http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/143165/index.do
McGillivray Restaurant Ltd. v. Canada (March 30, 2016 – 2016 FCA 99, Dawson, Ryer (author), De Montigny JJ. A.).
Précis: This is an appeal of a decision reported earlier on this site. McGillivray Restaurant Ltd. (the “Company”) was incorporated to operate a Keg restaurant franchise in Winnipeg. The majority shareholder of the Company was Mrs. Howard. Her husband managed the Company. He owned two other Keg franchises and was instrumental in obtaining the Company’s franchise. The Tax Court held that he exercised de facto control of the Company making it associated with corporations owned by him for the purposes of the small business deduction. The Company appealed to the Federal Court of Appeal.
The Court of Appeal concluded that the Tax Court Judge erred in imposing the wrong legal test for de facto control but found that he had made no reversible error in concluding the Mr. Howard exercised de facto control through an unwritten agreement with his wife. As a result the appeal was dismissed with costs.
Decision: Although the Tax Court Judge erred in imposing the wrong legal test for de facto control, he did not err in concluding that Mr. Howard exercised control of the Company by means of an unwritten agreement with his wife:
[55] A review on a standard of palpable and overriding error requires an appellate court to show meaningful deference to the factual findings of a trial judge. In the circumstances, it is my view that the Judge’s finding that there was an unwritten agreement between Mr. and Mrs. Howard was open to him on the evidence that was before him and in making it, he committed no palpable and overriding error.
[56] The absence of a written agreement is not proof that there was no unwritten agreement. The Judge was aware of the longstanding and successful relationship between Mr. Howard and the Franchisor, underscoring the trust that had been established between them over the years. This relationship indicates that the Franchisor may well have been satisfied by Mr. Howard’s verbal assurances that things would be run in the same way they always had in the three restaurants.
[57] Although the parties stipulated in the partial agreed statement of facts that Mrs. Howard could terminate Mr. Howard’s directorship at any time, she did not do so. As long as the unwritten agreement was in effect, Mr. Howard retained the right to determine the entirety of the Taxpayer’s board of directors, i.e. that he would constitute the entire board. It is clear that the rights possessed by Mr. Howard under the unwritten agreement with his wife fell short of giving him de jure control of the Taxpayer, as he did not own a majority of its voting shares and that agreement was not a unanimous shareholders agreement within the meaning of the governing corporate legislation. Nonetheless, as long as that agreement was not repudiated by Mrs. Howard, Mr. Howard’s right to determine the Taxpayer’s Board of Directors was influence of the type contemplated by subsection 256(5.1), within the interpretation of this Court set out in Silicon Graphics.
Accordingly the appeal was dismissed with costs.