Tax Court of Canada Judgments

[OFFICIAL ENGLISH TRANSLATION]

2000-2264(IT)G

BETWEEN:

TRANSPORT M.L. COUTURE INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on September 26, 2002, at Québec, Quebec, by

the Honourable Judge Pierre Archambault

Appearances

Counsel for the Appellant:                                       Marc Bouchard

Counsel for the Respondent:                                   Valérie Tardif

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1997 taxation year is dismissed, with costs to the respondent.

Signed at Drummondville, Quebec, this 16th day of January 2003.

"Pierre Archambault"

J.T.C.C.

Translation certified true

on this 28th day of April 2003.

Sophie Debbané, Revisor

[OFFICIAL ENGLISH TRANSLATION]

2000-2266(IT)G

BETWEEN:

9044-2807 QUÉBEC INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on September 26, 2002, at Québec, Quebec, by

the Honourable Judge Pierre Archambault

Appearances

Counsel for the Appellant:                                       Marc Bouchard

Counsel for the Respondent:                                   Valérie Tardif

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1995 and 1996 taxation years are dismissed, with costs to the respondent.

Signed at Drummondville, Quebec, this 16th day of January 2003.

"Pierre Archambault"

J.T.C.C.

Translation certified true

on this 28th day of April 2003.

Sophie Debbané, Revisor

[OFFICIAL ENGLISH TRANSLATION]

Date: 20030116

Dockets: 2000-2264(IT)G

2000-2266(IT)G

BETWEEN:

TRANSPORT M.L. COUTURE INC.,

9044-2807 QUÉBEC INC.,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Archambault, J.T.C.C.

[1]      The corporations 9044-2807 Québec inc. (ML1) and Transport M.L. Couture inc. (ML2) challenge the assessments made by the Minister of National Revenue (the Minister) for the 1995 and 1996 taxation years in the case of 9044-2807 Québec Inc. and for the 1997 taxation year in the case of Transport M.L. Couture Inc. The Minister determined that the two appellant corporations were associated with Transport Couture et Fils inc. (Transport Couture) during those taxation years (the relevant period) and, consequently, neither appellant corporation was able to obtain the full amount of the small business deduction (SBD) in computing its tax. The Minister is of the opinion that, according to subsection 256(5.1) of the Income Tax Act (the Act), Transport Couture controlled ML1 and ML2 directly or indirectly during the relevant period. Control is the only issue in dispute.

Facts

[2]      Marie-Louis Couture was the sole shareholder of ML1 during the relevant period. At the time of the hearing, he was 85 years old and suffering from Alzheimer's Disease.[1] It is for this reason that he was unable to testify in person on that occasion. The testimony of his son, Michel Couture, President and Chief Executive Officer of Transport Couture, and the documents produced in evidence by the appellants revealed the following: Marie-Louis Couture had operated a trucking firm in the Beauce region since the early 1950s; he was then in his early thirties. Although the evidence is uncertain on this point, it appears that the firm was always of a modest size. At least, that is how it was when Marie-Louis Couture, who was then 78, transferred it to ML1 in July 1995, since at that time he owned only three trucks and three bulk trucking permits. The permits allowed him to transport wood chips to pulp and paper mills situated in Windsor (Quebec) and Trois-Rivières. There was only a very limited number of customers then. As for ML1, it had been in existence for a number of years. In 1982, in particular, it was associated with Transport Couture and was then known under the corporate name of Location C.T.R. inc. Under the agreement between associated corporations provided to the Minister in 1984, ML1 was allocated $25,000 as its business limit for the 1982 taxation year. In October 1994, that is, a few months before the transfer of Marie-Louis Couture's business to ML1, his business' name was changed to Transport M.L. Couture inc., a name that was again changed on December 2, 1996, to its current name.

[3]      Seventeen years before the transfer of his business to ML1, that is, in 1978, Marie-Louis Couture had transferred to the recently incorporated Transport Couture an indeterminate number (probably one or two) of general trucking permits. This kind of permit authorized the trucking of goods other than bulk trucking. The five shareholders of Transport Couture were the five children of Marie-Louis Couture, who, through a holding company, still hold an equal number of shares. Mr. Couture apparently did not transfer his bulk trucking permit(s) at the same time since, according to Michel Couture, this kind of permit could not be transferred until the death of the holder.

