The taxpayer was capitalized, and its common shares then were held, on a 51-49 basis, by a business corporation ("Kruger") and a Government of Quebec corporation ("SGF") in order to acquire, modernize, and operate a sawmill business. Under a unanimous shareholder agreement ("USA"), Kruger was entitled to elect three of the five directors. The taxpayer was not entitled to refundable investment tax credits if it was associated with Kruger by virtue of s. 256(1)(a).
Jorré J ultimately found that s. 256(1.2)(c) applied so that Kruger was deemed to control the taxpayer for purposes of s. 256(1)(a). However, before so concluding, he found that, under the USA, Kruger had "operational," but not "strategic," control of the taxpayer so that it thus lacked de jure control. The USA required unanimous approval by the board (with at least one of SGF's directors included) or of the shareholders for a wide range of matters – including of the capital and operating budgets and changes thereto, business plans or departures therefrom, the hiring or dismissal of various officers or payment of bonuses, any significant financing or security interest grant, and any entering into or changes in various significant contracts. (On the other hand, decisions on various operations matters could be made by majority decision.)
Kruger's inability to make strategic decisions meant that it did not have a "dominant influence in the direction of the appellant," as per Langlois (paras. 65-66).
In considering whether Kruger had de facto control, reference also could be made to non-USA agreements, namely, for the provision by Kruger of management services, and the marketing by it of the taxpayer's products, including the sale of wood pulp to Kruger itself, as well as to Kruger's specialized industry knowledge. However, these were not enough to establish de facto control, given significant built-in restrictions in those agreements and given the significant role of SGF.
See summary under s.256(1.2)(c).