A public company controlled a trust that controlled an R and D corporation. The scheme was devised to allow the public company to access research and development tax credits. To qualify for the refundable R&D tax credits, the new subsidiary had to be a “Canadian-controlled private corporation”, as defined in ITA s. 125(7). This meant that the public corporation could not be seen to control “directly or indirectly in any manner whatever” the R and D subsidiary.
In concluding that the public corporation did, in fact, control the R&D subsidiary, the Court said:
“[39] … ‘It is not possible to list all the factors which may be useful in determining whether a corporation is subject to de facto control … However, whatever factors are considered, they must show that a person or group of persons has the clear right and ability to change the board of directors of the corporation in question or to influence in a very direct way the shareholders who would otherwise have the ability to elect the board of directors (Silicon Graphics, [2002] FCA 260, para. [67]). In other words, the evidence must show that the decision-making power of the corporation in question in fact lies elsewhere than with those who have de jure control.’”
The Court then, effectively, approved the following paragraph from Archived IT64R4- “Corporations: Association and Control”:
Ҧ 23. Whether a person or group of persons can be said to have de facto control of a corporation, notwithstanding that they do not legally control more than 50 per cent of its voting shares, will depend on each factual situation. The following are some general factors that may be used in determining whether de facto control exists:
(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.
Although the degree of influence in (f) is always a question of fact, close family ties (between parents and children or between spouses) especially lend themselves to the development of significant influences. Generally, these persons must demonstrate their economic independence and autonomy before escaping presumptions of fact which apply to related persons. However, with respect to siblings, unless the facts indicate otherwise, generally one sibling would not be considered to have influence over another.
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.”
See Lyrtech RD inc. c. Canada, 2014 CAF 267 (FCA, Scott, Nadon, Boivin)