Regulvar Canada Inc. v. Her Majesty in Right of Ontario
[Indexed as: Regulvar Canada Inc. v. Ontario]
70 O.R. (3d) 641
[2004] O.J. No. 3299
Docket No. C41057
Court of Appeal for Ontario
Labrosse, Weiler and Charron J.A.
August 12, 2004
- Reasons released in French and English. Vous trouverez les motifs en français à la p. 649, post [70 O.R. (3d) 649].
Construction law -- Fairness is a Two-Way Street Act (Construction Labour Mobility) -- Application of Act -- Act applying to person resident in designated jurisdiction -- Quebec designated jurisdiction -- Corporation in Ontario closely related to Quebec corporation -- Ontario corporation not controlled by Quebec corporation -- De jure test of control -- Ontario corporation not person resident in designated jurisdiction -- Fairness is a Two-Way Street Act (Construction Labour Mobility), 1999, S.O. 1999, c. 4, s. 1(1)(b).
Under the Fairness is a Two-Way Street Act (Construction Labour Mobility), 1999, restrictions on access to jobs in the Ontario construction industry were imposed on a "person resident in a designated jurisdiction". Under the Act, the only designated jurisdiction was Quebec and, under s. 1(1) of the Act, "person resident in a designated jurisdiction" was defined in the case of a corporation to mean "(i) a person whose head office or registered office is located in that jurisdiction or (ii) a person controlled directly or indirectly by a person described in subclause (i)". Subsection 1(2) of the Act defined the word "controlled" as having the same meaning as the definition in s. 1(5) of the Business Corporations Act, R.S.O. 1990, c. B.16.
Regulvar Canada Inc. ("Regulvar Ontario") carried on business in the construction industry and it had a head office in Ontario. Regulvar Ontario was closely related to Regulvar Inc. ("Regulvar Quebec"), a corporation whose head office was located in the province of Quebec. Regulvar Quebec owned 30 per cent of the shares of Regulvar Ontario and the balance of Regulvar Ontario's shares were held by 14 individuals who, for the most part, were either directors, officers or shareholders of Regulvar Quebec.
Regulvar Ontario applied for a declaration that it was not a "person resident in a designated jurisdiction" as defined under the Act. Métivier J. granted the application and held that the test to be applied was the de jure control test as set out by the Supreme Court of Canada in Duha Printers (Western) Ltd. v. Canada. On the basis of Duha Printers, she concluded that Regulvar Quebec, as holder of only 30 per cent of the shares, could not be said to be in de jure control of Regulvar Ontario. The Crown appealed and submitted that (1) Métivier J. interpreted the Act too narrowly by ignoring that the Act allows for control to be "direct or indirect", and (2) control was established on the facts of this case.
Held, the appeal should be dismissed with costs.
The applications judge was correct in applying the test in Duha Printers. If the legislature had intended the appropriate test to be de facto rather than de jure control, the legislature would have made this explicit. On the contrary, the Act specifically incorporated the definition of control found in the Business Corporations Act, which, in effect, is a codification of the common law concept of de jure control. The use of the word "indirectly" in the Act did not bring the definition outside the scope of the de jure test because the de jure control test has [page642] been applied even in cases where the relevant legislation includes the word "indirectly".
Regulvar Ontario was not indirectly controlled by Regulvar Quebec simply due to the fact that many of the individual shareholders of Regulvar Ontario are also directors and officers of Regulvar Quebec. There was no legal authority to support the argument that shareholders of Regulvar Ontario, who were also directors and officers of Regulvar Quebec, were required to vote in their capacity as shareholders of Regulvar Ontario in a manner that was in the best interest of Regulvar Quebec. Nor was indirect control established by reason of the fact that the sole director of Regulvar Ontario was also a director and officer of Regulvar Quebec. There was no absolute rule regarding multiple directorships. While it was possible that a conflict of interest could arise, a hypothetical conflict of interest was not enough to ground a finding that Regulvar Quebec controls Regulvar Ontario.
