http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/145645/index.do
Kruger Wayagamack Inc. v. Canada (June 27, 2016 – 2016 FCA 192, Nöel C.J. (author), Boivin, de Montigny JJ. A.).
Précis: This is somewhat of an oddball case involving entitlement to refundable SRED credits. The taxpayer was owned as to 51% (through an intermediary corporation) by Kruger Inc. (“Kruger”) and as to 49% by SGF Rexfor Inc. (“SGF”) (a company owned by the Government of Quebec). It was common ground that if the taxpayer was associated with Kruger it was not entitled to the refundable credits. That in turn boiled down to whether Kruger controlled, or was deemed to control, the taxpayer. The Tax Court carefully analysed [163 paragraphs plus extensive quotations from the documentation] the Unanimous Shareholder Agreement between Kruger and SGF and concluded that Kruger did not have de jure or de facto control. Nevertheless Kruger was deemed to control the taxpayer by paragraph 256(1.2)(c) of the Income Tax Act (Act) since the value of its 51% shareholding was worth more than 50% of the total shareholdings in the taxpayer. As a result the appeal was dismissed with costs.
The Federal Court of Appeal accepted the findings of the Tax Court and dismissed the appeal.
Decision: The taxpayer argued that the Tax Court failed to apply a 4.1% discount which would have brought the value of the Kruger holding below 50%. The Court of Appeal rejected this argument:
[12] Emphasizing this constraint, the Tax Court judge gave extensive reasons as to why he preferred the opinion adduced by the Crown’s expert, according to which Kruger’s 51% share ownership in the appellant had a fair market value commensurate with that percentage (Reasons, paras. 90 to 160). He also explained at length why he could not accept the appellant’s contention that the value of Kruger’s shares had to be discounted based on liquidity and marketability concerns while those held by SGF did not (ibidem).
[13] The appellant submits that in rejecting this last contention the Tax Court judge either erred in applying the relevant legal principles or made a number of palpable and overriding errors (Memorandum of the appellant, paras. 47 to 57).
[14] The appellant first seizes on the Tax Court judge’s statement at paragraph 127 and footnote 63 of his reasons to suggest that “the end result [of his reasoning] is that [Kruger’s] block of shares would require a discount of 4.1% in order for it to not be associated with the [a]ppellant,” (Memorandum of the appellant, para. 81). The appellant contends that this conclusion is either plainly wrong or reveals an error in principle, as it is clear that only a 2% discount is required to bring the value of Kruger’s block of shares below 50% (ibidem).
[15] A fair reading of the reasons does not support this attack as it is clear from the reasons that the Tax Court judge was merely addressing the relative value of Kruger’s 51% interest in relation to SGF’s 49% interest based on the approach used by the appellant’s own expert (Reasons, para. 121). The suggestion that the Tax Court judge thereby lost track of the numbers and that this “tainted his overall analysis” is without foundation (Memorandum of the appellant, para. 82).
The Court also accepted the Tax Court’s conclusion that the fair market value of the Kruger holding exceeded 50% did not disclose any reviewable error. Moreover the Court rejected the argument that the Tax Court erred in applying discounts to both shareholders in determining the value of the Kruger shares:
[19] The appellant further asserts that the Tax Court judge erred in holding that the alleged discount for lack of liquidity and marketability would have impacted both Kruger’s and SGF’s block of shares the same way, so that the relative value of their share ownership remained unaffected (Memorandum of the appellant, para 86).
[20] It suffices to say in this respect that the findings made by the Tax Court judge in support of this conclusion are all factual (Reasons, paras. 114, 115, 117, 118, 130 to 162) and that no error of a palpable and overriding nature has been demonstrated with respect to any of them.
As a result the appeal was dismissed with costs.