[4]      On November 15, 1995, or four months after the transfer of the bulk trucking business to ML1, Transport Couture and ML1 signed an agreement whereby Transport Couture would provide management services to ML1 in return for 10 per cent of all revenues generated by the operations of ML1. In addition, ML1 agreed to provide trucking services as a subcontractor for Transport Couture. Under the agreement, Transport Couture was to provide drivers' services for the trucks belonging to ML1. Transport Couture was also required to train those drivers. Every month, ML1 reimbursed the cost of compensation for those drivers, plus 1 per cent. Transport Couture promised to give ML1 at least 130,000 miles of trucking per truck for a period of 12 months. However, the agreement is silent regarding the terms and conditions of the compensation for the trucking services. Although tables used in computing the compensation in particular were referred to, none of those tables was produced in evidence. Under the agreement, the tractors in the possession of ML1 were to be painted with Transport Couture colours and bear its logo. ML1 had the right to terminate the agreement upon three months' notice.

[5]      Unlike the firm of Marie-Louis Couture, Transport Couture grew considerably, especially in the 1990s. Michel Couture referred to an "explosion" in his testimony. He and his brothers were behind this success. In 1978, Transport Couture owned five tractors and eight trailers. At the beginning of the relevant period, i.e., in 1995, the number of tractors rose to thirty, twenty-two of which were purchased in 1995. Eleven new tractors were purchased in 1996, twelve in 1998 and nine in 1999. In 2002, Transport Couture owned 110 tractors and 315 trailers. Between 1994 and 1997, the number of employees varied from 75 to 100. During the 1996 financial year, ML1 purchased two new tractors in November 1995 and nine in February 1996, bringing its total to fourteen tractors.

[6]      According to Michel Couture, the competition in bulk trucking was fierce. This would explain, at least in part, why the firm of Marie-Louis Couture had not grown. In addition, this situation apparently forced Marie-Louis Couture, and subsequently ML1, to offer their services to Transport Couture, which had to [Translation] "respond to the growing demand of its "customers".[2] According to the testimony of Claude Rodrigue, the comptroller of Transport Couture, 45 per cent of the revenues of ML1 came from general trucking in the financial year ending in August 1995, that is, less than two months after Marie-Louis Couture's firm was transferred. In the following financial year, the share of ML1's revenues from general trucking apparently rose to 85 or 90 per cent. However, as indicated in the accompanying notes to the financial statements of August 31, 1995, prepared by the accounting firm of Raymond, Chabot, Martin, Paré, under the heading [Translation] "economic dependence"[3] ML1 provided its services to only one customer. Moreover, under the heading [Translation] "transactions entered into with associated companies", 100 per cent of the turnover is indicated as well as 100 per cent of the costs of subcontracting, maintenance and repair of rolling stock, insurance and computer processing.

[7]      In view of the competition in bulk trucking, it was apparently decided to sell the bulk trucking permits to a corporation belonging to one Yvon Champagne. On December 18, 1996, Marie-Louis Couture accordingly transferred all of his shares of the capital stock of ML1 to 9017-7304 Québec inc. On this date, ML1 held [Translation] "three (3) bulk trucking permits, three (3) extra-provincial bulk trucking permits, one intra-provincial trucking permit and one extra-provincial trucking permit...and six (6) trailers". The sale price was $442,471.

[8]      On the same day, that is, December 18, 1996, ML1 transferred all of its assets, with the exception of the three bulk trucking permits and the six trailers, to ML2, incorporated on December 5, 1996.[4] The sale price was $1,037,654 payable by ML2's assuming $760,183 in debt, with the balance of $277,471 payable in cash. This would give an approximate value of $165,000 for the bulk trucking permits and six trailers retained by ML1. According to Michel Couture, Marie-Louis Couture had negotiated the sale price for the bulk trucking permits.[5] However, it was Michel Couture who structured the transaction with the assistance of his legal advisers and accountants and who signed the contract for the sale of the shares on behalf of his father (Exhibit I-1, Tab 35). ML2 is held by two common shareholders: 90 per cent by the spouse of Marie-Louis Couture, Fleurette Hamel Couture, and 10 per cent by Claude Rodrigue. These two people are the sole directors of ML2. Before becoming Transport Couture's comptroller in January 1995, Mr. Rodrigue had been Transport Couture's external auditor and Marie-Louis Couture's auditor.

