HSC Research Development Corp. v. The Queen, 95 DTC 225, [1995] 1 CTC 2283 (TCC)

O’Connor J.T.C.C.:-These appeals were heard in Toronto, Ontario on July 20 and 21, 1994 pursuant to the General Procedure of this Court respecting the appellant’s 1986, 1987 and 1988 taxation years.

Issue

The only issue in these appeals is whether the appellant, in those years was or was not an excluded corporation as defined in subsection 127.1(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). If not, the appellant was entitled to a full refund of the investment tax credits claimed in those years. If it was an excluded corporation, it was only entitled to a refund of 40 per cent of those credits. The issue boils down to whether the appellant was "controlled directly or indirectly, in any manner whatever" by the Hospital for Sick Children and/or the Hospital for Sick Children Foundation. These two entities were registered charities exempt from tax under Part 1 of the Act pursuant to section 149. The Foundation is the funding arm of the Hospital and for the purposes of these appeals, they both can be considered as one entity. Any references hereafter to "the Hospital" is a reference to both entities.

Facts acts

The admitted facts are:

1. The appellant was incorporated under the Corporations Act (Ontario), R.S.O. 1980, c. 54, on November 2, 1981 as a charitable corporation without share capital.

2. Supplementary letters patent were issued to the appellant on March 2, 1984 which

(a) removed all references to the status of the appellant as a charitable corporation;

(b) amended clause (e) of the November 2, 1981 letters patent to provide that "upon the dissolution of the corporation and after the payment of all debts and liabilities its remaining property shall be distributed or disposed of to either or both of the Hospital for Sick Children and the Hospital for Sick Children Foundation";

(c) added new clause 3(c) to provide that the appellant’s profits would be distributed ‘solely to either one or both of the Hospital for Sick Children and the Hospital for Sick Children Foundation, provided that the timing and the amounts of such distributions of profit [would] be at the discretion of the directors and provided that any profits not so distributed [would] be used solely in furtherance of the objects of the corporation; and

(d) added new paragraph 3A which provided that the foregoing provisions of clause 3(c) could not be altered "except with the unanimous resolution of the directors which is confirmed in writing by 100 per cent of the members".

3. Further supplementary letters patent were issued to the appellant on July 16, 1984 which provided that the appellant’s objects were, among other things, "to make profits by the commercial exploitation of the results of scientific and medical research to be undertaken or acquired by the [appellant]" and "to carry on any other activities of a useful nature related to research". These supplementary letters patent also added the requirement that the profits generated by the appellant be used, firstly, to advance and assist the appellant in furthering its scientific and medical activities and, secondly, to the extent not required for its business purposes, to be distributed, at the discretion of the board of directors of the appellant, to the hospital.

4. At no time in 1986, 1987 and 1988 did the members of the appellant appointed by, associated with, or connected to the hospital or any other person exempt from tax under Part I of the Act by virtue of section 149 (individually referred to as an "exempt person" and collectively referred to as "exempt persons"), have sufficient votes to elect a majority of the board of directors of the appellant.

5. The appellant incurred expenditures in the aggregate of $179,346, $250,844 and $659,492 in its 1986, 1987 and 1988 taxation years, respectively, which constituted expenditures in respect of scientific research and experimental development under paragraph 37(1 )(a) of the Act and section 2900 of the Regulations to the Act, and "qualified expenditures" under subsection 127(9) of the Act. This resulted in investment tax credits for purposes of section 127 of the Act of $62,771, $87,795 and $230,822 in each of those years, respectively. The appellant claimed the additional refund under subparagraphs 127.1 ( 1 )(a)(vi) and (vii) of the Act in respect of the investment tax credits resulting from its qualified expenditures in each of its 1986, 1987 and 1988 taxation years on the grounds that it was a "qualifying corporation" other than an "excluded corporation" under subsection 127.1(2) of the Act.

6. The Minister of National Revenue (the "Minister") assessed the appellant by notices of assessment, disallowing 60 per cent of the amount claimed by the appellant as a refundable investment tax credit in each of its 1986, 1987 and 1988 taxation years, on the grounds that the appellant was controlled, directly or indirectly, in any manner whatever, by one or more exempt persons and was, therefore, an "excluded corporation" under subsection 127.1(2) of the Act.

