Promutuel Réassurance – Tax Court of Canada finds that 27 insurance companies who acted in a cooperative manner were a “group of persons” for s. 256(7)(d) purposes

27 mutual general insurance companies (the “MGICs”), which were non-share corporations carrying on insurance businesses in their respective territories in Quebec, were found by Favreau J to constitute a “group of persons,” so that s. 256(7)(d) applied to their transfer of (Class A) shares, representing the voting control of a taxable Canadian trust company (“ProCap”), to a corporation without share capital (“ProRé”) engaged in the reinsurance of casualty risk and of which they were members. Since s. 256(7)(d) applied, this transfer was deemed not to entail an acquisition of control of ProCap, so that its non-capital loss was preserved.

These findings turned in significant part on the role of a non-share corporation (the “Federation”) which did not have any capital participation in ProRé, and whose affairs were administered by a board of directors consisting of 10 individuals – seven directors and three managing directors of different MGICs. In finding that the MGICs constituted a group of persons (who in fact acted in concert in the transaction), Favreau J noted that with the assistance of the Federation they operated using the same accounting and technological platform, they had a common objective, decided unanimously to implement the transaction and in the meantime had decided the basis upon which representatives on the board of the Federation were to be allocated (i.e., approximately equal representation for each of the three geographic regions of Quebec). Furthermore, Favreau J found that since the corporate Act governing ProRé specifically provided that the Board of Directors of ProRé was appointed by the Board of Directors of the Federation, it was clear that the de jure control of ProRé was held by the Federation through its Board of Directors. He concluded:

Since the MGICs, as a group of persons, controlled the Federation and the Federation controlled ProRé, the MGICs must be considered to also control ProRé by virtue of the simultaneous control principle set out in subsection 256(6.1) of the ITA, both immediately after and immediately before the disposition by the MGICs of the Class A shares of ProCap to ProRé.

At the level of ProCap, the evidence revealed that the MGICs, as a group, also controlled ProCap, immediately prior to the disposition by the MGICs of the Class A shares of ProCap to ProRé. ProCap's shareholders' agreement and the amendments made to it demonstrate that the MGICs had the power to exercise control of the corporation through their ability to appoint the majority of the members of the board of directors of the corporation.

Before concluding that s. 256(7)(d) applied on the above basis, he rejected an alternative basis for the application of that provision, namely, that the Federation itself (as contrasted to the MGIC group of persons) controlled ProCap before the transaction (false), and controlled ProRé both before and after the transaction (true). Although there was a shareholders agreement giving the MGICs the right to appoint the board of the Federation from amongst their board members, this agreement did not constitute a unanimous shareholders agreement (and, thus, was to be ignored for de jure control purposes) given that nothing in the corporate statute governing ProRé “allowed ProCap's shareholders to enter into agreements to take away or restrict the powers normally vested in ProCap's directors.”

Neal Armstrong. Summaries of Promutuel Réassurance v. The Queen, 2020 CCI 13 under s. 256(7)(d) and s. 256(8.1).