[9]      When Marie-Louis Couture sold his shares in ML1 and the majority of the shares of that corporation were subsequently purchased by ML2,[6] Transport Couture and ML2 did not sign a new management and subcontracting contract. However, the parties behaved as if this agreement continued to exist. Michel Couture affirmed that the compensation paid for the trucking services provided by ML1 and ML2 represented the fair market value of these services. This was the same compensation that Transport Couture apparently paid its other subcontractors. However, it appears that Transport Couture did not use the services of these subcontractors until April 1997. There were fourteen of them on May 15, 1998. Most of the subcontractors had one truck, but some had two or three trucks. According to the model agreement[7] (Exhibit I-1, Tab 32) between Transport Couture and its subcontractors, there was no obligation to use the colours of the Transport Couture trucks. However, that firm's logo and the information about the firm had to appear on the subcontractor's truck. In order to benefit from the group rebate, the subcontractor could purchase a truck and obtain insurance through Transport Couture. Contrary to what Michel Couture stated, the subcontractor was free to choose his own insurer (clause 6.7).

[10]     The names of ML1 and ML2 do not appear on the list of Transport Couture's subcontractors. Michel Couture's explanation was that he took ML1 and ML2's participation for granted because Transport Couture and those corporations [Translation] "were an old couple". For Mr. Rodrigue, the fact that ML1 and ML2 are not indicated on this list is a mere oversight. Their names also do not appear on the computer printout for the subcontractors, which shows information regarding the compensation paid to the various subcontractors[8] and the expenses incurred by the subcontractors that were to be reimbursed by Transport Couture.

[11]     According to Michel Couture, his father, who was 55 to 57 years old at the time, still drove a truck between 1972 and 1974. He had always been involved in ML1, except in the last two years because of his illness. On cross-examination, Michel Couture explained that his father came to the garage every day and spent five or six hours there. He took part in some manual activities, such as truck maintenance. According to Claude Rodrigue, Marie-Louis Couture did not come into the offices of Transport Couture: [Translation] "He took care of his trucks."

[12]     As for Fleurette Hamel Couture, Mr. Rodrigue said that he met with her once a month to bring her up to date on ML2's business affairs. However, Ms. Couture's signature does not appear on the general borrowing by-law of the corporation-only Mr. Rodrigue's signature. Furthermore, Ms. Hamel Couture did not testify at the hearing. Michel Couture said that his mother came to the office once a month at most.

[13]     Since Transport Couture provided all of the management services, it is not surprising to note that ML1 and ML2 carried on their business in the same establishment as Transport Couture. Generally speaking, it was Yvan Couture who negotiated the truck purchases while Michel Couture handled the financing contracts. Michel Couture said that he had inadvertently signed some documents, such as ML1's statement of annual operating duties for 1995 and 1996. [Translation] "I signed too fast; I felt dizzy", he explained.[9] The same is true with respect to some applications for safety certificates sent to the Société de l'assurance automobile du Québec (SAAQ) and signed by Michel Couture. The documentary evidence produced by the respondent includes correspondence relating to the extra-provincial bulk trucking permits sent by ML1's counsel to Michel Couture.[10]

[14]     With the exception of diesel and management costs, which were invoiced each month, the expenses incurred by Transport Couture were invoiced to ML1 or ML2 as they arose.

Relevant provisions

[15]     The following provisions of the Act are relevant to resolving the issue raised by these appeals:

125.      Small business deduction.

(1) There may be deducted from the tax otherwise payable under this Part for a taxation year by a corporation that was, throughout a taxation year, a Canadian-controlled private corporation, an amount equal to 16% of the least of                                                                                                                         

(a) the amount, if any, by which the total of

(i)    the total of all amounts each of which is the income of the corporation for the year from an active business carried on in Canada (other than the income of the corporation for the year from a business carried on by it as a member of a partnership), and

(ii)    ...

exceeds the total of

(iii)the total of all amounts each of which is a loss of the corporation for the year from an active business carried on in Canada (other than a loss of the corporation for the year from a business carried on by it as a member of a partnership), and

(iv) ...