7. The appellant objected to such assessments and by notice of confirmation dated January 20, 1992, the Minister confirmed the disallowance of $37,663, $52,667 and $138,493 of the refundable tax credit claimed by the appellant in its 1986, 1987 and 1988 taxation years, respectively.

Other facts which were proved to the satisfaction of the Court were:

8. The appellant was initially established to commercially exploit the various ideas, products and other innovations developed by the hospital and the Research Institute, a division of the hospital. Whereas the Research Institute developed ideas to further scientific knowledge, the appellant was set up to take these ideas and develop them into viable commercial products for sale to third parties.

9. Pursuant to paragraph 3 of By-law No. 1 of the appellant, responsibility for management of the appellant was vested in a board composed of twelve directors. At all relevant times, said By-law No. I required the board of directors of the appellant to consist of twelve individuals.

10. The appellant commenced operations with two employees. Cyberfluor Inc. ("Cyberfluor") was incorporated in 1985 to carry on research and development in a specific area. The appellant initially subscribed for 70 per cent of the shares of Cyberfluor in consideration of the transfer by the appellant to Cyberfluor of technology valued at $2,000,000. The remaining shares were apparently taken by IDEA Corporation, an Ontario-sponsored corporation. During the years in question the appellant always owned more than 50 per cent of the shares of Cyberfluor. At this time in 1985, the appellant had approximately 40 employees and the appellant and Cyberfluor combined had approximately 55 employees.

11. All decisions to hire and fire employees of the appellant were made by Dr. J.A. Lowden, the appellant’s president. Before 1985, Dr. J.A. Lowden’s salary was paid 50 per cent by the appellant and 50 per cent by the hospital, as he was still an active member of the hospital’s Research Institute. From 1985 onward, however, all of Dr. J.A. Lowden’s salary was paid by the appellant, as he was no longer associated with the hospital.

12. For convenience, the appellant purchased payroll administration and purchasing services from the hospital and paid the hospital an administration fee for such services. All payroll and benefit expenses were paid by the appellant.

13. While the appellant was initially established to commercially exploit technology developed by the hospital, it subsequently devoted a major portion of its efforts to exploiting technology developed by the appellant or by third parties. One of the appellant’s witnesses, a Mr. Campbell, testified that a great percentage of the appellant’s operations related to technology developed by the hospital, but this testimony was contradicted by other witnesses who were more familiar with the day to day operations of the appellant.

14. The appellant obtained start-up funding from the hospital and attempted to obtain additional, longer-term financing from government agencies such as the National Research Council, IDEA Corporation as well as from investments by venture capitalists and other private sector investors and by sales and licensing revenue and by fees paid for carrying out research for other entities.

15. The start-up funding from the hospital was $3,000,000 in the form of a loan payable over a five-year period.

16. Although the appellant communicated with the board of the hospital from time to time, such communication was done on an informal basis. The appellant did not "report” to the hospital.

Law

The most relevant provision of the Act is subsection 127.1(2) which reads:

127.1(2) Definitions. In this section,

"excluded corporation” for a taxation year means a corporation that is, at any time in the year,

(a) controlled directly or indirectly, in any manner whatever, by

(i) one or more persons exempt from tax under this Part by virtue of section 140....

Appellant’s submissions

Appellant submits that, since in the years in question the majority of the members (all of whom were also directors) of the appellant were not appointed by, associated with or employed by the hospital there was no de jure control of the appellant by the hospital. Appellant further submits that there was no de facto control by the hospital. Even if there was, the enactment in 1988 of subsection 256(5.1) of the Act which defined the phrase "controlled directly or indirectly, in any manner whatever" as including, for years after 1988, de facto control, changed the law, so that one can argue for the years in question, de facto control was not sufficient to constitute the control contemplated by subsection 127.1(2).

