In order to generate refundable investment tax credits for research and development expenditures, a Canadian public corporation ("Lyrtech") transferred its R&D operations (but not its intellectual property rights) to the taxpayer, which was intended to qualify as a Canadian-controlled private corporation. The taxpayer initially was financed through debt owing to a discretionary trust which also held it shares. The trust's trustees were two individuals, one of whom was the president and a director of Lyrtech, of the other trust beneficiaries and of the taxpayer, and the other of whom was a director of such companies and a co-founder of Lyrtech. The trust's capital beneficiaries were various subsidiaries of Lyrtech. Lyrtech agreed to pay 10% of any related product sales or 25% of any related royalties to the taxpayer. The taxpayer entered into a unanimous shareholders' agreement with the trustees.
After accepting (at para. 18) that control as defined in s. 256(5.1) encompassed both de jure control and de facto control (so that the presence of de jure control by A did not preclude de facto control by B) [confirmed by Scott JA in the FCA at para. 38] and finding (at para. 25) that the trustees (whose decisions required unanimity under the declaration of trust) together had de jure control of the taxpayer, Favreau J. went on to find that Lyrtech had de facto control of the taxpayer, as described in s. 256(5.1), so that the taxpayer did not qualify as a CCPC. Among other factual considerations were that:
- the two individuals controlling the taxpayer de jure also were the key directors and officers of Lyrtech (which had a seven-person board) and of other group companies, and they were not independent directors of Lyrtech;
- the taxpayer had virtually no revenues, was under-capitalized, and depended on Lyrtech to finance its activities either directly or through guarantees; and
- Lyrtech determined what R&D work the taxpayer would conduct.