Aeronautic Development Corp. in Tax Court of Canada January 2017
Download PDFDocket: 2014-4207(IT)G
BETWEEN:
AERONAUTIC DEVELOPMENT CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 25 and 26, 2017, at Montreal, Quebec
Before: The Honourable Justice Robert J. Hogan
Appearances:
Counsel for the Appellant: Dominic C. Belley
Counsel for the Respondent: Benoit Mandeville
JUDGMENT
The appeal from the assessments made under the Income Tax Act with
respect to the Appellant’s 2009, 2010, and 2011 taxation years is dismissed, with
costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of March 2017.
“Robert J. Hogan”
Hogan J.
Citation: 2017 TCC 39
Date: 20170313
Docket: 2014-4207(IT)G
BETWEEN:
AERONAUTIC DEVELOPMENT CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
I. Introduction
[1] The Appellant, Aeronautic Development Corporation (“ADC”), claimed
refundable scientific research and experimental development tax credits at the rate
of 35% (“Refundable ITCs”) in respect of expenditures that it incurred in its 2009,
2010, and 2011 taxation years in connection with the prototyping and certification
of an amphibious aircraft known as the Seawind.
[2] The Minister of National Revenue (the “Minister”) disallowed the
Refundable ITCs on the basis that the Appellant was not a “Canadian controlled
private corporation” (“CCPC”) as defined in the Income Tax Act, (Canada) (the
“Act”) throughout its 2009, 2010, and 2011 taxation years.
[3] The Respondent’s position is that the Appellant failed to qualify as a CCPC
in the relevant taxation years because from August 17, 2009 to December 31, 2011
a non-resident shareholder (the “Controller”) exercised control in fact (” de facto
control”) over the Appellant within the meaning of subsection 256(5.1) of the Act.
The parties agree that prior to August 17, 2009, a non-resident shareholder
exercised ” de jure ” control over the Appellant through the ownership of all of its
issued and outstanding shares. Therefore, the Appellant was not a CCPC prior to
that date.
[4] The Respondent, belatedly, merely two weeks prior to the hearing, advised
the Appellant that she would be presenting a new argument at the hearing (the
“New Argument”), which argument was not outlined in her pleadings. The
Respondent’s counsel now contends that the holder of 44% of the common shares
of the Appellant could not exercise the voting rights attached to those shares until
March 9, 2012 because those shares were not fully paid by the shareholder until
that date. As a result, the majority of the voting rights attached to the common
shares of the Appellant were exercisable by Seawind Development Corporation
(“Seawind Corp.”), a corporation controlled by Mr. Richard Silva, who is a non-
resident of Canada. Consequently, the Appellant was controlled, on both a de jure
and a de facto basis, by a non-resident person throughout the relevant period.
[5] The Appellant takes issue with this New Argument. The Appellant argues
that the Respondent admitted in her Reply that all of the common shares were
voting shares during the period from August 17, 2009 to December 31, 2011. The
Appellant also observes that the Canada Revenue Agency (“CRA”) knew that the
subscription price for certain of the common shares had been unpaid until March 9,
2012, prior to the issuance of the assessment at issue in this appeal. This matter had
been discussed with the CRA auditor assigned to the audit of the Appellant. The
Respondent nonetheless chose to plead the issue of de jure control only in respect
of the period ending on August 16, 2009. Finally, the Respondent failed to amend
her Reply to plead the facts on which the New Argument is based. In this context,
the Appellant alleges that it would be a violation of the rules of procedural fairness
for the New Argument to be considered at this late date.
[6] With respect to the issue of de facto control, the Appellant submits that
subsection 256(5.1) of the Act is not applicable in the circumstances because a
non-resident person did not have any direct or indirect influence that, if exercised,
would have resulted in de facto control of the Appellant.
II. Factual Background
[7] The evidence shows that Mr. Silva, a United States (“US”) citizen and
resident, is a both an engineer and an architect. He also has extensive experience in
the field of aeronautics. Mr. Silva is a pilot who has logged considerable flying
time.
