Docket: A-72-13
Citation: 2014 FCA 267
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CORAM :
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NADON J.A.
SCOTT J.A.
BOIVIN J.A.
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BETWEEN:
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LYRTECH RD INC.
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Appellant
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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
SCOTT J.A.
I)
Background
[1]
This is an appeal from a
judgment of Justice Favreau (the judge) of the Tax Court of Canada (the Court)
dated January 24, 2013, dismissing the appeals filed by Lyrtech RD Inc.
(the appellant) against the assessments made under the Income Tax Act,
R.S.C. 1985, c. 1 (5th Supp.) (the Act), for taxation years 2005, 2006 and
2007. The judge concluded that the appellant was not a Canadian-controlled
private corporation as defined in paragraph 125(7)(a) of the Act. The
appellant was therefore not entitled to the fifteen percent (15%) addition to
the investment tax credit provided for in subsection 127(10.1) of the Act, nor
was it entitled to an investment tax credit refund under subsection 127.1(1) of
the Act, since it was not a qualifying corporation within the meaning of
subsection 127.1(2) of the Act.
[2]
For the reasons which
follow, I am of the view that this appeal should be dismissed.
II)
Facts
[3]
Lyrtech Inc. (Lyrtech) is a
public corporation that has had a class of shares of its capital stock listed
on a designated stock exchange in Canada since October 4, 2000,
[4]
Between 2000 and 2004,
Lyrtech, as a public corporation, claimed against its tax payable
non-refundable investment tax credits at the rate of twenty percent (20%) of
its research and development (R&D) qualified expenditure pool. For the 2000
to 2004 taxation years, Lyrtech was unable to claim federal investment tax credits
for its eligible R&D expenditures because it was in a loss position.
[5]
In 2005, Lyrtech
restructured its business and transferred its R&D activities to the
appellant, a new corporation created on May 30, 2005, so that it could
again benefit from investment tax credits under subsection 127.1(1) of the
Act and the fifteen percent (15%) addition to the investment tax credit under subsection 127(10.1)
of the Act.
[6]
The appended organizational
chart, part of the judge’s decision, shows the corporate structure in place
following the 2005 reorganization.
[7]
On June 1, 2005, as
part of the restructuring, Fiducie Financière Lyrtech (FFL), a discretionary
trust, was created by corporation 4296621 Canada Inc., a subsidiary of Lyrtech.
FFL became the owner of all the appellant’s voting shares.
[8]
The appellant, 4296630
Canada Inc. and 4296648 Canada Inc. became the beneficiaries of FFL’s income,
while 4296630 Canada Inc., 4296648 Canada Inc. and 4296621 Canada Inc. became
the beneficiaries of FFL’s capital.
[9]
Under the trust deed, the
trustees have to be directors of Lyrtech at all times because they are
appointed trustees of FFL when they agree to be directors. The trust deed also
stipulates that the number of trustees cannot exceed the number of directors of
Lyrtech.
[10]
Miguel Caron and Louis
Bélanger sat on the boards of directors of Lyrtech, the appellant, and each
Lyrtech subsidiary; they were also FFL trustees.
[11]
In addition, it must be
noted that the Lyrtech board of directors had seven (7) shareholder-elected
directors. None of the shareholders owned more than ten percent (10%) of Lyrtech’s
capital stock, with the exception of Corriente Master Fund, which held slightly
over 25,000,000 of the 243,725,724 Class A shares issued and in
circulation that entailed one voting right per share. Consequently, none of the
shareholders was able to elect the majority of Lyrtech’s directors.
[12]
Following the restructuring,
the appellant claimed investment tax credits in the amount of $384,812,
$663,130 and $742,640, respectively, for taxation years 2005 to 2007. The
respondent denied it these credits given Lyrtech’s control of the appellant.
