Foreign Owned Corp Qualifies as CCPC for SR&ED

Bagtech Case

(Not the official translation – translated by GOOGLE™)

Reference: 2012 CCI 120

Date: 20120412

File: 2009-3734 (IT) G

BETWEEN:

 

PRICE WATERHOUSE COOPERS INC.

His capacity as trustee ACTING IN BANKRUPTCY

Bioartificial OF GEL TECHNOLOGIES ( BAGTECH ) INC.,

appellant

and

HER MAJESTY THE QUEEN

respondent.

 

REASONS FOR JUDGMENT

Bédard J.

 

[ 1 ]               During the tax years ended December 31, 2004 and 2005 (the “relevant year”), Bioartificial Gel Technologies company (BAGTECH ) Inc.. (”  Bagtech  “) has incurred ongoing scientific research and experimental development (” SR & ED “) and capital SR & ED. To determine the tax credit for investment (“ITC”) of Bagtech for SR & ED for the relevant years, the Minister of National Revenue (the “Minister”) has concluded that Bagtech was not a “private corporation Canadian control  “(” CCPC “) within the meaning of subsection 125 (7) of the Tax Act on income (the ”  ITA  “ ). Accordingly, the Minister concluded thatBagtech during the relevant years, was a “non-qualifying company” as defined in subsection 127 (9) of the ITA and she had no right to “tax credit refundable investment “under subsection 127.1 (1) of the ITA .

 

[ 2 ]               The only question is: what is Bagtech was a CCPC, according to paragraph 125 (7) of the ITA ? This definition reads as follows:

 

125 (7) The following definitions apply in this section.

 

[…]

 

“Canadian-controlled private corporation” means a corporation that is a private Canadian company, with the exception of the following companies:

 

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 venture capital prescribed) by one or more companies referred to in paragraph c ) or a combination of persons or companies;

 

b ) each share of the capital stock of a corporation owned by a non-resident person, a public corporation (other than a venture capital prescribed) or company referred to in paragraph c ) belonged to one person, the company would be controlled by the latter;

 

c ) the company has a class of shares of the capital stock is listed on a designated stock exchange;

 

d ) for the purposes of subsection (1), paragraphs 87 (2)vv ) and ww ) (considering amendments to these paragraphs by virtue of paragraph 88 (1)e.2 )), definitions of “eligible dividend”, “eligible reduced rate” and “excessive eligible dividend designation” in subsection 89 (1) and subsections 89 (4) to (6 ) and (8) to (10) and 249 (3.1), the company that has made an election under subsection 89 (11) and has not revoked under subsection 89 (12).

 

 

[ 3 ]               The appellant essentially argues that “person” does not control Bagtech only because it holds more than 50% of the shares with voting rights, since it is bound by the unanimous shareholder agreement (the “AUC”) to prevent the election of a majority of the directors Bagtech (see Appendix 1). In addition, the respondent argues that the application of paragraph b) of the definition of “Canadian-controlled private corporation” in subsection 125 (7) of the ITA , we should not consider shareholder agreements or unanimous shareholder agreement. In the event that the Court concluded that it must take into account the existence of a unanimous shareholder agreement to determine whether the “control” referred to in paragraph b) of the definition of “private corporation Canadian control “is exercised by the” person “, the respondent argues that the” person “still had control de jure for the relevant years. Indeed, the respondent argues that if we take into account provisions in the nature of a unanimous shareholder agreement, the control law has not been removed from the non-resident shareholders who together are the majority shareholders because:

 

a) the terms with the nature of a unanimous shareholder agreement have not had the effect of removing the control de jure non-resident shareholders, who are the majority;

 

b) the majority of the clauses of the unanimous shareholder agreement provides that it will be implemented by way of an ordinary resolution. Non-residents, therefore, control the decisions regarding these clauses.

 

[ 4 ]               The parties agreed to an “agreement on the facts and documents issue” (Exhibit A-1) which I reproduce here in full section on the facts:

 

AGREEMENT ON THE FACTS ISSUE AND FILINGS OF CONSENT

 

 

1.         RELEVANT FACTS ADMITTED BY THE PARTIES

 

1.1               The company Bioartificial Gel Technologies ( BAGTECH ) inc. (”  Bagtech  “) was incorporated on March 8, 1996, under Canadian law on joint stock companies (”  CBCA  “).

1.2               It is a taxable Canadian corporation as defined within the meaning of paragraph 89 (1) of the Income Tax Act (Canada) (”  ITA  “).

1.3               Following the acquisition of patented technologies, Bagtech specializes in medical technology tips, including the development of several ranges of wet dressings for the accelerated healing of various types of wounds.

4.1               Since the beginning of its operations and throughout the tax years 2004 and 2005 ending December 31 each (“tax years 2004 and 2005”), Bagtech conducted scientific research and experimental development ( “SR & ED”).

1.5               During the 2004 tax year, Bagtech current expenditures incurred for SR & ED for an amount of $ 1,017,722 and capital expenditure of SR & ED in the amount of $ 431,517.

1.6               During the 2005 tax year, Bagtech current expenditures incurred for SR & ED for an amount of $ 1,461,189 and capital expenditure of SR & ED in the amount of $ 69,641.

1.7               The authorized share capital of Bagtech consists of Class A, B, C, D and E.

1.8               Only Class A shares are voting and participating.

1.9               The Class B and C are non-cumulative to a maximum rate of 8% and are redeemable at the amount of stated capital.

10.1          The Class D and E are non-cumulative to a maximum rate of 8% and are redeemable at the stated amount plus a premium equal to the difference between the reported amount and the fair market value of property received by the company during the issuance of these shares.

1.11          Throughout the tax years 2004 and 2005, only one Class D was outstanding and was issued at incorporation in favor of Mr. Guy Fortier (”  Fortier  “), a Canadian resident, in consideration of certain technologies.

12.1          All other actions were issued and outstanding Class A

1.13          During the first round of financing completed in 1998, the Regional Solidarity Fund of the island of Montreal (Quebec, Canada) (” FRSIM  “) and the Fund for Worker Solidarity (FTQ) (Quebec, Canada) (”  FSTQ  “) participated in the subscription of shares of Class A Bagtech .

1.14          Other investors were a group represented by the founders of Bagtech , and only investors were residents of Canada shareholdersBagtech .

1.15          In 1999, two angels European subscribed to the capital stock of Bagtech , and in 2000, two other venture capital companies have subscribed to the share capital: SGF Santé Inc.. (Quebec, Canada) (”  SGF  “) and Finedix BV (Amsterdam, Netherlands) (”  Finedix  “).

1.16          In 2002, venture capital companies have subscribed to the following capital stock Bagtech  : Medco SA (Geneva, Switzerland) (” Medco  “), Schroder & Co. Bank AG (Zurich, Switzerland) (”  Schroder  “) and Gutrafin Limited (London, England) (”  Gutrafin  “), making sure that 45.31% of Class A shares outstanding were then owned by non-residents of Canada.