[8] Mr. Silva was an early investor in a Canadian company that hoped to
develop, market, and sell a small amphibious aircraft known as the Seawind in kit
format. This corporation failed and Mr. Silva acquired all of the intellectual
property rights to the Seawind.
[9] Mr. Silva completed the development of the Seawind, which allowed it to be
produced in kit format. It enjoyed very limited commercial success because it was
not a “type” certified aircraft. I understand that a “type” certificate is issued by a
regulating body when rigorous testing has confirmed the air worthiness of the
aircraft’s design. Once an aircraft has been certified, its design or manufacturing
process cannot be modified without a supplemental certification process being
gone through.
[10] Mr. Silva embarked on the certification of the Seawind in the late 1990s. Mr.
Silva believed certification would lead to greater acceptability of the Seawind’s
unique design, thus improving the chances of its commercial success. To be
eligible for certification, Mr. Silva had to abandon the sale of the Seawind in kit
format.
[11] According to Mr. Silva, he was approached by Investissement Quebec and
Industry Canada to carry out the certification work and the subsequent production
of the certified Seawind in Quebec. Mr. Silva claims he was advised by both
agencies that he could become eligible to receive Refundable ITCs if the
development work was carried out in Canada by a CCPC.
[12] Mr. Silva testified that he hired a major Canadian accounting firm to advise
him how to implement a structure that would allow him to gain access to the
Refundable ITCs. An initial corporate structure was established for this purpose by Mr. Silva and his Canadian partners.1 The Canadian corporation, Flight Dynamics
Corporation (“FDC”), that initially took on the certification work in Canada
encountered financial difficulty after the Seawind prototype crashed during a test
flight.
[13] In 2009, following the bankruptcy of FDC, Mr. Silva acquired the assets of
FDC, including the technical data base pertaining to the certification work carried
out by it. Mr. Silva did so for the purpose of restarting the certification program in
Canada.
1 It is outlined in the document found at Tab 1 of Exhibit A-1.
[14] Mr. Silva caused the Appellant to be incorporated as a Nova Scotia
unlimited corporation in April 2009. Seawind Corp., a US corporation controlled
by Mr. Silva, became the sole shareholder of the Appellant.
[15] Soon thereafter, while the Appellant was wholly owned by Seawind Corp.,
the Appellant entered into an agreement with Seawind Corp. (“the Development
Agreement”) to provide services necessary to complete the prototyping and
certification of the Seawind on a cost-plus basis. All intellectual property rights
resulting from the work carried on by the Appellant became the property of Mr.
Silva and Seawind Corp.
[16] The Development Agreement provided that the Appellant’s prototyping and
certification expenses (net of Refundable ITCs actually received by it) (the
“Certification Expenses”) would be reimbursed by Seawind Corp. The Appellant
was required to remit the amount of the Refundable ITCs, if any, that it received to
Seawind Corp. The Appellant was entitled to receive an additional amount equal to
5% of its Certification Expenses (the “Markup”). The evidence shows that the
Markup was never paid. However, had it been paid, the Appellant would have been
required to use the Markup to finance its Certification Expenses. The Appellant
acknowledges that it had no ability to use those funds to pay dividends to its
shareholders or to fund other projects.
[17] The Appellant recorded the full amount of its Refundable ITC claim on its
balance sheet for its 2011 financial year. However, the Appellant failed to show its
offsetting liability to Seawind Corp. The amount of the Appellant’s refund claim
was $1,295,969. This amount exceeded the amount of the Appellant’s accumulated
retained earnings for the period. The Appellant’s financial statements for 2009 and
2010 were prepared on a similar basis. Therefore, as pointed out by the
Respondent, the Appellant’s operations were generating deficits.
[18] The material, equipment, and tools acquired by the Appellant and funded by
Seawind Corp. were to become the property of the latter corporation on completion
of the certification work.
[19] Seawind Corp. remained the sole client of the Appellant throughout the
period. When Seawind Corp. was unable to fund the Appellant’s activities, the
Appellant suspended its operations.
[20] The Appellant acknowledged that Sea Air Composites (“Sea Air”), a
Canadian corporation controlled by Mr. Silva, was to manufacture the Seawind if
and when the aircraft was certified by Transport Canada.
