REASONS
FOR JUDGMENT
Hogan J.
I. Introduction
[1]
The Appellant, Aeronautic Development
Corporation (“ADC”), claimed refundable scientific research and experimental development
tax credits at the rate of 35% (“Refundable ITCs”) in respect of expenditures
that it incurred in its 2009, 2010, and 2011 taxation years in connection with
the prototyping and certification of an amphibious aircraft known as the
Seawind.
[2]
The Minister of National Revenue (the
“Minister”) disallowed the Refundable ITCs on the basis that the Appellant was
not a “Canadian controlled private corporation” (“CCPC”) as defined in the Income
Tax Act, (Canada) (the “Act”) throughout its 2009, 2010, and 2011 taxation
years.
[3]
The Respondent’s position is that the Appellant
failed to qualify as a CCPC in the relevant taxation years because from August
17, 2009 to December 31, 2011 a non-resident shareholder (the “Controller”) exercised
control in fact (“de facto control”) over the Appellant within the
meaning of subsection 256(5.1) of the Act. The parties agree that prior to August
17, 2009, a non-resident shareholder exercised “de jure” control over
the Appellant through the ownership of all of its issued and outstanding shares.
Therefore, the Appellant was not a CCPC prior to that date.
[4]
The Respondent, belatedly, merely two weeks
prior to the hearing, advised the Appellant that she would be presenting a new
argument at the hearing (the “New Argument”), which argument was not outlined
in her pleadings. The Respondent’s counsel now contends that the holder of 44%
of the common shares of the Appellant could not exercise the voting rights
attached to those shares until March 9, 2012 because those shares were not
fully paid by the shareholder until that date. As a result, the majority of the
voting rights attached to the common shares of the Appellant were exercisable
by Seawind Development Corporation (“Seawind Corp.”), a corporation controlled
by Mr. Richard Silva, who is a non-resident of Canada. Consequently, the Appellant
was controlled, on both a de jure and a de facto basis, by a
non-resident person throughout the relevant period.
[5]
The Appellant takes issue with this New
Argument. The Appellant argues that the Respondent admitted in her Reply that
all of the common shares were voting shares during the period from August 17,
2009 to December 31, 2011. The Appellant also observes that the Canada Revenue
Agency (“CRA”) knew that the subscription price for certain of the common shares
had been unpaid until March 9, 2012, prior to the issuance of the assessment at
issue in this appeal. This matter had been discussed with the CRA auditor
assigned to the audit of the Appellant. The Respondent nonetheless chose to plead
the issue of de jure control only in respect of the period ending on August
16, 2009. Finally, the Respondent failed to amend her Reply to plead the facts
on which the New Argument is based. In this context, the Appellant alleges that
it would be a violation of the rules of procedural fairness for the New
Argument to be considered at this late date.
[6]
With respect to the issue of de facto
control, the Appellant submits that subsection 256(5.1) of the Act is not
applicable in the circumstances because a non-resident person did not have any
direct or indirect influence that, if exercised, would have resulted in de
facto control of the Appellant.
II.
Factual Background
[7]
The evidence shows that Mr. Silva, a United
States (“US”) citizen and resident, is a both an engineer and an architect. He
also has extensive experience in the field of aeronautics. Mr. Silva is a pilot
who has logged considerable flying time.
[8]
Mr. Silva was an early investor in a Canadian
company that hoped to develop, market, and sell a small amphibious aircraft
known as the Seawind in kit format. This corporation failed and Mr. Silva
acquired all of the intellectual property rights to the Seawind.
[9]
Mr. Silva completed the development of the
Seawind, which allowed it to be produced in kit format. It enjoyed very limited
commercial success because it was not a “type” certified aircraft. I understand
that a “type” certificate is issued by a regulating body when rigorous testing
has confirmed the air worthiness of the aircraft’s design. Once an aircraft has
been certified, its design or manufacturing process cannot be modified without
a supplemental certification process being gone through.
[10]
Mr. Silva embarked on the certification of the Seawind
in the late 1990s. Mr. Silva believed certification would lead to greater
acceptability of the Seawind’s unique design, thus improving the chances of its
commercial success. To be eligible for certification, Mr. Silva had to abandon
the sale of the Seawind in kit format.