Respondent's submissions

The respondent submits that there was de jure control as that concept has been expanded by the jurisprudence over the years. Alternatively if de jure control did not exist, de facto control did, principally because the appellant was initially a creation of the hospital, that it owed a substantial sum of money to the hospital, that profits not required for the purposes of the appellant were to go to the hospital and that on a wind up of the appellant its assets went to the hospital. The respondent submits further that for a non-share corporation like the appellant the concept of de jure control must be expanded. One cannot simply adopt or adapt the test developed by the jurisprudence for share corporations.

Analysis

In the pre-1972 Act, the words "control” or "controlled” were in most cases used without qualification. When those provisions were carried forward into the 1972 Act they were generally carried forward without change. In new provisions which were added to the 1972 Act, however, such as the definitions of "Canadian-controlled private corporation" or "private corporation”, the qualification "directly or indirectly, in any manner whatever" was in most cases added. This language was included in the definition of "excluded corporation" in subsection 127.1(2) when it was enacted in 1983. Have the courts distinguished between "control" and "controlled directly or indirectly, in any manner whatever"?

The leading case is the decision of the Exchequer Court of Canada in Buckerfield's Ltd. v. M.N.R., [1964] C.T.C. 504, 64 D.T.C. 5301 (Ex. Ct.). In that case, the Court considered the meaning of the term "control" in the context of the associated corporation rules in subsection 39(2) of the 1952 Act. President Jackett stated at pages 507-08 (D.T.C. 5303) as follows:

The word "control" might conceivably refer to de facto control by one or more shareholders whether or not they hold a majority of shares. I am of the view, however, that, in section 39 of the Income Tax Act, the word ‘controlled’ contemplates the right of control that rests in ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the Board of Directors. See British American Tobacco Co. v. LR.C., [1943] 1 A.E.R. 13, where Viscount Simon L.C., at page 15, says:

The owners of the majority of the voting power in a company are the persons who are in effective control of its affairs and fortunes.

In M.N.R. v. Dworkin Furs (Pembroke) Ltd., [1967] S.C.R. 223, [1967] C.T.C. 50, 67 D.T.C. 5035, the Supreme Court of Canada approved President Jackett’s decision. Mr. Justice Hall stated at page 224 (C.T.C. 51, D.T.C. 5036) that:

The word "controlled" as used in this subsection was held by Jackett P. to mean de jure control and not de facto control and with this I agree.

These initial pronouncements expanded over time. It became clear that, in determining whether de jure control exists, courts are not to be limited simply to technical and narrow interpretations of the legal rights attaching to shares of a corporation. The courts will take into account both the immediate legal ability of a shareholder to control the corporation and the ultimate legal ability of a shareholder to control the corporation.

Thus, in Donald Applicators Ltd. v. M.N.R., [1969] C.T.C. 98, 69 D.T.C. 5122 (Ex. Ct.); aff’d [1971] C.T.C. 402, 71 D.T.C. 5202 (S.C.C.), the Minister assessed the appellant corporations as associated corporations on the basis that each was associated with Company S, and therefore, with each other. In each company there were two classes of shares, Class A and Class B. In each company, two Class A shares were issued; one to each of two individuals and 498 Class B shares were issued to Company S. Class A shareholders could vote on any issue; Class B shareholders could vote on any issues except the election of directors. Company S in fact managed the business and affairs of each of the appellant corporations. Because the Class B shareholder ultimately had the legal power to remove the existing directors from office, and to authorize the issuance of additional Class A shares, the Court found that Company S had de jure control of all of the corporations. Mr. Justice Thurlow stated at page 105 (D.T.C. 5126) as follows:

A shareholder who, though lacking immediate voting power to elect directors, has sufficient voting power to pass any ordinary resolution that may come before a meeting of shareholders and to pass as well a special resolution through which he can take away the powers of the directors and reserve decisions to his class of shareholders, dismiss directors from office and ultimately even secure the right to elect the directors is a person of whom I do not think it can correctly be said that he has not in the long run the control of the company. Such a person in my view has the kind of de jure control contemplated by section 39 of the Act.

