Words and Phrases - "group"


Canada v. Deans Knight Income Corporation, 2021 FCA 160, leave granted 10 March 2022

the object and spirit of s. 111(5) is abused on an arm’s length acquisition of “actual” (albeit, not de jure) control of a Lossco

The non-capital losses of $90M, and other tax attributes of the taxpayer, were effectively sold to arm’s length investors pursuant to transactions under which:

  • The existing shareholders of the taxpayer exchanged their shares for shares of a “Newco” (“New Forbes”) under a Plan of Arrangement
  • A private company “facilitator” (Matco) entered into an “Investment Agreement” with the taxpayer and New Forbes pursuant to which Matco (principally in consideration for $3M in cash) acquired a debenture of the taxpayer that was convertible into shares representing 79% of its equity shares but only 35% of its voting shares.
  • The taxpayer then transferred its assets (including the proceeds of issuing the debenture) and its liabilities to New Forbes.
  • Matco then identified a mutual fund management company which wanted to effect a public offering of shares of the taxpayer and use the proceeds (of $100M) for a new bond trading business to be carried on in the taxpayer.
  • The subscription price for the newly-issued common shares under this offering caused the securities of the taxpayer held by New Forbes and Matco to appreciate which, in the case of Matco, effectively was its fee.
  • New Forbes sold its remaining shares of Lossco to Matco for a pre-agreed price of $0.8M.

Woods JA set the stage by stating (at para. 83):

[I]t must be remembered that the GAAR is intended to supplement the provisions of the Act in order to deal with abusive tax avoidance. I see nothing inconsistent with the conclusion that the object, spirit and purpose of subsection 111(5) takes into account different forms of control even though the text of the provision is limited to de jure control.

In finding that Mateo acquired “actual control” (albeit, not de jure control) of the taxpayer, she indicated (at paras. 100-101) that the Investment Agreement provided “severe restrictions on the actions” that New Forbes and the taxpayer could take including prohibiting the taxpayer from “engag[ing] in any activity other than related to a Corporate Opportunity” (e.g., the offering) and required that “New Forbes shall use commercially reasonable efforts to satisfy (or cause the satisfaction of) its obligation to cooperate with Matco in the implementation of a Corporate Opportunity.”

As “the Investment Agreement resulted in New Forbes and the Respondent handing over actual control of the Respondent to Matco” (para. 105) there was an abuse of s. 111(5), and the tax benefit of the taxpayer’s tax attributes were properly denied by CRA.

Before so concluding, she also noted (at para. 45):

In order for multiple shareholders to collectively exercise de jure control of a corporation, there must be a sufficient common connection between them, such as in a voting agreement, an agreement to act in concert, or business or family relationships (Silicon Graphics ... ). Accordingly, an IPO which results in a corporation being widely held may achieve a takeover without an acquisition of de jure control

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) avoidance of a de jure acquisition of a Lossco through acquiring “actual control” was abusive 591

Vina-Rug (Canada) Limited v. Minister of National Revenue, 68 DTC 5021, [1968] CTC 1, [1968] S.C.R. 193

Because John Stradwick, Jr., his brother W.L. Stradwick and H.D. McGilvery, who collectively owned more than 50% of the shares of Stradwick's and Vina-Rug, had at all material times a sufficient interconnection as to be in a position to exercise control over the two corporations, and therefore constituted a 'group of persons' within the meaning of s. 39(4) of the pre-1972 Act, the two corporations were associated. It was irrelevant whether other combinations of majority shareholders could be found.

Words and Phrases
group of persons group

Atomic Truck Cartage Ltd. v. The Queen, [1985] 2 CTC 21, 86 DTC 6032 (FCTD)

The phrase "group of persons" in s.251(4)(a) refers to a group of two or more persons.

Words and Phrases

Silicon Graphics Ltd. v. Canada, 2002 DTC 7113, 2002 FCA 260

U.S. public shareholders not a group; no de facto control by lender/licensor

The taxpayer, which was a Canadian corporation with Canadian management, had effected a public offering of its common shares in the U.S. as a result of which 89% and 74% of its common shares were owned by non-residents in its 1992 and 1993 taxation years, respectively.

In finding that the taxpayer was not "controlled, directly or indirectly in any manner whatever, by one or more non-resident persons", Sexton J.A. noted (at para. 33) authorities suggesting "that a common connection must exist amongst the majority shareholders in order for them to compose a 'group of persons'," found that the quoted phrase was synonymous to control by a non-resident person or group of non-resident persons, that "'control' necessitates that there be a sufficient common connection between the several persons referred to in that definition in order for there to be control by those several persons" (para. 35) and that "the common connection might include, inter alia, a voting agreement, an agreement to act in concert, or business or family arrangements" (para. 36). Here, there was no evidence of any common connection among the non-resident shareholders.

Respecting a submission of the Crown that a U.S. corporation ("Silicon U.S."), that had lent U.S $5 million to the taxpayer and made financial contributions for software development and marketing, whose founder was a director of the taxpayer and whose hardware was utilized by the taxpayer's software, exercised de facto control over the taxpayer, Sexton J.A. stated (at para. 67) "that in order for there to be a finding of de facto control a person or group of persons must have the clear right and ability to effect a significant change in the board of directors or to influence in a very direct way the shareholders who would otherwise have the ability to elect the board of directors." Here, Silicon U.S. was merely protecting its interests as lender to the taxpayer, and Toronto management managed the taxpayer and annually prepared the slate of individuals to be elected to the board.

Words and Phrases