[11]
According to Mr. Silva, he was approached by
Investissement Quebec and Industry Canada to carry out the certification work
and the subsequent production of the certified Seawind in Quebec. Mr. Silva
claims he was advised by both agencies that he could become eligible to receive
Refundable ITCs if the development work was carried out in Canada by a CCPC.
[12]
Mr. Silva testified that he hired a major
Canadian accounting firm to advise him how to implement a structure that would
allow him to gain access to the Refundable ITCs. An initial corporate structure
was established for this purpose by Mr. Silva and his Canadian partners. The Canadian corporation,
Flight Dynamics Corporation (“FDC”), that initially took on the certification
work in Canada encountered financial difficulty after the Seawind prototype crashed
during a test flight.
[13]
In 2009, following the bankruptcy of FDC, Mr.
Silva acquired the assets of FDC, including the technical data base pertaining
to the certification work carried out by it. Mr. Silva did so for the purpose
of restarting the certification program in Canada.
[14]
Mr. Silva caused the Appellant to be incorporated
as a Nova Scotia unlimited corporation in April 2009. Seawind Corp., a US
corporation controlled by Mr. Silva, became the sole shareholder of the
Appellant.
[15]
Soon thereafter, while the Appellant was wholly
owned by Seawind Corp., the Appellant entered into an agreement with Seawind
Corp. (“the Development Agreement”) to provide services necessary to complete the
prototyping and certification of the Seawind on a cost-plus basis. All
intellectual property rights resulting from the work carried on by the Appellant
became the property of Mr. Silva and Seawind Corp.
[16]
The Development Agreement provided that the
Appellant’s prototyping and certification expenses (net of Refundable ITCs
actually received by it) (the “Certification Expenses”) would be reimbursed by
Seawind Corp. The Appellant was required to remit the amount of the Refundable ITCs,
if any, that it received to Seawind Corp. The Appellant was entitled to receive
an additional amount equal to 5% of its Certification Expenses (the “Markup”).
The evidence shows that the Markup was never paid. However, had it been paid,
the Appellant would have been required to use the Markup to finance its Certification
Expenses. The Appellant acknowledges that it had no ability to use those funds
to pay dividends to its shareholders or to fund other projects.
[17]
The Appellant recorded the full amount of its Refundable
ITC claim on its balance sheet for its 2011 financial year. However, the
Appellant failed to show its offsetting liability to Seawind Corp. The amount
of the Appellant’s refund claim was $1,295,969. This amount exceeded the amount
of the Appellant’s accumulated retained earnings for the period. The Appellant’s
financial statements for 2009 and 2010 were prepared on a similar basis. Therefore,
as pointed out by the Respondent, the Appellant’s operations were generating
deficits.
[18]
The material, equipment, and tools acquired by
the Appellant and funded by Seawind Corp. were to become the property of the
latter corporation on completion of the certification work.
[19]
Seawind Corp. remained the sole client of the
Appellant throughout the period. When Seawind Corp. was unable to fund the
Appellant’s activities, the Appellant suspended its operations.
[20]
The Appellant acknowledged that Sea Air Composites
(“Sea Air”), a Canadian corporation controlled by Mr. Silva, was to manufacture
the Seawind if and when the aircraft was certified by Transport Canada.
[21]
Sea Air also owned the hangar in Richelieu,
Quebec, out of which the Appellant operated. The Appellant acknowledged that the
parties had not entered into a lease for the use of the premises.
[22]
The evidence shows that Mr. Silva travelled regularly
to the Appellant’s workplace. During his visits he oversaw the work carried out
by the Appellant.
[23]
On August 17, 2009, almost four months after the
execution of the Development Agreement, the Appellant issued additional common
shares, such that from that date onward a majority of its common shares were
held directly and indirectly by persons residing in Canada. The Respondent
acknowledged this change in paragraph (j) of her Reply as follows:
(j) From August
17, 2009 to December 31, 2011, the shares of the capital stock of the appellant
were owned as follows:
|
Shareholder
|
% of shares and voting rights
|
Stated Capital
|
|
Seawind Corp.
|
46%
|
$1,150
|
|
7163860
|
44%
|
$1,100
|
|
Mano[u] Inc.
|
5%
|
$125
|
|
Patrick [Desautels]
|
5%
|
$125
|
[24]
Aéro Manou Inc. (“Manou Inc.”) is a Canadian corporation
controlled by Manou Dessertine, an employee of the Appellant and a resident of
Canada. The numbered company 7163860 Canada Inc. is a Canadian corporation, the
shares of which were owned equally by Patrick Desautels and Jean-François
Bolduc, both of whom resided in Canada. Desautels and Bolduc were also
employees of the Appellant. Manou Inc., Patrick Desautels, and 716380 Canada
Inc. are hereinafter referred to as the “Canadian Resident Shareholders”.