The Act did not prevent individual Quebecers from holding shares in a corporation, the head office of which is in Ontario. The legislation was not meant to prevent Quebecers from doing business in Ontario, but rather to encourage them to relocate and do business in Ontario. Regulvar Ontario was effectively relocated to Ontario and was not controlled by a corporation in Quebec. This was sufficient to exempt it from restrictions under the Act.
APPEAL from an order that the applicant was not a "person resident in a designated jurisdiction" under the Fairness is a Two-Way Street Act (Construction Labour Mobility), 1999, S.O. 1999, c. 4.
Cases referred to Abbey Glen Property Corp. v. Stumborg (1978), 1978 ALTASCAD 115, 9 A.R. 234, [1978] A.J. No. 712, 85 D.L.R. (3d) 35, [1978] 4 W.W.R. 28, 4 B.L.R. 113 (C.A.); Canadian Western Natural Gas Co. v. Central Gas Utilities Ltd., [1966] S.C.R. 630, 58 W.W.R. 155; Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795, 159 D.L.R. (4th) 457, 225 N.R. 241, 39 B.L.R. (2d) 1, 98 D.T.C. 6334 (sub nom. Duha Printers (Western) Ltd. v. R.); HSC Research Development Corp. v. Canada, [1994] T.C.J. No. 890, 95 D.T.C. 225, [1995] 1 C.T.C. 2283 (Tax Ct.); Okanagan Helicopters Ltd. v. Canada (Transport Commission), [1983] 2 F.C. 234, 144 D.L.R. (3d) 10, 46 N.R. 271 (C.A.); Thompson v. Canada Fire & Marine Insurance Co. (1885), 9 O.R. 284 (C.A.) Statutes referred to Aeronautics Act, R.S.C. 1970, c. A-3 Business Corporations Act, R.S.O. 1990, c. B.16, s. 1(5) Canada Business Corporations Act, S.C. 1974-75-76, c. 33, s. 2(3) Fairness is a Two-Way Street Act (Construction Labour Mobility), 1999, S.O. 1999, c. 4, Preamble, s. 1(1) "person resident in a designated jurisdiction" Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) Interpretation Act, R.S.O. 1990, c. I.11, s. 10 Authorities referred to Van Duzer, J.A., The Law of Partnerships and Corporations, 2nd ed. (Toronto: Irwin Law, 2003)
André Claude and Anne Sheppard, for respondent. Douglas K. Gray and George G. Vuicic, for appellant. [page643]
The judgment of the court was delivered by
Background
1This dispute arises under the Fairness is a Two-Way Street Act (Construction Labour Mobility), 1999, S.O. 1999, c. 4 ("the Act"). In the words of the preamble, this provincial legislation was enacted for the purpose of enhancing "employment opportunities", and providing "more equal access to business and job opportunities", for "contractors, workers in the construction industry and aggregate haulers . . . in Ontario". The legislation states that the latter "experience barriers to working and doing business in other jurisdictions because of unfair, discriminatory or restrictive practices", while their counterparts "from those other jurisdictions are able to work in Ontario without [facing] similar barriers". The Act is therefore designed to restrict the access of "those taking advantage of Ontario's policy of free mobility" to jobs in the construction industry, and to reduce the unemployment rate in the construction industry in Ontario. The Act restricts the ability of a "person resident in a designated jurisdiction" to engage in construction work in Ontario. The only designated jurisdiction is Quebec.
2The head office of the respondent, Regulvar Canada Inc. ("Regulvar Ontario"), is located in Ontario. Regulvar Ontario is a firm engaged in the construction industry, and is closely related to Regulvar Inc. ("Regulvar Quebec"), a company whose head office is located in the province of Quebec. Thirty per cent of the shares of Regulvar Ontario are held by Regulvar Quebec and all other shares of Regulvar Ontario are held by 14 individuals who, for the most part, are either directors, officers or shareholders of Regulvar Quebec.