(b) the amount, if any, by which the corporation's taxable income for the year exceeds the total of

...

(c) the corporation's business limit for the year.

(2) Interpretation of "business limit". For the purposes of this section, a corporation's "business limit" for a taxation year is $200,000 unless the corporation is associated in the year with one or more other Canadian-controlled private corporations in which case, except as otherwise provided in this section, its business limit for the year is nil.

(3) Associated corporations. Notwithstanding subsection (2), if all of the Canadian-controlled private corporations that are associated with each other in a taxation year have filed with the Minister in prescribed form an agreement whereby, for the purposes of this section, they allocate an amount to one or more of them for the taxation year and the amount so allocated or the total of the amounts so allocated, as the case may be, is $200,000, the business limit for the year of each of the corporations is the amount so allocated to it.

  

256. Associated corporations (1). For the purposes of this Act, one corporation is associated with another in a taxation year if, at any time in the year,                                                                                                                                                                                   

(a) one of the corporations controlled, directly or indirectly in any manner whatever, the other;

...

(1.2) Control, etc. For the purposes of this subsection and subsections (1), (1.1) and (1.3) to (5),

...

(b) for greater certainty,

(i) ...

(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;

...

(5.1) Control in fact. 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.

                                                                             [Emphasis added.]

Position of the parties

[16]     Counsel for the appellant corporations submitted that the scope of subsection 256(5.1) is very broad but that it should clearly be restricted. In his pleadings, he referred to Interpretation Bulletin IT-64R4 and cited, inter alia, paragraphs 21 and 23, which I reproduce here:

21. De facto control goes beyond de jure control and includes the ability to control "in fact" by any direct or indirect influence. De facto control may exist even without the ownership of any shares. It can take many forms, e.g., the ability of a person to change the board of directors or reverse its decisions, to make alternative decisions concerning the actions of the corporation in the short, medium or long term, to directly or indirectly terminate the corporation or its business, or to appropriate its profits and property. The existence of any such influence, even if it is not actually exercised, would be sufficient to result in de facto control.

...

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.

                                                                             [Emphasis added.]

[17]     Counsel for the appellants also cited the decision of the Federal Court of Appeal in Silicon Graphics Limited v. The Queen, [2002] F.C.A. 260, 2002 D.T.C. 7112, [2002] 3 C.T.C. 527. Paragraphs 66 to 68 are reproduced below:

[66]            The case law suggests that in determining whether de facto control exists it is necessary to examine external agreements (Duha Printers, supra at 825); shareholder resolutions ^[[11]] (Société Foncière d'Investissement Inc. v. Canada, [1996] T.C.J. No. 1568, para. 10 (T.C.C.)); and whether any party can change the board of directors or whether any shareholders' agreement gives any party the ability to influence the composition of the board of directors (International Mercantile Factors Ltd. v. The Queen (1990), 90 DTC 6390 at 6399 (F.C.T.D.), aff'd (1994), 94 DTC 6365 (F.C.A.); and Multiview Inc. v. The Queen (1997), 97 DTC 1489 at 1492-93 (T.C.C.)).

[67]            It is therefore my view that in order for there to be a finding of de facto control, a person or group of persons must have the clear right and ability to effect a significant change in the board of directors or the powers of the board of directors or to influence in a very direct way the shareholders who would otherwise have the ability to elect the board of directors.

[68]            The Respondent has adduced no evidence which would satisfy these criteria. There is no evidence that Silicon US as a creditor ever exercised operational control of Alias. It simply loaned money to Alias and took steps to make sure that money was only spent with a view to protecting its position as a lender. Further, the $5,000,000 bridge financing agreement lasted for only seven weeks and was repaid by the end of Alias' 1992 taxation year. Additionally, there is evidence that Silicon US did not want to be in control of Alias because it did not want to be viewed as partisan to other customers who were competitors of Alias. Silicon US never tried to install a person in management or as a director.

                             [Emphasis added.]

