De Facto Control

I am regularly asked whether it is possible to “multiply” the small business deduction (the SBD), and just as regularly I find it difficult to provide easy-to-understand advice and guidance. The association rules are complex, and even if their technical requirements are met the CRA can still reassess to require corporations to share the SBD on the grounds that they are controlled de facto by the same person. Two recent cases show that the courts are willing to uphold such reassessments.

In Corpor-Air Inc. c. La Reine, 2006 CCI 75 (which is apparently available on-line only in French), the wife was the sole shareholder and director of one corporation and her husband controlled another group of corporations. The wife’s corporation (the taxpayer) claimed its own SBD. The Minister reassessed on the basis that, even though the wife was the sole shareholder and director of the taxpayer, she was not involved in making decisions about its business. The husband, that is, possessed “direct or indirect influence that [was] exercised [to] result in control in fact of the corporation” as per subsection 256(5.1) of the Income Tax Act (Canada). That the wife legally controlled her corporation did not prevent the husband having de facto control. The court noted that the taxpayer did not have its own fixed assets and that it used the facilities of the husband’s group to carry on its business. In fact, it appears the taxpayer’s assets consisted mainly of loans to the husband’s group that did not bear interest and that did not provide for terms of repayment. The taxpayer’s only client of significance was the husband’s group of corporations. The fees payable by the husband’s group to the taxpyer for its were services were adjusted at year-end, for reasons the wife could not explain satisfactorily. What was worse, the wife’s testimony, which was largely unsupported by documents, was vague and imprecise, especially on questions relating to the taxpayer’s day-to-day operations.

The court, in its analysis, endorsed the summary of the factors to be considered in deciding whether de facto control exists found in ¶23 of IT-64R4. In light of the evidence, it had no difficulty concluding that the husband had de facto of the taxpayer. As a result, the taxpayer was associated with the husband’s companies and was required to share the SBD with them.

To similar effect is a recent Federal Court of Appeal decision: see Plomberie J.C. Langlois Inc. c. La Reine, 2006 CAF 113. These cases show that neither the CRA nor the courts will be shy about ignoring the legal structures put in place by taxpayers to “multiply” the SBD if they believe that there is common de facto control of the corporations claiming separate deductions.