1.17          In 2003, during a round of additional funding, several shareholders have acquired new shares Bagtech Class A, namely venture capital company Auriga Ventures II (Paris, France) (”  Auriga  “), and two business angels , namely Mr. Yuri Popowski (Geneva, Switzerland) (”  Popowski  “) and Onami Investments inc. (Quebec, Canada) (”  Onami  “).

1.18          On 11 September 2003, the shareholders of Bagtech signed a document entitled “unanimous shareholder agreement” (”  AUC  “) including in particular the following clauses:

“RULES OF INTERNAL REGIE

Article 3.1 Subject to the following provisions during the term of this Agreement, the Shareholders shall take the necessary measures and to use the voting rights attached to the shares they hold and maintain Elect on the Board of administration seven (7) Directors.

Article 3.2 of the date hereof, the Shareholders agree that the Board of Directors shall be composed of representatives appointed by the Shareholders listed below:

Group A 2 directors (including Marie-Pierre Faure)

Group B 3 directors (including one appointed jointly by FSTQ and FRSIM, one designated by SGF and another by Auriga)

C 2 directors (including Mr. André Lamotte) ”

1.19          Under the definition in section 1.21 of the AUC, Group A consists of the following shareholders: Marie-Pierre Faure (”  Faure  “) Fortier, Richard J. Deckelbaum (”  Deckelbaum  “), Jean Emmanuel Raphael Guetta (”  Guetta  “), Amaze through its managing director, Richard Emile Azera (”  Amaze  “), Jean-François Brisson (”  Brisson  “) Ms. Marie-Claude Lévesque (”  Levesque  “), Marielle Robert (” Robert  “), Popowski and Onami.

1.20          Under the definition in section 1.22 of the AUC, Group B consists of the following shareholders: FMS FSTQ FRSIM, Finedix and Auriga in which SGF appoints, and FSTQ and FRSIM jointly designate in a second.

1.21          Under the definition in section 1.22 of the AUC, Group C consists of the following shareholders: Medco, Gutrafin and Schroder, which appoints two directors, Mr. Collin Bier who will act as Chairman of the Board administration.

1.22          On 31 December 2004, more than 60% of the Class A Shares were held by non-residents of Canada.

1.23          In the period from 1 st January to 21 July 2005, the shareholders of Bagtech was the same as at 31 December 2004.

1.24          On 22 July 2005, other investors have subscribed to the capital stock of Bagtech or HSBC (Switzerland), Auxitec (France), Ayman (Switzerland) and Bagadine (France).

1.25          Following the purchase of shares by investors in the share capital of Bagtech , clauses 3.1 and 3.2 of the AUC were modified by amendment to the AUC of 22 July 2005 to indicate that the number of directors of Bagtech increased from 7 to 8, and the number of directors appointed by the Group C increase from 2 to 3, which one of them would be appointed by Bagadine.

1.26          On 31 December 2005, more than 70% of the Class A Shares were held by non-residents of Canada.

1.27          During the production of the original declaration of Bagtech for its taxation years 2004 and 2005, the Company was not named as a “Canadian-controlled private corporation” (“CCPC”).

28.1          On or about 1 st June 2007, under subsection 127.1 (1) of the ITA , a prescribed form was amended product for tax years 2004 and 2005, so that the status Bagtech is registered as a CCPC and “eligible corporation,” as tax credits refundable investment applicable rate of 35% is granted from 20% originally claimed, and a refund of a portion of this loan will be paid.

1.29          On 21 October 2008, the Company Bagtech made an assignment of his property and Price Waterhouse Coopers Inc.. was appointed as trustee in bankruptcy of Bagtech .

1.30          On 3 November 2008, the CRA was part of his decision to the effect that the company Bagtech was not, she says, a Canadian-controlled private corporation in the taxation years 2004 and 2005.

1.31          On 9 April 2009, the CRA issued a “notice of determination of loss for tax years 2004 and 2005.

 

Analysis and Conclusion

 

[ 5 ]               Paragraph b) of the definition of CCPC in subsection 125 (7) of the Income Tax Act , a corporation is not a CCPC in case, if each share of the company owned by a non- -resident or to a public company owned by a “person”, the company would be controlled by the latter.

 

[ 6 ]               As stated in the stop Sedona Networks Corp.. c. The Queen , 2007 CAF 169 (CanLII) , 2007 FCA 169, the analysis under paragraph b) shall be performed in two steps. On the one hand, we must determine the non-resident persons and public corporations, and assume that their shares are owned by a “person”. On the other hand, once this allocation made, it must determine whether the company would be controlled by this “person”. In this case, the evidence showed that on 31 December 2004, 62.52% of Class A shares outstanding Bagtech (the Class A shares during the year being the only shares with votingBagtech ) were held by non-residents of Canada. The evidence also revealed that 31 December 2005, 70.42% of Class A shares outstanding Bagtech (the Class A shares during the year being the only shares with voting Bagtech ) were held by non- residents of Canada.

 

[ 7 ]               The question to be answered now is: although the “person” holds 62.52% and 70.42% of the outstanding shares of Class A Bagtech December 31, 2004 and December 31, 2005 respectively, is that the “person” controlled so far Bagtech during these years? To answer this question, we must determine the meaning of “control” for purposes of the ITA .

 

[ 8 ]               The courts have ruled repeatedly control, since there is no definition in the ITA .

 

[ 9 ]               The decision making authority for control is Buckerfield’s Ltd. c. Minister of National Revenue , [1965] 1 Ex. 299, in which the President Jackett wrote:

 

[TRANSLATION] It could probably adopt many methods for the definition of “control” in a text such as the Law of Income Tax . It could for example be the control exercised by the “leaders”, when the leaders and the Board of Directors are separate, or it could be the control exercised by the Board of Directors. […] The word “control” could perhaps be understood of de facto control by one or more shareholders or not they hold the majority of shares. I believe, however, that in Article 39 of the Tax Act on income , the term “controlled” refers to the right of control that place the holding of a number of shares as gives voice to the majority of them in the election of the Board . [Emphasis added.] See British American Tobacco Co. v. IRC , [1943] 1 All ER 13, where the Lord Chancellor, Viscount Simon said, at p. 15:

 

The holders of a majority in a society are those who have actual control of its business and its destiny.

 

[ 10 ]          This extract from the Exchequer Court was subsequently cited with approval several times by the Supreme Court of Canada (“SCC”), in cases such as the Minister of National Revenue v.. Dworkin Furs (Pembroke) Ltd.. ,1967 CanLII 112 (SCC) , [1967] SCR 223 , Vina-Rug (Canada) Ltd. c. Minister of National Revenue , 1968 CanLII 66 (SCC) , [1968] SCR 193 , R. c. Imperial General Properties Ltd. ., 1985 CanLII 7 (SCC) , [1985] 2 SCR 288, and Duha Printers (Western) Ltd.. c. The Queen , 1998 CanLII 827 (SCC) , [1998] 1 SCR 795.