[21] Sea Air also owned the hangar in Richelieu, Quebec, out of which the
Appellant operated. The Appellant acknowledged that the parties had not entered
into a lease for the use of the premises.
[22] The evidence shows that Mr. Silva travelled regularly to the Appellant’s
workplace. During his visits he oversaw the work carried out by the Appellant.
[23] On August 17, 2009, almost four months after the execution of the
Development Agreement, the Appellant issued additional common shares, such
that from that date onward a majority of its common shares were held directly and
indirectly by persons residing in Canada. The Respondent acknowledged this
change in paragraph (j) of her Reply as follows:
(j) From August 17, 2009 to December 31, 2011, the shares of the capital stock of
the appellant were owned as follows:
Shareholder % of shares and Stated Capital
voting rights
Seawind Corp. 46% $1,150
7163860 44% $1,100
Mano[u] Inc. 5% $125
Patrick [Desautels] 5% $125
[24] Aéro Manou Inc. (“Manou Inc.”) is a Canadian corporation controlled by
Manou Dessertine, an employee of the Appellant and a resident of Canada. The
numbered company 7163860 Canada Inc. is a Canadian corporation, the shares of
which were owned equally by Patrick Desautels and Jean-François Bolduc, both of
whom resided in Canada. Desautels and Bolduc were also employees of the
Appellant. Manou Inc., Patrick Desautels, and 716380 Canada Inc. are hereinafter
referred to as the “Canadian Resident Shareholders”.
III. Analysis
A. Preliminary Question: Can the New Argument be Entertained by This Court?
[25] The Respondent argues that the Minister may advance an alternative legal
argument in support of an assessment at any time. This is allowed under subsection
152(9) of the Act, subject to the limitations provided for in subparagraphs
152(9)(a) and (b) of the Act.
[26] The Appellant contends that it would be denied procedural fairness if I was
to entertain the New Argument raised by the Respondent at this late stage. In any
event, the Appellant contends that the Respondent is barred from raising the New
Argument because it is contradicted by factual admissions made by the Respondent
in her Reply.
[27] I agree with the Respondent that subsection 152(9) of the Act allows her to
present new legal arguments. However, this must be done while observing the
rules of procedural fairness. I observe that the procedural entitlements are
contingent on context. The purpose of pleadings and the Respondent’s actions in
the present proceedings must be considered in this regard.
[28] It is well established that pleadings serve to define the issues in dispute.
Properly crafted pleadings facilitate production and discovery. Procedural rules
governing how pleadings can be amended are meant to avoid surprises at trial.
[29] As noted earlier, the Respondent assumed the following facts with respect to
the shareholders of the Appellant for the period commencing on August 17, 2009.
(j) From August 17, 2009 to December 31, 2011, the shares of the capital stock of
the Appellant were owned as follows:
Shareholder % of shares and voting Stated Capital
rights
Seawind 46% $1,150
Corp.
7163860 44% $1,100
Mano[u] 5% $125
Inc.
Patrick [Desautels] 5% $125
[emphasis added]
[30] The Appellant admitted that this assumption was true. The New Argument is
thus contradicted by facts which were pleaded by the Respondent and admitted by
the Appellant and which, consequently, were not in dispute between the parties
[31] Consistent with this factual assumption, the Respondent submitted that
Seawind Corp. had de jure control of the Appellant for only a portion of its 2009
taxation year. The only issue left open by the pleadings is whether Mr. Silva and/or
Seawind Corp. had de facto control of the Appellant as spelled out by the
Respondent in paragraph 13 of the Reply.
[32] Our general procedure rules set out how amendments to pleadings should be
made in the absence of the consent of the other party. The Respondent failed to
amend her Reply in accordance with these rules. Therefore, it would be a clear
violation of procedural fairness for me to consider the New Argument at this late
stage.
[33] In any event, if I am wrong on this first point, I observe that the Respondent
has failed to establish that certain of the common shares of the Appellant were
non-voting during the relevant taxation years.