III)
Judgment of the Tax Court of
Canada
[13]
The judge had to determine
whether the appellant met the definition of a “Canadian-controlled
private corporation” as defined in paragraph 125(7)(a) of
the Act during taxation years 2005, 2006 and 2007 to entitle it to the addition
of the investment tax credit claimed.
[14]
The judge accepted the principle
that one person can have de facto control of a corporation while another person
simultaneously has de jure control for all provisions of the Act, without
it being necessary for the Act to make specific reference thereto.
[15]
In the case at bar, given
that the appellant’s capital stock was held by FFL, FFL exercised the appellant’s
de jure control.
[16]
After analyzing the
evidence, the judge found that there was an undeniable relationship between
Lyrtech and the appellant meaning that Lyrtech had de facto
control of the appellant. He arrived at this conclusion by applying the factors
found in paragraph 23 of Interpretation Bulletin IT-64R4. He also applied
the factors set out in the case law, specifically in Mimetix Pharmaceuticals
Inc. v. Canada, [2001] T.C.J. No. 749, [2002] 1 T.C.C. 2188, aff’d 2003 FCA
106, [2003] 3 C.T.C. 72, namely, the economic controlling influence Lyrtech
exercised over the appellant.
[17]
This led the judge to
conclude that Lyrtech controlled the appellant directly or indirectly within
the meaning of subsections 125(7) and 256(5.1) of the Act.
[18]
Moreover, the judge rejected
the respondent’s alternative argument that, in addition to de facto control, Lyrtech had indirect de jure
control of the appellant pursuant to subparagraph 251(5)(b)(i) and
subsection 248(25) of the Act as applied to a discretionary trust. According to
the judge, the beneficiaries of FFL’s capital only had an aleatory, uncertain
or indirect right to the appellant’s capital stock.
IV)
Issues
[19]
This appeal raises
the following issues:
a)
Did the judge err in deciding that the appellant did not
meet the definition of a “Canadian-controlled private corporation” under
subsection 125(7) of the Act during the taxation years ending on
December 31, 2005, 2006 and 2007?
b) Did the judge err in
rejecting the respondent’s alternative argument and in concluding that Lyrtech
did not also control the appellant under subparagraph 251(5)(b)(i) of the
Act?
[20]
Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, holds that
where the issue concerns the application of legal standards to the facts, the
Federal Court of Appeal may only intervene if the judge made a palpable and
overriding error. If the issue concerns the application of legal standards, it
is subject to a standard of correctness.
V)
Parties’ submissions
A.
Appellant’s submissions
[21]
The appellant essentially
makes the same submissions as it did before the judge. First, it challenges the
judge’s conclusion that de jure control and de facto
control can coexist simultaneously while being exercised by two distinct
persons, for all provisions of the Act, without it being necessary for the Act
to make specific reference thereto.
[22]
This Court’s decision in Parthenon
Investments Limited v. Canada (National Revenue), [1997] F.C.J. No. 800,
[1997] 3 C.T.C. 152 (Parthenon), led Parliament to enact subsections 256(6.1)
and (6.2) to adopt the concept of simultaneous de jure and
de facto control.
[23]
To confirm the presence of
this concept in all provisions of the Act, the judge cited Rosario Poirier
Inc. v. Canada, [2002] 4 C.T.C. 2346, [2002] T.C.J. No. 255 (Poirier),
and Avotus Corp. v. Canada, 2006 TCC 505, [2006] T.C.J. No. 501 (Avotus).
The appellant is challenging the relevancy of both cases on the grounds that
there was a specific provision in the Act that allowed simultaneous control, namely
subparagraph 256(1.2)(b)(ii) in Poirier, and that the facts
in Avotus are completely different from the case at bar.
[24]
Contrary to the judge’s
conclusion, the appellant submits therefore that subsections 256(6.1) and
(6.2) concern a specific situation and that there is no similar provision for
the application of paragraph (a) of the definition of
Canadian-controlled private corporation in subsection 125(7). Consequently,
it argues that we should stand by doctrine of Parthenon, namely, that de
jure and de facto control can only be exercised by one and the same
person.