The Minister also argued that Company S controlled the taxpayer corporations by virtue of the de facto control exercised by it. Mr. Justice Thurlow dismissed the Minister’s alternative argument, stating at page 102 (D.T.C. 5124) that:

I can deal with the alternative submission by saying that in my opinion de facto control is not to be taken into account, that de jure control is what is contemplated by the statute....

Similarly, a Court will look beyond apparent voting equality in a corporation to the true legal right of control. In Oakfield Developments (Toronto) Ltd. v. M.N.R., [1971] S.C.R. 1032, [1971] C.T.C. 283, 71 D.T.C. 5175, the taxpayer corporations issued non-participating preferred shares to individuals who were not related to a group holding the majority of the common shares. The result was that the preferred shareholders held 50 per cent of the voting rights in each corporation and the common shareholders held 50 per cent as well, creating an apparent equality of voting rights. In holding that the holders of the common shares controlled the taxpayer corporations, the Court looked at the legal rights attached to each class of shares, including the ability of the common shareholders to authorize the surrender of the corporation’s Letters Patent and to wind it up. Mr. Justice Judson stated at page 1037 (C.T.C. 286; D.T.C. 5177-78) as

follows:

The inside group controlled 50 per cent of the voting power through their ownership of the common shares. They were entitled to all the surplus profits on a distribution by way of dividend after the payment of the fixed cumulative dividend to the preferred shareholders. On a winding up of Polestar, they were entitled to all of the surplus after return of capital and the payment of a 10 per cent premium to the preferred shareholders. Their voting power was sufficient to authorize the surrender of the company’s letters patent. In my opinion, these circumstances are sufficient to vest control in the group when owners of non-participating preferred shares hold the remaining 50 per cent of the voting power.

The Supreme Court of Canada considered a situation similar to that in Oakfield Developments, supra, in The Queen v. Imperial General Properties Ltd., [1985] 2 S.C.R. 288, [1985] 2 C.T.C. 299, 85 D.T.C. 5500. In that case 90 of the 100 issued common shares of the taxpayer corporation were owned by V. Ltd. The remaining ten shares were held by an individual who, with his wife, held 80 voting but non-participating preference shares. The result was that V. Ltd. held 90 per cent of the common shares and 50 per cent of the voting power. A 50 per cent vote was sufficient to terminate the existence of the corporation. In allowing the Crown’s appeal, Mr. Justice Estey stated at page 295 (C.T.C. 302-03; D.T.C. 5503) that:

In determining the proper application of subsection 39(4) to circumstances before a Court, the Court is not limited to a highly technical and narrow interpretation of the legal rights attached to the shares of a corporation. Neither is the court constrained to examine those rights in the context only of their immediate application in a corporate meeting. It has long been said that these rights must be assessed in their impact "over the long run”.

This decision appears consistent with the decisions of the Supreme Court in Oakfield Developments and in Donald Applicators and Mr. Justice Estey stated at page 298 (C.T.C. 304; D.T.C. 5504) that:

The approach to "control" here taken does not involve any departure from prior judicial pronouncements nor does it involve any "alteration" of the existing statute. The conclusions reached above merely result from applying existing case law and existing legislation to the particular facts of the case at bar. The application of the ‘control’ concept, as earlier enunciated by the courts, to the circumstances now before the Court is, in my view, the ordinary progression of the judicial process and in no way amounts to a transgression of the territory of the legislator.

Each of the Buckerfields, Oakfield Developments, Donald Applicators, and Imperial General Properties cases, supra, involved provisions of the Act which did not include the qualifying words "directly or indirectly, in any manner whatever". Decisions of the courts, however, interpreting provisions of the Act containing such words have interpreted them in an identical manner, that is, by applying the concept of de jure control.

In Scandia Plate Ltd. v. The Queen, [1982] C.T.C. 431, 83 D.T.C. 5009 (F.C.T.D.), the Court considered the definition of "Canadian-controlled private corporation" in paragraph 125(6)(a) which includes those words. At page 433 (D.T.C. 5011) of the report, Mr. Justice Cattanach stated, in respect of paragraph 125(6)(a), that:

The word ’’controlled" as used in the context of the definition means de jure control and not de facto control.

and proceeded to cite the passage quoted above from the decision of the Supreme Court of Canada in Dworkin Furs.

