http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/100619/index.do
Solutions MindReady R&D Inc. v. The Queen (January 21, 2015 – 2015 TCC 17, Favreau J.).
Précis: The facts in this case were somewhat of a clone of those in the decision of the Federal Court of Appeal blogged earlier on this site: Lyrtech RD Inc. v. The Queen (the Tax Court in fact noted that the same accounting firm was used to implement both structures). To put a complex matter somewhat simply Solutions MindReady inc. (“Public”), a public company, spun off its SRED activities to a new corporation, Solutions MindReady R&D inc. (“Private”), which was owned by a Trust affiliated with Public. Private claimed SRED credits in respect of its taxation years ending on November 29, 2005, and December 31, 2005. The Minister denied the credits on the basis that Private was de facto controlled by Public and therefore not entitled to claim SRED credits.
The Tax Court agreed with the Minister that Private was under the de facto control of Public and dismissed the appeal with costs.
Decision: While this decision involved a complex set of facts the result ultimately boiled down to three pithy paragraphs:
[37] The partial agreement on the facts, the documentary evidence submitted by the parties and the testimonial evidence provided by the witnesses at the hearing show that
(a) operationally, the influence factors exercised by Solutions MindReady inc. over the appellant include the following:
(i) all of the corporations in the group of corporations controlled by Solutions MindReady inc. were managed by the same people;
(ii) Solutions MindReady inc. and the appellant occupied the same premises and shared the same employees;
(iii) the employees transferred to the appellant saw no changes in their tasks, their workplace or the research projects they worked on;
(iv) according to the organizational charts submitted by Solutions MindReady inc. to illustrate its corporate structure, the Fiducie financière Solutions MindReady and the appellant are an integral part of Solutions MindReady inc. and appear to be its subsidiaries;
(v) according to the Annual Information Form of Solutions MindReady inc. dated March 31, 2006, the appellant is described as a subsidiary 100% owned by Solutions MindReady inc. as of December 31, 2005.
(vi) the bookkeeping for all of the entities in the MindReady group was done by the accountants of Solutions MindReady inc.;
(vii) Marc Lamy authorized fund transfers between the various entities of the MindReady group;
(viii) no agreement was offered in evidence to justify recharging the cost of services provided by the appellant’s employees to Solutions MindReady inc. In addition, invoices issued by the appellant do not match the transactions performed in its bank accounts.
(ix) the salaries of employees assigned to research and development activities were paid by the appellant in Canadian dollars every two weeks from its bank account. That money came from transfers made directly by Solutions MindReady inc. The first million dollars, which was used to subscribe to 999,900 class B shares of the appellant, was never used to pay the salary of employees working in research and development.
and that
(b) Economically, the influence factors exercised by Solutions MindReady inc. over the appellant include the following:
(i) the appellant had only one client, namely, Solutions MindReady inc.;
(ii) Solutions MindReady inc. guaranteed a loan of $650,000 taken out by the appellant;
(iii) external auditors consolidated the appellant’s financial statements with those of Solutions MindReady inc.;
(iv) according to the research contract between Solutions MindReady inc. and the appellant, research work to be done by the appellant was determined by Solutions MindReady inc., and it kept the intellectual property rights arising from it;
(v) the royalties and revenues earned from the issuing of licences were clearly insufficient to offset the cost of the research expenses. During the first five months of the appellant’s operation, the net deposits in the appellant’s two bank accounts totalled $2,800,000 (including the initial share subscription of $1,000,000), while the royalties generated by the appellant’s research activities totalled only $50,000;
(vi) the appellant would not have been able to carry out its research and development activities without the advances of funds from Solutions MindReady inc.;
(vii) the bankruptcy of Solutions MindReady inc. resulted in the sale of some of the appellant’s assets, namely, its tax credits for scientific research and experimental development.
[38] On the basis of the operational and economic influence factors listed at sub-paragraphs (a) and (b) of paragraph 37, I can only find that Solutions MindReady inc. exercised de facto control over the appellant. During the taxation years at issue, the appellant was completely economically dependent on Solutions MindReady inc.
Thus the Tax Court reached the same conclusion as that of the Federal Court of Appeal in Lyrtech. As a result the appeal was dismissed with costs.