[34] The Respondent asserts that the voting rights attached to the 44 common
shares held by 716380 Canada Inc. could not be exercised until the shares were
fully paid on March 9, 2012, pursuant to a resolution adopted on that date.
[35] I disagree with the Respondent’s assessment of the evidence on this point.
The articles of association of the Appellant provide that “[n]o shareholder shall be
entitled to vote on any question whilst any call or other sum is due and payable to
the Company in respect of any Shares of such shareholder.” Section 21 of the
articles provides that the subscription price for shares can be paid by installments
or by call. If a call is made by the directors, the amount then becomes due and
payable. In the context of the articles, I believe that the expression “due and
payable” is meant to convey that the amount is immediately exigible. The
directors’ resolution that recorded the payment of the shares stipulated the
following:
the 44 common shares issued to 7163860 Canada Inc. were issued in
consideration for $1,100 which, by administrative oversight, was not paid until
today and not recorded in the Company’s books and records until now.
The resolution further provided that the Appellant considered the shares to have
been paid at all relevant times. Therefore, the conduct of the Appellant does not
support the assertion that the subscription price for the shares was considered to be
immediately exigible prior to the adoption of the resolution. The Appellant’s
conduct is equally consistent with a finding that the subscription price was payable
by call and became “due and payable” or exigible only when the resolution was adopted by the directors. The Respondent has failed to show otherwise.2
B. De facto control
[36] Subsection 248(1) of the Act provides that CCPC has the meaning assigned
to it in subsection 125(7) of the Act. The relevant part of the latter provision reads
as follows:
“Canadian-controlled private corporation “ means a private corporation that is
a Canadian corporation other than
(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
prescribed venture capital corporation), by one or more corporations described in
paragraph (c), or by any combination of them,
[emphasis added]
[37] Subsection 256(5.1) defines how the phrase “controlled, directly or
indirectly in any manner whatever” should be interpreted in a de facto control
analysis.
(5.1) For the purposes of this Act, where the expression “controlled, directly or
indirectly in any manner whatever,” is used, a corporation shall be considered to
be so controlled by another corporation, person or group of persons (in this subsection referred to as the “controller”3) 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
2 The Respondent did not cross-examine Mr. Silva and Ms. Dessertine on this matter. They are two of the three
directors of the Appellant who signed the resolution.
3 The term “Controller” when used herein has the same meaning as given above.
manner whatever, by the controller by reason only of that agreement or
arrangement.
[38] McGillivray 4 is the latest pronouncement on the concept of de facto control.
It reverses what previously appeared to be a broader conception of the applicable
test which included the concept of operational control. McGillivray reaffirms the
narrow test set out in Silicon Graphics, as follows:
[35] In Silicon Graphics, Justice Sexton formulated the test as follows:
[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.
[36] This test was affirmed in 9044 2807 Québec Inc. v. Canada, 2004 FCA 23,
325 N.R. 226 [Transport Couture], wherein Justice Noël (as he then was), stated:
[24] It is not possible to list all the factors which may be useful in
determining whether a corporation is subject to de facto control (Duha
Printers, [1998] 1 S.C.R. 795, para. [38]). However, whatever factors are
considered, they must show that a person or group of persons has the clear
right and ability to change the board of directors of the corporation in
question or to influence in a very direct way the shareholders who would
otherwise have the ability to elect the board of directors (Silicon Graphics,
[2002] FCA 260, para. [67]). In other words, the evidence must show that
the decision-making power of the corporation in question in fact lies
elsewhere than with those who have de jure control.
[37] At the heart of justice Noël’s description of the legal test for de facto control
is essentially a restatement of the test enunciated by Justice Sexton in Silicon
Graphics. Nothing in this excerpt from Justice Noël’s reasons suggests an
intention on his part to depart from the Silicon Graphics formulation of the test
for de facto control.