The Court also considered the definition of "Canadian-controlled private corporation" in International Mercantile Factors Ltd. v. The Queen, [1990] 2 C.T.C. 137, 90 D.T.C. 6390 (F.C.T.D.). In that case voting rights in the taxpayer corporation were divided equally between two public corporations and a private corporation. The taxpayer corporation’s board of directors consisted of four nominees of the two public corporations and one nominee of the private corporation. During the currency of a shareholders agreement and management agreement in the relevant taxation years, the composition of the board of directors could not be changed. After surveying the prior jurisprudence, Mr. Justice Teitelbaum concluded at pages 147-48 (D.T.C. 6398) that:

From the wording of paragraph 125(6)(a) of the Act as it was in 1979 to 1982 inclusively and from the jurisprudence submitted and considered, I would have found that the public corporations did not have control over the plaintiff corporation either directly or indirectly in any manner whatsoever had the issued voting shares of the corporation been equally divided between the two groups, Rieris and Charter and Hamilton and both groups would have had equal voice in determining all matters relating to the plaintiff corporation.

The Court did not draw any distinction between the statutory provisions considered in the previous jurisprudence and in the case at bar. Teitelbaum J. concluded at page 148 (D.T.C. 6399) that:

This finding may not be "on all fours" with the findings in the cases of Buckerfield and Dworkin Furs, supra. As in the cases of Oakfield or Imperial Properties, supra, the Supreme Court of Canada went further than the Buckerfield and Dworkin Furs cases by defining the issue of control not on the fact of equal voting rights, but by the fact that one 50 per cent shareholder could cause the liquidation of the Company giving it control. I also, following the principle in Oakfield and Imperial Properties, am satisfied that because Charter and Hamilton have retained, for as long as they wish, the majority of the Board of Directors, they have retained legal and effective control of the plaintiff corporation as control was defined in paragraph 125(6)(a) of the Income Tax Act.

In Zinkhofer v. M.N.R., [1991] 1 C.T.C. 2493, 91 D.T.C. 643 (T.C.C.), this Court considered the "stop loss" provisions of subsections 85(4) and 85(5.1) of the Act. The two individual taxpayers owned 40 per cent of the voting shares of a corporation. Their three sons owned the other 60 per cent. Each of the taxpayers and their sons were directors. The taxpayers disposed of a property to the corporation pursuant to a section 85 election and realized a loss. On the transfer of property to the corporation, the taxpayers received non-voting retractable Class D preference shares and promissory notes payable 30 days after demand. The Minister took the position that the loss was denied on the basis that, after the transfer of the properties, the taxpayers controlled the corporation. Judge Sobier described the Minister’s position as follows at page 2496 (D.T.C. 646):

The respondent’s position is that the economic clout wielded by the appellants gave them control of the corporation notwithstanding that together they only held 40 per cent of the voting shares.

The Court rejected this argument after reviewing the jurisprudence already described above on the meaning of "control”. Judge Sobier concluded at page 2497 (D.T.C. 646) that:

After analyzing these cases, the inescapable conclusion is not that economic control alone will give or shift control but that where there is an apparent voting equality which may or may not be artificially contrived, one must look at other factors to determine control, such as the right to terminate a company’s existence and seize the residue of its assets.

The respondent further contends that the retractable feature of the Class D Shares gives the appellants that clout and vests control in them.

With this the Court cannot agree. What the appellants receive is their investment and no more. They cannot vote to elect or oust the directors, alter the corporation’s articles, demand increased dividends, wind up the corporation Or cause its existence to cease or do any things which controlling shareholders may do. The amount of money they may remove from the corporation by way of return of capital is limited to their original investment.

In this instance, the parties have not bestowed voting rights on a class of shares in order to give the appearance of equality of votes and therefore there is nothing to look behind in order to determine actual control. Here, actual control rests in the hands of the holders of the Class A shares no matter how small their investment.