 

[ 11 ]          It is clear from this case for the purposes of the ITA , the “control” of a company means control de jure control and notde facto . All in all, the decision Buckerfield’s teaches us that the test is whether the majority shareholder exercises “effective control” over the “affairs and fortunes” of society, who control the spring “is to hold a number of shares as it provides the majority of votes in the election of the holder into board. ”

 

[ 12 ]          An important point was later made to comments made by President Jackett P. in Buckerfield’s . Indeed, the CSC said in the judgment Imperial General Properties Ltd. ., supra, at para. 11, to determine that control exists de jure , “a court is not restricted to a highly technical and narrow interpretation of rights under the law, are linked to shares of a corporation.” In fact, the highest court of the country includes most of what Justice Thurlow Donald Applicators Ltd.. c. Minister of National Revenue , [1969] 2 Ex. 43, affirmed [1971] SCR v., And states that “the court is not bound not to discuss these rights only in the context of their immediate application at a meeting of the company” and that, contrary to “these rights must be assessed in their impact” long term “” ( Imperial General Properties Ltd., supra, at para. 11).

 

[ 13 ]          However, although the directors generally have under the law governing the company, the explicit right to manage the daily operations of the company, the shareholder indirectly exerts this control because of its right to elect the Board of Directors. Thus, it is no doubt the majority shareholder, and not the administrators themselves, exercising control “over time” on the company: seeBritish American Tobacco Co. c. IRC, [1943] 1 All ER 13 at p. 15.

 

[ 14 ]          Finally, the last important decision regarding the control rule de jure established by Buckerfield’s is certainly the SCC decision in Duha Printers .

 

[ 15 ]          In that case, the fact that the relevant criterion was that the control de jure was not really in dispute between the parties.rather The dispute concerned the factors that may be taken into account in determining whether Control exists de jure .

 

[ 16 ]          Iacobucci J. began his analysis by repeating that “the application of a formal criterion as recited in Buckerfield’s , which does not take sufficient account of the rationale of this criterion can lead to artificial results unfortunately ” (Duha Printers, supra, at para. 37). In this regard, recall that the central objective criterion Buckerfield’s is to determine where lies the real control of the company.

 

[ 17 ]          The CSC then comes to the conclusion that, in general, “external agreements should not be considered as constituting factors influencing the control de jure  “in s. 51 and 55.

 

[ 18 ]          This reasoning CCS finds its justification in the principle that control de jure control remains conferred by the majority in a society. Although CSC has sometimes been willing to consider factors other than the register of shareholders of a corporation, the discussion is still limited to the constitution and not to external agreements. The only exception to this rule is in cases such asMinister of National Revenue v.. Consolidated Holding Co. , 1971 CanLII 191 (SCC) , [1974] SCR 419, where the very capacity to act was limited by external documents, but so far, this exception is apparent that when the shares were held by trustees: ss. 48 to 50.

 

[ 19 ]          Furthermore, Iacobucci some emphasis to the fact that “taxpayers rely heavily on the certainty and predictability that can provide the Tax Act on income  . ” It is therefore highly desirable, in the opinion of the CSC, “used as a simple criterion which has been applied since Buckerfield’s ”  : by. 52. “The concept of de facto was rejected because it requires checking that exercises control in fact , this can lead to a multitude of clues that may exist in addition to these sources “by. 58.

 

[ 20 ]          Therefore, Iacobucci J. precludes examining external agreements in the analysis of control de jure and states:

 

[…] Agreements among shareholders, agreements relating to voting rights, and so on, are generally agreements that the courts do not look to see who has the control. In my opinion, this is due to the fact they create contractual obligations and not obligations or taking a legal constitution. (para. 59)

 

[ 21 ]          Subsequently, Iacobucci J. examines the question of whether a unanimous shareholder agreement should be regarded as contractual in nature or as having a constitution.

 

[ 22 ]          The CSC decide in determining that a unanimous shareholder agreement is a “hybrid creation of corporate law, which is partly contractual and partly due to a constitution” (para. 66). That being said, the SCC is careful to clarify later that the appearance of the unanimous shareholder agreement that takes a constitution is even more powerful than its contractual nature: by. 67.

 

[ 23 ]          Accordingly, if an agreement can be considered a unanimous shareholder agreement (“AUC”) within the meaning of theCanadian Human Rights Act Corporations (the “CBCA”), it must be considered as acts of the corporation in order to settle the question of control de jure . The legal reasoning the principle that a unanimous shareholder agreement can play a vital role in the analysis of control de jure is well summarized by the few lines written by Iacobucci J.:

 

As I said, the main aim of criterion Buckerfield’s is to determine where lies the real control of the company. In my view, it is impossible to assert that a shareholder has acquired this control simply because it is able to elect a majority of the board, while the board has perhaps not even really the power to make one important decision on behalf of the company. Control de jure of a company by a shareholder depends on a very real way, the control exercised by a majority of directors whose election is controlled by such shareholder. When a constitution as a USA provides the legal authority to manage the company is vested in a person other than the Board, control de jure true necessarily changes hands and the court must recognize this reality. (para. 70)

 

[ 24 ]          In other words, the register of shareholders should be considered taking into account the relevant legal provisions governing corporations (in this case the CBCA) and the acts of the company (which the unanimous shareholder agreement must be assimilated). External agreements, however, have no place in this analysis, since they are only relevant in relation to control de facto.

 

[ 25 ]          Finally, the SCC concluded by warning that “the mere fact that the shareholders of a company have reached an AUC did not automatically divest control of de jure a shareholder who holds the majority of vote for the election of the Board. ” It is important to examine to what extent the provisions of a unanimous shareholder agreement restrict or withdraw the powers of the directors: s. 81. “It is possible to determine whether the control de jure was lost as a result of AUC AUC wondering if this leaves the majority shareholder any means to exercise effective control over the affairs and fortunes of the company, a manner analogous or equivalent in power to elect a majority of the Board of Directors (as provided by the criterion of Buckerfield’s ) “(para. 82).

 

[ 26 ]          Paragraph 85 of the judgment Duha Printers sums up the state of the law with respect to the notion of “control”. This paragraph reads as follows:

 

[85] It may be useful at this stage to summarize the principles of company law and tax law considered in this appeal, given their importance. These principles are:

 

(1) Subsection 111 (5) of the Tax Act on income control is de jure , and not the control de facto .

 

(2) The general test for control de jure was enunciated in Buckerfield’s , cited above: it is whether the majority shareholder enjoys “effective control” over the “affairs and fortunes” of society, control emerges from the “ownership of voting shares the majority votes for the election of the Board of Directors.”

 

(3)        In deciding whether “effective control”, take into consideration what follows:

 

a) the law that governs society;

 

b) the register of shareholders;

 

c)         any restrictions, special or exceptional imposed is the power of the majority shareholder to control the election of the board, or the board’s power to manage the business and affairs of the company, which shows a either of the following:

 

(I) acts of incorporation of the company;

 

(Ii) a unanimous shareholder agreement .

 

(4)        Documents other than the register of shareholders, articles of incorporation and any unanimous shareholder agreement should generally not be considered for this purpose.

