The taxpayer (“ProRé”) was a corporation without share capital engaged in the reinsurance of casualty risk whose capital had been contributed by 27 mutual general insurance companies (the “MGICs”), which were non-share corporations carrying on insurance businesses in their respective territories in Quebec with members having a participation in their capital. The MGICs were also the sole members of a non-share corporation (“Groupe Promutuel,” or the “Federation”) which did not have any capital participation in ProRé, and whose affairs were administered by a board of directors consisting of 10 individuals – seven directors and three managing directors of different MGICs. A majority of the voting shares of a taxable Canadian trust company (“ProCap”) with an $11.8 million non-capital loss were held by the MGICs, with most of the balance held by ProRé (and some also by Groupe Promutuel).
The MGICs and Groupe Promutuel transferred all their shares of ProCap to ProRé for consideration (in the case of the (Class A) voting shares transferred by the MGICs) in the form of certificates of additional participation in the capital of ProRé (the “transactions”). ProCap was then wound-up into its sole shareholder (ProRé).
S. 256(7)(d) deemed there to have been no acquisition of control of ProCap, so that the non-capital loss was preserved.
Favreau J first noted that the corporate Act governing ProRé specifically provided that the Board of Directors of ProRé was appointed by the Board of Directors of the Federation, so that it was clear that the “effective control of ProRé was held by the Federation through its Board of Directors” and that the “MGICs had no means of exercising effective control over the business and affairs of ProRé in a manner analogous or equivalent to the Buckerfield's test” (at para. 56, TaxInterpretations translation). However, the Federation did not control ProCap immediately before the transaction given that the Federation held no shares of ProCap (with the MGICs holding a majority of the ProCap voting shares) and although the 10 directors of ProCap were up to that time to be appointed by the board of the Federation from amongst its members, the agreement to this effect did not constitute a unanimous shareholders agreement (and, thus, was not to be taken into account for de jure control purposes) given that nothing in the corporate statute governing ProRé “allowed ProCap's shareholders to enter into agreements to take away or restrict the powers normally vested in ProCap's directors” (para. 64).
However, s. 256(7)(d) instead was satisfied on the basis that the MGICs were a group of persons who controlled ProRé both before and after the transaction and who controlled ProCap immediately before the transaction. In finding that the MGICs constituted a group of persons (who in fact acted in concert in the transaction), Favreau J noted that with the assistance of the Federation they operated using the same accounting and technological platform, they had a common objective, decided unanimously to implement the transaction and in the meantime had decided the basis upon which representatives on the board of the Federation were to be allocated (i.e., approximately equal representation for each of the three geographic regions of Quebec). Favreau J then stated (at paras. 92-93):
Since the MGICs, as a group of persons, controlled the Federation and the Federation controlled ProRé, the MGICs must be considered to also control ProRé by virtue of the simultaneous control principle set out in subsection 256(6.1) of the ITA, both immediately after and immediately before the disposition by the MGICs of the Class A shares of ProCap to ProRé.
At the level of ProCap, the evidence revealed that the MGICs, as a group, also controlled ProCap, immediately prior to the disposition by the MGICs of the Class A shares of ProCap to ProRé. ProCap's shareholders' agreement and the amendments made to it demonstrate that the MGICs had the power to exercise control of the corporation through their ability to appoint the majority of the members of the board of directors of the corporation.