III.
Analysis
A. Preliminary
Question: Can the New Argument be Entertained by This Court?
[25]
The Respondent argues that the Minister may advance
an alternative legal argument in support of an assessment at any time. This is
allowed under subsection 152(9) of the Act, subject to the limitations provided
for in subparagraphs 152(9)(a) and (b) of the Act.
[26]
The Appellant contends that it would be denied
procedural fairness if I was to entertain the New Argument raised by the
Respondent at this late stage. In any event, the Appellant contends that the
Respondent is barred from raising the New Argument because it is contradicted
by factual admissions made by the Respondent in her Reply.
[27]
I agree with the Respondent that subsection
152(9) of the Act allows her to present new legal arguments. However, this must
be done while observing the rules of procedural fairness. I observe that the
procedural entitlements are contingent on context. The purpose of pleadings and
the Respondent’s actions in the present proceedings must be considered in this
regard.
[28]
It is well established that pleadings serve to
define the issues in dispute. Properly crafted pleadings facilitate production
and discovery. Procedural rules governing how pleadings can be amended are
meant to avoid surprises at trial.
[29]
As noted earlier, the Respondent assumed the
following facts with respect to the shareholders of the Appellant for the
period commencing on August 17, 2009.
(j) From August 17, 2009 to December 31,
2011, the shares of the capital stock of the Appellant were owned as follows:
|
Shareholder
|
% of
shares and voting rights
|
Stated
Capital
|
|
Seawind
Corp.
|
46%
|
$1,150
|
|
7163860
|
44%
|
$1,100
|
|
Mano[u]
Inc.
|
5%
|
$125
|
|
|
5%
|
$125
|
[emphasis added]
[30]
The Appellant admitted that this assumption was
true. The New Argument is thus contradicted by facts which were pleaded by the
Respondent and admitted by the Appellant and which, consequently, were not in
dispute between the parties
[31]
Consistent with this factual assumption, the
Respondent submitted that Seawind Corp. had de jure control of the
Appellant for only a portion of its 2009 taxation year. The only issue left
open by the pleadings is whether Mr. Silva and/or Seawind Corp. had de facto
control of the Appellant as spelled out by the Respondent in paragraph 13 of
the Reply.
[32]
Our general procedure rules set out how amendments
to pleadings should be made in the absence of the consent of the other party.
The Respondent failed to amend her Reply in accordance with these rules. Therefore,
it would be a clear violation of procedural fairness for me to consider the New
Argument at this late stage.
[33]
In any event, if I am wrong on this first point,
I observe that the Respondent has failed to establish that certain of the
common shares of the Appellant were non-voting during the relevant taxation
years.
[34]
The Respondent asserts that the voting rights
attached to the 44 common shares held by 716380 Canada Inc. could not be
exercised until the shares were fully paid on March 9, 2012, pursuant to a
resolution adopted on that date.
[35]
I disagree with the Respondent’s assessment of
the evidence on this point. The articles of association of the Appellant provide
that “[n]o shareholder shall be entitled to vote on any question whilst any call
or other sum is due and payable to the Company in respect of any Shares
of such shareholder.” Section 21 of the articles provides that the
subscription price for shares can be paid by installments or by call. If a call
is made by the directors, the amount then becomes due and payable. In the
context of the articles, I believe that the expression “due and payable” is
meant to convey that the amount is immediately exigible. The directors’
resolution that recorded the payment of the shares stipulated the following:
the 44 common
shares issued to 7163860 Canada Inc. were issued in consideration for $1,100
which, by administrative oversight, was not paid until today and not recorded
in the Company’s books and records until now.
The resolution
further provided that the Appellant considered the shares to have been paid at
all relevant times. Therefore, the conduct of the Appellant does not support
the assertion that the subscription price for the shares was considered to be immediately
exigible prior to the adoption of the resolution. The Appellant’s conduct is
equally consistent with a finding that the subscription price was payable by
call and became “due and payable” or exigible only when the resolution was
adopted by the directors. The Respondent has failed to show otherwise.