 

(5) When there is a restriction of the kind referred to in paragraph 3c), the controlling shareholder can still exercise control de jure , unless it has no way exercise “control owner “of the business and for society, in a manner analogous or equivalent to criterionBuckerfield’s .

 

[ 27 ]          Although the judgment Duha Printers clearly establishes that we must take into account a unanimous shareholder agreement when considering control de jure , the Minister submits that such an agreement should not affect on the second step of the analysis (that is to say the determination of control of a corporation by the “person”) for the purposes of paragraph b) of the definition of a CCPC . Paragraph 21 of the Technical Interpretation 2008-0265902I7 – Canadian-Controlled Private Corporationsums up the argument of the Minister in this regard. This paragraph reads as follows:

 

21. In the Location Data, as generally elsewhere, we reiterate our position to the effect that AUC has no impact as regards the second step of the analysis (ie the determination of control of a corporation given by the hypothetical person) for the purposes of paragraph b) of the definition of CCPC in subsection 125 (7) . It still appears that the determination under the second step of the analysis is purely arithmetic.Jurisprudence does not contradict this approach, however, the Federal Court of Appeal affirms without reservation that the mere possession of shares by a majority of non-residents is sufficient to confer control these non-residents for the application of paragraph b) of the CCPC definition in subsection 125 (7) . Anyway, as mentioned in the document, given the hypothetical person is not a party to any unanimous shareholder agreement, or deemed to be for the purposes of paragraph b) of the definition of CCPC subsection 125 (7) .

 

CRA Technical Interpretation 2008-0265902I7, “Canadian-Controlled Private Corporation” (6 May 2008), at para. 21.

 

[ 28 ]          At this point, I find it useful to summarize the circumstances in which the legislature has added paragraph b) in the definition of a CCPC. Added by SC 1998, c. 19, 145 (2), this paragraph is likely against the decision of the Federal Court of Appeal in Silicon Graphics Ltd.. c. The Queen , 2002 CAF 260 (CanLII) , [2003] 1 FC 447, where it was decided that “the mere possession of a mathematical majority of shares by a group of shareholders taken at random from a large company number of shareholders having some common identifiers (eg. place of residence) but without a common bond is not a control law as well as the term was defined by the law “(at para. 36). The comments of the Federal Court of Appeal is then recorded in an analysis of the applicable law before the coming of the new paragraph b) of the definition of a CCPC.

 

[ 29 ]          In this sense, the purpose of the provision is also clearly stated in the technical notes thereto issued by the Minister of Finance:

 

Currently, a corporation is a CCPC if it is a private company and a Canadian company (both terms are defined in subsection 89 (1) of the Act) and if it is not controlled, directly or indirectly, in any way either by public companies (excluding companies with venture capital prescribed) or non-resident, or a combination thereof. The amendment to the definition to exclude two other companies of the notion of CCPC. It is, first of all, companies that if they are not actually controlled by non-residents, avoid this status simply because their shares are held by a large number of shareholders. Also excluded are companies whose shares are listed on stock exchanges abroad.

 

A company whose shares voting are distributed among a large number of people is not usually considered to be controlled by a particular group of shareholders, provided that the shareholders do not act in concert to exercise control. In this vein, one could argue that a privately owned Canadian company that belongs to multiple non-residents or public corporations is not controlled by non-residents or public corporations, and is a CCPC. New paragraph (b) of the CCPC definition aims to refute this position. Indeed, it provides that the shares held by non-residents and public corporations – not only the actions of the company in question, but also all companies – must be a hypothetical allocation to a hypothetical person.If such assignment gives control of the company to the person, the company is not a CCPC.

 

M inistry of Finance, Explanatory Notes Relating to Income Tax (8 December 1997), art. 125 (7) , “Canadian-controlled private corporation”.

 

 

[ 30 ]          So, in practice, this means that the text of paragraph b) of the definition of a CCPC creates a legal fiction. However, this type of alteration of reality was the subject of a comprehensive review by the SCC in R. c. Verrette , [1978] 2 SCR 838. Speaking on behalf of the Court, Beetz J. then described what kind of legal fiction of “deeming” and stated the reach:

A deeming provision is a legal fiction, it implicitly recognizes that something is not what it purports to be, but decrees that specific purpose, it will be considered that it is not or does not seem to be. (P. 845)

 

[ 31 ]          The purpose and application of a deeming provision has subsequently been examined in detail by the Court of Appeal in the case of Attorney General of Canada v.. Scarola, 2003 CAF 157 (CanLII) , 2003 FCA 157, [2003] 4 FC 645, where Mr. Justice Létourneau propped partly explain its French doctrine as follows:

 

Fiction is a process which has been often reported, belongs to the pragmatics of law. It is first to misrepresent the facts, to say other than they really are, and to make this even adulteration and false assumption that the legal consequences that would attach to the truth that pretends, if it was under the guise that he prepared. (Para.19)

 

[ 32 ]          In its judgment in LS c. The Queen , 2006 CAF 129 (CanLII) , 2006 FCA 129, at para. 55, the Court stated: “Insofar as [legal fiction] has the effect of transforming reality, its scope should be limited to what is clearly expressed. A deeming provision can not otherwise change the real situation. ‘

 

[ 33 ]          These comments also fall in the same line as those of SCC in Shell Canada Ltd. v.. The Queen , [1999] 3 SCR 622, where McLachlin J. remarked many times repeated since:

The Act is a complex statute through which Parliament seeks to strike a balance between a myriad of principles. The jurisprudence of this Court has consistently held that courts must therefore be cautious when it comes to attribute to Parliament in respect of a clear provision of the Act, an intention rather than explicit [… ]. (Para. 43)

 

[ 34 ]          Accordingly, I am of the opinion that paragraph b) of the definition of a CCPC, despite its peculiarities, must be interpreted in its context and in their grammatical and ordinary sense of the words which harmonizes with the spirit of the Act, its purpose and the intention of Parliament: see Ludco Company Ltd. c. The Queen , 2001 SCC 62 (CanLII) , 2001 SCC 62, [2001] 2 SCR 1082, at para. 36.

 

[ 35 ]          As a result, the legal effects of this legal fiction which are grafted to the truth that pretends to mean that the “person” to which we refer here is deemed to have the same rights and be bound by the same obligations as non-resident owners of those shares.

 

[ 36 ]          However, section 146 (3) of the CBCA states that:

The purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed to be a party to it.

 

[ 37 ]          Thus, considering all that has been raised, I find it very difficult to defend the hypothesis that the “person” to which reference is made in paragraph b) of the definition of a CCPC can not when considering control de jure taking into account the alteration of the facts required by the provision, be deemed a party to any unanimous shareholder agreement then in effect.

