Aeronautic Development – Federal Court of Appeal finds that a non-resident exercised de facto control of a mooted CCPC by virtue of being its sole customer under a development agreement (viewed as a “supply contract”)

A Canadian corporation (ADC), which had issued voting common shares (representing voting control) 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) - and before its expansion by s. 256(5.11)) of a U.S. corporation (Seawind) and its controlling shareholder (Mr Silva), so that it did not qualify for refundable SR&ED investment tax credits. Gleason JA noted that McGillivray “determined that operational control is insufficient to constitute de facto control under subsection 256(5.1) … [and] that, instead, there must be some legally-enforceable arrangement or arrangements that give rise to such control.” Such control under a legal agreement was found to be present in a cost-plus development agreement with Seawind for work on a particular development project that was the sole source of revenue of ADC and accorded a lot of levers to Seawind.

There is a carve-out from s. 256(5.1) for a supply agreement between the mooted CCPC and a person with whom it deals at arm’s length. Gleason JA accepted that the development agreement was a supply agreement (i.e., it did not matter that the supplier was the mooted CCPC rather than the non-resident), but found that there was a non-arm’s length relationship, stating:

[I]n light of ADC’s near-total economic dependence on Seawind Corp., the fact that the owner of the latter company dictated (and was able to dictate) the terms of the relationship between the two companies is a very relevant factor in determining whether the two were dealing at arm’s length. Even more telling was Mr. Silva’s ability to make the two companies disregard the terms of the development agreement – as he decided to do when he unilaterally decided that the 5% mark-up [under the development agreement] would not be paid to ADC.

Neal Armstrong. Summary of Aeronautic Development Corporation v. Canada, 2018 FCA 67 under s. 256(5.1).