Lyrtech RD Inc. v. The Queen

Lyrtech RD Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2013-01-24
Neutral citation
2013 TCC 12
File numbers
2009-1057(IT)G
Judges and Taxing Officers
Réal Favreau
Subjects
Income Tax Act
Decision Content
Docket: 2009-1057(IT)G
BETWEEN:
LYRTECH RD INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeals heard on April 17, 18 and 19, 2012, at Quebec City, Quebec.
Before: The Honourable Justice Réal Favreau
Appearances:
Counsel for the Appellant
René Roy
Counsel for the Respondent:
Anne Poirier
Dany Leduc
____________________________________________________________________
JUDGMENT
The appeals from the assessment dated February 8, 2008, for the appellant's 2005 taxation year and from the assessments dated July 9, 2008, for the appellant's 2006 and 2007 taxation years, made pursuant to the Income Tax Act by the Minister of National Revenue, are dismissed with costs in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 24th day of January 2013.
"Réal Favreau"
Favreau J.
Translation certified true
on this 30th day of May 2013.
Erich Klein, Revisor
Citation: 2013 TCC 12
Date: 20130124
Docket: 2009-1057(IT)G
BETWEEN:
LYRTECH RD INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1] These are appeals from assessments dated February 8, 2008, for the 2005 taxation year and July 9, 2008, for the 2006 and 2007 taxation years of the appellant, issued pursuant to the Income Tax Act, R.S.C. 1985, c. 1 (5th Suppl.), as amended (the Act), by the Minister of National Revenue (the Minister).
[2] In the February 8, 2008, and July 9, 2008, assessments, the following changes were made to the investment tax credit (ITC) and ITC refunds claimed by the appellant:
2005
$
2006
$
2007
$
Prior net income (net loss)
(-1,905,513)
(-4,453,027)
(-7,325,312)
R & D expenditures claimed
1,215,211
1,886,261
2,397,527
Revised R & D expenditures
1,046,328
1 626,415
2,611,237
Difference:
(-168,883)
(-259,846)
213,710
Revised net income (net loss)
(-2,074,396)
(-4,712,873)
(-7,111,602)
R & D credits claimed
387,922
697,419
806,599
R & D credits allowed
216,368
334,153
504,288
R & D credits disallowed
171,554
363,266
302,311
ITC refund claimed
384,812
663,130
742,640
ITC refund allowed
0
0
0
ITC carry-forward
216,368
550,521
1,054,809
[3] In its notice of appeal, the appellant does not dispute the Minister's changes regarding the scientific research and experimental development (SR&ED) expenditures claimed by the appellant.
[4] The issue is whether the appellant was a "Canadian-controlled private corporation", as defined in subsection 125(7) of the Act, during the taxation years ending December 31, 2005, 2006 and 2007. If the appellant was not a "Canadian-controlled private corporation" during those taxation years, it would not be entitled to the 15% addition to the investment tax credit provided for in subsection 127(10.1) of the Act and would not be entitled to an investment tax credit refund pursuant to subsection 127.1(1) of the Act, since it would not be a qualifying corporation within the meaning of subsection 127.1(2) of the Act.
Respondent's position
[5] The respondent submits that for the taxation years ending December 31, 2005, 2006 and 2007, the appellant was controlled, directly or indirectly in any manner whatever by Lyrtech Inc. (Lyrtech), a public corporation within the meaning of subsection 89(1) of the Act, because Lyrtech had a direct or indirect influence that, when exercised, resulted in the control in fact of the appellant within the meaning of subsection 256(5.1) of the Act.
[6] Alternatively, the respondent submits that each of the beneficiaries of Fiducie Financière Lyrtech (FFL), namely 4296621 Canada Inc. (4296621), 4296630 Canada Inc. (4296630) and 4296648 Canada Inc. (4296648), had a conditional right to the shares of the appellant's capital stock such that each was deemed to control the appellant pursuant to subparagraph 251(5)(b)(i) of the Act and thus had de jure control of the appellant.
Appellant's position
[7] Counsel for the appellant submits there is no need to consider whether there was de facto control of the appellant since FFL had de jure control of the appellant. In the absence of any express and specific statutory provisions, de jure control and de facto control cannot be analyzed simultaneously.
