2016 FCA 192
DE MONTIGNY J.A.
HER MAJESTY THE
This is an appeal brought by Kruger Wayagamack
Inc. (the appellant) from a decision of the Tax Court of Canada (2015 TCC 90)
wherein Jorré J. (the Tax Court judge) dismissed the appellant’s appeal from
reassessments issued by the Minister of National Revenue (the Minister) pursuant
to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the Act) with
respect to its 2003, 2004, 2005, and 2006 taxation years.
The legislative provisions relevant to the
analysis are reproduced in Annex I to these reasons.
During the taxation years in issue, the
appellant operated a paper mill in Trois-Rivières, Quebec and conducted
scientific research and experimental development activities for which it became
entitled to investment tax credits (the ITCs). As it had no income during that
period against which the ITCs could be used, the appellant claimed refundable
Pursuant to subsection 127.1(1), when read with the
definition of “refundable investment tax credit”
in subsection 127.1(2) of the Act, a “qualifying
corporation” is deemed to have paid on account of its taxes an amount equal
to 40% of its ITCs at the end of the year. A “qualifying
corporation” is defined as (subsection 127.1(2)):
a Canadian-controlled private corporation (other
than an associated corporation) the taxable income of which does not exceed its
business limit for the preceding year, or
a Canadian-controlled private corporation
associated with another corporation, where the total of their taxable income
does not exceed their total business limit for the preceding year.
Pursuant to subsection 248(1) of the Act, a
corporation’s “business limit” is the amount
determined under section 125. Subsection 125(2) provides the basic business
limit of a corporation, which is then subject to a reduction under subsection
125(5.1) commensurate with the corporation’s − or any associated corporation’s
payable under Part I.3.
At all relevant time, 51% of the appellant’s
issued and outstanding shares were owned by Kruger Inc. (Kruger) through
3864057 Canada Inc., its wholly-owned subsidiary, and the remaining 49% were
owned by SGF Rexfor Inc. (SGF), a corporation owned by the Government of
Quebec. For present purposes, nothing turns on the fact that Kruger’s stake in
the appellant was held through a subsidiary.
It is common ground that Kruger’s taxable income
well exceeded the total business limit contemplated by subsection 127.1(2) with
the result that if Kruger was associated with the appellant during the four
years in issue, the appellant exceeded the business limit. It also follows that
Kruger was associated with the appellant if it can be established that it controlled
The Crown’s primary position at trial was that
Kruger had de jure and/or de facto control over the appellant
(paragraph 256(1)(a)). The Crown further alleged that Kruger was deemed
to control the appellant pursuant to paragraph 256(1.2)(c) because
its shares had a fair market value which exceeded 50% of the fair market value
of all the issued and outstanding shares of the capital stock of the appellant.
The Tax Court judge found that Kruger controlled
the appellant only by reason of this last provision. While Kruger’s 51%
ownership of the shares gave it control over operating decisions, the Unanimous
Shareholder Agreement (USA) took that control away with respect to many
strategic decisions with the result that Kruger did not have de jure control
(Reasons, paras. 29 to 71). Nor could it be said that Kruger had de
facto control as nothing in fact overrode the effect of the USA insofar as
the overall direction of the appellant was concerned (Reasons, paras. 72 to
It remained however that the shares held by Kruger
had a fair market value that exceeded 50% of the fair market value of the
overall issued and outstanding shares of the appellant with the result that
Kruger was deemed to control the appellant pursuant to paragraph 256(1.2)(c)
of the Act.
ANALYSIS AND DECISION
The only question which arises in this appeal is
whether the valuation exercise which led to this conclusion was properly
conducted. This valuation had to be made subject to the statutory prescription set
out in paragraph 256(1.2)(g) of the Act which deems all the subject shares
to be non-voting for purposes of this exercise.
Emphasizing this constraint, the Tax Court judge
gave extensive reasons as to why he preferred the opinion adduced by the Crown’s
expert, according to which Kruger’s 51% share ownership in the appellant had a
fair market value commensurate with that percentage (Reasons, paras. 90 to
160). He also explained at length why he could not accept the appellant’s
contention that the value of Kruger’s shares had to be discounted based on
liquidity and marketability concerns while those held by SGF did not (ibidem).
The appellant submits that in rejecting this last
contention the Tax Court judge either erred in applying the relevant legal
principles or made a number of palpable and overriding errors (Memorandum of
the appellant, paras. 47 to 57).
The appellant first seizes on the Tax Court
judge’s statement at paragraph 127 and footnote 63 of his reasons to suggest
that “the end result [of his reasoning] is that [Kruger’s]
block of shares would require a discount of 4.1% in order for it to not be
associated with the [a]ppellant,” (Memorandum of the appellant, para.
81). The appellant contends that this conclusion is either plainly wrong or reveals
an error in principle, as it is clear that only a 2% discount is required to bring
the value of Kruger’s block of shares below 50% (ibidem).
A fair reading of the reasons does not support
this attack as it is clear from the reasons that the Tax Court judge was merely
addressing the relative value of Kruger’s 51% interest in relation to SGF’s 49%
interest based on the approach used by the appellant’s own expert (Reasons,
para. 121). The suggestion that the Tax Court judge thereby lost track of
the numbers and that this “tainted his overall
analysis” is without foundation (Memorandum of the appellant, para. 82).
The appellant also challenges the Tax Court
judge’s understanding of the issue which he had to decide by highlighting the
following two questions which he stated (Reasons, para. 92):
Does [paragraph 256(1.2)(c)] apply if
Kruger’s shares in the appellant are worth more than 50% of what someone would
pay to buy all the shares of the appellant at once? or
Does [paragraph 256(1.2)(c)] apply if
Kruger’s shares are [worth] more than 50% of the value of all the shares with
the shares owned by different owners valued separately, i.e. are Kruger’s
shares worth more than those owned by SGF?
The appellant contends that the Tax Court judge failed
to identify and address the first question as the only relevant question
(Memorandum of the appellant, para. 80).
That this is the only relevant question is
uncontested. However, in setting out the above questions, the Tax Court judge
was again addressing the issue as it was presented by the appellant’s expert
during the hearing (Reasons, para. 99). The answer that he gave is that regardless
of the question asked, the fair market value of Kruger’s shares exceeded the
50% threshold (Reasons, para. 123). I can detect no error in this regard.
The appellant further asserts that the Tax Court
judge erred in holding that the alleged discount for lack of liquidity and
marketability would have impacted both Kruger’s and SGF’s block of shares the
same way, so that the relative value of their share ownership remained
unaffected (Memorandum of the appellant, para 86).
It suffices to say in this respect that the
findings made by the Tax Court judge in support of this conclusion are all
factual (Reasons, paras. 114, 115, 117, 118, 130 to 162) and that no error of a
palpable and overriding nature has been demonstrated with respect to any of
I would dismiss the appeal with costs.