[25]
In short, the appellant
submits that paragraph (a) of the definition of “Canadian-controlled private corporation” under
subsection 125(7) of the Act had to contain a specific provision relating
to the simultaneous existence of de
jure and de facto control or a similar provision to that of
subsection 256(6) of the Act, which it does not.
[26]
The appellant is also
challenging the judge’s second conclusion, according to which Lyrtech had de facto control of the appellant.
[27]
The appellant submits that a
narrower test should be applied to determine whether there is de facto control. In the appellant’s opinion, de facto control exists when a party can effect a change in the
board of directors or very directly influence the shareholders that would
otherwise have the ability to elect the board of directors.
[28]
In this regard, the
appellant points out that the judge merely referred to the factors noted in the
parties’ partial agreed statement of facts. He failed to apply the test set out
in the case law, such as in Silicon Graphics Ltd. v. Canada, 2002 FCA
260, [2002] 3 C.T.C. 527 (Silicon Graphics), namely, the clear ability
to effect a significant change in 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.
[29]
The appellant further
submits that the judge, having concluded that Mr. Bélanger and Mr. Caron
had de facto control of the appellant, could not then determine that
Lyrtech had this de facto control since they were distinct persons. Moreover,
the judge did not take into consideration the duties of these two trustees
under the Civil Code of Québec, S.Q. 1991, c. 64 (articles 1261,
1278, 1309 and 1310).
[30]
Lastly, the appellant
criticizes the judge for ignoring basic information, namely, that Lyrtech was a
public company and that it had seven (7) shareholder-elected directors.
B.
Respondent’s submissions
[31]
In turn, the respondent
submits that the judge interpreted subsection 256(5.1) of the Act
correctly. The enactment of this subsection resulted in broadening the concept
of control to include de facto control, which had not been the case
previously. Lyrtech’s de facto control of the appellant therefore excluded it
from the definition of a Canadian-controlled private corporation.
[32]
The respondent argues that
the judge did not make a palpable and overriding error in his analysis of the
facts with respect to the existence of de facto
control on the part of Lyrtech, particularly given that the evidence
establishes that the appellant was operationally and economically dependent on
Lyrtech.
[33]
On appeal, the respondent
reiterated its alternative argument, rejected by the judge, and alleged that
the judge erred in refusing to apply the legal fiction created by
subparagraph 251(5)(b)(i) of the Act when he determined that the
appellant was not deemed to be controlled by Lyrtech.
VI)
Analysis
a) Did the judge err in deciding that the appellant
did not meet the definition of a “Canadian-controlled
private corporation” under subsection 125(7) of the Act during the
taxation years ending on December 31, 2005, 2006 and 2007?
[34]
First, it should be
noted that under section 248 of the Act, a Canadian-controlled private
corporation is defined as such under subsection 125(7) of the Act, which
reads as follows:
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Income Tax Act R.S.C. 1985, c.1 (5th supp.)
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Loi de l’impôt sur le revenu L.R.C. 1985, ch. 1 (5e
suppl.)
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Paragraph 125 (7) (a)
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Alinéa 125 (7) a)
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Definitions
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Définitions
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(7) In this section :
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(7) Les définitions qui suivent s’appliquent
au présent article :
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“Canadian-controlled private corporation” means a private corporation
that is a Canadian corporation other than:
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«société privée sous contrôle canadien».
Société privée qui est une société canadienne, à l’exception des sociétés
suivantes :
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(a) a corporation controlled, directly or indirectly in any
manner whatever, by one or more non-resident persons, by one or more public
corporations (other than a prescribed venture capital corporation), by one or
more corporations described in paragraph (c), or by any combination of
them;
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a) la société contrôlée, directement ou
indirectement, de quelque manière que ce soit, par une ou plusieurs personnes
non-résidentes, par une ou plusieurs sociétés publiques (sauf une société à
capital de risque visée par règlement), par une ou plusieurs sociétés visées
à l’alinéa c) ou par une combinaison de ces personnes ou sociétés;
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[35]
Buckerfield’s Ltd.
v. Minister of National Revenue,
[1964] C.T.C. 504, 64 D.T.C. 5301 clearly decided that de jure control is held by the holder of the majority of the votes
that elect the board of directors.