3The issue in this case is whether Regulvar Ontario is a "person resident in a designated jurisdiction" within the meaning of the Act. The issue has arisen because the City of Ottawa has refused to give a construction contract to Regulvar Ontario on the ground that it is a "person resident in a designated jurisdiction".
4The application judge ruled that Regulvar Ontario is not a person resident in a designated jurisdiction. The appellant appeals from that decision. For the reasons that follow, we would dismiss the appeal.
Decision of the Application Judge
5Upon the application of Regulvar Ontario, the application judge granted a declaration that Regulvar Ontario is not a [page644] "person resident in a designated jurisdiction" as defined under the Act:
1(1) In this Act,
"person resident in a designated jurisdiction" means,
(b) in the case of a corporation,
(i) a person whose head office or registered office is located in that jurisdiction, or
(ii) a person controlled directly or indirectly by a person described in subclause (i), . . .
6It was not disputed that the head office of Regulvar Ontario was in Ottawa and that consequently it does not fall within subclause 1(1)(b)(i) of the definition. The issue to be determined, rather, was whether Regulvar Ontario could be said to be "controlled directly or indirectly" by a Quebec corporation within the meaning of subclause 1(1)(b)(ii).
7Subsection 1(2) of the Act further defines the word "controlled" as having the same meaning as the definition in subsection 1(5) of the Business Corporations Act, R.S.O. 1990, c. B.16. It in turn provides as follows:
1(5) For the purposes of this Act, a body corporate shall be deemed to be controlled by another person or by two or more bodies corporate if, but only if,
(a) voting securities of the first-mentioned body corporate carrying more than 50 per cent of the votes for the election of directors are held, other than by way of security only, by or for the benefit of such other person or by or for the benefit of such other bodies corporate; and
(b) the votes carried by such securities are sufficient, if exercised, to elect a majority of the board of directors of the first-mentioned body corporate.
8The application judge held that the test to be applied was the de jure control test, as set out by the Supreme Court of Canada in Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795, 159 D.L.R. (4th) 457. She stated as follows (at paras. 17-18):
The Supreme Court of Canada, in Duha Printers (Western) Ltd. v. Her Majesty the Queen, [1998] 1 S.C.R. 795, states that: "de jure control has emerged as the Canadian standard, with the test for such control generally accepted to be whether the controlling party enjoys, by virtue of its shareholdings, the ability to elect the majority of the board of directors. . . . The test neither requires nor permits an inquiry into whether a given director is the nominee [page645] of any shareholder, or any relationship or allegiance between the directors and the shareholders."
The Court thus states further on that the "de jure standard was chosen because in some respects it is a relevant and relatively certain and predictable concept to employ in determining control. In general terms, de jure refers to those legal sources that determine control: namely, the corporation's governing statute and its constitutional documents, including the articles of incorporation and by- laws. The de facto concept was rejected because it involves ascertaining control in fact, which can lead to a myriad of indicators which may exist apart from these sources."
9Therefore, on the basis of Duha Printers, the application judge concluded that Regulvar Quebec, as holder of only 30 per cent of the shares, could not be said to be in de jure control of Regulvar Ontario. Consequently, Regulvar Ontario could not be said to be "a person resident within a designated jurisdiction" within the meaning of the Act.
Position of the Parties
(a) Position of the appellant
10The appellant's argument is essentially two-fold. First, it argues that the application judge interpreted the legislation too narrowly by ignoring that the legislation allows for control to be "direct or indirect". Second, it argues that control is established on the facts of this case.
