Minister of National Revenue v. Consolidated Holding Co., 72 DTC 6007, [1972] CTC 18, [1974] SCR 419

Judson, J (concurred in by Fauteux, CJC, Abbott and Hall, JJ):— Harold Duncan Gavin and Robert Duncan Gavin control the respondent, Consolidated Holding Company Limited. The issue on appeal is whether they also control Martin & Robertson Limited. If they do, the two companies are associated within the meaning of subsection 39(4) of the Income Tax Act. The Tax Appeal Board (reported [1968] Tax ABC 561) held that they did control Martin & Robertson Limited, but this decision was reversed on appeal to the Exchequer Court (reported [1969] CTC 633).

The case was argued on the following agreed statement of facts:

The Appellant (Consolidated) is a company incorporated under the laws of the Province of British Columbia and having authorized capital of $200,000 divided into 5,000 ordinary shares of $10.00 each and 150,000 redeemable preference shares of $1.00 each. A total of 3,302 ordinary shares have been issued and these are held 1,651 by Harold D Gavin and 1,651 by Robert D Gavin.

In the taxation years 1963 and 1964 the Minister reassessed the income of the Appellant on the basis that the Appellant was “associated” in the taxation years with Martin & Robertson Limited. The reassessment denies the Appellant a low rate of tax in respect of the said years and assesses tax at the high rate by reason of the alleged association.

Martin & Robertson Limited is a company incorporated under the laws of the Province of British Columbia with authorized capital of $30,000.00 divided into 30,000 ordinary shares of $1.00 each. The issued capital of the said company is held as follows:

Harold D Gavin	1 share
Robert D Gavin	1 share
Duncan H Gavin (as executor for Estate of A S Gavin)	3,111 shares
Estate of Duncan Gavin, deceased	13,777 shares
Consolidated Holding Co Ltd	13,110 shares
	30,000 shares

Under the will of Duncan Gavin deceased, Montreal Trust Company, Harold D Gavin and Robert D Gavin were appointed executors and the executors were directed, after the termination of certain life interests, to divide the estate into four equal shares to be held as to three shares in trust for the daughters of the deceased and as to -a fourth share to Robert D Gavin, the son of the deceased. In the taxation years 1963 and 1964 one of the life interests continued to exist and accordingly the estate had not been divided to provide for the interests of the said daughters and son.

The Appellant objected to the said reassessments and has been notified by the Minister that the Minister has reconsidered the assessments and they are confirmed on the ground that “in the 1963 and 1964 taxation years the taxpayer was associated with Martin & Robertson Limited within the meaning of subsection (4) of section 39 of the Act”.

Two conflicting theories are put forward in this appeal. The taxpayer says that for the purpose of deciding the question of control under paragraph 39(4)(b) of the Income Tax Act, only the share register of the company in question, Martin and Robertson Limited, may be looked at. If this is followed, we find three executors and trustees (Montreal Trust Company, Harold Duncan Gavin and Robert Duncan Gavin) registered for 13,777 shares and Consolidated Holding Company, whose two shareholders are Harold Duncan Gavin and Robert Duncan Gavin, as to the 13,110 shares. On the other hand, the Minister contends that we must look at legal realities as found in the will of Duncan Gavin, the 15th clause of which provides that

in carrying out the duties of the trustees save as aforesaid, I direct that the views, discretion or direction of any two of my trustees shall be binding upon the other of my trustees.

Do Harold Duncan Gavin and Robert Duncan Gavin, who control “Consolidated”, also control Martin & Robertson Limited by virtue of their ability to combine and give a direction to the third trustee, Montreal Trust? The Exchequer Court held (p. 638), in accordance with the company’s articles, that Montreal Trust Company had

equal voice with the co-executors and may prevent the two co-executors exercising that control which is accorded by the said will.

In determining whether a group of persons controls a company, it is not sufficient in the case of trustees who are registered as shareholders to stop the inquiry at the register of shareholders and the articles of association. It is necessary to look to the trust instrument to ascertain whether one or more of the trustees have been put in a position where they can at law direct their co-trustees as to the manner in which the voting rights attaching to the shares are to be exercised.