[18]     Counsel for the appellants argued that Transport Couture exercised no influence either over the shareholders of ML1 or over those of ML2. The sole shareholder of ML1 was Marie-Louis Couture and nothing in the evidence indicates that he was under the influence of Transport Couture or its shareholders, namely, the children of Mr. Couture. The two shareholders of ML2 were Ms. Hamel Couture and Claude Rodrigue. Ms. Couture was regularly informed of what was going on by Mr. Rodrigue. She could therefore make the decisions that she considered appropriate.

[19]     As for the economic dependence factor discussed in paragraph 23(d) of Interpretation Bulletin IT-64R4, counsel for the appellants stated that, in the case at bar, such economic dependence was completely relative, that Marie-Louis Couture could have found work for ML1 elsewhere and that the operation of this firm did not require extensive knowledge since it was not a highly specialized business. Counsel did not make the same argument for ML2 but merely said that Ms. Couture was a person who was involved in the decision-making. Finally, he emphasized the fact that the contractual relations between Transport Couture, on the one hand, and ML1 and ML2, on the other hand, were those of parties dealing at arm's length. He also emphasized the fact that Transport Couture did not confer any economic benefit on the ML1 and ML2 corporations since the rate demanded for management costs and transportation costs was reasonable.

[20]     As for the issue of operational control, the fact that the signatures of Michel Couture and Claude Rodrigue were on certain documents was of minor significance given the lack of importance of these documents.

[21]     In the alternative, counsel for the appellants contended that there could be no de facto control of a corporation where a person controls it de jure. In this case, Marie-Louis Couture held all of the shares of ML1 and Ms. Hamel Couture held 90 per cent of the shares of ML2. In subparagraph 256(1.2)(b)(ii) of the Act, there is no reference to subsection 256(5.1), and therefore this subparagraph does not apply in this case.

[22]     Counsel for the respondent argued that Transport Couture directly or indirectly controlled ML1 and ML2 by reason of Transport Couture's exercise of operational control over the two corporations and because of the economic dependence in which the two corporations found themselves in relation to Transport Couture. In support of his first argument, he noted many facts and, in particular, the fact that Michel Couture signed the contract whereby Marie-Louis Couture sold the shares of ML1 to a company held by Yvon Champagne. The names of Michel Couture and his brother Yvan Couture are found in the context of major operations carried out by the ML1 and ML2 corporations, including the purchase and financing of trucks. Their names are also found on the statements of annual operating duties addressed to the Commission des transports du Québec (CTQ) and in correspondence concerning a decision of the CTQ in issuing the trucking permits for ML1.

[23]     To illustrate the economic dependence of the ML1 and ML2 corporations, counsel for the respondent noted that they did not have their own establishment and they had not hired any employees. All of the work was done by Transport Couture. According to counsel for the respondent, if Transport Couture had terminated the management contract and ceased to use the trucking services of ML1 and ML2, both these corporations would have been in serious financial difficulties since not only did they have no employees, but they also had no expertise in management that would have allowed them to make their many trucks profitable. Finally, counsel cited my decision in Rosario Poirier Inc. v. The Queen, 2002 CarswellNat 1174, 2002 CarswellNat 1445, 2002 D.T.C. 1770 and 2002 D.T.C. 1940, which, according to him, presented many facts similar to those in the case at bar.

Analysis

[24]     The sole question at issue is whether Transport Couture controlled ML1 and ML2 directly or indirectly in any manner whatever during the relevant period. If such a control existed, Transport Couture, ML1 and ML2 would have been associated corporations during that period and should then share the $200,000 business limit. In that case, the Minister's assessments should be confirmed. If not, ML1 and ML2 would be entitled to the full amount of the SBD claimed by them.

[25]     Before analysing the concept of de facto control and examining its application to the facts of these appeals, it is worth recalling the legislative context in which the matter arises. Through the SBD, the Act allows Canadian-controlled private corporations (CCPC) to benefit from a reduced federal tax rate (12 per cent instead of 28 per cent) applicable to revenues from an active business.[12] However, this rate applies only to the first $200,000 of profits from the business. To prevent taxpayers from multiplying CCPCs, the Act establishes anti-avoidance rules partly set out in subsections 125(2) and 125(3) of the Act. Essentially, associated corporations must share the $200,000 business limit among themselves.

