CO2 Solution Technologies – Tax Court of Canada finds that a declaration of trust requiring the trustees to be the Pubco directors gave Pubco de jure and de facto control of a trust investment

A high-tech public company (CO2 Public) carried on its SR&ED through a private company (CO2 Technologies) that was held by a discretionary trust whose beneficiaries were CO2 Public and special-purpose subsidiaries thereof. Smith J found that CO2 Technologies was a “a corporation controlled, directly or indirectly in any manner whatever” by a public corporation (CO2 Public) and, thus, was not a Canadian-controlled private corporation (CCPC) – even before getting to the one-sided terms of the research agreement between the two corporations.

Of particular interest was a provision in the Declaration of Trust, that provided that each trustee was required to be a director of CO2 Public. Smith J found that this provision, by itself, was sufficient to give CO2 Public de jure control, i.e., the Declaration of Trust could be looked to for such purposes in the same manner as the constating documents of CO2 Technologies. Smith J went on to find that this provision also constituted “a legally-enforceable agreement whose object was to assure the control of the appellant by a public corporation, within the meaning of subsection 256(5.1).” Furthermore, the research agreement was similar to the development agreement in Aeronautics, which was found in that case to “constitute … a legally-enforceable arrangement capable of establishing de facto control under subsection 256(5.1)” – and the facts here were similar to Lyrtech and Solutions Mindready.

Respecting the argument, in the alternative, of the Crown, that the declaration of trust constituted an agreement referred to s. 251(5)(b)(i) and, having regard to there being a discretionary trust, s. 248(25) deemed CO2 Public to be beneficially interested in CO2 Trust, Smith J stated that although it was unnecessary for him to address this argument:

It appears to me however that this Court is bound by the decision … in … Propep.

Neal Armstrong. Summary of CO2 Solution Technologies Inc. v. The Queen, 2019 CCI 286 under s. 127(1) - Canadian-controlled private corporation – (a).