[8] Counsel for the appellant also submits that Lyrtech did not have de facto control of the appellant because it could not influence the decisions of the appellant's board of directors.
Partial agreed statement of facts
[9] The parties produced a partial agreed statement of facts dated April 13, 2011. I reproduce in its entirety the section of the statement setting out the facts:
[translation]
Lyrtech Inc.
1. Technologies Lyre Inc. was incorporated on June 26, 1991, under Part 1A of the Companies Act (Quebec), and specialized in developing, manufacturing and marketing digital electronic circuits and analog circuits.
2. Technologies Lyre Inc. was involved in research and developed, for its own benefit or for others, products based on digital signal processors in the field of digital telecommunications and various other electro-optical products.
3. Louis Bélanger and Louis Chouinard were the founders of Technologies Lyre Inc.
4. Lyrtech Inc. (Lyrtech) was incorporated on March 9, 2000, under Part 1A of the Quebec Companies Act.
5. On September 1, 2000, Technologies Lyre Inc. acquired control of Lyrtech Inc.
6. On September 1, 2000, Lyrtech Inc. merged with Technologies Lyre Inc. and continued the latter’s activities.
7. Following a public offering by means of a prospectus[1] filed on October 4, 2000, Lyrtech became a public corporation that had a class of shares of its capital stock listed on a designated stock exchange in Canada.
8. Before June 1, 2005, Lyrtech conducted R&D activities and on that basis claimed investment tax credits.
9. As a public corporation, Lyrtech claimed against its tax payable non-refundable investment tax credits at the rate of 20% of its eligible R&D expenditure account. For its 2000 to 2004 taxation years, Lyrtech was in a loss position. As a result, it could not benefit from the federal investment tax credit because it was non-refundable.
Restructuring
10. In 2005, Lyrtech restructured its business in order to transfer its R&D activities to a new corporation, the appellant.[2]
11. On May 30, 2005, 4296621 Canada Inc. (4296621) was incorporated. Lyrtech subscribed for 400 Class A shares of this new corporation's capital stock for $400.
12. Miguel Caron and Louis Bélanger were appointed directors of 4296621.
13. On May 30, 2005, 4296630 Canada Inc. (4296630) was incorporated. 4296621 subscribed for 100 Class A shares of this new corporation's capital stock for $100.
14. Miguel Caron and Louis Bélanger were appointed directors of 4296630.
15. On May 30, 2005, 4296648 Canada Inc. (4296648) was incorporated. 4296621 subscribed for 100 Class A shares of this new corporation for $100.
16. Miguel Caron and Louis Bélanger were appointed directors of 4296648.
17. On June 1, 2005, Fiducie Financière Lyrtech (FFL) was created. This trust was set up by 4296621.
18. The income beneficiaries were 4296630, 4296648 and the appellant, while the capital beneficiaries were 4296630, 4296648 and 4296621.[3]
19. From June 1 to June 17, 2005, the trustees were Miguel Caron, Vincent Bélanger and Louis Bélanger.
20. As of June 17, 2005, Miguel Caron and Louis Bélanger were the trustees.
21. Under the trust deed, the trustees of FFL cease to be trustees when they are no longer directors of Lyrtech, and the number of FFL trustees cannot be greater than the number of directors of Lyrtech.
22. Under the trust deed, FFL must distribute all of its tax revenue to its beneficiaries yearly. The distribution of revenue and capital among the beneficiaries is discretionary.
23. On May 30, 2005, Lyrtech RD Inc. (the appellant) was incorporated.
24. On June 1, 2005, 4296621 gave FFL $200.
25. On June 1, 2005, FFL subscribed for 100 Class E shares of the capital stock of 4296630 for $100.
26. On June 1, 2005, FFL subscribed for 100 Class A shares and 100 Class B shares of the appellant's capital stock, for $100 in each case.
27. Miguel Caron and Louis Bélanger were appointed directors of the appellant.
28. On June 1, 2005, 4296621 granted the appellant an option to purchase at fair market value all of the shares of either 4296648 or 4296630. According to the appellant, this transaction was intended to ensure that Lyrtech and the appellant were not at arm’s length, within the meaning of section 251 of the Income Tax Act, for the purposes of section 7 of that Act.
