1 September 1998 CTF Roundtable, 9822620 - DUHA PRINTERS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Recent Cases
Revenue Canada Review
Canadian Tax Foundation Conference
October 1998

Duha Printers (Western) Ltd. v. The Queen

Supreme Court of Canada
May 28, 1998

This case deal with a series of transactions designed to facilitate the acquisition by one corporation (“Duha”) of the non-capital losses of another corporation ("Outdoor"). In brief, the facts were as follows.

Outdoor was controlled by a corporation ("Marrs"). Marrs in turn was controlled by an individual (“Mr. M”) and his spouse. All the shares of Duha were held, directly or indirectly, by Mr. and Mrs. Duha and their children.

On February 7, 1984, Duha amalgamated with a subsidiary corporation to form Duha 2. Duha 2 issued 2000 Class C voting shares to Mr. M for one dollar each which gave Mr. M 56% of the voting shares. Contemporaneously with the share issue, a shareholders’ agreement (the "Agreement") was entered into among the shareholders of Duha including Mr. M.

The Agreement provided, inter alia, that no shares were to be issued by Duha 2 without the unanimous consent of the shareholders and that there were to be three directors chosen from the among Mr. and Mrs. Duha, a friend of the Duhas and of Mr. M (“Mr. Q”) and Mr. M.

On February 9, 1984, Duha 2 purchased all of the shares of Outdoor from Marrs for one dollar. The next day, Duha 2 and Outdoor amalgamated to form Duha 3. On February 12, the shareholders of Duha 3 elected three directors - Mr. Duha, Mrs. Duha and Mr. Q.

The issue before the court arose out of whether subsection 111(5) precluded Duha 3 from making use of the losses of Outdoor. If Outdoor was related to Duha 2 prior to their amalgamation, then by virtue of subsection 256(7), subsection 111 would not apply to restrict the use of Outdoor’s losses. Whether the two corporations were related in turn depended on whether Mr. M controlled Duha prior to the amalgamation.

Accordingly, the issues before the Supreme Court were : (1) in determining de jure control of a corporation for purposes of subsections 111(5), 251(2) and 256(7), are documents other than the constating documents of the corporation relevant and does a Unanimous Shareholder Agreement ( “USA”) enjoy any special status, and (2) if the Agreement was a relevant document determing de jure control, did any of its terms affect that determination.

The Supreme Court concluded that, outside of the constating documents of a corporation and its share register, USAs were the only relevant documents that should be examined in determining de jure control. Although the Agreement was a USA, and therefore relevant in determining de jure control, it did not result in the loss of de jure control by Marrs.

The Department accepts the Supreme Court’s findings regarding the relevance of external documents in determing de jure control.

If, however, temporary control of a corporation is acquired in order to take advantage of tax benefits, as in a Duha type of arrangement, the Department would generally seek to apply GAAR.

Author: D.A. Palamar
File: 982262
Date: September 1998