B. De facto control
[36]
Subsection 248(1) of the Act provides that CCPC
has the meaning assigned to it in subsection 125(7) of the Act. The relevant
part of the latter provision reads as follows:
“Canadian-controlled
private corporation” means a private corporation that is a Canadian corporation other
than
(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,
[emphasis added]
[37]
Subsection 256(5.1) defines how the phrase
“controlled, directly or indirectly in any manner whatever” should be interpreted
in a de facto control analysis.
(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.
[38]
McGillivray is the
latest pronouncement on the concept of de facto control. It reverses
what previously appeared to be a broader conception of the applicable test which
included the concept of operational control. McGillivray reaffirms the
narrow test set out in Silicon Graphics, as follows:
[35] In Silicon
Graphics, Justice Sexton formulated the test as follows:
[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.
[36] This test
was affirmed in 9044 2807 Québec Inc. v. Canada, 2004 FCA 23, 325 N.R.
226 [Transport Couture], wherein Justice Noël (as he then was), stated:
[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.
[37] At the heart
of justice Noël’s description of the legal test for de facto control is
essentially a restatement of the test enunciated by Justice Sexton in Silicon
Graphics. Nothing in this excerpt from Justice Noël’s reasons suggests an
intention on his part to depart from the Silicon Graphics formulation of
the test for de facto control.
[45] Accordingly,
I affirm that the narrow test set out in paragraph 67 of Silicon Graphics
is correct and has not been overturned by this Court.
[39]
The Respondent asserts that Mr. Silva directly,
and through Seawind Corp. and Sea Air, exercised de facto control over
the Appellant through economic influence derived from rights contained in the
Development Agreement and through the other commercial agreements and arrangements
of the parties. The economic influence constituted a sort of Sword of Damocles
over the Canadian Resident Shareholders of the Appellant and was capable of
influencing how they exercised their voting rights to determine the composition
of, or the change in, the board of directors.
[40]
The Appellant appears to concede that economic
influence might still be relevant; however, the Appellant argues that such economic
influence must be based on legal rights that go beyond governing the ordinary
commercial relationships of the parties. The influence must also be derived
from agreements that are not otherwise excluded under subsection 256(5.1) by
virtue of the following language:
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.
[emphasis added]
[41]
The Appellant argues that the Appellant could
and did operate independently of the alleged de facto Controller. The
Development Agreement contained terms and conditions necessary to ensure that
the work would be carried out to Seawind Corp.’s satisfaction. Finally, the
commercial arrangements of the parties are excluded from the Silicon
Graphics tests by the exclusionary language set out in subsection 256(5.1),
cited above (the “Exclusion”).
[42]
Is “economic influence” a factor to be
considered in a de facto control analysis in light of the principles
reaffirmed in McGillivray? If yes, how should it be applied?
[43]
In McGillivray, the Court specifically
confirmed that, “the list of factors that may be considered when applying the Silicon
Graphics test is open-ended.” A caveat was added, clarifying that “a
factor that does not include a legally enforceable right and ability to effect
a change to the board of directors or its powers or to exercise influence over
the shareholder or shareholders who have that right and ability, ought not to
be considered as having the potential to establish de facto control.”
[44]
Subsection 256(5.1) of the Act makes it clear
that control in fact is based on the ability to exercise direct or indirect influence.
McGillivray confirms that the influence must be exercisable, directly or
indirectly, against the voting shareholders of the corporation.
[45]
Can the commercial agreements and arrangements
of the corporation be the source of that influence? The wording of the
Exclusion suggests that Parliament considered that they could, otherwise that
language is redundant. It is a well-established principle that Parliament does
not speak in vain. Therefore, by necessary implication, unless the commercial
agreements and arrangements fall within the narrow purview of the Exclusion,
they must be considered in a de facto control analysis.
[46]
For the courts to conclude that the controller
has control in fact, I believe that the evidence must show that the controller
has the ability to affect the economic interest of the voting shareholders in a
manner that allows the controller to impose his or her will on them, should he
or she decide to do so. The evidence must allow the Court to discern that it
would be unlikely that the shareholders would exercise their voting rights
independently of the controller’s wishes.