29. On June 1, 2005, the trustees of FFL, through a sole shareholder declaration, withdrew all the powers held by the appellant's directors and assumed them themselves, in accordance with subsection 146(2) of the Canada Business Corporations Act.
30. On June 1, 2005, Lyrtech transferred to the appellant all of its R&D assets (except intellectual property) at fair market value, as well as the employees assigned to R&D activities, in consideration of the issuance by the appellant of 1,016,437 Class C shares of its capital stock.
31. On June 1, 2005, the appellant redeemed the Class C shares of its capital stock held by Lyrtech. As consideration, the appellant issued a demand promissory note to Lyrtech in the amount of $1,016,437.
32. Around June 1, 2005, Lyrtech subscribed for 1,016,437 Class A shares of the capital stock of 4296621. The subscription price was paid by delivery to 4296621 of the appellant's promissory note.
33. On June 1, 2005, 4296621 made a capital contribution to 4296630 by transferring to it the appellant's promissory note.
34. On June 1, 2005, 4296630 paid a dividend of $1,016,437 on the Class E shares of its capital stock held by FFL. This dividend was paid by delivery to FFL of the appellant's promissory note.
35. On June 1, 2005, Lyrtech granted the appellant a research contract under which the appellant agreed to carry out all the R&D work in order to pursue the development of the technologies patented or owned by Lyrtech that Lyrtech might entrust to the appellant.[4]
36. As consideration, the appellant obtained a share in future income. The appellant was entitled to 10% of the income from sales of the products resulting from the R&D work and 25% of the income from licences granted with respect to those products.
37. The research contract is of indeterminate duration. However, Lyrtech may, among other things, terminate the research contract on 60 days’ notice to the appellant.
38. The organization chart dated June 1, 2005, appended to the Amended Reply to the Notice of Appeal, accurately represents the organizational structure of Lyrtech and the appellant after the restructuring in stating the following:
· Louis Bélanger, Louis Chouinard and Société Innovatech Qc and
Chaudière‑Appalaches were not the sole shareholders of Lyrtech;
· according to the information circulars from Lyrtech's management, no Lyrtech shareholder held more than 10% of the Class A shares of Lyrtech’s capital stock.
39. After the corporate restructuring, the appellant filed its tax returns as a CCPC and claimed the refundable investment tax credit at the rate of 35%.
Analysis of activities and of the relationships between Lyrtech and the appellant
40. From the time it began operations, the appellant occupied space in the same premises as Lyrtech.
41. These premises were rented by Lyrtech for $15,848 per month, exclusive of taxes.
42. As of January 24, 2007, there was no written lease between Lyrtech and the appellant.
43. From June 1 to December 31, 2005, the appellant did not record any rental expenses.
44. In an allocation based on the number of employees, the appellant would have been responsible for around $60,400 in rent ($15,848 X 7 months X 43/79).
45. Some individuals were members of the administrative personnel of both Lyrtech and the appellant.
46. Miguel Caron was president of both Lyrtech and the appellant.
47. Alain Landry was vice-president of finance and human resources for both Lyrtech and the appellant.
48. Daniel Bellemare was the comptroller for both Lyrtech and the appellant.
49. Sylvie Coulombe was the secretary for both Lyrtech and the appellant.
50. The appellant assumed part of the Lyrtech's expenses related to its business. These expenses appeared as accounting entries and were mostly allocated according to the number of employees, that is, at a ratio of 43/79, and included the following:
(a) The appellant assumed part of the life insurance premium for some directors, although Lyrtech was the sole beneficiary of the life insurance policy.
(b) The appellant assumed part of the premium for the insurance covering damage to equipment that belongs to both companies, although Lyrtech was the sole beneficiary of the insurance policy.
(c) The appellant assumed part of the accounting fees related to the audit of Lyrtech's consolidated financial statements.
(d) The appellant assumed part of the costs related to the director’s fees paid to participants at meetings of Lyrtech's board of directors.
(e) The appellant assumed part of the remuneration paid to Pierre Lortie, chairman of Lyrtech's board of directors.
51. For the year ending December 31, 2005, no royalty was paid to the appellant by Lyrtech under the terms of the June 1, 2005, research contract, and so the appellant had no income for that year.