From the point of view of the company, apart from protective provisions, trustee shareholders must vote as a unit. If they are not unanimous, the shares cannot be voted. In this event, the control would be in “Consolidated”, the two shareholders of which are the two Gavin trustees. Merely to look at the share register is not enough when the question is one of control.

The problem here is not solved by a decision that a company is not bound to see to the execution of trusts to which its shares are subject or that it may take the vote of the first named trustee on its share register. These are merely protective provisions in favour of the company and do not touch the question of control. Here, if one looks at the facts as a whole, one finds that the two Gavins, by combining, can control the vote of the estate shares. They already control the voting of “Consolidated”. In this case, therefore, both corporations are controlled by the same group of persons, namely the two Gavins. They are, in the words of Abbott, J in Vina Rug (Canada) Ltd v MNR, [1968] SCR 193 at 197; [1968] CTC at 4,

in a position to control at least a majority of votes to be cast at a general meeting of shareholders.

I do not think that the decision in Inland Revenue Commissioners v J Bibby & Sons Ltd, [1945] 1 All ER 667, establishes anything more than this proposition — that a person who is the registered owner of 50 per cent of the shares with voting rights controls the company and that it is immaterial whether or not his exercise of that voting power can be controlled either by co-trustees or through appropriate proceedings by order of the Court. It does not establish the proposition that in a case such as this, where two trustees have the power to subject a third trustee in the exercise of the voting rights of the shares, one must disregard that power.

I would allow the appeal with costs both here and in the Exchequer Court, and restore the assessments of the Minister.

Spence, J (dissenting):—This is an appeal from the judgment of Sheppard, J, Deputy Judge of the Exchequer Court of Canada, pronounced on November 17, 1969 (reported [1969] CTC 633). By that judgment, Sheppard, J allowed an appeal by Consolidated Holding Company Limited from the decision of the Tax Appeal Board pronounced by Mr W O Davis on May 24, 1968 (reported [1968] Tax ABC 561).

The question before Sheppard, J and again before this Court was whether or not the Consolidated Holding Company Limited was an “associated company” with Martin and Robertson Limited within the meaning of section 39 of the Income Tax Act, RSC 1952, c 148, as amended, and particularly paragraph 39(4)(b) of the said statute. That subsection provides:

39.(4) For the purpose of this section, one corporation is associated with another in a taxation year if, at any time in the year,

(a) one of the corporations controlled the other,

(b) both of the corporations were controlled by the same person or group of persons,

(c) . . .

Consolidated Holding Company Limited has two registered shareholders, namely, Harold Duncan Gavin and Robert Duncan Gavin, who each hold 1,651 shares and who are cousins. Therefore, these two form the group which controls Consolidated Holding Company Limited. Martin and Robertson Limited has outstanding 30,000 shares, the voters of which are registered on the share records of the company as follows:

Both companies were incorporated under the Companies Act of British Columbia, RSBC 1960, c 67.

Duncan Gavin, deceased, held 26,889 shares. The said Duncan Gavin died and by his last will and testament appointed Harold D Gavin, Robert D Gavin and the Montreal Trust Company as his executors and trustees. Clause 15 of the said last will and testament of Duncan Gavin, deceased, provided:

15. In carrying out the duties imposed upon my Trustees save as aforesaid, I DIRECT that my [sic] views, discretion or direction of any two of my Trustees shall be binding upon the other of my Trustees.

The problem, therefore, is whether Harold Duncan Gavin and Robert Duncan Gavin as a group also controlled Martin and Robertson Limited. The Tax Appeal Board held that the group did so and dismissed the appeal of Consolidated Holding Company Limited from the Minister’s assessment. Sheppard, J held that the group did not control Martin and Robertson Limited and allowed the Consolidated Holding Company Limited appeal from the Tax Appeal Board. In so doing, Sheppard, J adopted the judgment of this court in MNR v Dworkin Furs (Pembroke) Ltd et al, [1967] SCR 223; [1967] CTC 50, where Hall, J, giving the judgment of the court, said at page 227 [52]:

The word controlled as used in this subsection was held by Jackett, P to mean de jure control and not de facto control and with this I agree.