The respondent urged the Court to look to the fact that the appellants held promissory notes of the corporation which would again give them leverage over the corporation by the ability to call the notes. If this were the case then any creditor, particularly a secured creditor, could be said to control a corporation since it controls its assets. This could never be the meaning of control for the purposes of the Act. In order for the respondent to establish that the appellants control the corporation, he must establish that the appellants had a preponderance of the votes at a meeting of the shareholders of the corporation or that they had sufficient votes when coupled with other powers to control the corporation as that term was defined in Imperial General Properties, supra.

Applying the de jure test, did the hospital control the appellant in the relevant taxation years? It is the evidence that:

— at no relevant time was the majority of the directors of the appellant appointed by, associated with, or connected to the hospital or the foundation

— the directors of the appellant were its sole members

- the directors had complete discretion as to the admission of members and could terminate the membership of any member

— the hospital had no direct or indirect right to appoint members or directors of the appellant

- the hospital had no direct right to cause the appellant to be wound up.

The cases reviewed above show that prior to the amendments to the Act made in 1988 which added subsection 256(5.1), the courts consistently construed the words "controlled, directly or indirectly, in any manner whatever" to apply a de jure and not a de facto test for control.

For taxation years commencing after 1988, subsection 256(5.1) of the Act provides that the phrase "controlled, directly or indirectly, in any manner whatever" includes factual or de facto control. This provision does not apply to the taxation years of the appellant before the Court. It is the submission of the appellant that this amendment changed, rather than clarified, the law; that the phrase "controlled, directly or indirectly, in any manner whatever" for taxation years commencing prior to 1989 did not include any concept of factual or de facto control.

Subsection 45(2) of the Interpretation Act provides that the fact of an amendment, in and of itself, does not give rise to an inference that the amendment changed the pre-existing law. It provides as follows:

45(2) The amendment of an enactment shall not be deemed to be or to involve a declaration of the law under that enactment was or was considered by Parliament or other body or person by whom the enactment was enacted to have been different from the law as it is under the enactment as amended.

Notwithstanding subsection 45(2), the courts have taken account of amendments in construing the amended statute.

In Bathurst Paper Ltd. v. Minister of Municipal Affairs of the Province of New Brunswick, [1972] S.C.R. 471, 22 D.L.R. (3d) 115, the Court considered amendments to the New Brunswick Assessment Act changing the definition of "tax concession". Counsel for the appellant relied in part on section 13 of the New Brunswick Interpretation Act which provided that:

The amendment of an Act shall not be deemed to be, or to involve, a declaration that the law under the Act was different from the law as it has become under the Act as amended.

This provision is in substance identical to section 45 of the Interpretation Act. Laskin J. found at page 476 (D.L.R. 118) that:

In my opinion, section 13 merely precludes a Court from making the prohibited inference from the fact that an amendment was enacted. It does not exclude reference to the amendment as an item of legislative history bearing on the construction of the amended statute.

and concluded at page 477 (D.L.R. 119) that:

There is another consideration that is equally telling. Legislative changes may reasonably be viewed as purposive, unless there is internal or admissible external evidence to show that only language polishing was intended. The submission of the appellant would have it that the amendment in 1968 accomplished nothing of substance, but merely improved the drafting. This is, in my opinion, an untenable position.

In Ottawa v. Hunter (1900), 31 S.C.R. 7, the Court considered the provisions of two statutes whose language was originally identical but where additional words had been added to one of the provisions. The Court was urged to interpret both provisions as having the same effect. Mr. Justice Taschereau stated at page 10 as follows:

Now when we see in statutes in pari materia, by the very same legislature, additional words of that nature to a prior enactment, we would be setting at naught the very clear intention of the legislature if we gave to the last enactment the same construction that had been judicially given to the prior one, as the appellant asks us to do. We cannot so read out of a statute expressions that must be held to have deliberately been inserted so as to make the new statute different from the prior one.

This is also the position taken by Driedger, Construction of Statutes, second edition who states at page 127 that:

In general a change in language on reenactment of a provision must be presumed to have some significance.

