Date: 20040120
Docket: A-80-03
Citation: 2004 FCA 23
CORAM: RICHARD C.J.
LÉTOURNEAU J.A.
NOËL J.A.
IN RE THE INCOME TAX ACT
BETWEEN:
9044-2807 QUÉBEC INC.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Hearing held at Québec, Quebec, on January 20, 2004.
Judgment rendered at Québec, Quebec, on January 20, 2004.
REASONS FOR JUDGMENT: NOËL J.A.
CONCURRED IN BY: RICHARD C.J.
LÉTOURNEAU J.A.
Date: 20040120
Docket: A-80-03
Citation: 2004 FCA 23
CORAM: RICHARD C.J.
LÉTOURNEAU J.A.
NOËL J.A.
IN RE THE INCOME TAX ACT
BETWEEN:
9044-2807 QUÉBEC INC.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1] This is one of two appeals from a decision by Judge Archambault on January 16, 2003 (2003 D.T.C. 817; [2003] 3 C.T.C. 2882). Both appeals (the other being listed as case A-81-03) were consolidated on May 2, 2003, and this appeal designated the [TRANSLATION] "principal appeal".
[2] The issue is whether 9044-2807 Québec inc. (the appellant or ML1) and the appellant in the related case Transport M.L. Couture inc. (ML2) were associated with Transport Couture et Fils inc. (Transport Couture) and 1864-5333 Québec inc. (1864 Québec) within the meaning of subsection 256(1) of the Income Tax Act when read with subsection 256(5.1). If so, the Tax Court judge was right to deny the appellant the full amount of the small business deduction mentioned in subsection 125(1) of the Act, and the parties agree that the appeal should be dismissed.
Facts
[3] The trial judge's reasons set out in detail the development of the trucking business founded by Louis-Marie Couture in the 1950s, which is the subject of the case at bar. Since the parties did not dispute the account of the facts given by the trial judge at paragraphs 2 to 14 of his reasons, I rely on that account and feel no need to set it out again.
[4] I need only note, to explain the background to the case, that in the relevant period (the taxation years ending August 31, 1995, August 31, 1996 and December 9, 1996, in the case of ML1 and August 31, 1997, in the case of ML2), Transport Couture, ML1 and ML2 were under the control of separate persons according to the list of the holders of their respective capital stock.
[5] Thus, Transport Couture's shares were held by a holding company (1864 Québec) in which Louis-Marie Couture's five sons each held 20% of the capital stock.
[6] Louis-Marie Couture was the sole shareholder in ML1. Ninety per cent of ML2's shares were held by his wife, Fleurette Couture. The other 10% was held by Claude Rodrigue, Louis-Marie Couture's former accountant, who became the internal comptroller of Transport Couture and secretary of ML1 in 1995 and who was still occupying those positions during the period at issue.
[7] At the same time, ML1 and ML2 had no separate employees or premises. Transport Couture was their sole client and it was that company which provided the management services and obtained for ML1 and ML2 the drivers who carried out their transport operations. Fleurette Couture and Louis-Marie Couture had little or no involvement in their respective companies. It was Transport Couture which ensured that things worked smoothly.
[8] It was on the basis of these facts that the trial judge concluded that ML1 and ML2 were under the controlling influence of Transport Couture and subject to its de facto control.
Statutory provisions
[9] Section 125 allows a Canadian-controlled private corporation to benefit from a lower tax rate on its income from an active business carried on in Canada up to the amount of a "business limit" ($200,000), unless the corporation is associated, in which case the limit must be shared by the associated corporations.