[26]     It is section 256 of the Act that defines associated corporations. Paragraph 256(1)(a) states that two corporations are associated where one corporation controlled, directly or indirectly in any manner whatever, the other. Prior to the enactment of subsection 256(5.1), which was applicable to taxation years beginning after 1988, the Act did not define what constituted control of a corporation. The courts decided that control meant de jure control, namely, the fact of owning enough voting shares to have a majority in the directors of a corporation. The classic decision was rendered by Jackett, President of the Exchequer Court of Canada, in Buckerfield's Limited et al. v. M.N.R., 64 DTC 5301. This is what he wrote at page 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.

                                                          [Emphasis added.]

[27]     That interpretation has been confirmed by the Supreme Court of Canada in M.N.R. v. Dworkin Furs (Pembroke) Ltd. et al., 67 DTC 5035, and more recently in Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795, ([1998] S.C.J. No. 41 and 98 D.T.C. 6334). The concept of control recognized by the courts rejected any concept of de facto control. According to Judge Iacobucci in Duha Printers, at paragraph 58 : "The de factoconcept was rejected because it involves ascertaining control in fact, which can lead to a myriad of indicators which may exist apart from these sources." In addition, he said in paragraph 52: "If the distinction between de jure and de facto control is to be eliminated at this time, this should be left to Parliament, not to the courts."

[28] It just so happens that this is what Parliament did in 1988 by enacting subsection 256(5.1) of the Act. For the purposes of the rule of associated corporations, inter alia, the concepts of de jure control and de facto control must thus now be used. Moreover, subparagraph 256(1.2)(b)(ii) of the Act expressly provides that a corporation may be controlled by a person notwithstanding that the corporation is also controlled or deemed to be controlled by another person. Judge Bowman (as he then was) commented as follows on the enactment of subsection 256(5.1) of the Act in Société foncière d'Investissement Inc. v. Canada, [1995] T.C.J. No. 1568, 1995 CarswellNat 1504:

8 Since these decisions, ^[[13]] other words have been added for the clear purpose of broadening the concept of control, in particular the words "directly or indirectly in any manner whatever". So far as I know, the point has not been decided, but I would have thought that it could reasonably be argued that these words necessarily include the idea of de facto control of a corporation in the case of a person who does not hold more than 50 per cent of the shares but has a controlling influence, whether economic, contractual or moral, over a corporation's affairs. It is hard to imagine words with a broader meaning.

9 Apparently, the Parliament of Canada feared that the words "directly or indirectly in any manner whatever" did not go far enough. It therefore tried to reinforce their effect by means of paragraph [sic] 256(5.1).

                                                                                      [Emphasis added.]

[29]     In addition, it is worth quoting from the explanatory notes accompanying the 1988 bill (which provided for the addition of subsection 256(5.1)) for a statement of the policy pursued by the Minister of Finance in proposing this amendment[14] to Parliament:

New subsection 256(5.1) provides that, for the purposes of the Act, a corporation shall be considered to be controlled, directly or indirectly in any manner whatever, by another corporation, a person or a group of persons (the "controller") where the controller has any direct or indirect influence that, if exercised, would result in control in fact of the corporation. An exception is provided where the corporation and the controller are dealing at arm's length and the controller's influence is derived from an agreement or arrangement - such as a franchise, license, lease, distribution, supply or management agreement - the main purpose of which is to govern the relationship between the parties regarding the manner in which a business carried on by the corporation is to be conducted.

New subsection 256(5.1) expands the concept of control for certain provisions of the Act to include what is often referred to as de facto control. Under the existing rules, control of a corporation generally exists by reason of the ability to elect a majority of the directors of the corporation - de jure control. An example of de facto control might be a situation where a person held 49% of the voting control of a corporation and the balance was widely dispersed among many employees of the corporation or was held by persons who could reasonably be considered to act in respect of the corporation in accordance with his wishes. Whether a person can be said to be in actual control of a corporation, notwithstanding that he does not legally control more than 50% of its voting shares, will depend in each case on all of the circumstances.