In Woodward Stores Ltd. v. Canada, [1991] 1 C.T.C. 233, 91 D.T.C. 5090 (F.C.T.D.), the Court considered the provisions of subsection 45(2) of the Interpretation Act. In this case the corporate taxpayer had received "fixturing allowances" which would have fallen within the subsequently- enacted provisions of paragraph 12(l)(x) of the Act. It was argued by the taxpayer that the enactment of paragraph 12(l)(x) had changed the law. The existence of the transitional provisions led Mr. Justice Joyal to rebut any presumption that the enactment of paragraph 12(l)(x) was merely intended to clarify the existing state of the law. He concluded at page 246 (D.T.C. 5100) that:

Subsection 37(2) of the Interpretation Act [now subsection 45(2)] simply states that there is no presumption that a legislative amendment indicates a change in the law. This cannot mean that an amendment can never be interpreted as reflecting a change in the law, especially when there is external evidence to that effect.

In the present case, there is internal and external evidence to show that the addition of subsection 256(5.1) effected a change in the law. Prior to the enactment of subsection 256(5.1), which is applicable to taxation years commencing after 1988, the Act did not define the phrase ’’controlled, directly or indirectly, in any manner whatever". As noted above, until the addition of subsection 256(5.1), this phrase was used interchangeably with the terms "control" and "controlled directly or indirectly" to denote the concept of control. For example, prior to the 1988 amendments, the Act referred to corporations "controlled, directly or indirectly, in any manner whatever" in the following provisions:

(a) Category "A" Provisions

(i) subsection 24(2), which provides rules applicable where an individual ceases to carry on a business which is thereafter carried on by a corporation controlled by the individual;

(ii) paragraph 54(i), which defines "superficial loss";

(iii) subsections 85(4) and (5.1), which provide rules applicable to dispositions of property to controlled corporations;

(iv) paragraph 95(6)(b), an anti-avoidance provision applicable to foreign affiliates and controlled non-resident corporations;

(v) paragraph 125(7)(b), which defines "Canadian-controlled private corporation"; and

(vi) the definition of “excluded corporation” in subsection 127.1(2), applicable for purposes of the refundable investment tax credit.

(b) Category "B" Provisions

(i) paragraphs 12(l)(o) and 18(l)(m) and subsections 69(6) and 69(7), in respect of corporations controlled by Her Majesty in right of Canada or a province;

(ii) subparagraph 85.1 (2)(b)(i), in respect of share for share exchanges;

(iii) paragraph 89(1 )(f) defining "private corporation’;

(iv) paragraph 95(1 )(a) defining "controlled foreign affiliate"; and

(v) subsection 186(1), in respect of corporations liable for Part IV tax.

Pursuant to S.C. 1988, c. 55, subsection 192(3), subsection 256(5.1) was enacted to provide that for taxation years commencing after 1988, where the expression "controlled, directly or indirectly in any manner" is used, a corporation is considered to be so controlled by a corporation, person or group of persons if it is controlled in fact by such corporation, person or group of persons. When the simple terms "control" or "controlled" continued to be used, this "control in fact" test did not apply.

The Act was contemporaneously amended in 1988 to delete from the provisions listed under Category "B", in the above paragraph, the words "directly or indirectly in any manner whatever". No such deletions were made to the Category "A" provisions. These amendments were applicable to taxation years commencing after 1988, the effective date of new subsec- tion 256(5.1). The effect of these deletions was to ensure that the new control in fact test did not apply to these provisions. Had the enactment of subsection 256(5.1) merely clarified that the phrase "controlled directly or indirectly in any manner whatever" was intended to encompass factual control, the deletion of these words would not have been necessary.