11The appellant submits that the legislation should receive such "fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Act according to its true intent, meaning and spirit" (s. 10 of the Interpretation Act, R.S.O. 1990, c. I.11). According to the appellant, the substantive provisions of the Act were intended to be of broader applicability than determined by the trial judge, so as to ensure that the objects of the Act are met. The appellant submits that it is not enough to say that Regulvar Quebec does not own more than 50 per cent of the shares of Regulvar Ontario; rather, the court must also determine whether Regulvar Quebec indirectly controls Regulvar Ontario. The appellant also argues that the concepts of de jure or de facto control unduly limit the analysis because the words "directly or indirectly" can incorporate a myriad of transactions or circumstances that signify the accomplishment of an objective by indirect means. According to the appellant, indirect control can be gleaned from circumstances other than the mere examination of the share register.
12The appellant contends that indirect control is established in this case by reason of the close relationship that the individual shareholders of Regulvar Ontario have with the corporate shareholder, Regulvar Quebec. The appellant submitted that because [page646] most of the individual shareholders of Regulvar Ontario are also directors and officers of Regulvar Quebec, they are, by reason of their fiduciary obligation to the Quebec corporation, required to vote, in their capacity as shareholders of Regulvar Ontario, in a manner that reflects the best interest of Regulvar Quebec. Thus, the appellant contends that Regulvar Quebec indirectly controls Regulvar Ontario within the meaning of the Act.
(b) Position of the respondent
13The respondent submits that the application judge was correct in interpreting the legislation with reference to the question of de jure control. It argues that it is clear that the reference to the Business Corporations Act was intended to import into the analysis the recognized and foreseeable principle of corporate law in the determination of control. The respondent submits that such an interpretation does not render meaningless the word "indirectly" as contended. For example, the respondent submits that "indirect" control could be established in a situation where a person resident in a designated jurisdiction holds more than 50 per cent of the shares through an intermediary.
Analysis
14With regard to the appellant's submission regarding the words "direct or indirect", if the legislature had intended the appropriate test to be de facto, rather than de jure control, the legislature would have made this explicit. On the contrary, the Act specifically incorporates the definition of control found in the Business Corporations Act, which, in effect, is a codification of the common law concept of de jure control.
15The use of the word "indirectly" in the Act does not bring the definition outside the scope of the de jure test. Indeed, the de jure control test has been applied even in cases where the relevant legislation includes the word "indirectly". For example, in Okanagan Helicopters Ltd. v. Canada (Transport Commission), [1983] 2 F.C. 234, 144 D.L.R. (3d) 10 (C.A.), leave to appeal to Supreme Court of Canada refused February 8, 1983, Urie J.A. considered the meaning of "control" in the Aeronautics Act, R.S.C. 1970, c. A-3. In the course of his analysis, he compared the provision in question to another provision in the Act, which used the phrase "controlled directly or indirectly" and which incorporated the definition of control from s. 2(3) of the Canada Business Corporations Act, S.C. 1974-75-76, c. 33. Subsection 2(3) was very similar to the section of the Ontario Business Corporations Act at issue in this case. Notwithstanding the use of the words "directly [page647] and indirectly", Urie J.A. concluded that the definition in the Canada Business Corporations Act served to restrict the meaning of "control" to "legal" or de jure control.
16In HSC Research Development Corp. v. Canada, [1994] T.C.J. No. 890 (Tax Ct.), O'Connor T.C.J. considered the phrase "controlled directly or indirectly in any manner whatever" in the Income Tax Act. Notably, the Act had been amended in 1988 to specify that where the expression "controlled, directly or indirectly in any manner" is used, a corporation is considered to be so controlled by a corporation, person or group of persons if it is controlled in fact by such corporation, person or group of persons. Prior to the 1988 amendments to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), the courts had consistently construed the words "controlled directly or indirectly in any manner" to indicate that the appropriate test was de jure control, and not a de facto test. The question then arose whether the 1988 amendment was meant to clarify the meaning of the phrase as it had been understood up to that time, or whether it was meant to expand it by introducing the notion of de facto control in the definition. O'Connor T.C.J. concluded that the pre-1988 definition did not include de facto control and that the de facto test was only to be applied because Parliament had enacted a new section which made the use of this test clear.