52. For the period at issue, the appellant had no line of credit.
53. Before March 2006, the appellant had taken out no bank loan. In March 2006, the appellant obtained a credit facility with a banking institution, benefiting from two loans made available to it to finance R&D credits.[5]
54. Lyrtech stood surety with respect to these loans.
55. During the period from June 1 to December 31, 2005, Lyrtech transferred around $2,037,481 to the appellant.
56. For the year ending December 31, 2006, the business expenses incurred by the appellant were determined to be around $224,000. These expenses were initially paid by Lyrtech.
57. For the year ending December 31, 2006, Lyrtech owed the appellant around $269,000 in royalties resulting from the research contract between the companies.
58. In light of the facts noted in the two preceding paragraphs, Lyrtech owed the appellant an amount of around $45,000, which was never paid.
59. In its tax returns for the years ending December 31, 2006[6] and 2007,[7] the appellant declared no royalty income.
60. Mr. Bellemare, comptroller for Lyrtech and the appellant, made the electronic transfers of funds between the various companies.
61. Mr. Bellemare performed the transfers of funds according to the expenses incurred by the appellant.
62. The appellant could not operate without the advances of funds from Lyrtech.
63. In 2005, when Lyrtech made loans to the appellant, Mr. Bellemare circulated the funds through the subsidiaries 4296621, 496630 and FFL. After that stage, the appellant returned the funds it received from FFL to Lyrtech, which then returned them directly to the appellant. These last two money transfers in fact cancel each other out.
64. Alain Landry, Miguel Caron and Daniel Bellemare are authorized to sign cheques for Lyrtech and the appellant.
65. An external accounting firm consolidated the financial statements of Lyrtech and the appellant on the basis of Canadian Institute of Chartered Accountants (CICA) Guideline 15[8] that applies when an entity controls another entity otherwise than by holding voting rights, namely through contractual rights or other financial interests, as indicated in the introductory paragraph (paragraph 1) of that guideline.
66. According to the external accounting firm, the main reason for consolidating the appellant's activities with Lyrtech's had to do with the advances of funds the appellant received from Lyrtech, either directly or through its subsidiaries and FFL.
4296630, 4296648 and 4296621
67. For the period from June 1, 2005, to December 31, 2007, around $11,850,000 moved between Lyrtech and the appellant, an amount with respect to which adjustment resolutions were passed on March 6, 2008.[9]
68. The corporate books for 4296630, 4296648 and 4296621 were completed during the corporate restructuring, the transactions respecting which are described at paragraphs 10 to 37 of this agreed statement; however, those books have not been updated since then, except as regards the adjustment resolutions mentioned in the preceding paragraph.
69. There are no 4296621 minutes regarding a subscription by Lyrtech for shares of its capital stock totalling around $2,037,481.
70. There is no mention in 4296621’s shareholder register of a subscription totalling around $2,037,481 for shares of its capital stock, but this amount was recognized in 4296621’s financial statements.
71. There is no book or record that refers to the advances to 4296630’s capital stock by 4296621.
72. The companies 4296648, 4296621 and 4296630 did not file their tax returns for the 2006 and 2007 taxation years until July 30, 2009.
73. There is no information about the dividends 4296630 paid on its Class E shares held by FFL.
[10] The organization chart dated June 1, 2005, showing Lyrtech’s and the appellant’s organizational structure, appended to the Amended Reply to the Notice of Appeal, is reproduced in the Appendix hereto.
Analysis
[11] The relevant provisions of the Act for the purposes of the present case are paragraph (a) of the definition of "public corporation" in subsection 89(1), the definition of "Canadian-controlled private corporation" in subsection 125(7), the definition of "non-qualifying corporation" in subsection 127(9), subsection 127(10.1), the definition of "qualifying corporation" in subsection 127.1(2), and subsections 248(25), 251(5), 256(5.1), 256(6.1) and 256(6.2). These provisions read as follows:
Definitions
89. (1) In this subdivision,
. . .
“public corporation” at any particular time means
(a) a corporation that is resident in Canada at the particular time if at that time a class of shares of the capital stock of the corporation is listed on a designated stock exchange in Canada,
125. (7) In this section,
. . .