The conclusion that the enactment of subsection 256(5.1) effected a change in the law is also supported by the wording of the provision and its effective date. Unlike a number of provisions in the Act (for example, subsection 248(24)), which begin with the words "for greater certainty", subsection 256(5.1) begins with the words "for the purposes of this Act"...the expression "controlled, directly or indirectly in any manner whatever shall be considered …." If the drafters intended to merely clarify the meaning of the phrase "controlled directly or indirectly in any manner whatever", they could have done so with clear wording. The fact that they did not is indicative of the fact that subsection 256(5.1) introduced a new concept of control. The effective date of the provision (i.e., for taxation years commencing after 1988) also makes it clear that the concept of factual control was not applicable prior to 1989. In the absence of this effective date, control for the purposes of the provisions listed in Category "B" above, would have included factual control. Given the deletion of the words "directly or indirectly in any manner whatever" from these provisions when subsection 256(5.1) was enacted, this was clearly not intended.

The Department of Finance also considered the addition of subsection 256(5.1) by S.C. 1988, c. 55, subsection 192(3) to effect a change in the law. In the Technical Notes to subsection 192(3) of Bill C-139, dated June 30, 1988, the Department of Finance gave the following explanation as to the effect of new subsection 256(5.1) of the Act:

New subsection 256(5.1) expands the concept of control for certain provisions of the Act to include what is often referred to as de facto control. Under the existing rules, control of a corporation generally exists by reason of the ability to elect a majority of the directors of the corporation — de jure control. An example of de facto control might be a situation where a person held 49 per cent of the voting control of a corporation and the balance was widely dispersed among many employees of the corporation or was held by persons who could reasonably be considered to act in respect of the corporation in accordance with his wishes. Whether a person can be said to be in actual control of a corporation, notwithstanding that he does not legally control more than 50 per cent of its voting shares, will depend in each case on all of the circumstances.

[Emphasis added.]

Where the words "controlled directly or indirectly in any manner whatever" were removed from an existing provision, such as subparagraph 12( 1 )(o)(iii), the following explanation was given in the Technical Notes:

This amendment is consequential on the introduction of new subsection 256(5.1) and ensures that the provisions of that subsection — relating to de facto control — are not applicable to paragraph 12( 1 )(o).

It was also the view of Revenue Canada that the enactment of subsection 256(5.1) changed the law. This can be seen from a comparison of the relevant Interpretation Bulletin which had been issued prior to the enactment of subsection 256(5.1), namely IT-64R2, dated December 20, 1983 with IT-64R3, issued March 9, 1992 and entitled "Corporations: Association and Control — After 1988".

The conclusion is that the 1988 amendments were purposive, that purpose being to expand the concept of control, among other things, for the purposes of the definition of "excluded corporation" in subsection 127.1(2) of the Act, to include de facto control. Accordingly, prior to the amendment, control for the purposes of the definition of "excluded corporation" was legal or de jure control.

It was argued by counsel for the respondent that the jurisprudence defining de jure control should not be applied to a corporation without share capital. There is apparently no reported jurisprudence on this point but counsel for the respondent submitted that, with a corporation without shares, the Court must look beyond the directors/members to see really "who is in the driver’s seat." The Court has done this but concludes that the hospital did not have de jure control of the appellant because, at all relevant times, the majority of the members and directors of the appellant were not appointed by, employed by, associated with or otherwise connected to or controlled by the hospital and the other factors discussed below were not sufficient to result in de jure control.

It is true that the hospital was to receive the property of the appellant on winding up and to receive any excess profit as determined by the directors of the appellant and that the initial and subsequent funding of the appellant was provided by the hospital and guarantees of other loans were given by the hospital. However, the hospital had no legal right or power to cause the winding up of the appellant or to cause its directors to distribute profits or to remove directors. It is also well established that the economic power of a creditor does not constitute control.

In the Court’s opinion, the phrase "controlled, directly or indirectly, in any manner whatever", in the years in question, meant de jure control. Furthermore, the Court finds no valid reason not to apply the concepts of control developed in the decided cases for share corporations to a corporation without shares. The persons who control the non-share corporation are the members who in turn appoint the directors. In this case the members and directors are one and the same. They ran the day-to-day operations and made the decisions. If the hospital had any control, same would have to be classified as de facto control and for the years in question, this was not sufficient. For all of the above reasons, the appeals are allowed, with costs, and the matter is referred back to the Minister for reconsideration and reassessment.

Appeal allowed.