He quoted Jackett, P in Buckerfield's Limited et al v l\ZINR, [1965] 1 Ex CR 299 at 302; [1964] CTC 504 at 507, as follows:

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 to control by the Board of Directors. The kind of control exercised by management officials or the Board of Directors is, however, clearly not intended by section 39 when it contemplates control of one corporation by another as well as control of a corporation by individuals (see subsection (6) of section 39). The word “control” might conceivably refer to de facto control by one or more shareholders whether or not they hold a majority of shares. I am of the view, however, that, in section 39 of the Income Tax Act, the word “controlled” contemplates the right of control that rests 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. See British American Tobacco Co v IRC, [1943] 1 All ER 13, where Viscount Simon, LC, at p 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.”

See also MNR v Wrights’ Canadian Ropes Ltd, [1947] AC 109 per Lord Greene, MR at page 118, where it was held that the mere fact that one corporation had less than 50 per cent of the shares of another was “conclusive” that the one corporation was not “controlled” by the other within section 6 of the Income War Tax Act.

It is, of course, plain that the group has de jure control of Consolidated Holding Company Limited and no further reference need be made to that issue.

The question is whether the same group control Martin and Robertson Limited in the fact that the members thereof own such a number of shares as carry the majority of votes in the election of the board of directors. As I have said, between the two of them, the group composed of Harold Duncan Gavin and Robert Duncan Gavin own 26,889 of the 30,000 shares issued but of those 26,887, 13,777 are owned by them together with the Montreal Trust Company as executor and trustee of the Estate of Duncan Gavin, deceased, and they each held one share transferred to them to qualify their election as directors. It is the contention of the Minister of National Revenue that because of the provisions of clause 15 [of the will] the same two members of the group may impose their decision on the third executor, the Montreal Trust Company, and by so doing control Martin and Robertson Limited as effectively as they control Consolidated Holding Company Limited. It would, of course, under the clause, be possible for either of the two cousins to agree with Montreal Trust Company and impose their joint decision upon the other cousin but, as Abbott, J said, in his judgment in this Court in Vina Rug (Canada) Ltd v MNR, [1968] SCR 193 at 197; [1968] CTC 1 at 4:

Moreover, in determining de jure control, more than one group of persons can be aptly described as a “group of persons” within the meaning of section 39(4)(b). In my view, it is immaterial whether or not other combinations of shareholders may own a majority of voting shares in either company, provided each combination is in a position to control at least a majority of votes to be cast at a general meeting of shareholders.

The respondent Consolidated Holding Company Limited submits that there is no right to go behind the share register of Consolidated Holding Company Limited and investigate the character in which any shareholder holds the shares registered in his name and that when three persons hold shares jointly, in this case, Harold Duncan Gavin, Robert Duncan Gavin and the Montreal Trust Company, then the provision in the will, of which they are executors, that two may impose their decision on the third, is irrelevant. The respondent further submits that under the ordinary rules of corporation law there must be unanimity in the voting of the said shares before they may be validly voted. The respondent cites Lumbers v Fretz, 62 OLR 635, where a judgment of Wright, J was affirmed on appeal to the Court of Appeal ((1928-29), 63 OLR 190). Wright, J said at pages 649-650:

Counsel for the defendants has cited to me some American decisions to the effect that in such cases a trustee or executor is entitled to vote the shares when the other trustees are not present. I do not think these decisions are in harmony with the English decisions. In Masten and Fraser’s Company Law of Canada, 2nd ed, p 528, it is stated that “joint holders must concur in voting, unless the by-laws provide otherwise,” and that statement or opinion appears to be the logical deduction from the decisions in /n re T H Saunders & Co Ltd, [1908] 1 Ch 415, and Barton v London and North Western Railway Co (1889), 24 QBD 77; Burns v Siemens Bros Dynamo Works Ltd (No 2) (1918), 88 LJ Ch 21.

In Corpus Juris, vol 14, p 903, para 1397, it is stated: “Where there are two or more personal representatives, no one or more can vote against the protest of the other or others.”

It is manifest that the action of L O Lumbers and Maria Lumbers in protesting against the introduction of the by-laws in question, and requesting an adjournment of the meeting, was an emphatic protest on their part against the other executors assuming to represent or vote the shares of the estate.

