PRICE WATERHOUSE COOPERS INC. ACTING IN THE CAPACITY OF TRUSTEE IN BANKRUPTCY OF BIOARTIFICIAL GEL TECHNOLOGIES (BAGTECH) INC., Appellant, v. HER MAJESTY THE QUEEN,, 2012 TCC 120

Docket: 2009-3734(IT)G BETWEEN: PRICE WATERHOUSE COOPERS INC. ACTING IN THE CAPACITY OF TRUSTEE IN BANKRUPTCY OF BIOARTIFICIAL GEL TECHNOLOGIES (BAGTECH) INC., Appellant, and HER MAJESTY THE QUEEN, Respon dent. [OFFICIAL ENGLISH TRANSLATION] ____________________________________________________________________ Appeals heard on October 17, 2011, at Montréal, Quebec.

Before: The Honourable Justice Paul Bédard Appearances : Counsel for the Appellant: Isabelle Pillet Counsel for the Respondent: Anne-Marie Boutin Marie-Aimée Cantin ____________________________________________________________________ JUDGMENT The reassessments made under the Income Tax Act for the 2004 and 2005 taxation years are allowed, with costs, in accordance with the attached Reasons for Judgment . Signed at Ottawa, Canada, this 12t h day of Apri l 2012. “Paul Bédard” Bédard J. Translation certified true

on this 9th day of January 2013. François Brunet, Revisor Citation: 2012 TCC 120 Date: 20120412 Docket: 2009-3734(IT)G BETWEEN: PRICE WATERHOUSE COOPERS INC.

ACTING IN THE CAPACITY OF TRUSTEE IN BANKRUPTCY OF BIOARTIFICIAL GEL TECHNOLOGIES (BAGTECH) INC., Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] REASONS FOR JUDGMENT Bédard J. [ 1 ] During the taxation years ending on December 31, 2004 and 2005 (the relevant years), Bioartificial Gel Technologies (BAGTECH) Inc. (Bagtech) incurred scientific research and experimental development (SR&ED) expenses and SR&ED capital expenditures.

To determine Bagtech’s investment tax credit (ITC) for SR&ED for the relevant years, the Minister of National Revenue (the Minister) concluded that Bagtech was not a “Canadian-controlled private corporation” (CCPC) within the meaning of subsection 125(7) of the Income Tax Act (the ITA). The Minister, therefore, concluded that, during the relevant years, Bagtech was a “non-qualifying corporation” within the meaning of subsection 127(9) of the ITA and was not entitled to the “refundable investment tax credit” provided for in subsection 127.1(1) of the ITA.

[ 2 ] The only issue in this case is whether Bagtech was a CCPC under subsection 125(7) of the ITA . That definition reads as follows: 125(7) In this section, . . . “Canadian-controlled private corporation” means a private corporation that is a Canadian corporation other than (

a) a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation), by one or more corporations described in paragraph ( c ), or by any combination of them, (

b) a corporation that would, if each share of the capital stock of a corporation that is owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation described in paragraph (

c) were owned by a particular person, be controlled by the particular person, (

c) a corporation a class of the shares of the capital stock of which is listed on a designated stock exchange, or (

d) in applying subsection (1), paragraphs 87(2)( vv ) and ( ww ) (including, for greater certainty, in applying those paragraphs as provided under paragraph 88(1)( e.2 )), the

definitions “excessive eligible dividend designation”, “general rate income pool” and “low rate income pool” in subsection 89(1) and subsections 89(4) to (6), (8) to (10) and 249(3.1), a corporation that has made an election under subsection 89(11) and that has not revoked the election under subsection 89(12); [ 3 ] The appellant essentially contends that a “particular person” does not control Bagtech simply because they hold more than 50% of the voting shares, since the person is bound by the unanimous shareholders’ agreement (the USA), which prevents them from electing a majority of Bagtech’s directors (see Appendix 1). However, the respondent contends that, for the purposes of paragraph (

b) of the definition of the expression “Canadian-controlled private corporation” in subsection 125(7) of the ITA , shareholders’ agreements or unanimous shareholders’ agreements may not be taken into consideration. The respondent submits that, in the event that the Court concludes that the existence of a unanimous shareholders’ agreement must be taken into consideration in determining whether the “control” referred to in paragraph (

b) of the definition of the expression “Canadian-controlled private corporation” is exercised by the “particular person”, the “particular person” nonetheless had de jure control during the relevant years. The respondent’s submission is that if the clauses in the nature of a unanimous shareholders’ agreement are taken into consideration, legal control was not withdrawn from the non-resident shareholders, who together form the majority shareholders, since: (

a) the clauses in the nature of a unanimous shareholders’ agreement did not operate to withdraw de jure control from the non-resident shareholders, who form the majority; and (

b) a majority of the clauses in the unanimous shareholders’ agreement provide that they will be implemented by ordinary resolution. The non-residents, therefore, control the decision-making in relation to those clauses. [ 4 ] The parties agreed to an [ TRANSLATION ] “agreement as to the facts, issue and documents” (Exhibit A-1), of which I reproduce the

section on the facts in full here: [T ranslation ] AGREEMENT AS TO THE FACTS, ISSUE AND DOCUMENTS FILED BY CONSENT

RELEVANT FACTS ADMITTED BY THE PARTIES 1.1 Bioartificial Gel Technologies (BAGTECH) Inc. (“Bagtech”) was incorporated on March 8, 1996, under the Canada Business Corporations Act (“CBCA”). 1.2 It is a taxable Canadian corporation as defined in subsection 89(1) of the Income Tax Act (Canada) (“ITA”). 1.3 After it acquired patented technologies, Bagtech specialized in cutting-edge medical technologies, including the development of several ranges of moist bandages that assist in speeding the scarring process for various types of wounds. 1.4 Since it began operating, and throughout the 2004 and 2005 taxation years, each ending on December 31 (“2004 and 2005 taxation years”), Bagtech carried on scientific research and experimental development activities (“SR&ED”). 1.5 During the 2004 taxation year, Bagtech incurred SR&ED operating expenses in the amount of $1,017,722 and SR&ED capital expenditures in the amount of $431,517. 1.6 During the 2005 taxation year, Bagtech incurred SR&ED operating expenses in the amount of $1,461,189 and SR&ED capital expenditures in the amount of $69,641. 1.7 Bagtech’s authorized capital stock is composed of Class A, B, C, D and E shares. 1.8 Only Class A shares are voting and participating. 1.9 Class B and C shares bear a non-cumulative dividend at a maximum rate of 8% and are redeemable in the amount of the stated capital. 1.10 Class D and E shares bear a non-cumulative dividend at a maximum rate of 8% and are redeemable at the stated amount plus a premium equivalent to the difference between the stated amount and the fair market value of property received by the company at the time the shares were issued. 1.11 Throughout the 2004 and 2005 taxation years, only one Class D share was issued and outstanding, at the time of incorporation, in the name of Guy Fortier (“ Fortier ”), a Canadian resident, in consideration for certain technologies. 1.12 All other issued and outstanding shares were Class A shares. 1.13 In the first round of financing, carried out in 1998, the Fonds régional de solidarité de l’île de Montréal (Quebec, Canada) (“ FRSIM ”) and the Fonds de Solidarité des travailleurs du Québec (F.T.Q.) (Quebec, Canada) (“ FSTQ ”) participated in the subscription for Class A shares of Bagtech. 1.14 The other investors were a group represented by the founders of Bagtech, and only investors resident in Canada were shareholders of Bagtech. 1.15 In 1999, two European “business angels” subscribed to the capital stock of Bagtech, and in 2000, two other venture capital corporations subscribed to the capital stock: SGF Santé Inc. (Quebec, Canada) (“ SGF ”) and Finedix B.V. (Amsterdam, Netherlands) (“ Finedix ”). 1.16 In 2002, the following venture capital corporations subscribed to the capital stock of Bagtech : Medco SA (Geneva, Switzerland) (“ Medco ”), Schroder & Co.

Bank AG (Zurich, Switzerland) (“ Schroder ”) and Gutrafin Limited (London, England) (“ Gutrafin” ), with the result that 45.31% of the outstanding Class A shares were then held by non-residents of Canada. 1.17 In 2003, in an additional round of financing, a number of shareholders acquired new Class A shares of Bagtech: the venture capital corporation Auriga Ventures II (Paris, France) (“ Auriga ”) and two “business angels”, Youri Popowski (Geneva, Switzerland) (“ Popowski ”) and Investissements Onami inc. (Quebec, Canada) (“ Onami ”). 1.18 On September 11, 2003, the Bagtech shareholders signed a document entitled [T ranslation ] “unanimous shareholders’ agreement” (“ USA ”), which included the following clauses: “RULES OF INTERNAL GOVERNANCE

Article 3.1 Subject to the following provisions, the Shareholders agree, during the term of this Agreement, to take the necessary measures and to use the voting rights associated with the Shares they hold to elect and continue seven Directors on the Board of Directors.

