This decision arose from an attempt to split 3 restaurant businesses into two corporations — to increase access to the small business deduction. That meant making sure the two corporations were not “associated”, such as by the husband’s “de facto” control. The TCC judge (Boyle) had held that the husband’s effective control over operations meant that the corporations were associated, even though the husband might have no right to control appointment of the board of directors. The FCA rejected that broad interpretation of ITA s. 256(5.1)’s control test:
[46] I reject any assertion that the test for control in fact is based on “operational control”. De facto control, like de jure control, is concerned with control over the board of directors and not with control of the day-to-day operations of the corporation or its business. Paragraph 256(1)(b) and subsection 256(5.1) specifically refer to control of a corporation and not to control of the corporation’s business or operations. …
[48] …., in my view, a factor that does not include a legally enforceable right and ability to effect a change to the board of directors or its powers, or to exercise influence over the shareholder or shareholders who have that right and ability, ought not to be considered as having the potential to establish de facto control.
Although the FCA concluded that the TCC judge used a wrong control test, it came to the same conclusion as he. The FCA accepted that the husband and wife had an oral agreement that she would always appoint him as director. That was enough to ensure that the husband had de facto control and wrecked this tax avoidance scheme. (See e.g., paras. 54-55, 57.)
McGillivray Restaurant Ltd. v. Canada 2016 FCA 99 (Ryer, Dawson, DeMontigny JJ.A.)