 

[ 38 ]          The Minister argues that to reflect a unanimous shareholder agreement in force when considering the criterion of hypothetical shareholder could have the effect of distorting the analysis of control of the target company, since during the drafting of the unanimous shareholder agreement in question, the shareholders could certainly not predict the eventual accession of the fictional shareholder under the provision. Therefore, to avoid unusual or undesirable results, the Minister concludes that it is better not to deem a hypothetical shareholder party to any unanimous shareholder agreement then in effect. He explains:

 

[TRANSLATION]

 

When Canadian residents do not own enough shares to elect a majority of the directors, the purpose and effect of the deeming provision in paragraph b) of the definition of “CCPC” are that the person is deemed hold effective control of the business and for society in a way similar to the power to elect a majority of directors. This is because the person is not a party to a unanimous shareholder agreement and is not deemed to be a party. In our opinion, it would be contrary to the wording and spirit of the provision to assume that the dummy control resulting from the application of paragraph b) of the definition can be weakened by an agreement that removes the powers of the directors to assign to shareholders, while the person would never be a shareholder.

 

See: Andrew W. Dunn, Ron Durand, Phil Jolie, and Mark Symes, “Canada Revenue Agency Round Table,” Report of the Proceedings of the Sixty-First Tax Conference, 2009 Conference Report (Toronto, Canadian Tax Foundation, 2009), on page 3: 14-3:15.

 

[ 39 ]          The answer I think is essential. The result seems incongruous only if one chooses to ignore the fiction. It is not if we give effect to the fiction of the truth.

 

[ 40 ]          In my humble opinion, simply imagine a situation where all shareholders who are non-residents or public corporations which are decided, for whatever reason, to sell all their shares in the same purchaser. It is indisputable that in such a case, the purchaser of the shares would be party to any unanimous shareholder agreement then in effect.

 

[ 41 ]          I could not agree more with the Court of Appeals when it stated: “It could create intolerable uncertainty if the courts could rule a deeming provision of general application on the sole ground that it produces the result in a particular case they feel unwanted.Parliament is well aware of the effect of presumptions enacted, and it is up to him to define the scope  “( LS , supra, at para. 79).

 

[ 42 ]          In this case, paragraph b) of the definition of a CCPC is a general provision and the role of the courts is to give effect thereto.

 

[ 43 ]          In conclusion, I am of the opinion that the hypothetical shareholder referred to in paragraph b) of the definition “Canadian-controlled private corporation” in subsection 125 (7) of the ITA is bound by the AUC Bagtech occurred in 2003 and subsequently by the 2005 amendments.

 

[ 44 ]          Now, the answer to the following question: what is a USA clauses governing the election of directors of a company must be taken into account in determining control de jure a company ?

 

[ 45 ]          Before answering this question, it should, in my opinion, to understand the nature of a unanimous shareholder agreement for the CBCA Section 146 (1) of the CBCA reads as follows:

 

Is valid, if it is otherwise lawful written agreement by all the shareholders of a company among themselves or with third parties, that restricts, in whole or in part, the powers of directors to manage the business and the affairs of the company or supervise the management.

 

[ 46 ]          It appears from paragraph 146 (1) of the CBCA four conditions so that agreement can be described as unanimous shareholder agreement. First, the agreement must, of course, be lawful and consistent with the general requirements of the contracts. Second, the agreement must be in writing, and it is important to note that this requirement is indeed a condition of validity, not only a question of evidence. It must also be signed by all the shareholders of a corporation, either among themselves or with third parties, and finally, it must restrict in whole or in part the powers of the directors to manage the business and affairs of society or supervise management. An agreement signed by all shareholders is increasing in accordance with paragraph 6 (3) of the CBCA, the number of votes for the adoption of certain measures by the shareholders may, exceptionally, be a unanimous shareholder agreement and even if it does not restrict or withdraw any powers of the directors. However, this is the only exception under both federal law that Quebec: see Paul MARTEL, Companies and Corporations , Law Collection 2011-2012, École du Barreau du Québec, Vol. 9, 2011, p. 41 et seq.

 

[ 47 ]          These four conditions for a unanimous shareholder agreement is valid are being echoed by the SCC in its sole discretion that examines in detail the unanimous shareholder agreement, or stop Duha Printers , supra.

[47]

[ 48 ]          The CBCA, the Act Corporations Ontario and Quebec Civil Code all provide, for example, an explicit exception to the prohibition hinder the powers of the directors. Thus, the various Canadian laws on corporations provide the validity of any unanimous shareholder agreement, and, despite the common law principle that shareholders, even unanimously, may hinder or prevent them from exercise its legal right and duty to manage the business and affairs of the Company and monitoring management.(The prohibition hinder the powers of directors seems to have its origin in the decision Automatic Self Cleansing Filter Syndicate Co. Ltd.. c. Cuninghame , [1906] 2 Ch 34 (CA). This principle has subsequently taken decisions in Motherwell c. Schoof , [1949] 4 DLR 812 (Alta. SC.) and Atlas Development Co. c. Calof reflex , (1963), 41 WWR 575 (Man. QB)..)

 

[ 49 ]          In fact, before the advent of the unanimous shareholder agreement, shareholders’ ability to control the company is limited to the power to elect and dismiss directors. The arrival of the unanimous shareholder agreements in corporate law has fundamentally changed the situation by establishing a mechanism by which shareholders may deprive the directors of all or part of their management authority.

 

[ 50 ]          Moreover, the unanimous shareholder agreement does not limit the powers of the directors. It has a positive aspect in that it provides that shareholders may exercise the powers they have gained administrators.

 

[ 51 ]          The unanimous shareholder agreements thus open thereby breaching the shareholders so that they can deviate considerably conventional corporate law, they allow to relax some of the strict principles rather old and dry.

 

[ 52 ]          In addition, with regard to the legal recognition of AUC, CSC, as I mentioned a little earlier, has shed light on many aspects of a unanimous shareholder agreement in its judgment Duha Printers , supra. Speaking on behalf of the CSC, Iacobucci J. states in particular a unanimous shareholder agreement is a “hybrid creation of corporate law, which is partly contractual and partly due to a constitution” ( Duha Printers , supra, at para. 66).

 

[ 53 ]          That being said, the SCC makes it clear later that “the appearance of the AUC is a constitution is even more powerful than its contractual nature”: s. 67 and 68.