The exception in subsection 256(5.1) distinguishes between control of the corporation and control over the business carried on by the corporation and clarifies that the de facto control test provided for therein will not be applicable in arm's length situations where the controller's influence derives only from an 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 conducted. Thus, for example, a franchise agreement or lease which provides to the franchisor or lessor a measure of control over the products sold by the corporation or the hours during which it conducts its business, would not in itself result in the franchisor or lessor having control over the corporation.

                                                                             [Emphasis added.]

[30]     In the case at bar, it is clear that Transport Couture did not exercise de jure control over ML1 and ML2 since it held no shares of their capital stock. Therefore, it must be determined whether, on the other hand, Transport Couture exercised de facto control over them, i.e., whether, as subsection 256(5.1) of the Act requires, Transport Couture had, during the relevant period, a direct or indirect influence that, if exercised, would have resulted in control in fact of ML1 and ML2. Based on the English version of this subsection, which in my opinion is more explicit than the French version,[15] it must be determined whether Transport Couture had an influence over ML1 and ML2 that, if exercised, would have resulted in control in fact of those two corporations. The evidence, therefore, does not need to establish that Transport Couture exercised control in fact over ML1 and ML2 or that Transport Couture's influence as a controller was in fact exercised. It is sufficient to note the existence of such influence.

[31]     Subsection 256(5.1) of the Act does not describe the circumstances on the basis of which it may be concluded that there is such influence. However, an analysis of this subsection shows that such influence can derive from a franchise, licence, lease, distribution, supply or management agreement or other similar agreement or arrangement. The enactment explicitly provides that the mere existence of such an agreement should not result in control in fact of a corporation provided two conditions are satisfied. First, there must be an arm's length relationship between the corporation and the controller. Second, the main purpose of the agreement from which the influence is derived must be to govern the relationship between the corporation and the controller regarding the manner in which the business carried on by the corporation is to be conducted. On the other hand, the existence of a distribution, supply or management agreement regarding the manner in which a business is to be conducted that is binding on parties not dealing at arm's length could be a relevant factor for establishing whether an influence is exercised by the controller.

[32]     It should be explained that the Court is not limited to merely considering whether there is a similar agreement or arrangement in order to determine whether an entity has an influence that would result in control in fact of a corporation. Each case must be analysed on its facts and, while it might be desirable, an exhaustive list of all of the relevant factors cannot be provided. It is worth recalling the words of Judge Bowman who, in Société foncière d'investissement (supra), spoke of an economic, contractual or moral influence over a corporation's affairs. Finally, I would add that the statement in paragraph 23 of Interpretation Bulletin IT-64R4 appears to me to be a reasonable statement of the factors that are relevant in determining whether there is an influence that, if exercised, could result in control in fact of a corporation.

[33]     In my opinion, the evidence adduced in these appeals reveals that there was a direct or indirect influence by Transport Couture that, if exercised, would have resulted in the control in fact of ML1 and ML2. The three most important factors that support a finding that there was such influence are: (i) the economic dependence of the two corporations on Transport Couture; (ii) the operational control of ML1 and ML2's businesses; and (iii) the family relationship between the shareholders of all these corporations.

[34]     In many respects, the facts of these appeals are very similar to those of Rosario Poirier Inc. (supra), a case that I heard. In the case at bar, ML1 and ML2 are economically dependent on Transport Couture, a dependence similar to the one I found in that case. Not only was Transport Couture the only customer of ML1 and ML2, but it was also the only one to provide management for those two corporations. Not only did it supply them with all management services, but it also provided the services of all the drivers needed for the transport trucks belonging to the two corporations. Not only did ML1 and ML2 not have any employees, but they also had no establishment separate from that of Transport Couture.