Article 3.2 On the date of this Agreement, the Shareholders agree that the Board of Directors shall be composed of representatives appointed by the Shareholders as hereinafter set out : Group A 2 Directors (including Marie-Pierre Faure ) Group B 3 Directors (including one appointed jointly by FSTQ and FRSIM, one appointed by SGF and one appointed by

Auriga ) Group C 2 Directors (including André Lamotte )” 1.19 Under the definition set out in

article 1.21 of the USA, Group A is composed of the following shareholders: Marie-Pierre Faure (“ Faure ”), Fortier, Richard J. Deckelbaum (“ Deckelbaum ”), Jean Emmanuel Raphael Guetta (“ Guetta ”), Amaze through its delegated director, Richard Émile Azera (“ Amaze ”), Jean-François Brisson (“ Brisson ”), Marie-Claude Lévesque (“ Lévesque ”), Marielle Robert (“ Robert ”), Popowski and Onami. 1.20 Under the definition set out in

article 1.22 of the USA, Group B is composed of the following shareholders: SGF, FSTQ, FRSIM, Finedix and Auriga, of which SGF appoints one director and FSTQ and FRSIM jointly appoint a second director. 1.21 Under the definition set out in

article 1.22 of the USA, Group C is composed of the following shareholders: Medco, Gutrafin and Schroder, which appoints two directors, including Collin Bier who is to act as chair of the board of directors. 1.22 On December 31, 2004, over 60% of the Class A shares outstanding were held by non-residents of Canada. 1.23 In the period from January 1 to July 21, 2005, the shareholders of Bagtech were the same as the shareholders on December 31, 2004. 1.24 On July 22, 2005, other investors subscribed to the capital stock of Bagtech: HSBC (Switzerland), Auxitec (France), Ayman (Switzerland) and Bagadine (France). 1.25 Following the subscriptions of those investors for shares in the capital stock of Bagtech, clauses 3.1 and 3.2 of the USA were changed by amendment to the USA dated July 22, 2005, to indicate that the number of directors of Bagtech would be increased to eight from seven, and that the number of directors appointed by Group C would increase to three from two, one of whom would be appointed by Bagadine. 1.26 On December 31, 2005, over 70% of the Class A shares outstanding were held by non-residents of Canada. 1.27 When Bagtech’s original return for its 2004 and 2005 taxation years was filed, the corporation was not designated as a “Canadian-controlled private corporation” (“CCPC”). 1.28 On or about June 1, 2007, under subsection 127.1(1) of the ITA , an amended prescribed form was filed for the 2004 and 2005 taxation years, to have Bagtech’s status recorded as a CCPC and an “eligible corporation”, for it to be given the applicable refundable investment tax credits at the 35% rate instead of the 20% initially claimed, and to have a portion of that credit refunded to it. 1.29 On October 21, 2008, Bagtech made an assignment of property and Price Waterhouse Coopers Inc. was appointed as trustee in the bankruptcy of Bagtech. 1.30 On November 3, 2008, CRA issued its decision that Bagtech was not, in its opinion, a Canadian-controlled private corporation during the 2004 and 2005 taxation years. 1.31 On April 9, 2009, CRA issued a “notice of determination of loss” for the 2004 and 2005 taxation years.

Analysis and Conclusion [ 5 ] Under paragraph (

b) of the definition of a CCPC in subsection 125(7) of the ITA , a corporation is not a CCPC where, if each share of the corporation that is owned by a non-resident person or a public corporation were owned by a “particular person”, the corporation would be controlled by the particular person. [ 6 ] As was held in Sedona Networks Corp. v. The Queen , 2007 FCA 169 , the paragraph (

b) analysis must be done in two stages. First, it is necessary to determine who the non-resident persons and public corporations are, and assume that their shares are owned by a “particular person”. Second, once that attribution is made, it is necessary to determine whether the corporation is controlled by that “particular person”. In the case, the evidence is that on December 31, 2004, 62.52% of the outstanding Class A shares of Bagtech (Class A shares being the only voting shares of Bagtech during that year) were held by non-residents of Canada.

The evidence also is that on December 31, 2005, 70.42% of the outstanding Class A shares of Bagtech (Class A shares being the only voting shares of Bagtech during that year) were held by non-residents of Canada. [ 7 ] The question to be answered now is: while the “particular person” held 62.52% and 70.42% of the outstanding Class A shares of Bagtech on December 31, 2004, and December 31, 2005, respectively, did the “particular person” actually control Bagtech during those years?

To answer that question, the meaning of the word “control” for the purposes of the ITA must be determined. [ 8 ] The courts have had to rule on the issue of control a number of times, since there is no definition in the ITA .

[9] The leading case with respect to control is Buckerfield’s Ltd. v. Minister of National Revenue, (CA EXC),[1965] 1 Ex. C.R. 299, in which President Jackett wrote: Many approaches might conceivably be adopted in applying the word “control” in a statute such as the Income Tax Act to a corporation.It might, for example, refer to control by “management”, where management and the board of directors are separate, or it might refer tocontrol by the board of directors. . . . The word “control” might conceivably refer to de facto control by one or more shareholderswhether or not they hold a majority of shares. I am of the view, however, that in

Section 39 of the Income Tax Act [the former sectiondealing with associated companies], the word “controlled” contemplates the right of control that rests in ownership of such a number ofshares as carries with it the right to a majority of the votes in the election of the board of directors. [Emphasis added.] See BritishAmerican Tobacco Co. v. I.R.C., [1943] 1 All E.R. 13, where Viscount Simon L.

C., at page 15, says: The owners of the majority of the voting power in a company are the persons who are in effective control of its affairs and fortunes. [10] That excerpt from the decision of the Exchequer Court was subsequently cited and approved on a number of occasions by theSupreme Court of Canada (the SCC), in particular in Minister of National Revenue v. Dworkin Furs (Pembroke) Ltd., (SCC), [1967] S.C.R. 223, Vina-Rug (Canada) Ltd. v. Minister of National Revenue, (SCC), [1968] S.C.R. 193, R. v.Imperial General Properties Ltd., (SCC), [1985] 2 S.C.R. 288, and Duha Printers (Western) Ltd. v.

The Queen, (SCC), [1998] 1 S.C.R. 795. [11] It is clear from that case law that, for the purposes the ITA, “control” of a corporation means de jure control and not de factocontrol.

In short, Buckerfield’s stands for the proposition that the test consists in deciding whether the majority shareholder enjoys“majority control” over the “affairs and fortunes” of the corporation, as manifested in “ownership of such a number of shares as carrieswith it the right to a majority of the votes in the election of the board of directors”. [12] One important clarification was subsequently added to the comments made by President Jackett in Buckerfield’s.

Indeed, inImperial General Properties Ltd., supra, at para. 11, the SCC stated that, in determining de jure control, “the court is not limited to ahighly technical and narrow

interpretation of the legal rights attached to the shares of a corporation”. In fact, the highest court in the landessentially reiterated what had been said by Thurlow J. in Donald Applicators Ltd. v. Minister of National Revenue, (CA EXC), [1969] 2 Ex.

C.R. 43, affirmed by [1971] S.C.R. v, and held that “[n]either is the court constrained to examine those rights inthe context only of their immediate application in a corporate meeting”, and that, on the contrary, “these rights must be assessed in theirimpact ‘over the long run’” (Imperial General Properties Ltd., supra, at para. 11). [13] While under the legislation that governs the corporation, directors generally have the express right to manage the corporation’sday-to-day activities, the majority shareholder exercises that control indirectly by virtue of their right to elect the board of directors.Accordingly, it is unquestionably the majority shareholder, and not the directors themselves, who exercise control of the corporation“over the long run”: see British American Tobacco Co. v.

I.R.C., [1943] 1 All E.R. 13, at p. 15. [14] The final important authority regarding the de jure control rule laid down in Buckerfield’s is, of course, Duha Printers, adecision of the SCC. [15] In that case, the fact that the relevant test was de jure control was not really disputed by the parties.

The dispute related, rather,to the factors that may be taken into consideration in the determination of whether there is de jure control. [16] Iacobucci J. commenced his analysis by reiterating that “to apply formalistically a test like that set out in Buckerfield’s, withoutpaying appropriate heed to the reason for the test, can lead to an unfortunately artificial result” (Duha Printers, supra, at para. 37).

Onthat point, it should be recalled that the central objective of the Buckerfield's test is to determine where effective control of thecorporation lies. [17] The SCC then concluded that, as a general rule, “external agreements are not to be taken into account as determinants of de jurecontrol”: at paras. 51 and 55.