 

[ 54 ]          Another important element of the unanimous shareholder agreement is obviously that it can bind future shareholders. In fact, the purchaser or transferee of shares is considered as an absolute presumption, be a party to a unanimous shareholder agreement: see subsection 146 (3) of the CBCA However, if the purchaser or transferee is not informed of the existence of the unanimous shareholder agreement by a statement on the share certificate or otherwise, he may, within thirty days after becoming aware of its existence, rescind the transaction by which he became purchaser or assignee: see paragraph 146 (4) of the CBCA

 

[ 55 ]          Finally, it seems important to finish my tour of the unanimous shareholder agreement by insisting on the fact that the nature of the unanimous shareholder agreement is to restrict the powers of the directors and the increase of shareholders in the management of the company: see Paul MARTEL, Companies and Corporations, Law Collection 2011-2012 , École du Barreau du Québec, Vol. 9, 2011, p. 41 et seq.; Normand RATTI, the unanimous shareholder agreement , (1986) CP N. 93. SCC could not be more clear about this by arguing that “unlike conventions” ordinary “shareholders, which can interfere with the exercise of directors’ powers, an AUC can and should have this effect” ( Duha Printers, cited above, at para. 71). Ultimately, the effect of a unanimous shareholder agreement restricts the powers of the directors must be shareholders to replace directors about their rights, powers and responsibilities, and the extent of the restriction: see paragraph 146 (5) of the CBCA Instead remove directors, the unanimous shareholder agreement simply relieves them of their powers, their rights and their responsibilities. Moreover, the CBCA provides that directors manage the business of the company “subject to any unanimous shareholder agreement” (see paragraph 102 (1) of the CBCA), and it expressly requires directors and officers to comply with the provisions of such an agreement: see subsection 122 (2) and Article 247 of CBCA

 

[ 56 ]          It is now time to answer the following question: is it a unanimous shareholder agreement may include provisions other than those relating to the management of a company? If so, is that only clauses restricting the powers of the directors are subject to the provisions relating to the unanimous agreement of the shareholders of the Companies Act applicable? In other words, is that only clauses restricting the power of administrators create the presumption of enforceability to the new shareholders?

 

[ 57 ]          Although the agreement is described as a unanimous shareholder agreement, it is appropriate to keep in mind that an agreement signed by all the shareholders, but does not restrict the power administrators, can not be considered a unanimous shareholder agreement under the CBCA and will not be enforceable against future shareholders: see Paul MARTEL, The corporation in Quebec , vol. 1, Legal Issues , Montreal, Wilson and Lafleur, 2011, para. 27-34.

 

[ 58 ]          Conversely, an agreement between the shareholders of a company which restricts the powers of the directors may be called unanimous shareholder agreement, and, despite the fact that it is a different designation: see Paul MARTEL, the corporation in Quebec , supra, para. 27-34, Alteco c. Queen , reflex , [1993] TCJ n o  213 (QL) , [1993] 2 CTC 2087, at para. 35.

 

[ 59 ]          Moreover, the question of whether an agreement is a unanimous shareholder agreement while only some of its provisions restrict the powers of directors remains contentious: see François and BEAUREGARD Nathalie Auger, agreements between shareholders , Days of Fiscal Studies (Montreal, Canadian Tax Foundation, 2010), p. 12.

 

[ 60 ]          In this regard, Justice Iacobucci, before being appointed judge, stated:

 

The statutory provision unanimous shareholder agreements Relating to are found in ss. 2 (1) and 146 of the CBCA, and ss. 1 (1), 45 and 108 of the OBCA. Note que le Distinguishing feature of a “unanimous shareholder agreement” in the statutes is That It “restricts, in whole or in part, the powers of the directors to manage [or, in the OBCA, to supervise the management of] the business and affairs of the corporation. ” Between year agreement assumes all the Shareholders of the corporation restricts the authority of the directors, goal aussi contains other agreements, Relating to Such matters as buy-sell arrangements, requisite votes on the Undertaking Shareholders of Fundamental exchange, shareholder voting agreements, etc.. Is the whole agreement a “unanimous shareholder agreement”, or only share That That Relates to the authority of the directors? Do the words “in whole or in part” in CBCA s. 146 (2) and OBCA s. 108 (3) Refer to the “written agreement”, or do they Refer to the restriction of the powers of directors? The distinction may be important. For example, has transferred shares with notice of a common law of voting agreement is not bound by the agreement (because of the lack of privity of contract); see Greenhalgh v. Mallard [1943] 2 All ER 234 (CA). However, shares of a transferred subject to a usa is bound by the usa; see CBCA s. 146 (4), OBCA s. 108 (4) (Note although the limitation CONTAINED IN CBCA s. 49 (8), OBCA s. 56 (3)).

 

See: Frank Iacobucci, Canadian Corporation Law: Some Recent Developments Shareholder , The Cambridge Reading 1981, compiled by N. Eastham and B. Krivy, 1982, p. 88, pages 92 to 95.

 

[ 61 ]          Several authors, including Paul Martel to name him, nonetheless argue that AUC may include provisions other than those relating to the management of the company but that, however, “only clauses restricting the powers of the directors are covered by the provisions of the Act relating to the unanimous agreement, and the presumption that they create on the new shareholders only applies to these clauses, and not the rest of the Convention “(see Paul MARTEL, agreements between shareholders , Montreal, Wilson and Lafleur, 2007, p. 340-341). Paul Martel also advance it would be preferable to insert the two types of clauses in separate conventions when he writes:

 

Generally, one should treat the practice clauses of Directors as apples and oranges as the other, and make two separate documents. It is indeed difficult, especially at the provincial level, to adopt the terms of purchase and sale as a restriction on the powers of the directors, and it is almost impossible for voting clauses and society. Clauses administration “unanimous agreement” within the meaning of the law, automatically bind new shareholders (note the markings on the stock certificates!), While others bind those who intervene specifically, with the permission of signatories.

 

See: Paul MARTEL, agreements between shareholders , supra, at page 341.

 

[ 62 ]          Daniel Lafortune is also of this opinion and wrote:

 

That said, this is the third becoming a shareholder is bound by the shareholders’ agreement? In this respect, a distinction must be made. Are we facing the provisions of the kind of the unanimous agreement or the provisions of any other nature?

 

For provisions that are not of the nature of unanimous agreement, the rule is simple. By applying the principle of privity of contract, the third party is not bound by the Convention, unless consent.

 

See  : Daniel Lafortune, The Shareholders’ Agreement (2002), 36 RJT 197, page 217.

 

[ 63 ]          The Superior Court also seems to believe that a unanimous shareholder agreement is severable and well sums up this approach in the judgment Leblanc c. Fertek inc ., REJB 2000-20884, [2000] JQ n o  4045 (QL). In that decision, Judge Dalphond treats different clauses of the nature of a unanimous shareholder agreement that appear in a simple agreement between shareholders

 

49 The agreement between the shareholders on 31 January 1996, as indicated in its fifth “Whereas” a dual purpose: to record shareholders’ approval on the one hand, the management of the company and other hand, the detention and transfer of their shares.

 

50 The first part is a unanimous shareholder agreement within the meaning of art. 146 (2) of the LCSPA, since it is a written agreement signed by all shareholders on the management of business and affairs of the company.

 

51 A unanimous shareholder agreement or declaration of the sole shareholder to the same effect, essentially to restrict the powers of the directors of the company, not the holding of shares. This is also because she has this item that such an agreement may be made by a single shareholder as stated in art. 146 (3) of the LCSPA The directors and officers of the company, which Tassé, are required to comply with them (art. 122 (2) of the LCSPA).