I accept as the law the statement already cited from Masten and Fraser’s book, and hold that the votes for the estate of James Lumbers in respect of the 40 shares held jointly as trustees by Maria Lumbers and W G Lumbers were improperly cast.

It will be seen that Wright, J cited as his authority, inter alia, Masten and Fraser’s Company Law of Canada, 3rd ed. The last edition of that outstanding text is Fraser and Stewart, 5th ed, and at page 663 the learned author in turn uses the Lumber v Fretz decision as authority for his proposition in these words:

An executor, administrator, committee, guardian or trustee may vote in respect of any shares registered in his name. Where there are several execu-

tors all must concur in voting the shares of the estate they represent: Lumbers v Fretz (1928), 62 OLR 635 at 650, aff’d (1928), 63 OLR 190 (CA).

In my view, the proposition is sound and, despite the provisions of clause 15 of the will, the company is entitled to require the unanimous decision of the three executors in the voting of the block of shares in their names as executors and trustees of Duncan Gavin. The question has been considered in several decisions in the United Kingdom dealing with statutes the wording of which differs but the intention is the same as paragraph 39(4)(b) of the Income Tax Act.

Inland Revenue Commissioners v J Bibby and Sons Ltd, a decision of the House of Lords, [1945] 1 All ER 667, dealt with a section of the Finance (No 2) Act of 1939 which provided in subsection 13(3) that a company was entitled to have its standard profits increased by the percentage of the increase in its capital and in subsection (9) permitted that increase to come to 10% provided that the directors had a “controlling interest” in the company. There were eight directors who were the beneficial owners and registered holders of 209,000-odd ordinary shares out of the 500,000 issued. Three of those directors were also registered holders of another 57,500 shares which they held as trustees of their sister’s marriage settlement. The Commissioners contended that those latter shares, of which the said three directors were not the beneficial owners although they were the registered owners, could not be counted in determining whether the directors had a controlling interest. The House of Lords unanimously found in favour of the company. Lord Russell of Killowen said at page 669:

My Lords, I agree with the view of the Court of Appeal. When the section speaks of directors having a controlling interest in a company, what it is immediately concerned with in using the words ‘controlling interest” is not the extent to which the individuals are beneficially interested in the profits of the company as a going concern or in the surplus assets in -a winding up, but the extent to which they have vested in them the power of controlling by votes the decisions which will bind the company in the shape of resolutions passed by the shareholders in general meeting. In other words, the test which is to exclude a company’s business from subsect. (9)(a) and include it in (9)(b), is the voting power of its directors, not their beneficial interest in the company.

For the purpose of such a test the fact that a vote-carrying share is vested in a director as trustee seems immaterial. The power is there, and though it be exercised in breach of trust, or even in breach of an injunction, the vote would be validly cast vis-a-vis the company, and the resolution until rescinded would be binding on it.

Lord Macmillan said at pages 670-671:

In my opinion the Court of Appeal rightly rejected the contention of the Inland Revenue Commissioners. The question whether the directors of the respondent company have the control of it by their voting power as shareholders must in my view be determined by the memorandum and articles of the company and by the register of shareholders. By the constitution of the company, as I have already mentioned, the voting power is vested in the ordinary shareholders and the register shows that the directors hold a majority of these shares. As was said by Jessel, MR, in Pulbrook v Richmond Consolidated Mining Company (1878), 9 Ch D 610 at 615:

“The company cannot look behind the register as to the beneficial interest but must take the register as conclusive and cannot inquire . . . into the trusts affecting the shares.”

And again on the latter page:

Suppose that all the shares held by the directors in the present case were held by them as trustees, could it be said that they did not control the company? If so, then in whose hands was the control of the company?

Lord Porter said at page 672:

Nevertheless for good or ill the trustee like the beneficial owner controls, though if his powers be wrongly exercised they may in some way or other be capable of being challenged.

