De Jure Control May Require “Dominant Influence”

Consider a situation in which CCPC status for a non-resident corporation is the desirable outcome. One way to achieve this outcome is to bring in a Canadian shareholder who has voting control. However, because the non-resident may want to maintain effective control over its operations, restrictions may be put on the powers of the Canadian shareholder through a shareholders’ agreement—for example, the requirement for a unanimous board decision on strategic matters relating to the company. Kruger Wayagamack Inc. v. The Queen (2015 TCC 90; under appeal)—although the case was decided in a different context and the parties might have had a different intention—suggests that this strategy may not be effective: the non-resident may be held to have de jure control, and therefore the company may not be considered a CCPC. More broadly, this case adds new content to the concept of de jure control.

In Kruger Wayagamack, the taxpayer corporation had two shareholders, Kruger and SGF, which owned 51 percent and 49 percent, respectively, of the corporation’s shares. The issue was whether the taxpayer was associated with Kruger by virtue of de jure or de facto control.

The TCC examined the applicable provisions regarding control, and cited Duha Printers (Western) Ltd. v. Canada (1998 CanLII 827 (SCC)) as a leading authority for determining control of a corporation. In citing Duha, the court held that for the purposes of ascertaining whether there is de jure control,
  1. one determines whether a person has “effective control” of the corporation at any time in the year, and

  2. in doing so, one is limited to the consideration of only the share ownership (the share register); the governing statute and constating documents of the corporation; and any unanimous shareholder agreement (USA).

In the case at hand, the USA provided that Kruger was entitled to elect the majority of the directors. Nevertheless, the court found that significant restrictions in the USA on the powers of the individual directors prevented Kruger from having effective control. Accordingly, Kruger was found not to have de jure control over the taxpayer.

The TCC reasoned that “effective control” (as described in Duha) of a corporation can be diminished if, pursuant to a USA, decisions are required to be unanimous. For instance, even if one shareholder has a majority of the voting shares and elects the majority of the directors, if he or she does not have the ability to exert a “dominant influence” over the management, direction, or orientation of the future of the corporation, that shareholder does not have “effective control” of the corporation. Essentially, Kruger was found not to have control because it did not have the ability to make strategic decisions that would change the direction of the company; such decisions required the unanimous agreement of the directors or shareholders. The court did not inquire into the actual operations of the company; instead, it relied on the content of the shareholders’ agreement.

The court highlighted the distinction between strategic and operational decisions included in the USA. For example, the court held that decisions relating to budgets, business plans, and the mission of the company were strategic, while those relating to the management of production operations, policies relating to the operations and implementation of the mission, and parameters for negotiating labour agreements were considered operational.

After a review of the relevant facts, the court determined that Kruger also did not have de facto control of the taxpayer.

Jennifer Leve and Nathan Wright
JGW Business and Tax Law LLP, Toronto
jleve@jgwlegal.com

nwright@jgwlegal.com

Canadian Tax Focus
Volume 5, Number 3, August 2015
©2015, Canadian Tax Foundation