[18] The SCC’s reasoning is justified by the principle that de jure control is the control conferred by the majority vote in acorporation. While the SCC has sometimes been prepared to examine factors other than a corporation’s share register, its review hasalways been restricted only to the constating documents, not external agreements. The only exception is found in cases like Minister ofNational Revenue v.

Consolidated Holding Co., (SCC), [1974] S.C.R. 419, where the very capacity to act was limitedby external documents, but that exeption has emerged only in cases where the shares were held by trustees: at paras. 48 to 50. [19] Iacobucci J. also placed some weight on the fact that “taxpayers rely heavily on whatever certainty and predictability can begleaned from the Income Tax Act”.

Accordingly, in the opinion of the SCC, “a simple test such as that which has been followed sinceBuckerfield’s” is desirable: para. 52. “The de facto concept was rejected because it involves ascertaining control in fact, which can leadto a myriad of indicators which may exist apart from these sources”: para. 58. [20] Accordingly, Iacobucci J. dismissed the possibility of reviewing external agreements in the de jure control analysis, and stated: . . . agreements among shareholders, voting agreements, and the like are, as a general matter, arrangements that are not examined bycourts to ascertain control.

In my view, this is because they give rise to obligations that are contractual and not legal or constitutional innature. (para. 59) [21] Iacobucci J. then examined the question of whether a unanimous shareholders’ agreement must be qualified as contractual innature, or in the nature of a constating document. [22] The SCC settled the issue by deciding that a unanimous shareholders’ agreement is “a corporate law hybrid,

part contractualand

part constitutional in nature” (para. 66). That being said, the SCC was careful to go on to say that the constitutional element of theunanimous shareholders’ agreement is even more potent than its contractual features: para. 67. [23] Accordingly, if an agreement can be considered to be a unanimous shareholders’ agreement (USA) within the meaning of theCanada Business Corporations Act (the CBCA), it must be taken into consideration just like the corporation’s constating documents inorder to determine de jure control.

The legal reasoning underlying the principle that a unanimous shareholders’ agreement may play avital role in the de jure control analysis is summarized well by the following comments of Iacobucci J.: As I have said, the essential purpose of the Buckerfield’s test is to determine the locus of effective control of the corporation.

To mymind, it is impossible to say that a shareholder can be seen as enjoying such control simply by virtue of his or her ability to elect amajority of a board of directors, when that board may not even have the actual authority to make a single material decision on behalf ofthe corporation. The de jure control of a corporation by a shareholder is dependent in a very real way on the control enjoyed by themajority of directors, whose election lies within the control of that shareholder.

When a constating document such as a USA providesthat the legal authority to manage the corporation lies other than with the board, the reality of de jure control is necessarily altered andthe court must acknowledge that alteration. (para. 70) [24] In other words, the share register should be examined having regard to the relevant legislative provisions governing thecorporations (in this instance, the CBCA) and the corporation’s constating documents (to which unanimous shareholders’ agreementsmust be seen as analogous).

However, external agreements play no role in this analysis, since they are relevant only to de facto control. [25] Lastly, the SCC concludes by cautioning that “the simple fact that the shareholders of a corporation have entered into a USAdoes not have the automatic effect of removing de jure control from a shareholder who enjoys the majority of the votes in the election ofthe board of directors”.

The extent to which the provisions of a unanimous shareholders’ agreement restrict or abrogate the directors’powers must be examined (para. 81): “it is possible to determine whether de jure control has been lost as a result of a USA by askingwhether the USA leaves any way for the majority shareholder to exercise effective control over the affairs and fortunes of thecorporation in a way analogous or equivalent to the power to elect the majority of the board of directors (as contemplated by theBuckerfield’s test)” (para. 82). [26] Paragraph 85 of Duha Printers provides an excellent

summary of the current law relating to the concept of “control”. Thatparagraph reads as follows: [85] It may be useful at this stage to summarize the principles of corporate and taxation law considered in this appeal, in light of their

importance. They are as follows: (1) Section 111(5) of the Income Tax Act contemplates de jure , not de facto , control.

(2) The general test for de jure control is that enunciated in Buckerfield’s , supra : whether the majority shareholder enjoys “effective control” over the “affairs and fortunes” of the corporation, as manifested in “ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the board of directors”.

(3) To determine whether such “effective control” exists, one must consider: (

a) the corporation’s governing statute; (

b) the share register of the corporation; and (

c) any specific or unique limitation on either the majority shareholder’s power to control the election of the board or the board’s power to manage the business and affairs of the company, as manifested in either : (

i) the constating documents of the corporation; or (ii) any unanimous shareholder agreement .

(4) Documents other than the share register, the constating documents, and any unanimous shareholder agreement are not generally to be considered for this purpose.

(5) If there exists any such limitation as contemplated by item 3(c), the majority shareholder may nonetheless possess de jure control, unless there remains no other way for that shareholder to exercise “effective control” over the affairs and fortunes of the corporation in a manner analogous or equivalent to the Buckerfield’s test. [ 27 ] While Duha Printers clearly stands for the proposition that a unanimous shareholders’ agreement must be taken into consideration in determining de jure control, the Minister submits that an agreement of that nature must have no influence on the second stage of the analysis (that is, the determination of control of a corporation by a “particular person”) for the purposes of paragraph (

b) of the definition of a CCPC. Paragraph 21 of technical

interpretation 2008–0265902I7 – Canadian-Controlled Private Corporation provides a fairly good

summary of the Minister’s argument on this point. That paragraph reads as follows: [T ranslation ] 21. In that specific case, indeed as a general proposition, we reiterate our position that a USA has no impact on the second stage of the analysis (i.e. determination of control of a corporation by the hypothetical particular person) for the purposes of paragraph (

b) of the definition of CPCC in subsection 125(7) . It still seems to us that the determination provided for in the second stage of the analysis is purely arithmetical. The case law in no way rejects that approach; on the contrary, the Federal Court of Appeal unreservedly holds that mere possession of shares by a non-resident majority is sufficient to give the non-residents control for the purposes of paragraph (

b) of the definition of CCPC in subsection 125(7) . In any event, as stated in the Document, the hypothetical particular person is not a party to any unanimous shareholders’ agreement or deemed to be such for the purposes of paragraph (

b) of the definition of CCPC in subsection 125(7) . CRA, Technical

Interpretation 2008-0265902I7, “Canadian-Controlled Private Corporation” (May 6, 2008), at para. 21.

[28] At this point, I think it will be useful to summarize the circumstances in which Parliament added paragraph (

b) to the definitionof a CCPC. It was added by S.C. 1998, c. 19, subsection 145(2), and evidently runs counter to the decision of the Federal Court ofAppeal in Silicon Graphics Ltd. v. The Queen, 2002 FCA 260 , [2003] 1 F.C. 447, in which the Court held that “simpleownership of a mathematical majority of shares by a random aggregation of shareholders in a widely held corporation with somecommon identifying feature (e.g. place of residence) but without a common connection does not constitute de jure control as that termhas been defined in the case law” (at para. 36). The comments by the Federal Court of Appeal were made in the context of an analysis ofthe applicable law before new paragraph (

b) was added to the definition of a CCPC. [29] In this regard, the purpose of the provision is, moreover, clearly laid out in the relevant technical notes published by theMinister of Finance: Currently, a corporation is a CCPC if it is a private corporation and a Canadian corporation (both of which terms are defined insubsection 89(1) of the Act), and it is not controlled, directly or indirectly in any manner whatever by one or any combination of publiccorporations (other than prescribed venture capital corporations) or non-resident persons. This amendment ensures that two other typesof corporation are not CCPCs.

The first type are corporations that, if they are not actually controlled by non-residents, avoid that statusonly because their shares are widely held. The second type are corporations the shares of which are listed on a foreign stock exchange. A corporation the voting shares of which are distributed among a large number of persons is usually not considered to be controlled byany group of its shareholders, provided the shareholders do not act together to exercise control.

As a result, it may be argued that aprivate Canadian corporation that is owned by a number of non-residents or public corporations is not controlled by non-residents orpublic corporations, and is thus a CCPC. New paragraph (

b) of the CCPC definition clarifies that this is not the case. Paragraph (b)requires non-residents’ and public corporations’ shareholdings – not only of the corporation in question, but of all corporations – to benotionally attributed to one hypothetical person. If that person would control the corporation, then the corporation is not a CCPC. Department of Finance of Canada, Explanatory Notes Relating to Income Tax (December 8, 1997), s. 125(7), “Canadian-controlledprivate corporation”. [30] The practical result is, therefore, that paragraph (

b) of the definition of a CCPC creates a legal fiction. This kind of alteration ofreality was thoroughly canvassed by the SCC in R. v. Verrette, (SCC), [1978] 2 S.C.R. 838. Writing for the Court,Mr.