“Canadian-controlled private corporation” means a private corporation that is a Canadian corporation other than
(a) a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation), by one or more corporations described in paragraph (c), or by any combination of them,
(b) a corporation that would, if each share of the capital stock of a corporation that is owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation described in paragraph (c) were owned by a particular person, be controlled by the particular person,
(c) a corporation a class of the shares of the capital stock of which is listed on a designated stock exchange, or
(d) in applying subsection (1), paragraphs 87(2)(vv) and (ww) (including, for greater certainty, in applying those paragraphs as provided under paragraph 88(1)(e.2)), the definitions “excessive eligible dividend designation”, “general rate income pool” and “low rate income pool” in subsection 89(1) and subsections 89(4) to (6), (8) to (10) and 249(3.1), a corporation that has made an election under subsection 89(11) and that has not revoked the election under subsection 89(12);
127. (9) In this section,
. . .
“non-qualifying corporation” at any time means
(a) a corporation that is, at that time, not a Canadian-controlled private corporation,
(b) a corporation that would be liable to pay tax under Part I.3 for the taxation year of the corporation that includes that time if that Part were read without reference to subsection 181.1(4) and if the amount determined under subsection 181.2(3) in respect of the corporation for the year were determined without reference to amounts described in any of paragraphs 181.2(3)(a), (b), (d) and (f) to the extent that the amounts so described were used to acquire property that would be qualified small-business property if the corporation were not a non-qualifying corporation, or
(c) a corporation that at that time is related for the purposes of section 181.5 to a corporation described in paragraph (b);
127. (10.1) For the purpose of paragraph (e) of the definition “investment tax credit” in subsection (9), where a corporation was throughout a taxation year a Canadian-controlled private corporation, there shall be added in computing the corporation’s investment tax credit at the end of the year the amount that is 15% of the least of
(a) such amount as the corporation claims;
(b) the amount by which the corporation’s SR&ED qualified expenditure pool at the end of the year exceeds the total of all amounts each of which is the super-allowance benefit amount for the year in respect of the corporation in respect of a province; and
(c) the corporation’s expenditure limit for the year.
127.1. (2) In this section,
. . .
“qualifying corporation” for a particular taxation year that ends in a calendar year means
(a) a corporation that is a Canadian-controlled private corporation throughout the particular year (other than a corporation associated with another corporation in the particular year) the taxable income of which for its immediately preceding taxation year (determined before taking into consideration the specified future tax consequences for that preceding year) does not exceed its business limit for that preceding year, or
(b) a corporation that is a Canadian-controlled private corporation throughout the particular year and associated with another corporation in the particular year, where the total of all amounts each of which is the taxable income of the corporation or such an associated corporation for its last taxation year that ended in the preceding calendar year (determined before taking into consideration the specified future tax consequences for that last year) does not exceed the total of all amounts each of which is the business limit of the corporation or such an associated corporation for that last year;
248. (25) For the purposes of this Act,
(a) a person or partnership beneficially interested in a particular trust includes any person or partnership that has any right (whether immediate or future, whether absolute or contingent or whether conditional on or subject to the exercise of any discretion by any person or partnership) as a beneficiary under a trust to receive any of the income or capital of the particular trust either directly from the particular trust or indirectly through one or more trusts or partnerships;
(b) except for the purpose of this paragraph, a particular person or partnership is deemed to be beneficially interested in a particular trust at a particular time where
(i) the particular person or partnership is not beneficially interested in the particular trust at the particular time,
(ii) because of the terms or conditions of the particular trust or any arrangement in respect of the particular trust at the particular time, the particular person or partnership might, because of the exercise of any discretion by any person or partnership, become beneficially interested in the particular trust at the particular time or at a later time, and
(iii) at or before the particular time, either
(A) the particular trust has acquired property, directly or indirectly in any manner whatever, from
(I) the particular person or partnership,
(II) another person with whom the particular person or partnership, or a member of the particular partnership, does not deal at arm’s length,
(III) a person or partnership with whom the other person referred to in subclause (II) does not deal at arm’s length,
(IV) a controlled foreign affiliate of the particular person or of another person with whom the particular person or partnership, or a member of the particular partnership, does not deal at arm’s length, or
(V) a non-resident corporation that would, if the particular partnership were a corporation resident in Canada, be a controlled foreign affiliate of the particular partnership, or
(B) a person or partnership described in any of subclauses (A)(I) to (V) has given a guarantee on behalf of the particular trust or provided any other financial assistance whatever to the particular trust; and
(c) a member of a partnership that is beneficially interested in a trust is deemed to be beneficially interested in the trust.
