadian Courts on a number of occasions. In 9044-2807 Québec Inc. v. The Queen, 2004 DTC 6636, Noël, J.A. of the Federal Court of Appeal said at paragraph 24:
[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 DTC 7112] [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. [Emphasis added]
[16] In Silicon Graphics Limited v. The Queen, 2002 DTC 7112, the Federal Court of Appeal also considered "de facto control". At paragraphs 66 and 67 Sexton J.A. said:
[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, [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.
[17] In this situation I have noted the following points:
1. The evidence indicates that Mr. Duntz and Mr. Timm have been involved as "co-venturers" in a number of projects since 1981.
2. During 1999 and 2000 Mr. Duntz acted as the sole director of Holdings. Mr. Duntz communicated with Mr. Timm directly and through Elke Fleming on a regular basis.
3. There was no evidence produced of an agreement between Mr. Duntz and Mr. Timm requiring the election of Mr. Duntz as a director and officer of Holdings.
4. On January 24, 2003, Mr. Duntz and Mr. Timm were elected directors of Holdings.
5. Mr. Duntz was not properly re-elected as a director of Holdings but he continued to be a director by virtue of the wording contained in Article 14.3 (see Exhibit A-1, Tab 22, page 54).
6. Mr. Duntz's tenure as the sole director of Holdings could be terminated (see Exhibit A-1, Tab 22, page 54, Article 14.3).
7. The Chairman of the Board of Holdings does not have a casting vote (see Exhibit A-1, Tab 22, page 49, Article 11.10).
[18] After considering the above factors and the relevant case law, I have concluded that Mr. Duntz could not control the election of the directors of Holdings because:
(a) Developments owned 50% of the voting shares of Holdings and Mr. Timm owned 50% of the voting shares of Holdings.
(b) There were no agreements which gave Mr. Duntz the power to determine the directors of Holdings.
(c) Mr. Duntz had no direct influence over Mr. Timm.
[19] The Minister also argued in paragraph 13(h)(ii) of the Reply to the Notice of Appeal that Mr. Duntz had control over the Joint Venture.
[20] It should be noted that paragraph 9.3 of the Joint Venture (see Exhibit A-1, Tab 3, page 6) provides that there must be unanimity to:
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(c) Do any other act which would make it impossible to carry on the ordinary business of the Joint Venture.
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(f) Make, execute or deliver for the Joint Venture any bond, mortgage, deed of trust guaranty, indemnity bond, surety bond, security agreement, accommodation paper, accommodation endorsement, or commercial paper.
[21] It therefore follows that Mr. Duntz could not sell the undertaking owned by the Joint Venture nor could he raise financing for the Joint Venture without the consent of all the members of the Joint Venture.
[22] As I have noted above in 9049-2807 Quebec Inc. v. The Queen, 2004 DTC 6636 at 6640, Mr. Justice Noël referred to "de facto control" and said:
[24] ... 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.
[23] Based on the evidence that was presented to me I am not convinced that Mr. Duntz had "de facto control" of Holdings in the 1999 and 2000 taxation years. It therefore follows that Developments and Holdings were not associated corporations in the 1999 and 2000 taxation years.
[24] The appeals are allowed, with costs.
Signed at Vancouver, British Columbia, this 27th day of October 2005.
Little J.
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