[36]
The purpose of introducing
subsection 256(5.1) of the Act in 1988 was to define the phrase “controlled, directly or indirectly in any manner whatever”
in order to incorporate the concept of de facto
control into the Act (Transport M.L. Couture Inc. v. Canada, 2004 FCA 23
at paragraph 14).
[37]
Moreover, section 256
of the Act is in Chapter XVII, which deals with the interpretation of the
Act. Subsection 256(5.1) of the Act begins as follows: “For the purposes of this Act”. The wording used by
Parliament does not contain any restrictions and does not intend to limit its
scope for a particular purpose or situation.
[38]
Moreover, it is my opinion
that the judge did not err in following the doctrine propounded by this Court
in Poirier at paragraphs 28 to 30, which confirms the principle
that the existence of de jure control does not preclude the possibility of
another party exercising de facto control at the same time.
[39]
Furthermore, particularly
with respect to the concept of de facto control, the basic principle is
set out in Silicon Graphics, at paragraph 67. 9044 2807 Québec
Inc. v. Canada, 2004 FCA 23, [2004] F.C.J. No. 135 clarifies it at
paragraph 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.
[40]
Paragraph 23 of
Interpretation Bulletin IT 6424, published shortly after Silicon Graphics,
lists the general factors to be weighed to determine whether a person has de
facto control of a corporation. The trial judge applied these factors, and
they can be summarized as follows:
(a) the percentage of ownership of voting shares
(when such ownership is not more than 50 per cent) in relation to the
holdings of other shareholders;
(b) ownership of a large debt of a corporation which
may become payable on demand (unless exempted by subsection 256(3) or (6)) or a
substantial investment in retractable preferred shares;
(c) shareholder agreements that include a casting
vote;
(d) commercial or contractual relationships of the
corporation, e.g., economic dependence on a single supplier or customer;
(e) possession of a unique expertise that is
required to operate the business; and;
(f)
the influence that a family
member, who is a shareholder, creditor, supplier, etc., of a corporation, may
have over another family member who is a shareholder of the corporation.
. . .
[41]
The judge also made an
exhaustive analysis of the applicable tests. He then proceeded to an in-depth
review of the factual background to conclude that Lyrtech had de facto control of the appellant given the relationship between
Louis Bélanger, Miguel Caron and the appellant. In addition, the judge placed
particular emphasis on the appellant’s economic dependence on Lyrtech.
[42]
What is relevant for R&D
credits is whether there was an economic dependence or de facto
control during the taxation years in issue. The fact that the appellant
intended to eventually become financially autonomous is irrelevant; what is
relevant is whether it was autonomous during the years at issue, failing which
it was not entitled to the credits.
[43]
In the matter at bar, the appellant
has failed to satisfy me that the judge made a palpable and overriding error
when he concluded that Lyrtech had de
facto control of the appellant
given Lyrtech’s economic controlling influence and the relationships binding
the appellant and Lyrtech.
b) Did the judge err in rejecting the respondent’s
alternative argument and in concluding that Lyrtech did not also control the
appellant under subparagraph 251(5)(b)(i) of the Act?
[44]
Given the conclusion on the
first issue, which disposes of this appeal, and considering the circumstances
of this case, there is no need to address the alternative argument raised by
the respondent.
[45]
For these reasons, I would
dismiss the appeal with costs.
“A.F. Scott”
“I agree.
M. Nadon, J.A.”
“I agree.
Richard Boivin, J.A.”
Translation
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