[47]
I will now consider the circumstance of the
parties’ dealings with each other in the present context.
[48]
The Appellant asserts that it was not directly
or indirectly economically dependent on Mr. Silva and/or Seawind Corp. I
disagree. The evidence shows otherwise.
[49]
First, the Appellant had nominal share capital.
It was entirely dependent on the cash flow provided to it by Seawind Corp.
under the Development Agreement to fund the Certification Expenses. Seawind
Corp. remained its sole client.
[50]
The terms of the Development Agreement were dictated
by Mr. Silva, who controlled both parties when the agreement was entered into.
The terms and conditions of the Development Agreement appear to me to be
lopsided. For example, the agreement provided that the Appellant could use the
“Markup”, its only potential source of profit, solely for the purpose of
funding the Certification Expenses. The evidence also shows that Seawind Corp.
refused to pay the Appellant the Markup on instructions from Mr. Silva. This
was a unilateral action that was not contested by the Appellant.
[51]
The evidence shows that the Appellant operated
at a deficit throughout the relevant period. When funding was no longer
available from Seawind Corp. in 2011, the Appellant suspended its operations.
All of the Appellant’s equipment belonged to Seawind Corp. under the terms of
the Development Agreement. The Appellant did not own the rights to the
intellectual property resulting from its development and certification work.
The Seawind was to be manufactured and sold by Sea Air Composites, a company
controlled by Mr. Silva.
[52]
In view of the Appellant’s economic dependence
on Seawind Corp. and
Mr. Silva, it is not surprising that the Appellant was unable to obtain funding
for its activities from third parties.
[53]
The Appellant points to the fact that Manou Dessertine,
an employee and shareholder of the Appellant, provided the Appellant with
$75,000 of funding through an investment that she made in Sea Air. The
Appellant points to this investment to illustrate that the Appellant had a
viable business operation. If anything, Manou Dessertine’s investment in Sea Air
demonstrates that a direct investment in the Appellant would have been
foolhardy. The Appellant offered no potential for earnings growth to justify a
direct investment in it. It had nominal fixed assets. It did not own the hangar
out of which it operated. All intellectual property rights to the Seawind
belonged to Mr. Silva or Seawind Corp.
[54]
The Appellant argues that it had the potential
to find other clients. It had a qualified, assembled work force that could
carry out other projects. Yet when Seawind Corp. began to have difficulty
raising capital to fund the Certification Expenses, the Appellant suspended its
operations. No evidence was led to show that the Appellant had, or could find, for
that matter, certification and prototyping work from other aircraft developers.
I doubt that the Appellant’s workers would have been prepared to wait around
for the Appellant to find other clients.
[55]
The Appellant’s 2009 and 2010 financial
statements highlight the fact that the Appellant was economically dependent on
Seawind Corp. In the notes to those statements, under the heading “economic dependence”,
management disclosed that the Development Agreement was the sole source of the
Appellant’s revenue. No similar note was added to the Appellant’s financial
statement for the 2011 year. I observe that this statement was prepared after
the audit of the Appellant commenced. I surmise that the note was dropped
because the issue of economic influence had already been raised by the CRA.
[56]
With this background in mind, it is hard to
conceive that the Canadian Resident Shareholders would have exercised their
voting rights independently of Mr. Silva’s wishes. The fact that the Canadian
Resident Shareholders were either employees of the Appellant or entities wholly
owned by employees of the Appellant reinforces this conclusion.
[57]
The Appellant contends that the evidence shows
that Ms. Dessertine helped to manage the Appellant’s operations, which is proof
that she was capable of acting independently of Mr. Silva.
[58]
I accept that Ms. Dessertine had useful
experience in assembling aircraft such as the Seawind. She was an accomplished
flyer who ran her own business, a flying school. I have no doubt that she was a
competent manager. However, as determined in McGillivray, operational or
management control is irrelevant in the application of the Silicon Graphics
test.
[59]
Finally, Ms. Dessertine was an employee of the
corporation. Her continued employment was dependent on the financial viability
of the Appellant. In this regard, the evidence shows that Mr. Silva and Seawind
Corp. had a virtual stranglehold on the Appellant’s financial wellbeing. It is not
hard for me to imagine that Mr. Silva, if he had chosen to do so, could have influenced
how Manou Inc. exercised its voting rights.