[45] Accordingly, I affirm that the narrow test set out in paragraph 67 of Silicon Graphics is correct and has not been overturned by this Court.5
[39] The Respondent asserts that Mr. Silva directly, and through Seawind Corp.
and Sea Air, exercised de facto control over the Appellant through economic
4 McGillivray Restaurant Ltd. v. The Queen, 2016 FCA 99 [McGillivray].
5 McGillivray, supra note 4 at paras. 35-37 and 45.
influence derived from rights contained in the Development Agreement and
through the other commercial agreements and arrangements of the parties. The
economic influence constituted a sort of Sword of Damocles over the Canadian
Resident Shareholders of the Appellant and was capable of influencing how they
exercised their voting rights to determine the composition of, or the change in, the
board of directors.
[40] The Appellant appears to concede that economic influence might still be
relevant; however, the Appellant argues that such economic influence must be
based on legal rights that go beyond governing the ordinary commercial
relationships of the parties. The influence must also be derived from agreements
that are not otherwise excluded under subsection 256(5.1) by virtue of the
following language:
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]
[41] The Appellant argues that the Appellant could and did operate independently
of the alleged de facto Controller. The Development Agreement contained terms
and conditions necessary to ensure that the work would be carried out to Seawind
Corp.’s satisfaction. Finally, the commercial arrangements of the parties are
excluded from the Silicon Graphics tests by the exclusionary language set out in
subsection 256(5.1), cited above (the “Exclusion”).
[42] Is “economic influence” a factor to be considered in a de facto control
analysis in light of the principles reaffirmed in McGillivray? If yes, how should it
be applied?
[43] In McGillivray, the Court specifically confirmed that, “the list of factors that
may be considered when applying the Silicon Graphics test is open-ended.” A
caveat was added, clarifying that “a factor that does not include a legally
enforceable right and ability to effect a change to the board of directors or its
powers or to exercise influence over the shareholder or shareholders who have that
right and ability, ought not to be considered as having the potential to establish de
facto control.”
[44] Subsection 256(5.1) of the Act makes it clear that control in fact is based on
the ability to exercise direct or indirect influence. McGillivray confirms that the
influence must be exercisable, directly or indirectly, against the voting
shareholders of the corporation.
[45] Can the commercial agreements and arrangements of the corporation be the
source of that influence? The wording of the Exclusion suggests that Parliament
considered that they could, otherwise that language is redundant. It is a well-
established principle that Parliament does not speak in vain. Therefore, by
necessary implication, unless the commercial agreements and arrangements fall
within the narrow purview of the Exclusion, they must be considered in a de facto
control analysis.
[46] For the courts to conclude that the controller has control in fact, I believe
that the evidence must show that the controller has the ability to affect the
economic interest of the voting shareholders in a manner that allows the controller
to impose his or her will on them, should he or she decide to do so. The evidence
must allow the Court to discern that it would be unlikely that the shareholders
would exercise their voting rights independently of the controller’s wishes.
[47] I will now consider the circumstance of the parties’ dealings with each other
in the present context.
[48] The Appellant asserts that it was not directly or indirectly economically
dependent on Mr. Silva and/or Seawind Corp. I disagree. The evidence shows
otherwise.
[49] First, the Appellant had nominal share capital. It was entirely dependent on
the cash flow provided to it by Seawind Corp. under the Development Agreement
to fund the Certification Expenses. Seawind Corp. remained its sole client.
[50] The terms of the Development Agreement were dictated by Mr. Silva, who
controlled both parties when the agreement was entered into. The terms and
conditions of the Development Agreement appear to me to be lopsided. For
example, the agreement provided that the Appellant could use the “Markup”, its
only potential source of profit, solely for the purpose of funding the Certification
Expenses. The evidence also shows that Seawind Corp. refused to pay the
Appellant the Markup on instructions from Mr. Silva. This was a unilateral action
that was not contested by the Appellant.
[51] The evidence shows that the Appellant operated at a deficit throughout the
relevant period. When funding was no longer available from Seawind Corp. in
2011, the Appellant suspended its operations. All of the Appellant’s equipment
belonged to Seawind Corp. under the terms of the Development Agreement. The
Appellant did not own the rights to the intellectual property resulting from its
development and certification work. The Seawind was to be manufactured and sold
by Sea Air Composites, a company controlled by Mr. Silva.
[52] In view of the Appellant’s economic dependence on Seawind Corp. and
Mr. Silva, it is not surprising that the Appellant was unable to obtain funding for its
activities from third parties.
