Decision No. 32-A-2012

BACKGROUND

[1] Thunderhook Air Charter Services, Inc. (TACSI) applied to the Canadian Transportation Agency (Agency) on February 28, 2011 for a licence to operate a domestic service, small aircraft.

[2] To obtain a licence to operate the proposed service, TACSI must, among other things, establish to the satisfaction of the Agency that it is Canadian as required by subparagraph 61(a)(i) of the Canada Transportation Act (CTA).

[3] By letter dated August 26, 2011, the Agency identified concerns with respect to the application and asked TACSI to respond within a thirty-day period why the Agency should not conclude that TACSI is not Canadian, or to significantly amend its business model and corporate affairs to demonstrate that TACSI will be Canadian, or to withdraw its application altogether.

[4] By letter dated September 23, 2011, TACSI requested an additional 45 days to address the concerns identified by the Agency. In its Decision No. LET-A-98-2011 dated September 28, 2011, the Agency provided TACSI until November 9, 2011 to respond.

[5] TACSI submitted its response on November 8, 2011 and provided additional information on December 13, 2011. These submissions have been considered by the Agency in making its ruling.

[6] As indicated in the reasons that follow, the Agency is not satisfied that TACSI is Canadian and denies the application.

CANADIAN OWNERSHIP AND CONTROL REQUIREMENT

[7] "Canadian” is defined in subsection 55(1) of the CTA as a “Canadian citizen or a permanent resident within the meaning of subsection 2(1) of the Immigration and Refugee Protection Act, a government in Canada or an agent of such a government or a corporation or other entity that is incorporated or formed under the laws of Canada or a province, that is controlled in fact by Canadians and of which at least seventy-five per cent, or such lesser percentage as the Governor in Council may by regulation specify, of the voting interests are owned and controlled by Canadians.”

[8] In order to be Canadian, TACSI must (i) be incorporated under the laws of Canada or a province, (ii) have at least 75 percent of its voting interests owned and controlled by Canadians, and (iii) be controlled in fact by Canadians.

Incorporation or formation requirement

[9] With respect to the requirement that TACSI be incorporated or formed under the laws of Canada or a province, the Agency acknowledges that TACSI was incorporated under the Business Corporations Act, R.S.A., 2000, c. B-9, as amended, of the Province of Alberta. Accordingly, the Agency determines that the applicant complies with this part of the Canadian ownership and control requirement.

Voting interest requirement

[10] With respect to the requirement that at least 75 percent of the voting interests of TACSI be owned and controlled by Canadians, the Agency acknowledges that a Canadian and a non-Canadian own 75 percent and 25 percent of the voting interests of the company, respectively. Accordingly, the Agency concludes that the requirement that at least 75 per cent of the voting interests of TACSI be owned and controlled by Canadians has been met.

Control in fact requirement

[11] With respect to the requirement that TACSI be controlled in fact by Canadians, the Agency concludes that TACSI is controlled in fact by the minority non-Canadian shareholder.

[12] The Agency views control in fact as the ongoing power/ability, exercised or not, to determine or decide the strategic decision-making activities of an enterprise and the ability to manage and run its day-to-day operations. Minority owners and their designated representatives normally have the ability to influence a company, as do others, such as financial institutions and employees. The influence, which can be exercised either positively (i.e., the requirement for a positive approval to be given for a decision to be made) or negatively (i.e., ability to veto a decision), needs to be dominant or determining, however, for it to be considered control in fact.

[13] The Agency assesses each applicable fact to determine whether it, individually or in combination with others, provides the non-Canadian(s) with the direct (e.g. formal voting or other rights) and/or indirect means (e.g. ability to exercise influence through their investment in the company or through any other means) to control the company. The Agency also considers the intent and ability of the non-Canadian(s) to exercise control over the company, particularly where control is obtained through indirect means.

[14] The Agency has reviewed the following facts: Board of Directors and veto rights, quorum at shareholders’ meetings, financial dependence and risks, shareholder remuneration and benefits, and business expertise.

Board of Directors and veto rights and quorum at shareholders’ meetings

[15] The Board of Directors is elected by the shareholders to govern and manage the affairs of the corporation. For control in fact to reside with Canadians, Canadian shareholders must have the right to appoint the majority of the members of the Board of Directors. The Agency notes that the majority Canadian shareholder has the right to appoint the majority of the members of the Board of Directors. The Agency is also satisfied that TACSI has addressed the concerns expressed in the Agency’s letter dated August 26, 2011 with respect to these matters.