17HSC Research Development again illustrates that absent other indication, where the words "directly or indirectly" are used, the de jure test is the proper test to use. The conclusion in that case applies even more so to the legislation in the case at bar since the Act does not include the words "in any manner whatever".
18The application judge was therefore correct in applying the test in Duha Printers. Such an interpretation does not ignore the words "or indirect" in the legislation. In our opinion, the respondent was correct when it submitted that "indirect" allows for the possibility that de jure control may be achieved indirectly through an intermediary. For example, Regulvar Ontario could be owned by two Ontario corporations, one owning 40 per cent of the shares and the other owning 60 per cent. The latter corporation could, in turn, be owned entirely by a Quebec corporation. In that case, the Quebec corporation would have indirect control of Regulvar Ontario. Therefore, in order for there to be control, there must be a holding by one party (either directly or indirectly) of sufficient shares to be able to elect the Board of Directors.
19We also reject the contention that Regulvar Ontario is indirectly controlled by Regulvar Quebec due to the fact that many of the individual shareholders of Regulvar Ontario are also [page648] directors and officers of Regulvar Quebec. There is no legal authority to support the argument that shareholders of Regulvar Ontario who are also directors and officers of Regulvar Quebec, are required to vote, in their capacity as shareholders of Regulvar Ontario in a manner that is in the best interest of Regulvar Quebec. When acting as a shareholder, a director is not generally prohibited from acting in his or her own best interest: see Thompson v. Canada Fire & Marine Insurance Co. (1885), 9 O.R. 284 (C.A.) and Canadian Western Natural Gas Co. v. Central Gas Utilities Ltd., [1966] S.C.R. 630, 58 W.W.R. 155.
20Nor is indirect control established by reason of the fact that the sole director of Regulvar Ontario is also a director and officer of Regulvar Quebec. The case law is clear that there is no absolute rule regarding multiple directorships. Citing Abbey Glen Property Corp. v. Stumborg (1978), 1978 ALTASCAD 115, 9 A.R. 234, [1978] A.J. No. 712 (C.A.), motion for leave to appeal to the Supreme Court of Canada dismissed (1978), 11 A.R. 270n, Professor J. Anthony Van Duzer states in The Law of Partnerships and Corporations, 2nd ed. (Toronto: Irwin Law, 2003) at pp. 288-89:
In each case, the question of breach of fiduciary duty will depend on the facts. The relevant question will be whether the fiduciary could act in the best interests of both corporations. Where corporations are in active competition, it will be impossible to avoid the conclusion that a director of both corporations is in a conflict of interest and in breach of his fiduciary duty . . . . On the other hand, it may be possible to be on the board of two corporations that carry on identical businesses, but in geographically distinct markets, without facing a conflict of interest.
21While it is therefore possible that a conflict of interest would arise, a hypothetical conflict of interest is not enough to ground a finding that Regulvar Quebec controls Regulvar Ontario. Indeed, there is no evidence to suggest that such a conflict would arise in this case; and in fact, it is not likely that a conflict would arise, given that the two companies are affiliates, rather than competitors. In any case, this kind of inquiry into the particular circumstances surrounding the casting of the votes would introduce the notion of de facto control and would be inconsistent with the de jure test.
Conclusion
22The Act does not in any way prevent individual Quebecers from holding shares in a corporation, the head office of which is in Ontario. The legislation is not meant to prevent Quebecers from doing business in Ontario, but rather to encourage them to relocate and do business in Ontario. This company has effectively relocated to Ontario and is not controlled by a [page649] corporation in Quebec. This is sufficient to exempt it from the restrictions under the Act.
Disposition
23For these reasons, we would dismiss the appeal with costs, fixed on a partial indemnity basis at $12,000, inclusive of disbursements and GST.
Appeal dismissed with costs.