Justice Beetz characterized this kind of legal fiction as a “deeming provision” and explained its effect as follows: A deeming provision is a statutory fiction; as a rule it implicitly admits that a thing is not what it is deemed to be but decrees that forsome particular purpose it shall be taken as if it were that thing although it is not or there is doubt as to whether it is. (p. 845) [31] The purpose and application of a deeming provision was then examined in detail by the Federal Court of Appeal in AttorneyGeneral of Canada v.

Scarola, 2003 FCA 157, [2003] 4 F.C. 645, in which Létourneau J. based his explanation in part on the followingFrench doctrine: Fiction is a process that, as repeatedly noted, is part of the pragmatics of law. It consists first in misrepresenting the facts, stating them tobe other than what they really are and extracting from that very adulteration and that false supposition the legal consequences that wouldflow from the dissembled truth, if that truth existed beyond the cloak of external appearances. (para. 19) [32] In Survivance v.

Canada, 2006 FCA 129, at para. 55, the Court stated: “Insofar as [a legal fiction] effectively alters reality, itsmeaning should be limited to what is clearly expressed. A deeming provision cannot otherwise modify the actual situation that obtains.” [33] Indeed, those comments are consistent with those of the SCC in Shell Canada Ltd. v. Canada, (SCC), [1999]3 S.C.R. 622, in which Madam Justice McLachlin, as she then was, stated, in comments that have been repeatedly cited since then: The Act is a complex statute through which Parliament seeks to balance a myriad of principles.

This Court has consistently held thatcourts must therefore be cautious before finding within the clear provisions of the Act an unexpressed legislative intention: . . . . (par. 43)

[ 34 ] Accordingly, I am of the opinion that, in spite of the particular characteristics of paragraph (

b) of the definition of a CCPC, it must be read in its entire context and in its ordinary and grammatical sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament: see Ludco Enterprises Ltd. v.

The Queen , 2001 SCC 62 , [2001] 2 S.C.R. 1082 , at para. 36 . [ 35 ] Consequently, the legal effects of this legal fiction, which are superimposed on the truth that is being pushed aside, mean that the “particular person” to whom we are referring here is deemed to have the same rights and to be subject to the same obligations as the non-resident owners of the shares of the corporation in question. [ 36 ] Subsection 146(3) of the CBCA provides: A purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed to be a party to the agreement. [ 37 ] Considering everything that has been discussed here, I therefore find it very difficult to defend the position that the “particular person” referred to in paragraph (

b) of the definition of a CPCC cannot be deemed, in determining de jure control, having regard to the alteration of the facts imposed by the provision, to be a party to the unanimous shareholders’ agreements then in effect. [ 38 ] The Minister contends that the effect of having regard to a unanimous shareholders’ agreement in effect at the time the test of the hypothetical shareholder is examined could be to skew the analysis of control of the corporation in question, since when the unanimous shareholders’ agreement in question was written, the shareholders of the corporation could certainly not have foreseen that the fictitious shareholder for which the provision provides would join in the future.

Accordingly, in order to avoid unusual or undesirable results, the Minister concludes that it is preferable not to deem the hypothetical shareholder to be a party to the unanimous shareholders’ agreements then in effect. The Minister explains: Where Canadian residents do not own enough shares to elect a majority of the board of directors, the objective and effect of the presumption in paragraph (

b) of the CCPC definition is to treat the hypothetical person as having the ability to exercise effective control over the affairs and fortunes of the corporation in a way analogous to the power to elect the majority of directors. That is so because the hypothetical person is not a party to a unanimous shareholder agreement nor is that person deemed to be a party to it. In our view, it would be contrary to both the text and the purpose of the provision to consider that the fiction of control created by the application of paragraph (

b) of the CCPC definition could be diluted by an agreement that restricts the powers of the directors of a corporation to allocate them to shareholders that would never include the hypothetical shareholder. See: Andrew W. Dunn, Ron Durand, Phil Jolie, and Mark Symes, “Canada Revenue Agency Round Table,” Report of the Proceedings of the Sixty-First Tax Conference, 2009 Conference Report (Toronto; Canada Tax Foundation, 2009), at pages 3:14-3:15. [ 39 ] In my view, the answer is inescapable. The result appears incongruous only if we choose not to have regard to the fiction.

It is not incongruous if the fiction is given full effect. [ 40 ] In my humble opinion, we need only imagine a situation where all of the shareholders that are non-residents or that are public corporations decided, for some reason, to sell all their shares in the corporation to the same purchaser.

It is undeniable that, in such a case, the purchaser of the shares would be a party to any unanimous shareholders’ agreement then in effect. [ 41 ] I could not agree more with the Federal Court of Appeal, when it stated: “There would be a risk of creating intolerable uncertainty if the courts could override a deeming provision of general application solely because the result it produces in a particular case seemed undesirable to them.

Parliament is well aware of the effect of the presumptions it enacts, and it is up to Parliament to set limits on their scope. ” ( Survivance , supra , at para. 79 ). [ 42 ] In this case, paragraph (

b) of the definition of a CCPC is a provision of general application and it is the role of the courts to give effect to it. [ 43 ] In conclusion, I am of the opinion that the hypothetical shareholder contemplated in paragraph (

b) of the definition of “Canadian-controlled private corporation” in subsection 125(7) of the ITA is bound by the Bagtech USA signed in 2003, and subsequently by the amendments made in 2005.

[44] The question that should now be answered is: must the clauses of a USA governing the election of a corporation’s directors betaken into consideration in the determination of de jure control of the corporation? [45] In my opinion, before answering that question, we need a clear understanding of the nature of a unanimous shareholders’agreement for the purposes of the CBCA.

Subsection 146(1) of the CBCA reads as follows: An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and one or morepersons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the managementof, the business and affairs of the corporation is valid. [46] Subsection 146(1) of the CBCA seems to be setting four requirements that an agreement must meet in order to be qualified as aunanimous shareholders’ agreement.

First, the agreement obviously must be lawful and meet the general requirements for contractualvalidity. Second, the agreement must be in writing, and it should be noted that this requirement is indeed a prerequisite for validity andnot merely evidentiary. It must also be entered into by all the shareholders of a corporation, whether among themselves or with thirdparties. And third, it must restrict, in whole or in part, the powers of the directors to manage or supervise the management of the businessand affairs of the corporation.

An agreement signed by all the shareholders that merely increases the number of votes required for certainactions to be taken by the shareholders, in accordance with subsection 6(3) of the CBCA, may, in exceptional situations, be a unanimousshareholders’ agreement, even if it does not restrict or abrogate any of the directors’ powers.

However, that is the only exception, underboth Quebec and federal law: see Paul MARTEL, Entreprises et sociétés, Collection de droit 2011-2012, École du Barreau du Québec,vol. 9, 2011, pp. 41 et seq. [47] These four requirements that a unanimous shareholders’ agreement must meet in order to be valid were also reiterated by theSCC in the only case that has examined unanimous shareholders’ agreements in detail: Duha Printers, supra. [47] [48] The CBCA, the Ontario Business Corporations Act and the Civil Code of Québec, for example, all provide for an expressexception to the prohibition on fettering the power of the directors.

Thus the various Canadian statutes governing business corporationsprovide that unanimous shareholders’ agreements will be valid, notwithstanding the common law principle that shareholders, even actingunanimously, may not fetter the board’s power to manage or supervise the management of the business and affairs of the corporation orprevent it from performing its legal duty to do so. (The prohibition on fettering the powers of the directors seems to originate inAutomatic Self Cleansing Filter Syndicate Co. Ltd. v. Cuninghame, [1906] 2 Ch. 34 (C.A.). The principle was then reiterated inMotherwell v.

Schoof, (AB KB), [1949] 4 D.L.R. 812 (Alta. S.C.) and Atlas Development Co. v. Calof (1963), (MB KB), 41 W.W.R. 575 (Man. Q.R.).) [49] In fact, before there were unanimous shareholders’ agreements, the ability of shareholders to control the corporation was limitedto the power to elect and dismiss directors.

When unanimous shareholders’ agreements became part of corporate law, they fundamentallyaltered the landscape by creating a mechanism whereby shareholders can strip directors of their management powers in whole or in part. [50] Moreover, a unanimous shareholders’ agreement does not merely limit the directors’ powers.

It has a positive aspect in that itprovides that the shareholders may exercise the powers they have taken away from the directors. [51] In and of themselves, unanimous shareholders’ agreements make it possible for shareholders to considerably depart from thestandard rules of corporate law; they bring a degree of flexibility to the some of the rather rigid and arid old principles. [52] In addition, and as I noted earlier, regarding legal recognition of USAs, the SCC clarified a number of aspects of a unanimousshareholders’ agreement in Duha Printers, supra.