251. (5) For the purposes of subsection (2) and the definition “Canadian-controlled private corporation” in subsection 125(7),
(a) where a related group is in a position to control a corporation, it shall be deemed to be a related group that controls the corporation whether or not it is part of a larger group by which the corporation is in fact controlled;
(b) where at any time a person has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently,
(i) to, or to acquire, shares of the capital stock of a corporation or to control the voting rights of such shares, the person shall, except where the right is not exercisable at that time because the exercise thereof is contingent on the death, bankruptcy or permanent disability of an individual, be deemed to have the same position in relation to the control of the corporation as if the person owned the shares at that time,
(ii) to cause a corporation to redeem, acquire or cancel any shares of its capital stock owned by other shareholders of the corporation, the person shall, except where the right is not exercisable at that time because the exercise thereof is contingent on the death, bankruptcy or permanent disability of an individual, be deemed to have the same position in relation to the control of the corporation as if the shares were so redeemed, acquired or cancelled by the corporation at that time;
(iii) to, or to acquire or control, voting rights in respect of shares of the capital stock of a corporation, the person is, except where the right is not exercisable at that time because its exercise is contingent on the death, bankruptcy or permanent disability of an individual, deemed to have the same position in relation to the control of the corporation as if the person could exercise the voting rights at that time, or
(iv) to cause the reduction of voting rights in respect of shares, owned by other shareholders, of the capital stock of a corporation, the person is, except where the right is not exercisable at that time because its exercise is contingent on the death, bankruptcy or permanent disability of an individual, deemed to have the same position in relation to the control of the corporation as if the voting rights were so reduced at that time; and
(c) where a person owns shares in two or more corporations, the person shall as shareholder of one of the corporations be deemed to be related to himself, herself or itself as shareholder of each of the other corporations.
256. (5.1) For the purposes of this Act, where the expression “controlled, directly or indirectly in any manner whatever,” is used, a corporation shall be considered to be so controlled by another corporation, person or group of persons (in this subsection referred to as the “controller”) at any time where, at that time, the controller has any direct or indirect influence that, if exercised, would result in control in fact of the corporation, except that, where the corporation and the controller are dealing with each other at arm’s length and the influence is derived from a franchise, licence, lease, distribution, supply or management agreement or other similar agreement or arrangement, the main purpose of which is to govern the relationship between the corporation and the controller regarding the manner in which a business carried on by the corporation is to be conducted, the corporation shall not be considered to be controlled, directly or indirectly in any manner whatever, by the controller by reason only of that agreement or arrangement.
. . .
256. (6.1) For the purposes of this Act and for greater certainty,
(a) where a corporation (in this paragraph referred to as the “subsidiary”) would be controlled by another corporation (in this paragraph referred to as the “parent”) if the parent were not controlled by any person or group of persons, the subsidiary is controlled by
(i) the parent, and
(ii) any person or group of persons by whom the parent is controlled; and
(b) where a corporation (in this paragraph referred to as the “subject corporation”) would be controlled by a group of persons (in this paragraph referred to as the “first-tier group”) if no corporation that is a member of the first-tier group were controlled by any person or group of persons, the subject corporation is controlled by
(i) the first-tier group, and
(ii) any group of one or more persons comprised of, in respect of every member of the first-tier group, either the member, or a person or group of persons by whom the member is controlled.
256. (6.2) In its application to subsection (5.1), subsection (6.1) shall be read as if the references in subsection (6.1) to “controlled” were references to “controlled, directly or indirectly in any manner whatever”.
[12] The first issue to resolve is whether a simultaneous analysis of de jure control and de facto control should be undertaken in the present circumstances. In my opinion, de jure control and de facto control coexist simultaneously for all provisions of the Act, without it being necessary for the Act to make specific reference thereto.