[35]     Another fact that reveals the existence of economic dependence is that the business operated by Marie-Louis Couture before its transfer to ML1 ceased to exist a few months after the transfer: the three tractors and trailers that Mr. Couture owned were quickly sold. The business of Mr. Couture was essentially a bulk trucking business, i.e, the transportation of wood chips to pulp and paper mills. This was a business that operated in a very competitive market and that never expanded. Furthermore, I am far from convinced as to the merits of Mr. Rodrigue's testimony that 45 per cent of ML1's turnover in the first financial year ending after the transfer of Mr. Couture's trucking business came from general trucking. I find more probative value in the financial statements, which reveal that 100 per cent of ML1's turnover during that financial year came from Transport Couture. Transport Couture, in fact, did only general trucking. Furthermore, as Mr. Rodrigue acknowledged, nearly 90 per cent of ML1's revenues in the following financial year came from general trucking. Consequently, the business operated by ML1 was no longer the business that Mr. Couture had carried on for a great part of his life, that is, bulk trucking, but was rather an extension of the general trucking business of Transport Couture. Under the management (and under the control) of Transport Couture, ML1 purchased nine tractors for general trucking. Those tractors could even have been purchased by Transport Couture. This would certainly have caused fewer administrative complications than maintaining the separate existence of ML1. Obviously, some tax benefits would then have been lost, particularly, the benefit of multiplying the SBDs.

[36]     It must be remembered that the sole shareholder of ML1, Marie-Louis Couture, was approximately 78 when he transferred his trucking business to this corporation and that, in all probability, he was suffering the harmful effects of Alzheimer's Disease. Even if Mr. Couture may still have had the intellectual faculties required to run ML1, the evidence does not show that he had played an important role in the administration of this corporation. As the testimony of Mr. Rodrigue indicates, Mr. Couture never came to the office. [translation] "He took care of his trucks." It is easy to imagine that this almost eighty-year-old man who had worked all his life driving trucks did not want to stay home doing nothing but wanted to continue being involved with his trucks. However, the business that was being operated at that time was no longer the business that he had carried on all his life. If Transport Couture had decided not to renew its management contract and to stop using the services of the ML1 and ML2 corporations, neither Mr. Couture nor subsequently his spouse, when ML2 replaced ML1, would, in all probability, have been able to operate the fourteen trucks owned by ML1 and the nine owned by ML2 at a profit. Transport Couture had an influence then that, if exercised, would have resulted in control in fact of ML1 and ML2, or, to use the words of Judge Sexton, in paragraph 67 of the decision in Silicon Graphics Ltd. (supra), it could "influence in a very direct way the shareholders who would otherwise have the ability to elect the board of directors" of these two corporations.

[37]     In addition to the facts already mentioned, which also reveal Transport Couture's operational control over ML1 and ML2, there is the conduct adopted by Transport Couture in the management of ML1 and ML2. In particular, we might mention that the terms and conditions of the contract of management and trucking between Transport Couture and ML1 and ML2 contained nothing in comparison to the detailed terms and conditions found in Transport Couture's other subcontracting contracts. No written management agreement had been considered necessary when ML1 was replaced by ML2. As Michel Couture said so eloquently, Transport Couture and the ML1 and ML2 corporations [Translation] "were an old couple". It was not necessary to provide for detailed terms and conditions to govern contractual relations between these companies since Transport Couture controlled in fact the operations of ML1 and ML2. It would have been completely pointless to stipulate the same terms and conditions as those set out in the contracts of Transport Couture with its other subcontractors.

[38]     The family relationships between the shareholders of that corporation and those of ML1 and ML2 are another indication of the existence of the controlling influence of Transport Couture. The five shareholders of Transport Couture were the sons of Marie-Louis Couture, the sole shareholder of ML1, and of Fleurette Hamel Couture, who held 90 per cent of the shares of ML2.[16] The evidence reveals only the age of Mr. Couture, who was between 78 and 81 years of age during the relevant period. Given Ms. Hamel Couture's minimal involvement in the administration of ML2 and Mr. Couture's lack of involvement in ML1, 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 through a management company.

[39]     I have no hesitation in concluding in the case at bar not only that Transport Couture had a direct or indirect influence on the ML1 and ML2 corporations but also that, on the facts, Transport Couture had control in fact of the other two.

[40]     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.

[41]     Consequently, the appeals of ML1 and ML2 are dismissed, with costs to the respondent.

Signed at Drummondville, Quebec, this 16th day of January 2003.

"Pierre Archambault"

J.T.C.C.

Translation certified true

on this 28th day of April 2003.

Sophie Debbané, Revisor

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