Writing for the SCC, Iacobucci J. said that a unanimous shareholders’ agreement is “acorporate law hybrid,

part contractual and

part constitutional in nature” (Duha Printers, supra, para. 66). [53] That being said, the SCC was careful to go on to say that the “constitutional element of the USA is even more potent than itscontractual features”: paras. 67 and 68. [54] Another important element of a unanimous shareholders’ agreement is obviously that it can be binding on future shareholders.

In fact, a purchaser or transferee of shares is deemed, under an irrebutable presumption, to be a party to the unanimous shareholders’agreement: see subsection 146(3) of the CBCA However, if the purchaser or transferee is not informed of the existence of the unanimousshareholders’ agreement, by an endorsement on the share certificate or otherwise, the shareholder may, no later than 30 days after hebecomes aware of the existence of the unanimous shareholders’ agreement, rescind the transaction by which he has acquired the shares:see subsection 146(4) of the CBCA. [55] It also seems to me to be essential to conclude this overview of unanimous shareholders’ agreements by stressing that the verynature of unanimous shareholders’ agreements is to restrict the directors’ power and expand the power of shareholders in themanagement of the corporation: see Paul MARTEL, Entreprises et sociétés, Collection de droit 2011-2012, École du Barreau duQuébec, vol. 9, 2011, p. 41 et seq.; Normand RATTI, La convention unanime des actionnaires,

(1986) C.P. du N. 93. The SCC couldnot have been clearer on this point, stating that “[u]nlike an ‘ordinary’ shareholder agreement, which cannot interfere with the exercise ofthe directors’ powers, a USA can and must do so”. (Duha Printers, supra, at para. 71). Ultimately, the effect of a unanimousshareholders’ agreement restricting the directors’ power must be to substitute the shareholders for the directors in the exercise of theirrights, powers and responsibilities, to the extent of the restriction: see subsection 146(5) of the CBCA.

Instead of removing theadministrators, a unanimous shareholders’ agreement simply strips them of their powers and rights and their associated responsibilities.The CBCA also provides that the directors shall manage the business of a corporation “[s]ubject to any unanimous shareholderagreement” (see subs. 102(1) of the CBCA), and expressly requires that the directors and officers comply with the provisions of such anagreement: see subsection 122(2) and

section 247 of the CBCA. [56] The question that should now be answered is: can a unanimous shareholders’ agreement contain clauses other than clausesrelating to the management of a corporation? If so, are only those clauses restricting the directors’ power covered by the provisions ofthe applicable corporations legislation relating to unanimous shareholders’ agreements?

In other words, do only the clauses that restrictthe directors’ power create the presumption that they may be set up against new shareholders? [57] Although the agreement is described as a unanimous shareholders’ agreement, it must be kept in mind that an agreement signedby all shareholders, the only effect of which is to restrict the directors’ power, cannot be considered to be a unanimous shareholders’agreement within the meaning of the CBCA and cannot be set up against future shareholders: see Paul MARTEL,

La société par actionsau Québec, vol. 1, Les aspects juridiques, Montréal, Wilson & Lafleur, 2011, paras. 27-34. [58] Conversely, an agreement entered into by all shareholders of a corporation that restricts the directors’ power can be qualified asa unanimous shareholders’ agreement notwithstanding the fact that it is called something else: see Paul MARTEL,

La société par actionsau Québec, supra, paras. 27-34, Alteco v. The Queen, (TCC), [1993] T.C.J.

No. 213 (QL), [1993] 2 C.T.C. 2087, atpara. 35. [59] Moreover, the question of whether an agreement is a unanimous shareholders’ agreement, when some of its provisions restrictthe directors’ powers, is still controversial: see Nathalie BEAUREGARD and François AUGER, Les conventions entre actionnaires,Journées d’études fiscales, (Montréal, Canadian Tax Foundation, 2010), p. 12. [60] Well before being appointed to the bench, Iacobucci J. had spoken on this point: The statutory provision relating to unanimous shareholder agreements are found in ss. 2(1) and 146 of the CBCA, and ss. 1(1), 45 and108 of the OBCA.

Note that the distinguishing feature of a “unanimous shareholder agreement” in the statutes is that it “restricts, inwhole or in part, the powers of the directors to manage [or, in the OBCA, to supervise the management of] the business and affairs of thecorporation”. Suppose an agreement between all the shareholders of the corporation restricts the authority of the directors, but alsocontains other agreements, relating to such matters as buy-sell arrangements, requisite shareholders votes on the undertaking offundamental changes, shareholder voting agreements, etc.

Is the whole agreement a “unanimous shareholder agreement”, or only thatpart that relates to the authority of the directors? Do the words “in whole or in part” in CBCA s. 146(2) and OBCA s. 108(3) refer to the“written agreement”, or do they refer to the restriction of the powers of directors? The distinction may be important. For example, atransferee of shares with notice of a common law voting agreement is not bound by the agreement (because of the absence of privity ofcontract); see Greenhalgh v. Mallard, [1943] 2 All E.R. 234 (C.A.).

However, a transferee of shares subject to a u.s.a. is bound by theu.s.a.; see CBCA s. 146(4), OBCA s. 108(4) (although note the limitation contained in CBCA s. 49(8), OBCA s. 56(3)). See: Frank IACOBUCCI, Canadian Corporation Law: Some Recent Shareholder Developments, The Cambridge Lecture 1981,complied by N. Eastham and B. Krivy, 1982, p. 88, at pages 92 to 95. [61] A number of authors, Paul Martel being just one, nonetheless maintain that a USA may contain clauses other than clauses

relating to the management of the corporation, but that still, [Translation] “only clauses restricting the directors’ power are covered bythe provisions of the legislation relating to unanimous agreements, and the presumption that those provisions create in respect of newshareholders applies only to those clauses and not to the rest of the agreement” (see Paul MARTEL, Les conventions entre actionnaires,Montréal, Wilson & Lafleur, 2007, pp. 340-341).

Paul Martel also argues that it would be preferable to incorporate the two types ofclauses in separate agreements: [Translation] In general, administration clauses should be treated, in practice, as apples, and other clauses as oranges, and they should be in twoseparate documents. Particularly at the provincial level, it is difficult to have purchase and sale clauses take the form of a restriction onthe directors’ power, and it is virtually impossible to do so for voting and corporate clauses.

Administration clauses, a “unanimousagreement” in the sense of the Act, will automatically be binding on new shareholders (mind that the share certificates are endorsed tothat effect), while the other clauses will be binding on new shareholders who expressly adhere to them, with the authorization of thesignatories. See: Paul MARTEL, Les conventions entre actionnaires, supra, at page 341. [62] Daniel Lafortune shares that opinion and writes: [Translation] That being the case, is a stranger to the agreement who becomes a shareholder bound by the shareholders’ agreement? A distinctionmust be made in that regard.

Are we dealing with provisions in the nature of a unanimous agreement or provisions of an entirely differentnature? For provisions that are not in the nature of a unanimous agreement, the rule is simple. By operation of the principle of the relative effectof contracts, strangers are not bound by the agreement, unless they agree to be. See: Daniel LAFORTUNE, La convention d’actionnaires (2002), 36 R.J.T. 197, at page 217. [63] The Superior Court of Quebec also seems to be of the opinion that a unanimous shareholders’ agreement is divisible, and,indeed, gives an excellent

summary of that approach in Leblanc v. Fertek Inc., (QC CS), REJB 2000-20884, [2000]J.Q. No. 4045 (QL). In that decision, Mr.

Justice Dalphond dealt differently with clauses in the nature of a unanimous shareholders’agreement that appear in a simple shareholders’ agreement: [Translation] 49 The agreement among the shareholders dated January 31, 1996, as indicated in its fifth “Whereas”, has two objectives: to recordthe shareholders’ agreement regarding management of the corporation and regarding the ownership and transfer of their shares. 50 The first aspect is a unanimous shareholders’ agreement within the meaning of s. 146(2) of the CBCA, since it is an agreement inwriting signed by all the shareholders relating to the management of the business and affairs of the corporation. 51 The purpose of a unanimous shareholders agreement, or a declaration by the sole shareholder to the same effect, is essentially torestrict the powers of the directors of the corporation, not the ownership of shares.

Indeed, it is because that is the purpose of this kind ofagreement that it can be made by a sole shareholder, as provided by subs. 146(3) of the CBCA. The directors and officers of thecorporation, including Tassé, shall comply with the agreement (s. 122(2) of the CBCA).