[13] The term "control" is not defined in the Act and the courts have had to rule a number of times on its meaning. The leading decision with regard to control is Buckerfield's Ltd. v. Minister of National Revenue, [1965] 1 Ex. C.R. 299, in which President Jackett stated the principle that the concept of control meant the right of control that results from ownership of such a number of shares as confers upon their holder a majority of votes in the election of the corporation’s board of directors. This, of course, is de jure control.
[14] In light of the case law, Parliament has had to make many clarifications with respect to the concept of control in order to reach specific legislative goals. Thus, since September 13, 1988, when subsection 256(5.1) was introduced, the Act is clear as to which are the provisions that specifically refer to the concept of de jure control as opposed to those that involve, rather, the application of de facto control.
[15] The use of the phrase "controlled, directly or indirectly in any manner whatever" specifically refers to de facto control, which exists when a dominant entity has direct or indirect influence whose exercise would result in control in fact. The phrase "controlled, directly or indirectly in any manner whatever" is used in particular in subsection 125(7) in the definition of "Canadian-controlled private corporation".
[16] According to the Canada Revenue Agency (CRA), when Parliament refers to the control of a corporation and uses the phrase "directly or indirectly in any manner whatever", it is indicating that control includes both de jure control and de facto control (paragraph 19, Interpretation Bulletin IT-64R4 (Consolidated)).
[17] Following the decision by the Federal Court of Appeal in Parthenon Investments Limited v. M.N.R., 97 DTC 5343, which granted control of a corporation to the corporation that had ultimate control rather than to an intermediary corporation, Parliament adopted subsections 256(6.1) and (6.2) to make clear the existence of the concept of simultaneous control that in fact already seemed implicit in the Act.
[18] According to Nicole Prieur, associate professor, HEC Montréal, the adoption of subsections 256(6.1) and (6.2) clearly shows that [translation] "simultaneous control applies naturally to all the relevant provisions of the Income Tax Act without it being necessary for the text to make specific reference thereto" (Nicole Prieur, "L’utilisation législative du concept de contrôle de droit" ["Statutory use of the concept of de jure control"], 2nd quarter 2009, CCH, 2011, page 8).
[19] In Rosario Poirier Inc. v. Canada, [2002] T.C.J. No. 255, counsel for the appellant argued that there could not be simultaneous control of Trab Inc. by Rosario Poirier Inc. and by Luc Poirier, as Luc Poirier had de jure control of 100% of the voting shares in Trab Inc. Judge Archambault did not accept this interpretation and made the following comments:
29 In my view, paragraph 256(1)(a) is clear and precise and leaves no doubt as to its meaning. Once one corporation controls another directly or indirectly in any manner whatever, those two corporations are associated with one another. The fact that another taxpayer had control in law of Trab is irrelevant here since RPI had control in fact under paragraph 256(1)(a) of the Act.
30 Furthermore, under subparagraph 256(1.2)(b)(ii) of the Act, there is nothing to prevent one from concluding that a corporation (RPI) has control in fact of another (Trab) within the meaning of paragraph 256(1)(a) of the Act, even if another person (Luc Poirier) exercises control in law over the latter corporation. Subparagraph 256(1.2)(b)(ii) of the Act clearly applies to paragraph 256(1)(a). In other words, it is not necessary for subsection 256(1.2) of the Act to refer to subsection 256(5.1). Reference to subsection 256(1) is sufficient.
[20] More recently, in Avotus Corporation v. Canada, 2006 TCC 505, which was essentially an analysis of de facto control, Paris J. indicated in obiter dictum that in his opinion one of the shareholders had de jure control of the appellant. As chairman of the board of directors, that shareholder had the right to cast the deciding vote, which right was granted by an amalgamation agreement and the appellant's articles of incorporation. This decision shows that the control analysis can be done simultaneously for de jure control and de facto control, one not excluding the other.
[21] In the case at bar, all the Class A shares of the appellant, that is, the only voting shares, were held by FFL. In such a situation the Supreme Court of Canada stated in M.N.R. v. Consolidated Holding Co., [1974] S.C.R. 419, that, in addition to the corporation's shareholders’ register and articles of incorporation, it was necessary to look at the trust instrument to determine how the voting rights attaching to the shares could be exercised. In that decision, the trustee shareholders were required to vote as a unit. If they were not unanimous, they could not exercise the shares’ voting rights.
