What are "de facto" vs. "de jure" control?
Control of a corporation generally exists by reason of the ability to elect a majority of the directors of the corporation - de jure control. The concept of control also includes what is often referred to as de facto control. An example of de facto control might be a situation where a person holds less than 50% of the voting control of a corporation but hold enough "other influence" so that they could force the corporation to act in accordance with his or her wishes.
From the Department of Finance technical notes to subsection 256(5.1):
"Whether a person can be said to be in actual control of a corporation, notwithstanding that he does not legally control more than 50 per cent of its voting shares, will depend in each case on all of the circumstances."
An example of de facto control without de jure control is the case of Mimetex Pharmaceuticals Inc. V. The Queen. During the year in question, Mimetex (a foreign corporation) owned 50 common shares in the capital stock of the appellant, and two Canadian residents, who were also directors owned 25 common shares each. There were three directors elected to the board, one a U.S. Resident and the other two Canadians.
No one had de jure control of the appellant; the issue was whether Mimetex had de facto control over the Canadian company.
The CRA's council pointed out that:
- the two Canadian directors who were supposed to control the Canadian company, knew almost nothing about the Canadian company (for example, one did not know how many employees were working there, who had signing authority, etc.)
- Mimetex had financial control over the Canadian company and had a controlling influence over the company's affairs. This was illustrated by the fact that a Canadian director of the appellant had to leave following a conflict with another U.S. doctor who was not a shareholder, director or officer of the Canadian company, but was hired by the U.S. Director on his own decision, without any resolution of the board of directors.
Based on the facts provided, the judge concluded that "indeed the evidence discloses that the only director that exercised such control and supervision was the non-resident director. (...) without the approval of the board of directors."
This case underlines the importance of clearly considering de facto control issues whenever there are foreign shareholders or directors of a qualified Canadian Controlled Private Corporation.