Financial dependence and risks, and shareholder remuneration and benefits

Risks and benefits

[16] The Agency generally expects that the parties that assume the majority of the risks and are entitled to the majority of the benefits related to the air carrier’s operation are the parties with the ability to exercise control in fact. Risks are generally tied to the level of economic interest in the air carrier, including share capital and debt. Benefits generally accrue from an entitlement to share in the expected profit of the company and also include salaries or any other benefit received.

[17] The Agency finds that the risks are borne entirely by the minority non-Canadian shareholder, who will provide essentially all of TACSI’s financing.

[18] The Agency notes that TACSI has not filed with the Agency a formal dividend or profit distribution policy. However, the minority non-Canadian shareholder will be employed as a contract pilot and will be paid a salary, while the remuneration of the majority Canadian shareholder is to be determined based on the profitability of the company.

[19] The Agency also notes that the majority Canadian shareholder will continue to be employed by a non-Canadian entity which is owned by the father of the minority non-Canadian shareholder, as well as by another non-Canadian.

[20] In these circumstances, the Agency finds that, initially, the majority of benefits will likely be realized by the minority non-Canadian shareholder.

Debt

[21] Where the monetary magnitude of the debt is comparatively significant to the other sources of financing, there could be implications on control in fact. In these cases, the nature of the debt holders and their relationship to the air carrier are considered. As previously indicated, 100 percent of the debt financing is provided by the minority non-Canadian shareholder.

Assets

[22] Where a company is dependent on a specific party to provide assets which cannot be obtained practically or financially elsewhere, there could be implications on control in fact. TACSI’s sole aircraft will be leased from a non-Canadian entity which is owned by the minority non-Canadian shareholder’s father and another non-Canadian.

[23] The lease agreement also provides TACSI with sole custody and control of the aircraft. It is noted, however, that the rental cost for the aircraft is based on an hourly rate and is only payable for hours during which the aircraft is operated, and therefore, the non-Canadian provider of the aircraft assumes the majority, if not the entire risk of ownership and can therefore be considered to be indirectly financing TACSI’s operations by providing the aircraft on these favorable terms.

Business expertise

[24] The business activity and relevant expertise of individual shareholders can indicate which shareholders exercise influence and control in fact over an air carrier.

[25] It is noted that the minority non-Canadian shareholder, as a pilot, has the requisite technical knowledge required for the operation of the aircraft, while the majority Canadian shareholder’s expertise pertains to the operation of a fly-in lodge or resort.

FINDINGS

[26] The Agency has considered the evidence both individually and collectively and concludes that the relationships and provisions described above result in the non-Canadian minority shareholder being able to exercise great influence over the affairs of TACSI. Specifically,

• The minority non-Canadian shareholder is the only one of the two shareholders with the requisite technical knowledge required for the operation of an air service;
• The minority non-Canadian shareholder has essentially financed the entire operation;
• The equity investment of both shareholders is insignificant;
• A non-Canadian entity owned in part by the minority non-Canadian shareholder’s father has leased the aircraft necessary for the new service to TACSI and provided this aircraft under terms in which the risk of ownership remains with the lessor;
• There is no formal dividend or profit distribution policy and the minority non-Canadian shareholder will be paid a salary for his pilot services while the majority Canadian shareholder’s remuneration will be dependent on the profitability of the company; and,
• The majority Canadian shareholder will continue to be employed by the same non-Canadian entity that is leasing the aircraft to TACSI and is owned, in part, by the father of the minority non-Canadian shareholder.

[27] The Agency is of the opinion that the evidence indicates that the influence is dominant or determining and results in the minority non-Canadian shareholder being able to exert control in fact over the affairs of TACSI.

CONCLUSION

[28] Accordingly, the Agency determines that TACSI has not satisfied the requirement that it be Canadian, as required pursuant to subparagraph 61(a)(i) of the CTA and as that term is defined in subsection 55(1) of the CTA. TACSI, therefore, has failed to meet a basic market entry requirement that is in place to maintain a strong Canadian aviation industry. Subparagraph 61(a)(i) of the CTA states that the Agency must be satisfied that the applicant is Canadian before a licence can be issued.

[29] The Agency denies the application.

[30] Due to the confidentiality of some of the information filed, a separate letter will be issued to TACSI, in confidence, setting out the more detailed reasons for this Decision.