52 The second aspect of the agreement deals with questions relating to ownership of shares and not the management of thecorporation. That class of agreement does not need to be agreed to by all shareholders. Accordingly, we see agreements amongshareholders representing only a majority, governing their right to vote at annual general meetings, for example, or granting them firstrefusal rights in the event that shares are sold. The validity of an agreement of that nature has long been recognized (Bergeron v.

Ringuet, (SCC), [1960] S.C.R. 672, [1958] B.R. 222) and it is government by the civil law of contracts, unless there are specificprovisions in legislation that applies to the corporation, such as the CBCA or the Securities Act.

Because it is a contract, there must be atleast two parties, because a person cannot contract with themself. 53 To summarize, the two aspects of the agreement made between the shareholders in January 1996 must not be confused, eventhough they appear in the same document. (at paras. 49 to 53) [64] However, other authors believe that a unanimous shareholders’ agreement may deal with incidental subjects that do not directlyaffect the internal management of the corporation. Kevin P.

McGuinness writes: 12.209 In addition, provisions are scattered throughout both the OBCA and the CBCA indicating various subjects that may be dealtwith in a USA, aside from the general authority to restrict the power of the directors. . . . 12.212 . . . the question is sometimes raised as to whether a unanimous agreement may deal with matters outside the management ofthe corporation. . . . it is doubtful that the inclusion of any such collateral provisions would adversely affect the validity of a unanimousshareholder agreement or its status as such.

It has always been open to the shareholders to regulate their own relationship. See Kevin P. McGUINNESS, Canadian Business Corporations Law, 2nd ed., Markham, LexisNexis, 2007, pages 1215 to 1218 [65] After noting that, in his opinion, a unanimous shareholders’ agreement may contain various incidental provisions that are notintended to restrict directors’ powers, without jeopardizing the validity of the agreement, Mr.

McGuinness lists a number of incidentalquestions that may be addressed in a unanimous shareholders’ agreement, including the election of directors (pages 1215 to 1216). [66] The Alberta Court of Queen’s Bench also supported that position, to a certain extent, in Wood v. Wood, [2004] A.J. No. 1230(QL), 2004 ABQB 775, where it expressly recognized the validity of a clause in a unanimous shareholders’ agreement relating to theelection of the board of directors: 8 The USA provided that the directors of the company would be Mr. Wood, Jennifer Wood and Mrs. Wood so long as eachremained a shareholder.

Two directors would constitute a quorum. If either Mr. Wood or Jennifer Wood ceased to be a director, the otherwould be “exclusively entitled to appoint a replacement director”. If Mrs. Wood should cease to be a director, she would not be replaced.(au par. 8) [67] Iacobucci J. made a very interesting observation before he was appointed to the bench: see Frank IACOBUCCI, CanadianCorporation Law: Some Recent Shareholder Developments, op. cit. In fact, he first just reminds us simply that a unanimousshareholders’ agreement appeared in the Canadian corporate law with

section 146 of the CBCA, and the concept was subsequentlyadopted in a majority of corporations laws, including by

section 146 of the Alberta act, the Alberta Business Corporations Act, RSA2000, c. B-9. [68] Iacobucci J. noted that

section 146 of the Alberta act seems to expand the scope of a USA beyond what is provided in theCBCA. Although the main purpose of a USA, at least under the federal statute, is to restrict the directors’ power,

section 146 of theAlberta act, which is set out in Appendix 2, does seem to have expanded its scope. Briefly, under

section 146 of the Alberta act,abrogating the powers of directors and assigning them to the shareholders is merely one possible purpose of a USA: see paragraph 146(1)(c). That

section provides that a USA may provide for the manner of electing directors: see paragraph 146(1)(b). After canvassing theissue, Iacobucci J. makes the following comments: The new Alberta Business Corporations Act adopts and extends the u.s.a. concept [section 146]. After acknowledging that the primaryapproach of the CBCA u.s.a. provisions reflected a desire to have shareholders rather than directors manage a closely-held company, the

designers of the Alberta statute felt that the u.s.a. should be expanded in scope to make the device even more useful and to clarify some of the problems which were felt to be present in the CBCA provisions. With respect to the expanded scope of the u.s.a., the Alberta

section allows the entrenchment of any provision concerning the internal affairs and organization of the corporation.

The Alberta definition of a u.s.a. includes an agreement which does any one of the following: (1) regulates the rights and liabilities of shareholders, as shareholders, among themselves or between themselves and any other party to the agreement; (2) regulates the election of directors; (3) provides for the management of the business and affairs of the corporation, including the restriction or abrogation, in whole or in part, of the powers of the directors; (4) includes any other matter that may be contained in a u.s.a. pursuant to any of other provision of the Alberta Business Corporations Act.

See: Frank IACOBUCCI, Canadian Corporation Law: Some Recent Shareholder Developments , op. cit. , at pages 92 to 95. [ 69 ] On reading

section 146 of the Alberta statute, we must conclude that the Alberta legislature intended to expand the scope of a unanimous shareholders’ agreement. The

section expressly provides that a shareholders’ agreement may include a number of elements other than abrogating the powers of the board of directors: see subsection 146(1).

Moreover, the Alberta act expressly provides that a unanimous shareholders’ agreement is binding on future shareholders, even if it contains provisions that have nothing to do with restrictions on the directors’ power of management and oversight: see subsections 146(2) and (3). [ 70 ] Some useful conclusions can be drawn from this comparative examination of the federal and Alberta legislation. [ 71 ] First, if a unanimous shareholders’ agreement, as first provided for by the CBCA, could, from the outset, have included provisions other than restrictions on the power of the directors, why did Alberta subsequently see fit to make substantial changes to the wording of the CBCA?

Other jurisdictions, such as Quebec and Manitoba, have merely reiterated the essence of

section 146 of the CBCA (see the Business Corporations Act , RSQ, c. S-31.1,

section 213 and The Corporations Act , C.C.S.M., c. C225, subsection 140(2)).

Why would one legislature go to the effort of specifying, in its corporations act, that a unanimous shareholders’ agreement may do more than restrict, in whole or in part, the powers of the board of directors, if the CBCA already permitted that? [ 72 ] Second, why did Parliament not make it clear, similarly to Alberta, that a unanimous shareholders’ agreement may include provisions other than provisions abrogating the directors’ powers of management and oversight, when it would have been easy to do so if that had been its intention? [ 73 ] In another vein, I would briefly note that a number of doctrinal opinions are to the effect that if someone tried to take advantage of the benefits of unanimous shareholders’ agreements by incorporating minor restrictions on the powers of directors, simply to satisfy that requirement, a court could declare those restrictions to be insufficient and refuse to characterize the document as a unanimous shareholders’ agreement: see Nathalie BEAUREGARD and François AUGER, Les conventions entre actionnaires , op. cit., page 12.

I would note immediately that in my opinion, that position must be rejected. [ 74 ] It is apparent from this analysis that the question of whether unanimous shareholders’ agreements may contain only clauses restricting the power of directors remains to be settled. [ 75 ] The question that should now be asked is: in examining de jure control, must clauses limiting the right of the majority shareholder to elect the directors of a corporation incorporated under the CBCA be considered, if those clauses appear in a unanimous

shareholders’ agreement that also restricts the directors’ power? [ 76 ] One school of thought holds that in examining de jure control, a unanimous shareholders’ agreement should be examined, as constituting a single instrument, particularly in relation to clauses whose sole effect is to restrict the power of the majority shareholders to elect the directors.

Referring expressly to Duha Printers , Nathalie Beauregard and François Auger opine: [T ranslation ] Accordingly, a unanimous shareholders’ agreement whose clauses restrict the ability of the majority shareholder to elect the members of the board of directors or that substantially fetters the directors’ power to manage the corporation may have an impact on the de jure control of the corporation. This type of clause will therefore have to be scrutinized closely at the time the unanimous shareholders’ agreement is signed.

See: Nathalie BEAUREGARD and François AUGER, Les conventions entre actionnaires , supra , p. 18 [ 77 ] Other authors take a more nuanced approach, and say that in examining the de jure control of a corporation, while Duha Printers may seem to support the proposition that a unanimous shareholders’ agreement must be read as inseverable, only the provisions that concretely restrict the directors’ powers must be taken into consideration: It may seem strange that the restriction of the powers of directors is the feature that permits other unrelated provisions of the agreement, namely, those dealing with the election of the directors, to be taken into account in determining de jure control, especially since the very restriction of the directors' powers might make one wonder why the ability to elect them should continue to be the litmus test for “effective control”.

See: Robert COUZIN, Some Reflections on Corporate Control , 2005, vol. 53, Can. Tax.