[10] Part XVII of the Act (Interpretation) provides rules by which one corporation is regarded as associated with another for the purposes of the Act. The provisions of Part XVII which are relevant to solution of the case at bar are the following:
|
256. (1) For the purposes of this Act, one corporation is associated with another in a taxation year if, at any time in the year, |
256. (1) Pour l'application de la présente loi, deux sociétés sont associées l'une à l'autre au cours d'une année d'imposition si, à un moment donné de l'année : |
|
(a) one of the corporations controlled, directly or indirectly in any manner whatever, the other; |
a) l'une contrôle l'autre, directement ou indirectement, de quelque manière que ce soit; |
|
(b) both of the corporations were controlled, directly or indirectly in any manner whatever, by the same person or group of persons; |
b) la même personne ou le même groupe de personnes contrôle les deux sociétés, directement ou indirectement, de quelque manière que ce soit; |
|
(c)... |
c) [...]
|
|
256 (1.2) For the purposes of this subsection and subsections 256(1), 256(1.1) and 256(1.3) to 256(5), |
256 (1.2) Pour l'application du présent paragraphe et des paragraphes (1), (1.1) et (1.3) à (5) : |
|
(a) a group of persons in respect of a corporation means any two or more persons each of whom owns shares of the capital stock of the corporation; |
a) un groupe de personnes s'entend de plusieurs personnes dont chacune est propriétaire d'actions du capital-actions de la même société; |
|
(b) for greater certainty, |
b) il est entendu : |
|
(i) a corporation that is controlled by one or more members of a particular group of persons in respect of that corporation shall be considered to be controlled by that group of persons, and |
(i) d'une part, qu'une société qui est contrôlée par un ou plusieurs membres d'un groupe donné de personnes est réputée être contrôlée par ce groupe de personnes, |
|
(ii) a corporation may be controlled by a person or a particular group of persons notwithstanding that the corporation is also controlled or deemed to be controlled by another person or group of persons; |
(ii) d'autre part, qu'une personne ou un groupe donné de personnes peut contrôler une société même si une autre personne ou un autre groupe de personnes contrôle aussi ou est réputé contrôler aussi la société; |
|
(c) ... |
c) [...]
|
|
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 (5.1) Pour l'application de la présente loi, lorsque l'expression "contrôlée, directement ou indirectement, de quelque manière que ce soit," est utilisée, une société est considérée comme ainsi contrôlée par une autre société, une personne ou un groupe de personnes -- appelé "entité dominante" au présent paragraphe -- à un moment donné si, à ce moment, l'entité dominante a une influence directe ou indirecte dont l'exercice entraînerait le contrôle de fait de la société. Toutefois, si cette influence découle d'un contrat de concession, d'une licence, d'un bail, d'un contrat de commercialisation, d'approvisionnement ou de gestion ou d'une convention semblable -- la société et l'entité dominante n'ayant entre elles aucun lien de dépendance -- dont l'objet principal consiste à déterminer les liens qui unissent la société et l'entité dominante en ce qui concerne la façon de mener une entreprise exploitée par la société, celle-ci n'est pas considérée comme contrôlée, directement ou indirectement, de quelque manière que ce soit, par l'entité dominante du seul fait qu'une telle convention existe. |
Decision a quo
[11] The trial judge came to the conclusion that Transport Couture exercised de facto control over ML1 and ML2 during the relevant period and that they were therefore associated within the meaning of section 256. Accordingly, ML1, ML2 and Transport Couture had to share the $200,000 "business limit" mentioned in section 125(2) of the Act.
[12] In the course of his reasons the judge indicated that before 1988, the Act did not define what control of a corporation was. In the absence of any legislative guidance, the courts have concluded over the years that only de jure control is decisive (that is, the power to elect a majority of the directors of a corporation).
[13] In this regard, the trial judge cited the classic decision on the matter (Buckerfield's Limited et al. v. M.N.R., 64 D.T.C. 5301, at 5303:
Many approaches might conceivably be adopted in applying the word 'control' in a statute such as the Income Tax Act to a corporation. It might, for example, refer to control by 'management', where management and the Board of Directors are separate, or it might refer to control by the Board of Directors. The kind of control exercised by management officials or the Board of Directors is, however, clearly not intended by section 39 when it contemplates control of one corporation by another as well as control of a corporation by individuals (see subsection (6) of section 39). The word 'control' might conceivably refer to de facto control by one or more shareholders whether or not they hold a majority of shares. I am of the view, however, that, in section 39 of the Income Tax Act, the word 'controlled' contemplates the right of control that rests in ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the Board of Directors. See British American Tobacco Co. v. I.R.C., [1943] 1 A. E. R. 13, where Viscount Simon L. C., at page 15, says:
The owners of the majority of the voting power in a company are the persons who are in effective control of its affairs and fortunes.