In British American Tobacco Co Limited v Inland Revenue Commissioners, [1943] AC 335, the House of Lords had agreed that when one company held the majority of the shares in another then one could look at the shareholding in the first-named company in order to determine if a group controlled the second company and other companies. The apparent clash between that decision and the decision in Bibby (supra) was explained by Lord Evershed, MR in Inland Revenue Commissioners v. Silverts Ltd, [1951] Ch 521, when he pointed out that the control may be exercised either directly or indirectly through the agency of another company. The Silverts case is interesting in the present situation as there of four directors one, S J Silvert, was the registered holder of all the "B" shares. No other director was the registered holder of either “A” or "B" shares. The “A” and "B" shares conferred equal voting rights on their holders and there was no provision for a casting vote. The "A" shares were all the subject matter of a settlement in favour of an infant. By the settlement, the National Provincial Bank Limited was appointed a custodian trustee but two of the other directors were appointed managing trustees. The question was whether those two directors together with the other director S J Silvert controlled the company. The Court of Appeal held that they did not do so and that the National Provincial Bank Limited being the registered shareholder of all the “A” shares excluded the two directors from being considered as controlling the company despite the fact that they were managing trustees of the settlement. At page 526, Lord Evershed, MR said:

The distinction (between a custodian and bare trustee) is, for practical purposes, perhaps a fine one; but it is a real one. Indeed, it has not been seriously contended before us on the part of the Crown that the bank in the present case can be properly regarded as a bare trustee in the sense intended by the House of Lords in the Bibby case.

The situation in the Silverts case (supra) would seem to be very close to the present one. By the statute under which the trustees were appointed, the Public Trustee Act, 1906, in section 4, paragraph (2)(b), all powers and discretions remain vested in the managing trustees, but by paragraph (d) the custodian trustee was not bound to give effect, for example, by voting in all cases to the wishes and effects of the managing trustees.

In my view, however, the matter is dealt with authoritatively in Barclays Bank Ltd v Inland Revenue Commissioners, [1961] AC 509. In that case, the deceased person held at his death 1,100 shares in a company. By a settlement made nineteen years before, he had settled another 3,650 shares of the company on a trust for his wife and children taking no beneficial interest himself. In the settlement deed, he named four trustees and he was the first of those named. Under Table A of the Companies (Consolidation) Act, 1908, which had been incorporated in the company’s articles of association, being the first-named of the four trustees, the deceased exercised the power of voting the shares. The two blocks together were a majority of the issued share capital of the company. It was held that the deceased had “control of the company” within the meaning of the relevant sections of the Finance :Act, 1940. Five members of the House of Lords sat on the appeal, Viscount Simonds, Lord Cohen and Lord Keith of Avonholm holding that a person who had the power by exercise of voting rights in accordance with the constitution of a company to carry a resolution in general meeting had control for the purpose of the subsection and that it was irrelevant that the shareholder who had the apparent control might himself be amenable to some external control. Lord Reid dissented and Lord Denning concurred only because the settlor was the person who held the joint holding having created it in his own disposition. The view of the majority would seem to apply exactly in the present case. There, the settlor being the first- named trustee voted by virtue of the provisions of the articles of the company despite the fact that he might have been amenable to control by the other three trustees. Here, by virtue of corporations law, the three executors and trustees must agree on the voting of the shares despite the fact that by virtue of the clause in the will two of the three might control the decision of the third.

The words of subsection 55(1) of the Finance Act, 1940, with which the case was concerned, were “the deceased had the control of the company at any time during the five years ending with his death”. The difference between those words and “controlling interest in” was stressed by the appellants. Lord Cohen, at page 536, said:

If that were all, I should be content to say that it seems to me to be a distinction without a difference, . . .

I have the same reaction as to any difference between the words in the Bibby case (supra) and the words in the present statute. The latter are simply “both of the companies were controlled by the same person or group of persons”. Those are ordinary English words and, in my view, should be interpreted as they have been in the cases which I have cited. Indeed, it would be very difficult to carry on the administration of corporate affairs on any other basis. A shareholders register well nigh has to be the sole basis upon which the voting rights of shares can be determined and, therefore, the sole basis for deciding who controls a company. One could think of a hundred situations which would make any other system impossible, only one of which was mentioned by Lord Macmillan in Bibby at page 671.

For these reasons, I would dismiss the appeal with costs.