Aeronautic Development – Tax Court of Canada finds that a situation of extreme economic dependence gave rise to de facto control

A Canadian corporation (ADC), which had issued voting common shares for a modest amount to three Canadian employees, was found to be subject to the de facto control (as defined in s. 256(5.1)) of a U.S. corporation and its controlling shareholder (Mr Silva), so that it did not qualify for refundable SR&ED investment tax credits. Hogan J noted that “McGillivray confirms that the influence [referenced in s. 256(5.1)] must be exercisable, directly or indirectly, against the voting shareholders of the corporation.” He nonetheless found that this narrow test was satisfied on the basis inter alia that the sole source of revenue of ADC was (and likely could only be) a cost-plus contract with the U.S. corporation for work on a particular project and, that, accordingly:

[I]t 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.

Neal Armstrong. Summary of Aeronautic Development Corp. v. The Queen, 2017 TCC 39 under s. 256(5.1).