J., 305, p. 318 [ 78 ] That line of thought, or at least the criticism it levels at the conclusions reached by the SCC, seems to better reflect certain fundamental principles of corporate law, and to some degree converge with the position advocated by Paul Martel, who contends that a unanimous shareholders’ agreement may address subjects other than the management of the corporation; however, [T ranslation ] “only clauses that restrict the power of the directors are governed by the provisions of the act relating to unanimous shareholders’ agreements, and the presumption they create regarding new shareholders applies only to those clauses, and not to the rest of the agreement” (Paul Martel, Les conventions entre actionnaires , op. cit. , pp. 340-341.). [ 79 ] Moreover, we would note that the Superior Court of Quebec has clearly held that a unanimous shareholders’ agreement is severable; in fact, it gave an excellent

summary of this approach in Leblanc v. Fertek Inc ., supra . In that case, involving an application for an injunction under

section 247 of the CBCA because of failure to comply with a unanimous shareholders’ agreement, Dalphond J. accorded different treatment to clauses in the nature of a unanimous shareholders’ agreement that appeared in a simple shareholders’ agreement. It should be noted, however, that the case related to corporate law and not the application of Duha Printers in determining de jure control. [ 80 ] For my part, I agree with both the

interpretation of Duha Printers offered by Robert Couzin and with his criticism of that decision: see Robert Couzin, Some Reflections on Corporate Control , supra , at pages 317 to 320. [ 81 ] However, a careful reading of paragraph 85 of the decision in Duha Printers leads me to conclude that any restriction on the power of the majority shareholder to elect the directors, set out in the constating document of the corporation or in a unanimous shareholders’ agreement, must be considered in the determination of de jure control. [ 82 ] I agree that this is an unusual result.

A restriction on the election of directors will not be relevant to the analysis of de jure control if it appears in a voting agreement, while the same restriction will be relevant if it is in a unanimous shareholders’ agreement. That being said, we have no choice but to follow the doctrine of the SCC, even though it may seem illogical.

[ 83 ] It would have been an easy matter for the SCC to write that in deciding whether there is “effective control”, both any restriction on the majority shareholder’s power to elect the directors as manifested in the constating document of the corporation and any restriction on the power of the directors to manage the business and affairs of the corporation as manifested in any unanimous shareholders’ agreement must be taken into consideration. [ 84 ] However, the SCC states, instead, that we must have regard to either of these restrictions in either of those documents. [ 85 ] I am, therefore, of the opinion that, as a general rule, a clause in a unanimous shareholders’ agreement that restricts the ability of the majority shareholders to elect the directors must be taken into account in the determination of the de jure control of a corporation, in the light of Duha Printers . [ 86 ] To summarize, I am of the opinion: (

i) that a unanimous shareholders’ agreement must be taken into consideration for the purposes of paragraph (

b) of the definition of the expression “Canadian-controlled private corporation” in subsection 125(7) of the ITA ; and (ii) that a restriction on the right of the majority shareholder to elect the directors, set out in a written unanimous shareholders agreement, must be taken into consideration in the determination of the de jure control of a corporation. [ 87 ] The analysis I have done of the clauses of the USA that are genuinely in the nature of a unanimous shareholders’ agreement (that is, that restrict the power of the directors), which I have identified (see Appendix 3), has persuaded me that they are minor restrictions on their power.

In my opinion, the clauses do not operate to strip the hypothetical shareholder of de jure control. [ 88 ] We will now examine the provisions of the USA relating to the election of directors that were in effect during the 2004 taxation year. [ 89 ] Under paragraph 3.2 of the USA, the directors are elected by three groups: Group A, Group B and Group C.

Because the “particular person” would have certain Class A shares, they would be a member of each of those groups. [ 90 ] Because the directors chosen by Group A are elected by residents of Canada and two of the three directors chosen by Group B are elected by residents of Canada, the “particular person” contemplated by paragraph (

b) of the definition of a CCPC could appoint only one of the five directors chosen by the members of those groups. [ 91 ] Because none of the three members of Group C is a resident of Canada, the “particular person” could appoint both directors elected by that group. [ 92 ] Accordingly, notwithstanding the fact that the “particular person” would hold more than 50% of the Class A shares of Bagtech, under the USA, it could not elect a majority of the directors: under the USA, it is residents of Canada who elect a majority of the directors, that is, four of the seven directors.

As a result, the “particular person” could not, during the 2004 taxation year, have controlled Bagtech within the meaning of paragraph (

b) of the definition of a CCPC in subsection 125(7) of the ITA . [ 93 ] We will now examine the clauses of the USA that were in effect during the 2005 taxation year. [ 94 ] Under paragraph 3.2 of the USA, the directors are elected by three groups: Group A, Group B and Group C. Because the “particular person” would have certain Class A shares, they would be a member of each of those groups.

[ 95 ] Because none of the three members of Group C is a resident of Canada, the “particular person” could appoint the directors elected by the group: two directors, from January 1 to July 21, and three directors, starting on July 22. [ 96 ] Accordingly, notwithstanding the fact that the “particular person” would hold more than 50% of the Class A shares of Bagtech, under the USA, it could not elect a majority of the directors: under the USA, it is residents of Canada who elect four of the seven directors, from January 1 to July 21, and four of the eight directors, from July 22 to December 31.

As a result, the “particular person” could not, during the 2005 taxation year, have controlled Bagtech within the meaning of paragraph (

b) of the definition of a CCPC in subsection 125(7) of the ITA . [ 97 ] Accordingly, I am of the opinion that Bagtech was a “Canadian-controlled private corporation” within the meaning of subsection 125(7) of the ITA during the 2004 and 2005 taxation years and, therefore, that it was entitled to the “refundable investment tax credit” provided for in subsection 127.1(1) of the ITA. [ 98 ] For all these reasons, the appeal is allowed with costs. Signed at Ottawa, Canada, this 12th day of April 2012. “Paul Bédard” Bédard J. Translation certified true on this 9th day of January 2013. François Brunet, Revisor

Appendix 1 UNANIMOUS SHAREHOLDER AGREEMENT (RELEVANT PORTION) UNANIMOUS AGREEMENT AMONG THE SHAREHOLDERS OF BIOARTIFICIAL GEL TECHNOLOGIES (BAGTECH) INC. signed at Montréal, Quebec, on September 11, 2003 BETWEEN: INVESTISSEMENTS ONAMI INC., having its principal place of business at 285 avenue Clarke, suite 202, Westmount, Quebec, Canada H3Z 2E3, represented herein by Hanan Ghraoui, who is duly authorized for the purposes hereof, as she has declared; (hereinafter “ Onami ”) AND: AURIGA VENTURES II , Fonds Commun de Placements à Risques, represented by the management company Auriga Partners, a limited liability company with management and supervisory boards and capital of 456,250 Euros, having its head office at 18 avenue Matignon, 75008 Paris, represented herein by Jacques Chatain, who is duly authorized for the purposes hereof; (hereinafter “ Auriga ”) AND: YOURI POPOWSKI , businessman, domiciled and residing at 16 rue Michel Servet, Geneva, Switzerland, 1206; (hereinafter “ Popowski ”) AND: MEDCO SA , a limited liability company duly constituted under the laws of Switzerland, having its head office at 11 rue de la Rôtisserie, CH-1204, Geneva, Switzerland, represented herein by Ferdinand O.

Walser, who is duly authorized for the purposes hereof, as he has declared; (hereinafter “ Medco ”) AND: GUTRAFIN LIMITED , a limited liability company duly constituted under the laws of Switzerland, having a place of business at 40 Egerton Crescent, London, England 5W3 2EB, represented herein by Francis C. Lang, who is duly authorized for the purposes hereof, as he has declared;

(hereinafter “ Gutrafin ”) AND: SCHRODER & CO.