[53] The Appellant points to the fact that Manou Dessertine, an employee and
shareholder of the Appellant, provided the Appellant with $75,000 of funding
through an investment that she made in Sea Air. The Appellant points to this
investment to illustrate that the Appellant had a viable business operation. If
anything, Manou Dessertine’s investment in Sea Air demonstrates that a direct
investment in the Appellant would have been foolhardy. The Appellant offered no
potential for earnings growth to justify a direct investment in it. It had nominal
fixed assets. It did not own the hangar out of which it operated. All intellectual
property rights to the Seawind belonged to Mr. Silva or Seawind Corp.
[54] The Appellant argues that it had the potential to find other clients. It had a
qualified, assembled work force that could carry out other projects. Yet when
Seawind Corp. began to have difficulty raising capital to fund the Certification
Expenses, the Appellant suspended its operations. No evidence was led to show
that the Appellant had, or could find, for that matter, certification and prototyping
work from other aircraft developers. I doubt that the Appellant’s workers would
have been prepared to wait around for the Appellant to find other clients.
[55] The Appellant’s 2009 and 2010 financial statements highlight the fact that
the Appellant was economically dependent on Seawind Corp. In the notes to those
statements, under the heading “economic dependence”, management disclosed that
the Development Agreement was the sole source of the Appellant’s revenue. No
similar note was added to the Appellant’s financial statement for the 2011 year. I
observe that this statement was prepared after the audit of the Appellant
commenced. I surmise that the note was dropped because the issue of economic
influence had already been raised by the CRA.
[56] With this background in mind, it is hard to conceive that the Canadian
Resident Shareholders would have exercised their voting rights independently of
Mr. Silva’s wishes. The fact that the Canadian Resident Shareholders were either
employees of the Appellant or entities wholly owned by employees of the
Appellant reinforces this conclusion.
[57] The Appellant contends that the evidence shows that Ms. Dessertine helped
to manage the Appellant’s operations, which is proof that she was capable of
acting independently of Mr. Silva.
[58] I accept that Ms. Dessertine had useful experience in assembling aircraft
such as the Seawind. She was an accomplished flyer who ran her own business, a
flying school. I have no doubt that she was a competent manager. However, as
determined in McGillivray, operational or management control is irrelevant in the
application of the Silicon Graphics test.
[59] Finally, Ms. Dessertine was an employee of the corporation. Her continued
employment was dependent on the financial viability of the Appellant. In this
regard, the evidence shows that Mr. Silva and Seawind Corp. had a virtual
stranglehold on the Appellant’s financial wellbeing. It is not hard for me to
imagine that Mr. Silva, if he had chosen to do so, could have influenced how
Manou Inc. exercised its voting rights.
[60] The parties produced, by consent, newsletters authored by Mr. Silva and
addressed to investors in the Seawind project. Mr. Silva uses the pronoun “we”
when he describes the various activities conducted with respect to the development
and certification of the Seawind. The reader is left with the impression that all
activities, including those conducted by the Appellant, were carried out by an
integrated, wholly owned organization. For example, new staff of the Appellant are
referred to as employees of the group.
[61] With this background in mind, it is not hard for me to imagine that Mr.
Silva, had he chosen to do so, could have imposed his will on the Canadian
Resident Shareholders of the Appellant with respect to the composition of, or a
change in, the board of directors of the Appellant.
[62] As its last line of defence, the Appellant argues that the Development
Agreement, the principal source of the alleged economic dependence identified by
the Respondent, is precluded from consideration under the Silicon Graphics test by
virtue of the exclusionary language of subsection 256(5.1).
[63] As pointed out by the Respondent, a commercial agreement is excluded
under subsection 256(5.1) of the Act only if (i) at the relevant time the corporation and the controller are dealing at arm’s length6 and (ii) the main purpose of the
agreement is to govern the relationship of the corporation and the controller
regarding the manner in which the business of the corporation is carried on.
[64] Considering the evidence as a whole, I find that Mr. Silva and Seawind
Corp. and the Appellant were not dealing with each other at arm’s length in each of
the relevant taxation years. Therefore, the Exclusion does not apply.