[22] For the period at issue, except the period of June 1 to June 17, 2005, the trustees were Miguel Caron and Louis Bélanger. Pursuant to the trust deed, the decisions made by the trustees were to be majority decisions. None of the trustees could therefore have sole de jure control of the appellant. Tardif J. came to the same conclusion in Létourneau v. Canada, 2007 TCC 91, in stating that two of the three trustees of the trust could not have de jure control because decisions regarding the corporation always had to be made unanimously under the terms of the trust deed.
[23] Here, it must be noted that, in addition to the shareholders’ register, the appellant's articles of incorporation and FFL's trust deed, one should also consider the sole shareholder’s statement whereby the trustees of FFL withdrew all powers held by the appellant's directors and assumed them themselves, in accordance with subsection 146(2) of the Canada Business Corporations Act. Subsection 146(2) reads as follows:
146(2) If a person who is the beneficial owner of all the issued shares of a corporation makes a written declaration that restricts in whole or in part the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation, the declaration is deemed to be a unanimous shareholder agreement.
[24] In the recent decision in Price Waterhouse Coopers Inc., Acting in the Capacity of Trustee in Bankruptcy of Bioartificial Gel Technologies (Bagtech) Inc. v. The Queen, 2012 TCC 120, Bédard J. held, at paragraph 85, "that, as a general rule, a clause in a unanimous shareholders' agreement that restricts the ability of the majority shareholders to elect the directors must be taken into account in the determination of the de jure control of a corporation". It should be noted that this decision has been appealed.
[25] In the present case, the effect of the declaration by the appellant's sole shareholder was simply to confirm that de jure control of the appellant truly belonged to the shareholders who were trustees of FFL.
Analysis of de facto control of the appellant
[26] In each situation it is the relevant facts that enable one to determine whether a person has de facto control of a corporation. Certain relevant general factors in this regard are listed in paragraph 23 of Interpretation Bulletin IT-64R4 (Consolidated):
(a) the percentage of ownership of voting shares (when such ownership is not more than 50 per cent) in relation to the holdings of other shareholders;
(b) ownership of a large debt of a corporation which may become payable on demand (unless exempted by subsection 256(3) or (6)) or a substantial investment in retractable preferred shares;
(c) shareholder agreements including the holding of a casting vote;
(d) commercial or contractual relationships of the corporation, e.g., economic dependence on a single supplier or customer;
(e) possession of a unique expertise that is required to operate the business; and
(f) the influence that a family member, who is a shareholder, creditor, supplier, etc., of a corporation, may have over another family member who is a shareholder of the corporation.
. . .
In addition to the general factors described above, the composition of the board of directors and the control of day-to-day management and operation of the business would be considered.
[27] These factors were quoted by Judge Lamarre in Mimetix Pharmaceuticals Inc. v. Canada, [2001] T.C.J. No. 749 and she concluded, at paragraph 52 "that the appellant was in fact controlled by Mimetix, the non-resident shareholder, in 1996, and consequently was not a CCPC in that year, within the meaning of subsections 125(7) and 256(5.1)". That decision was affirmed by the Federal Court of Appeal, 2003 FCA 106.
[28] According to the Supreme Court of Canada decision in Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795, external agreements, such as the trust deed and any agreement that might influence the exercise of voting rights and the composition of the appellant's board of directors, are relevant for determining de facto control. According to FFL's trust deed, all of Lyrtech's directors were automatically eligible to be trustees, but only those who signed the acceptance form with regard to acting as a trustee and who submitted that form to the trust could be elected or appointed as trustees by the existing trustees. Under the sole shareholder declaration, all the powers held by the appellant's directors were withdrawn and transferred to the trustees so that they could exercise them themselves.
[29] As a result, it can be concluded that the appellant was indirectly controlled by the two non-independent directors among the seven members of Lyrtech's board of directors. Miguel Caron was appointed director of Lyrtech on April 22, 2003, and he remained in that position until November 20, 2007. He also held the position of president and chief executive officer. Louis N. Bélanger had be