BANK AG , acting on behalf of its clients, a commercial bank duly constituted under the laws of Switzerland, having its head office at Central 2, Zurich, Switzerland, represented herein by Antonio Winspeare Guicciardi, who is duly authorized for the purposes hereof, as he has declared; (hereinafter “ Schroder ”) AND: FONDS DE SOLIDARITÉ DES TRAVAILLEURS DU QUÉBEC (F.T.Q.) , a legal person constituted under the Act to establish the Fonds de solidarité des travailleurs du Québec (F.T.Q.) , having its head office at 8717 rue Berri, Montréal, Quebec H2M 2T9, represented by and acting through Daniel Laporte, who is duly authorized for the purposes hereof, as he has declared; (hereinafter “ FSTQ ”) AND: FONDS RÉGIONAL DE SOLIDARITÉ ÎLE DE MONTRÉAL, SOCIÉTÉ EN COMMANDITE , a limited partnership duly constituted under the laws of Quebec, acting through its general partner Gestion du fonds regional de solidarité Île de Montréal Inc., having its principal place of business 255 rue St-Jacques Ouest, 3rd floor, Montréal, Québec H2Y 1M6, itself represented by and acting through André Savard, who is duly authorized for the purposes hereof, as he has declared; (hereinafter “ FRSIM ”) AND: SGF SANTÉ INC. , a company legally constituted under the laws of Quebec, having its head office at 600 rue de la Gauchetière Ouest, suite 1700, Montréal, Quebec, represented by and acting through Francis Bellido and Marc Paquet, who are duly authorized for the purposes hereof, as they have declared; 2 (hereinafter “ SGF ”) AND: FINECIX B.V. , a limited liability company duly constituted under the laws of the Netherlands, having its head office at (1043 EJ) Teleportboulevard 140, Amsterdam, Netherlands, represented by and acting through Willem van Wettum, general manager, who is duly authorized for the purposes hereof, as he has declared; (hereinafter “ Finedix ”) AND: GUY FORTIER , residing and domiciled at 3428 rue Marcil, Montréal, Quebec H4A 2Z3; (hereinafter “ Fortier ”) AND: MARIE-PIERRE FAURE , residing and domiciled at 1109 Place Guertin, Ville St-Laurent, Quebec H4M 1X5;

(hereinafter “ Faure ”) AND: RICHARD J.

DECKELBAUM , residing and domiciled at 8 Harvard Lane, Hastings-on-Hudson, New York 10806, U.S.A.; (hereinafter “ Deckelbaum ”) AND: JEAN-FRANÇOIS BRISSON , residing and domiciled at 3020 Contrecoeur, Montréal, Quebec, H1L 3Z8 (hereinafter “ Brisson ”) AND: 9079-1039 QUÉBEC INC. , a company legally constituted under the laws of Quebec, having its head office at 1109 Place Guertin, Ville St-Laurent, Quebec H4L 1X5, represented by and acting through Marie-Pierre Faure, its president, who is duly authorized for the purposes hereof, as she has declared; (hereinafter “ 9079 ”) 3 AND: AMAZE INTERNATIONAL SPRL , a corporation duly constituted under the laws of Belgium, having a place of business at 206 Avenue de Messidor, Brussels 1180, represented by and acting through Richard Émile Azera, its delegated director, who is duly authorized for the purposes hereof, as he has stated; (hereinafter “ AMAZE ”) AND: JEAN EMMANUEL RAPHAEL GUETTA , residing and domiciled at 19 Church Mount, London N2 0RW, United Kingdom; (hereinafter “ Guetta ”) AND: RICHARD ÉMILE AZERA , residing and domiciled at 206 Avenue Messidor, 1180 Brussels, Belgium; (hereinafter “ Azera ”) AND: MEDICAL SCIENCE PARTNERS INTERNATIONAL (MSPI) , a Singapore general partnership, represented by and acting through André Lamotte, partner, who is duly authorized for the purposes hereof, as he has stated; (hereinafter “ MSPI ”)

AND: MARIE-CLAUDE LÉVESQUE , domiciled and residing at 3460 Peel #1515, Montréal, Quebec H3A 2M1; (hereinafter “ Lévesque ”) AND: MARIELLE ROBERT , domiciled and residing at 6979 De Lanaudière #2, Montréal, Quebec H2B 1Y1; (hereinafter “ Robert ”) ( Onami, Auriga, POPOWSKI, Medco, Gutrafin, Schroder, MSPI, FSTQ, FRSIM, Fortier, Deckelbaum, Brisson, 9079, AMAZE, Guetta, SGF and Finedix, Lévesque and Robert being hereinafter collectively referred to as the “ Shareholders ”) 4 AND: BIOARTIFICIAL GEL TECHNOLOGIES (BAGTECH) INC. , a corporation legally constituted under the

Canada Business Corporations Act , having its head office at 400 rue de Maisonneuve ouest, suite 1156, Montréal, Quebec H2A 1L4, represented by and acting through Marie-Pierre Faure, its president, who is duly authorized for the purposes hereof, as she has declared; (hereinafter the “ Corporation ”) WHEREAS the Corporation’s authorized capital stock is composed of an unlimited number of Class A, B, C, D and E shares without par value, of which there are 8,162,749 Class A shares and 1 Class D share issued and outstanding; WHEREAS the shares of the Corporation that are outstanding (or reserved for issue) are divided among the shareholders, as of the date hereof, in the proportions set out below as among the shareholders, who are the beneficial owners thereof by good and valid title, free and clear of any priority, mortgage or encumbrance whatsoever; Shareholders Number and Class of Shares % Faure 1,041,280 Class A shares 12.76 FRSIM 771,980 Class A shares 9.46 Fortier 547,610 Class A shares and 1 Class D share 6.71 SGF 540,541 Class A shares 6.62 Finedix 472,973 Class A shares 5.79 Schroder 837,897 Class A shares 10.27 Medco 761,031 Class A shares 9.32 Gutrafin 648,649 Class A shares 7.95

5 Shareholders Number and Class of Shares % FSTQ 135,135 Class A shares 1.66 9079 90,037 Class A shares 1.10 Deckelbaum 61,804 Class A shares 0.76 AMAZE 47,393 Class A shares 0.58 Guetta 47,393 Class A shares 0.58 Brisson 2,000 Class A shares 0.03 MSPI 195,135 Class A shares 2.39 Auriga 1,621,621 Class A shares 19.87 Popowski 270,270 Class A shares 3.31 Lévesque 15,000 Class A shares 0.18 Robert 15,000 Class A shares 0.18 Onami 40,000 Class A shares 0.49 TOTAL 8,162,749 Class A shares, 1 Class D share 100.0 WHEREAS each of the Shareholders declares that it is the beneficial owner, directly or on behalf of its clients (in the case of Schroder), as of the date hereof, by good and valid title, free and clear of any charge, priority, mortgage or encumbrance whatsoever, of the number of Class A or Class D shares indicated alongside its name in the foregoing table; WHEREAS in addition to the 360,270 Class A shares of the capital of the Corporation reserved for the employees of the Corporation for the purposes of its profit-sharing program, the 195,135 Class A shares of the capital of the Corporation reserved for MSPI under a consultancy agreement made between MSPI and the Corporation, the 81,000 warrants (at $1.85 per share) issued to FRSIM and the share purchase option granted to Garantie Québec under a loan offer accepted by the Corporation on July 17, 2001, under which Garantie Québec may purchase 75,502 common shares of the capital of the Corporation at a price of $1.85 per share (the “ GQ-2001 Option ”), no option or other right to purchase shares of the Corporation or other securities convertible into shares has been authorized or is outstanding, and no agreement has been made to issue such option or other right; 6 WHEREAS Faure declares that she is directly the owner, on the date hereof, by good and valid title, free and clear of any priority, mortgage or encumbrance, of all of the currently issued and outstanding common shares of the capital stock of 9079; WHEREAS Azera declares that he is directly the owner, on the date hereof, by good and valid title, free and clear of any priority, mortgage or encumbrance, of all of the currently issued and outstanding common shares of the capital stock of AMAZE; WHEREAS no option or other right to purchase shares or other securities convertible into shares of 9079 has been authorized or is outstanding, and no agreement has been made to issue such option or other right; WHEREAS no option or other right to purchase shares or other securities convertible into shares of AMAZE has been authorized or is outstanding, and no agreement has been made to issue such option or other right; WHEREAS no option or other right to purchase shares or other securities convertible into shares of Finedix has been authorized or is outstanding, and no agreement has been made to issue such option or other right; WHEREAS the parties hereto have agreed that it is in the best interests to agree to certain terms and conditions governing the ownership and transfer of the Shares in the capital stock of the Corporation, the issued and outstanding shares in the capital stock of 9079 and the issued and outstanding shares in the capital stock of AMAZE and Finedix and all other voting or participating shares

subsequently acquired in the capital stock of the Corporation, 9079, AMAZE and Finedix and the exercise of the rights associated with such shares; and WHEREAS the parties have agreed to cancel and replace the Initial Shareholders Agreements (as defined in this Agreement) by this Agreement. NOW THEREFORE, THE PARTIES AGREE AS FOLLOWS: 1.

DEFINITIONS In this Agreement, the following expressions and words have the following meanings, unless otherwise indicated by the context: 1.1 “ Shareholders ” means the persons identified in the

preamble and any natural or legal person who may become a party to this Agreement as a registered holder or authorized transferee of Shares in the Corporation (in which event, the provisions of this Agreement shall be interpreted mutatis mutandis ); 7 1.2 “ Institutional Shareholders ” means, collectively, Auriga, Medco, Gutrafin, Schroder, FSTQ, SGF, FRSIM and Finedix, and “ Institutional Shareholder ” means any one of them individually; 1.3 “ Shares ” means (

i) the shares of the Corporation held

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