[65] First, when the Development Agreement was entered into by Seawind Corp.,
Mr. Silva indirectly, and Seawind Corp. directly, controlled the Appellant. The two
corporations were related persons by virtue of subparagraph 251(2)(b) of the Act
and, as a result, were deemed not to be dealing at arm’s length by virtue of
paragraph 251(5)(a) of the Act.
[66] The evidence shows that Mr. Silva was the sole person to define the terms
and conditions of the Development Agreement. The initial term of the agreement
was 15 months. When the term expired, the Appellant did not seek to renegotiate
the terms and conditions of the Development Agreement, although by then it was
operating at a deficit.
[67] Not only did Mr. Silva determine the terms and conditions of the parties’
arrangement, the evidence shows that he unilaterally decided that the Markup
should not be paid. The Appellant did not object and enforce its right to the
payment of the Markup.
[68] There are other indications of non-arm’s length dealings. The Appellant
operated in a hangar belonging to Sea Air. There was no evidence that suggested
that the Appellant paid rent for the use of the space. I suspect Mr. Silva did not
require the Appellant to enter into a formal lease because the Appellant was
economically dependent on Seawind Corp., a corporation wholly owned by Mr.
6 For a review of the law applicable to determining whether there is an arm’s length relationship, see Peter Cundill
& Associates Ltd. v. R., [1991] 1 C.T.C. 197 (FCTD).
Silva. Seawind Corp. would have had to fund the lease payments under the terms
and conditions of the Development Agreement. This would have been tantamount
to Mr. Silva paying rent to himself
[69] The absence of a lease, however, suggests that the parties envisaged that the
Appellant would not operate independently of Seawind Corp. and Mr. Silva. If the
Appellant had expected to do so, I believe it would have insisted on a lease to
avoid being evicted from its place of business when it secured other business. I
suspect that Mr. Silva would also have insisted on a lease based on normal
commercial terms. Otherwise, the Canadian Resident Shareholders would have
benefited from the rent free arrangement if the Appellant secured new clients. The
absence of a lease suggests that the parties were not dealing at arm’s length.
[70] Considering all of the above, I find that the requirement for arm’s length
dealings is not satisfied.
[71] For all of these reasons, the appeal is dismissed.
[72] The Appellant requested costs in any event of the cause. It claims that the
Respondent violated the rules of procedural fairness when it belatedly raised the
New Argument. The Appellant asserts that the Respondent’s conduct was abusive.
[73] With respect, I do not agree with the Appellant’s assessment of the situation.
The Respondent’s counsel owed a duty to his client to present the New Argument.
When counsel discovered the late payment of the subscription price for the shares,
he immediately advised the Appellant that he would argue that Mr. Silva and
Seawind Corp. had de jure control of the Appellant at all relevant times. While the
Appellant was correct in asserting that I should not consider the New Argument on
grounds of procedural fairness, no delay was caused in the hearing. Therefore, as is
the norm when appeals are dismissed, costs are awarded to the Respondent.
Signed at Ottawa, Canada, this 13th day of March 2017.
“Robert J. Hogan”
Hogan J.
CITATION: 2017 TCC 39
COURT FILE NO.: 2014-4207(IT)G
STYLE OF CAUSE: AERONAUTIC DEVELOPMENT
CORPORATION AND HER MAJESTY
THE QUEEN
PLACE OF HEARING: Montreal, Quebec
DATE OF HEARING: January 25 and 26, 2017
REASONS FOR JUDGMENT BY: The Honourable Justice Robert J. Hogan
DATE OF JUDGMENT: March 13, 2017
APPEARANCES:
Counsel for the Appellant: Dominic C. Belley
Counsel for the Respondent: Benoit Mandeville
COUNSEL OF RECORD:
For the Appellant:
Name: Dominic C. Belley
Firm: Norton Rose Fulbright Canada LLP
Suite 2500, 1 Place Ville Marie
Montreal, Quebec
H3B 1R1
For the Respondent: William F. Pentney
Deputy Attorney General of Canada
Ottawa, Canada