[14] He explained that subsection 256(5.1) was adopted in 1988 to incorporate the concept of de facto control in the Act, together with the concept of de jure control. To avoid any conflict between these two concepts, the Act now provides in subparagraph 256(1.2)(b)(ii) that a corporation may be controlled by a person notwithstanding that the corporation is also controlled or deemed to be controlled by another person. Accordingly, Transport Couture could exercise de facto control over ML1 and ML2 although the de jure control lay elsewhere.
[15] After a lengthy analysis of the facts surrounding the operations of the corporations in question, and relying principally on their economic dependence on Transport Couture, the operational control exercised over each of them by Transport Couture and the family connection between the shareholders of the three corporations the trial judge concluded there was such control by Transport Couture over ML1 and ML2 (reasons, paragraphs 34 to 38).
Alleged errors in judgment a quo
[16] In support of its appeal, the appellant challenged the trial judge's conclusion regarding the operational control allegedly exercised by Transport Couture and the economic interrelationship between that corporation and ML2. On the evidence, ML1 and ML2 could issue subcontracts at any time or act as "brokers" for other businesses.
[17] Additionally, in the appellant's submission, there is nothing to show that the five Couture brothers benefited economically from the fact that ML1 and ML2 were entitled to the full small business deduction, and conversely nothing indicated that Louis-Marie Couture in the case of ML1, or Fleurette Hamel Couture and Claude Rodrigue in the case of ML2, benefited economically from the fact that Transport Couture and 1864 Québec were entitled to that full deduction. Thus, the appellant submitted, the very spirit of the application of subsection 256(5.1) was not met.
[18] Finally, the appellant submitted that the trial judge made an error of law in the interpretation of subparagraph 256(1.2)(b)(ii), which provides that "a corporation may be controlled by a person or a particular group of persons notwithstanding that the corporation is also controlled or deemed to be controlled by another person or group of persons".
[19] In the appellant's submission, the wording of subsection 256(1.2) clearly limits its application to subsections (1), (1.1) and (1.3) to (5). If Parliament had intended a broader application covering subsection (5.1), it would have used wording similar to subsections 256(6.1) and 256(6.2), which deal with simultaneous control. Thus, according to the appellant, in the case at bar de jure control and de facto control cannot coexist.
Analysis and decision
[20] In my view, the trial judge gave a complete answer to this last argument at paragraph 40 of his reasons:
As for the alternative argument raised by counsel for the appellants, namely, that there could be no control in fact of ML1 and ML2 where there was control de jure of these corporations, I will note here, as I concluded in the Rosario Poirier inc. decision [17] (supra), that subparagraph 256(1.2)(b)(ii) of the Act expressly provides that one person may control a corporation even if another controls it also. The fact that subsection 256(1.2) does not refer to subsection 256(5.1) of the Act does not preclude the simultaneous existence of de jure control by one person and de facto control by another. These two concepts are found in subsection 256(1) of the Act. In other words, subsection 256(1.2) of the Act does not have to refer to subsection 256(5.1). The reference to subsection 256(1) suffices.
[21] Subsection 256(1), referred to by subsection 256(1.2), is a provision of general application the effect of which is to associate one corporation with another wherever one controls the other, and subparagraph 256(1.2)(b)(ii) states that for this purpose the existence of one of these two forms of control does not exclude the other. The fact that subsection 256(1.2) makes no reference to subsection 256(5.1) does not in any way impair the effect sought.
[22] As to the argument that the application of the concept of de facto control is contrary to the spirit of subsection 256(5.1), on the ground that the claiming of the full deduction by one of the corporations in question does not economically benefit the shareholders of the other, I note as did the trial judge that it is members of the same family who were shareholders of ML1, ML2 and Transport Couture. In any case, nothing in subsection 256(5.1) requires that there be such a benefit.
[23] This leads us to the question of whether the trial judge could conclude that there was control of ML1 and ML2 by Transport Couture within the meaning of subsection 256(5.1). This is essentially a question of fact, and the Court clearly should not intervene unless there was palpable and overriding error (Housen v. Nikolaisen, [2002] 2 S.C.R. 235).