[60]
The parties produced, by consent, newsletters
authored by Mr. Silva and addressed to investors in the Seawind project. Mr.
Silva uses the pronoun “we” when he describes the various activities conducted
with respect to the development and certification of the Seawind. The reader is
left with the impression that all activities, including those conducted by the
Appellant, were carried out by an integrated, wholly owned organization. For
example, new staff of the Appellant are referred to as employees of the group.
[61]
With this background in mind, it is not hard for
me to imagine that Mr. Silva, had he chosen to do so, could have imposed his
will on the Canadian Resident Shareholders of the Appellant with respect to the
composition of, or a change in, the board of directors of the Appellant.
[62]
As its last line of defence, the Appellant
argues that the Development Agreement, the principal source of the alleged
economic dependence identified by the Respondent, is precluded from
consideration under the Silicon Graphics test by virtue of the
exclusionary language of subsection 256(5.1).
[63]
As pointed out by the Respondent, a commercial
agreement is excluded under subsection 256(5.1) of the Act only if (i) at
the relevant time the corporation and the controller are dealing at
arm’s length
and (ii) the main purpose of the agreement is to govern the relationship of the
corporation and the controller regarding the manner in which the business of
the corporation is carried on.
[64]
Considering the evidence as a whole, I find that
Mr. Silva and Seawind Corp. and the Appellant were not dealing with each other
at arm’s length in each of the relevant taxation years. Therefore, the
Exclusion does not apply.
[65]
First, when the Development Agreement was
entered into by Seawind Corp., Mr. Silva indirectly, and Seawind Corp.
directly, controlled the Appellant. The two corporations were related persons
by virtue of subparagraph 251(2)(b) of the Act and, as a result, were deemed
not to be dealing at arm’s length by virtue of paragraph 251(5)(a) of the Act.
[66]
The evidence shows that Mr. Silva was the sole
person to define the terms and conditions of the Development Agreement. The
initial term of the agreement was 15 months. When the term expired, the Appellant
did not seek to renegotiate the terms and conditions of the Development
Agreement, although by then it was operating at a deficit.
[67]
Not only did Mr. Silva determine the terms and
conditions of the parties’ arrangement, the evidence shows that he unilaterally
decided that the Markup should not be paid. The Appellant did not object and
enforce its right to the payment of the Markup.
[68]
There are other indications of non-arm’s length
dealings. The Appellant operated in a hangar belonging to Sea Air. There was no
evidence that suggested that the Appellant paid rent for the use of the space.
I suspect Mr. Silva did not require the Appellant to enter into a formal lease
because the Appellant was economically dependent on Seawind Corp., a
corporation wholly owned by Mr. Silva. Seawind Corp. would have had to fund the
lease payments under the terms and conditions of the Development Agreement. This
would have been tantamount to Mr. Silva paying rent to himself
[69]
The absence of a lease, however, suggests that the
parties envisaged that the Appellant would not operate independently of Seawind
Corp. and Mr. Silva. If the Appellant had expected to do so, I believe it would
have insisted on a lease to avoid being evicted from its place of business when
it secured other business. I suspect that Mr. Silva would also have insisted on
a lease based on normal commercial terms. Otherwise, the Canadian Resident Shareholders
would have benefited from the rent free arrangement if the Appellant secured
new clients. The absence of a lease suggests that the parties were not dealing
at arm’s length.
[70]
Considering all of the above, I find that the requirement
for arm’s length dealings is not satisfied.
[71]
For all of these reasons, the appeal is
dismissed.
[72]
The Appellant requested costs in any event of
the cause. It claims that the Respondent violated the rules of procedural
fairness when it belatedly raised the New Argument. The Appellant asserts that
the Respondent’s conduct was abusive.
[73]
With respect, I do not agree with the
Appellant’s assessment of the situation. The Respondent’s counsel owed a duty
to his client to present the New Argument. When counsel discovered the late
payment of the subscription price for the shares, he immediately advised the
Appellant that he would argue that Mr. Silva and Seawind Corp. had de jure
control of the Appellant at all relevant times. While the Appellant was correct
in asserting that I should not consider the New Argument on grounds of
procedural fairness, no delay was caused in the hearing. Therefore, as is the norm
when appeals are dismissed, costs are awarded to the Respondent.
Signed
at Ottawa, Canada, this 13th day of March 2017.
“Robert J. Hogan”
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