 

52 The second part of this agreement addresses issues related to ownership of shares and not the management company. This category of agreement not to be approved by all shareholders. Thus, we found only between shareholders representing a majority governing, for example the right to vote at annual meetings or giving them rights of first refusal in the event of the sale of shares. The validity of such an agreement has long been recognized ( Bergeron c. Ringuet , 1960 CanLII 67 (SCC) , [1960] SCR 672, [1958] QB 222) and is governed by civil law contract, unless the provisions in special laws applicable to the Company or such LCSPA the Securities Act . Since it is a contract, there must be at least two parties, because you can not contract with itself.

 

53 In summary, do not confuse the two aspects of the agreement between shareholders in January 1996, even if they find themselves in the same document. (At paras. 49-53)

 

[ 64 ]          In addition, other authors believe that a unanimous shareholder agreement may address topics incidents not involving directly the internal management of the company. Kevin P. McGuinness wrote:

 

12209 In addition, provisions are scattered THROUGHOUT Both the OBCA and the CBCA various subjects indicating indication That may be Dealt with in a USA, aside from the general authority to restrict the power of the directors.

[…]

 

12212 […] the issue is sometimes raised as to Whether a unanimous agreement may deal with matters outside the management of the corporation.[…] It is doubtful que le inclusion of Any Such collateral provisions adversely affect the validity Would a unanimous shareholder agreement of or its status as Such. It Has beens always open to the Shareholders to Regulate Their Own relationship.

 

See Kevin P. McGUINNESS, Canadian Business Corporations Law , 2nd ed., Markham, LexisNexis, 2007, pages 1215-1218

 

[ 65 ]          Having said that, in his opinion, a unanimous shareholder agreement may include various provisions incident had not intended to restrict the powers of the directors without threatening the validity of the agreement, Mr. McGuinness lists some incidental questions may be addressed in a unanimous shareholder agreement, including the election of directors (pages 1215-1216).

 

[ 66 ]          The Court of Queen’s Bench of Alberta also supports, to some extent, this position in its decision Wood c. Wood ,2004 ABQB 775 (CanLII) , [2004] AJ n o  1230 (QL), 2004 ABQB 775, while it expressly recognizes the validity of a clause in a unanimous shareholder agreement relating to the election of the board of Directors:

 

8 The USA Provided que le directors of the company Would Be Mr. Wood, Jennifer Wood and Mrs. Wood so long as each Stock Remained a shareholder. Two directors Would Constitute a quorum. Either or if Mr. Wood Jennifer Wood Ceased to be a director, the other would be “extra Exclusively Entitled to a replacement director.” If Mrs. Wood shoulds cease to be a director, she Would not be replaced. (At para. 8)

 

[ 67 ]          Iacobucci J. made a very interesting observation before being appointed judge Frank Iacobucci see, Canadian Corporation Law: Some Recent Developments Shareholder , op. cit . Actually, he begins by reminding us that the only unanimous shareholder agreement appeared in corporate Canada to section 146 of the CBCA and, thereafter, this concept was adopted by the majority of laws Corporations in particular Article 146 of the law of Alberta’s Alberta Business Corporations Act ( Act corporations ) , RSA 2000, c. B-9 .

 

[ 68 ]          Iacobucci J. raises the fact that Article 146 of the Alberta Act appears to broaden the scope of the CUA beyond that provided the CBCA Although the main purpose of AUC, at least according to the law Federal or restrict the powers of the directors, section 146 of the Alberta Act, which appears in Annex 2, seems to have expanded its scope. In short, according to Article 146 of the Alberta Act, the withdrawal of powers of the directors to allot to the shareholders is only possible objects of the AUC: see paragraph 146 (1) c). This article provides among other things that AUC can predict how the election of directors: see paragraph 146 (1) b). After an overview of the issue, Iacobucci J. made the following comments:

 

The new Alberta Business Corporations Act Adopts and extends the concept usa [section 146]. After acknowledging que les primary approach of the CBCA provisions reflected a desire usa to Shareholders Have Rather Than directors manage a Closely-held company, the designers of the Alberta statute felt que la usa shoulds be expanded in scope to make the device even more useful and Clarify to some of the problems Which Were felt to be present in the CBCA provisions.

 

With respect to the expanded scope of the usa, the Alberta section allows the entrenchment of Any provision Regarding the internal affairs of the corporation and organization. The definition of a usa Alberta year agreement includes Which Does Any one of the Following:

 

(1) Regulates the rights and Liabilities of Shareholders, as Shareholders, Among Themselves gold Between Themselves and Any Other party to the agreement;

 

(2) Regulates the election of directors;

 

(3) Provides for the management of the business and affairs of the corporation, Including the restriction or repeal, in whole or in part, of the powers of the directors;

 

(4) Any other matter includes That may be Contained in a usa pursuant to-any other provision of of the Alberta Business Corporations Act.

 

See: Frank Iacobucci, Canadian Corporation Law: Some Recent Developments Shareholder , op. cit. , pages 92 to 95.

 

[ 69 ]          A reading of section 146 of the Alberta Act, we must conclude that the Alberta legislature intended to broaden the scope of a unanimous shareholder agreement. The provision explicitly states that unanimous shareholder agreement may include more elements other than the removal of powers of the board of directors: see paragraph 146 (1). In addition, the Alberta Act expressly states that a unanimous shareholder agreement binds future shareholders, even if it includes provisions other than those that limit the power management and monitoring of the directors: see paragraphs 146 (2) and ( 3).

 

[ 70 ]          We can draw some interesting conclusions from this comparison of the federal and Alberta.

 

[ 71 ]          First, if the unanimous shareholder agreement, introduced by the CBCA could readily include provisions other than those that restrict the powers of the directors, why Alberta does then fit significantly change the wording of the CBCA? Other jurisdictions such as Quebec and Manitoba confine itself to resume essential section 146 of the CBCA (see Act Corporations Act, RSQ, c. S-31.1 , Section 213 and Act Corporations Act, CCSM c. C225 , subsection 140 (2) ). Why would a legislator he took the time to clarify its law on corporations that unanimous shareholder agreement can do more than restrict in whole or in part, the powers of the Board if the CBCA already enabled?

[71]

[ 72 ]          Then why Parliament did not he explained in a manner similar to Alberta, a unanimous shareholder agreement may include provisions other than removing the powers of management and Monitoring of directors? It would have been easy to do, if it had been his intention.

 

[ 73 ]          In another vein, let us briefly mention that some believe that if we tried to take advantage of the benefits of unanimous shareholder agreement by inserting minor restrictions on the powers of the directors simply to satisfy this criterion, the court could declare these restrictions and inadequate refuse to qualify the document unanimous shareholder agreement: see François and BEAUREGARD Nathalie Auger, agreements between shareholders , op. cit., page 12. I immediately want to emphasize that I believe that we must refute this thesis.

 

[ 74 ]          It is clear from this analysis that the question of whether any unanimous shareholder agreement may only include provisions limiting the powers of the directors remains contentious.

 

[ 75 ]          We must now ask the following question: when considering control de jure , we must take into account the provisions limiting the right of the shareholder to elect the directors of a company incorporated under the CBCA if these clauses are in a unanimous shareholder agreement that restricts also the powers of the directors?