[24] It is not possible to list all the factors which may be useful in determining whether a corporation is subject to de facto control (Duha Printers, [1998] 1 S.C.R. 795, para. [38]). 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.
[25] The trial judge relied primarily on the operational control exercised by Transport Couture, the economic dependence on it of ML1 and ML2 and the family relations between the shareholders as a basis for concluding that Transport Couture in fact controlled ML1 and ML2. The appellant did not challenge the relevance of the factors considered by the trial judge. However, it argued that the evidence did not allow the trial judge to conclude that operational control of ML1 and ML2 was in the hands of Transport Couture or that ML1 and ML2 were economically dependent on Transport Couture.
[26] In my view, the evidence amply supports the trial judge's decision. As he indicated at paragraph 36 of his reasons, if Transport Couture had decided not to renew its management contract and no longer to retain the services of ML1 and ML2, neither Louis-Marie Couture in the case of ML1 nor his wife in the case of ML2 would have been in a position to pursue the activities of those corporations.
[27] The appellant challenged the trial judge's assertion that Louis-Marie Couture was suffering from the unfortunate effects of Alzheimer's disease during the relevant period, and had ceased to control the operations of ML1. However, the evidence was that Mr. Couture never went to the office and that his interest was limited to [TRANSLATION] "looking after his trucks".
[28] On the question of operational control, the evidence showed that it was the Couture brothers and Claude Rodrigue, manager of Transport Couture, who took all the important decisions and who negotiated truck purchases, loans and financing. Louis-Marie Couture's involvement was nil and that of his wife was limited to one information session a month.
[29] The appellant stated that it and ML2 could have stayed in business even if they had cut all ties to Transport Couture, citing the fact that the market was expanding. However, it did not show how the opposite conclusion drawn by the trial judge was unreasonable or invalid.
[30] On the last factor considered by the trial judge (the family relationship between shareholders), the following passage from the reasons indicates the relevance and force of that factor in the context of the case at bar (paragraph 38):
. . . it is reasonable to believe that Mr. and Ms. Couture counted on their children to take sufficient care of their investments in these two companies. Given their situation as retired persons and Mr. Couture's health, it is reasonable to conclude that they were under the influence of their five sons, who together held all of the shares of Transport Couture . . .
[31] Ultimately, the evidence was that, motivated by the relationship of trust which they had with their five sons, Louis-Marie Couture and his wife relied on Transport Couture and relegated to it all the decision-making powers they held as shareholders of ML1 and ML2.
[32] In my opinion, therefore, the trial judge properly concluded that Transport Couture was in a position to exercise de facto control over ML1 and ML2 during the relevant period and that ML1, ML2, Transport Couture and 1864 Québec inc. were therefore associated companies within the meaning of subsection 256(1).
[33] For these reasons, I would dismiss the appeal with costs and in accordance with the order of May 2, 2003 I would ask that a copy of these reasons be entered in case A-81-03 to stand as the reasons in that case. Only one set of costs will be awarded.
"Marc Noël"
J.A.
"I concur.
Richard C.J."
"I concur.
Létourneau J.A."
Certified true translation
Suzanne M. Gauthier, C Tr, LLL
FEDERAL COURT OF APPEAL
SOLICITORS OF RECORD
DOCKET: A-80-03
STYLE OF CAUSE: 9044-2807 QUÉBEC INC. v.
HER MAJESTY THE QUEEN
PLACE OF HEARING: QUÉBEC, QUEBEC
DATE OF HEARING: JANUARY 20, 2004
CORAM: RICHARD C.J.
LÉTOURNEAU J.A.
NOËL J.A.
REASONS FOR JUDGMENT OF THE COURT: NOËL J.A.
DATE OF REASONS: JANUARY 20, 2004
APPEARANCES:
Marc Bouchard FOR THE APPELLANT
Valérie Tardif FOR THE RESPONDENT
SOLICITORS OF RECORD:
Pouliot, L'Écuyer FOR THE APPELLANT
Sainte-Foy, Quebec
Department of Justice Canada FOR THE RESPONDENT
Montréal, Quebec