 

[ 76 ]          According to one school of thought, it is appropriate, when considering control de jure , consider a unanimous shareholder agreement as a whole, especially with respect to clauses that merely restrict the power of shareholders to elect directors. In reviewing the judgment explicitly Duha Printers , the authors Nathalie Beauregard and François Auger particular indicate the following:

 

Therefore, a unanimous shareholder agreement, the terms of which restrict the ability of the shareholder to elect members of the Board of Directors or which substantially impede the power of directors to manage the company, may affect control de jure society. Such clauses should therefore be careful consideration at the conclusion of the unanimous shareholder agreement.

 

View Nathalie and François AUGER BEAUREGARD, agreements between shareholders , supra, at p. 18

 

[ 77 ]          In a little more nuanced, other authors argue that, when considering control de jure a company, although it may seem result of the judgment Duha Printers that unanimous shareholder agreement should be taken as indivisible, only the provisions specifically restricting the powers of the directors must be taken into consideration:

Seems strange it may que le restriction of the powers of the directors is That feature allowded other unrelated provisions of the agreement derived, namely, Those dealing with the election of the directors, to be taken into account in Determining de jure control, Especially since the very restriction of the directors ‘powers might make one wonder why The ability to elect to continue shoulds’ em be the litmus test for “effective control”.

 

See Robert COUZIN, Some Reflections on Corporate Control , 2005, vol. 53, Can. Tax. J., 305, p. 318

 

[ 78 ]          This line of thought, or at least the critical fact that the findings of the CSC seems to take more account of certain fundamental principles of company law and converges to a certain degree with the thesis defended by the author Paul Martel, according to a unanimous shareholders may include other topics as management of the company, but “only clauses restricting the powers of the directors are subject to the provisions of the Act relating to the unanimous agreement, and presumption as they create new shareholders only applies to these clauses, and not the rest of the Convention “(Paul MARTEL, agreements between shareholders , op. cit. , p. 340-341.).

 

[ 79 ]          In addition, remember that the Quebec Superior Court has clearly stated that a unanimous shareholder agreement is divisible, it sums up very well this approach in decision Leblanc c. Fertek inc ., supra. In this case, which asked for an injunction under section 247 of the CBCA because of the failure of a unanimous shareholder agreement, the judge Dalphond treated differently clauses of the nature of a unanimous shareholder agreement that appeared in a single shareholder agreement. Note, however, that the cause was the right company and not on the implementation of decision Duha Printers when considering controlde jure .

 

[ 80 ]          For my part, I agree with both behind the interpretation of the judgment Duha Printers proposed by the author Robert Couzin and his criticism formula: see Robert COUZIN, Some Reflections on Corporate Control , supra, pages 317-320.

 

[ 81 ]          However, a careful examination of paragraph 85 of the judgment Duha Printers leads me to conclude that we must take into account any restriction on the power of the majority shareholder to elect directors who appears in the constitution society or in a unanimous shareholder agreement when considering control de jure .

 

[ 82 ]          I agree that this is an unusual result. A restriction on the election of directors is not relevant to the analysis of control de jure if it appears in a voting agreement, while the same restriction will be relevant if it is a unanimous shareholder agreement. That being said, we have no choice but to follow the decisions of the CSC, although they may seem to us illogical.

 

[ 83 ]          It would have been easy to write CCS for deciding whether “real control” must be taken into account on the one hand, any restriction on the power of the majority shareholder to elect directors emerges from the constitution of society and, secondly, any restriction on the power of directors to manage the business and affairs of the company emerges from a unanimous shareholder agreement.

 

[ 84 ]          However, SCC says rather that we must consider one or both of these restrictions in one or the other of these documents.

 

[ 85 ]          I am therefore of the opinion that, in general, we must consider a clause in a unanimous shareholder agreement that restricts the ability of shareholders to elect directors when considering control de jure of a company, in the light of Duha Printers.

 

[ 86 ]          In summary, I am of the opinion:

 

i)                   the need to take account of a unanimous shareholder agreement for the purposes of paragraph b) of the definition of “Canadian-controlled private corporation” subsection 125 (7) of the ITA ;

 

ii)                  it must be considered a restriction on the right of the shareholder to elect a director in a written agreement unanimous shareholder in determining control for promise of a society.

 

[ 87 ]          The analysis I made the terms of the AUC who are really the nature of a unanimous shareholder agreement (that is to say that restrict the powers of the directors) that I listed ( see Appendix 3) leads me to conclude that these minor limitations on their power. In my opinion, the provisions were not the effect of depriving shareholders assumed control de jure .

 

[ 88 ]          We now examine the provisions of the CUA in effect during the tax year 2004, which relate to the election of directors.

 

[ 89 ]          According to paragraph 3.2 of the AUC, the election of directors shall be by three groups: group A, group B and group C. Since the “person” would have some Class A shares, it is a member of each group.

 

[ 90 ]          Since the directors chosen by the group A are elected by residents of Canada, and that two of the three directors chosen by the group B are elected by residents of Canada, the “person” referred to in paragraph b) the definition of a CCPC could not name one of the five directors elected by the members of these groups.

 

[ 91 ]          Since none of the three members of the group C is resident in Canada, the “person” may appoint two directors elected by the group.

 

[ 92 ]          Thus, despite the fact that the “person” holds more than 50% of the shares of Class A Bagtech , under the AUC, it could elect a majority of directors. Indeed, according to the AUC, are residents of Canada who elect the majority of directors, four of the seven directors. Therefore, the “person” could not, during the 2004 tax year, check the company Bagtech within the meaning of paragraph b) of the definition of a CCPC in subsection 125 (7) of the ITA .

 

[ 93 ]          We now examine the terms of the AUC in force during the tax year 2005.

 

[ 94 ]          According to paragraph 3.2 of the AUC, the election of directors shall be by three groups: group A, group B and group C. Since the “person” would have some Class A shares, it is a member of each group.

 

[ 95 ]          Since none of the three members of the group C is resident in Canada, the “person” may appoint directors elected by this group, two directors from 1 st January to 21 July, and three directors from 22 July.

 

[ 96 ]          Thus, despite the fact that the “person” holds more than 50% of the shares of Class A Bagtech , under the AUC, it could elect a majority of directors. Indeed, according to the AUC, are residents of Canada who elect four of the seven directors of 1 st January to 21 July, and four of the eight directors from July 22 to December 31. Therefore, the “person” could not, during the 2005 tax year, check the company Bagtech within the meaning of paragraph b) of the definition of a CCPC in subsection 125 (7)of the ITA .

 

[ 97 ]          Accordingly, I am of the opinion that Bagtech was a “Canadian-controlled private corporation” within the meaning ofsubsection 125 (7) of the Income Tax Act for tax years 2004 and 2005, and thus she was entitled to “tax credit refundable investment” under subsection 127.1 (1) of the ITA .

 

[ 98 ]          For all these reasons, the appeal is allowed with costs.

 

Signed at Ottawa, Canada, this 12 th day of April 2012.

 

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