lacobucci
J.:
In
this
appeal,
this
Court
is
required
to
examine
the
definition
of
“control”
for
the
purposes
of
s.
111(5)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148,
as
amended,
in
order
to
determine
whether
the
appellant
corporation
was
entitled
to
deduct
from
its
1985
taxable
income
certain
non-capital
losses
incurred
by
a
predecessor
corporation
in
an
amalgamation.
In
this
regard,
it
will
be
necessary
to
consider
which
of
various
factors
may
properly
be
considered
in
assessing
the
de
jure
control
of
a
corporation,
and
in
particular,
whether
a
unanimous
shareholder
agreement,
as
contemplated
by
the
Manitoba
Corporations
Act,
R.S.M.
1987,
c.
C225[;
C.C.S.M.,
c.
C225]
(the
“Corporations
Act”)
(and
by
other
statutes
modelled
after
the
Canada
Business
Corporations
Act,
R.S.C.,
1985,
c.
C-44
(the
“CBCA”)),
is
to
be
considered
a
constating
document
for
the
purposes
of
the
de
jure
control
inquiry.
I.
Facts
This
case
proceeded
on
an
agreed
statement
of
facts,
and
therefore
the
facts
are
not
in
dispute.
Duha
Printers
(Western)
Ltd.
(“Duha
No.
1”),
incorporated
in
Manitoba
in
1963,
carried
on
business
as
a
specialty
printer.
Prior
to
and
as
at
February
7,
1984,
all
of
the
voting
shares
of
Duha
No.
1
were
held
either
directly
or
indirectly
by
Emeric
Duha,
his
wife,
Gwendolyn
Duha,
and
their
three
children.
Outdoor
Leisureland
of
Manitoba
Ltd.
(“Outdoor”),
incorporated
in
Manitoba
in
1971,
carried
on
business
as
a
retailer
of
recreational
vehicles.
As
at
February
8,
1984,
the
shares
of
Outdoor
were
held
by
Marr’s
Leisure
Holdings
Inc.
(“Marr’s”),
of
which
William
Marr
and
his
wife,
Norah
Marr,
owned
62.16
percent
of
the
voting
shares.
On
that
date,
and
as
early
as
1983,
Outdoor
was
inactive
and
had
accumulated
non-capital
losses
in
the
amount
of
$541,044.
On
December
3,
1983,
the
directors
of
Duha
No.
1
authorized
the
president
of
the
corporation,
Emeric
Duha,
to
proceed
at
his
discretion
to
acquire
the
shares
of
Outdoor
in
order
to
attempt
to
take
advantage
of
the
substantial
non-capital
losses
which
the
latter
had
accumulated,
so
long
as
the
losses
could
be
purchased
advantageously
and
if
the
related
costs
did
not
exceed
$10,000.
This
set
into
motion
the
chain
of
events
which
ultimately
gave
rise
to
this
litigation.
On
February
7,
1984,
Duha
No.
1
amalgamated
with
64457
Manitoba
Ltd.,
a
wholly
owned
subsidiary
of
Duha
No.
1,
to
form
Duha
Printers
Western
Ltd.
(“Duha
No.
2”).
This
caused
a
deemed
year-end,
permitting
Duha
No.
I
to
take
advantage
of
a
small
business
deduction,
and
the
shareholders
of
Duha
No.
2
received
the
same
number
of
shares
as
they
had
previously
owned
in
Duha
No.
1.
On
February
8,
1984,
the
articles
of
Duha
No.
2
were
amended
to
increase
the
authorized
capital
of
the
company
by
creating
an
unlimited
number
of
Class
“C”
preferred
shares.
These
shares
entitled
their
holders
to
non-cumulative
dividends
equal
to
9
percent
of
the
redemption
price
(the
stated
capital
for
each
share).
Each
share
also
carried
with
it
the
right
to
one
vote,
which
was
to
cease
either
upon
the
transfer
of
the
share
or
upon
the
death
of
its
holder.
The
Class
“C”
shares
were
redeemable
by
Duha
No.
2
with
the
consent
of
the
holder,
or
without
the
consent
of
the
holder
in
the
event
that
the
shares
were
transferred.
Marr’s
subscribed
for
2,000
Class
“C”
shares
at
a
price
of
one
dollar
each,
for
a
total
of
$2,000,
on
February
8,
1984.
Consequently,
Marr’s
then
held
a
55.71
percent
majority
of
the
voting
shares
in
Duha
No.
2.
It
is
worth
noting
that,
for
the
period
ending
December
31,
1983,
Duha
No.
1
had
net
income
of
$182,223
and
retained
earnings
of
$296,486.
For
the
period
ending
January
2,
1985,
it
had
net
income
of
$630,115
and
retained
earnings
of
$571,543.
Also
on
February
8,
1984,
an
agreement
was
entered
into
among
all
of
the
shareholders
of
the
new
corporation,
Duha
No.
2
(the
“Agreement”).
Aside
from
describing
itself
in
Article
3.1
as
a
“unanimous
shareholders’
agreement”,
the
Agreement
stated
that
it
dealt
with
the
operation
and
management
of
the
company’s
business
and
affairs.
According
to
Article
2
of
the
Agreement,
the
affairs
of
Duha
No.
2
were
to
be
managed
by
a
board
of
directors
elected
by
the
shareholders
and
composed
of
any
three
of
Emeric
Duha,
Gwendolyn
Duha,
William
Marr
and
Paul
Quinton.
Although
Mr.
Quinton
was
a
close
friend
of
both
Emeric
Duha
and
William
Marr,
and
had
served
as
a
director
of
Duha
No.
1
since
1974,
it
is
common
ground
that
he,
Emeric
Duha,
and
William
Marr
were
not
“related
to
each
other”
within
the
meaning
of
s.
251
of
the
Income
Tax
Act.
The
Agreement
also
restricted
the
transfer
of
shares
so
that
no
shares
could
be
transferred
without
the
consent
of
the
majority
of
the
directors
(Article
4.1);
prohibited
any
shareholder
from
selling,
assigning,
transferring,
or
otherwise
encumbering
its
shares
in
any
manner
(Article
4.3);
and
provided
that
new
shares
could
only
be
issued
with
the
unanimous
consent
of
the
existing
shareholders
(Article
4.4).
Further,
in
Article
6.1,
the
Agreement
provided
that
shareholder
disputes
regarding
the
business,
accounts,
or
transactions
of
Duha
No.
2
were
to
be
resolved
by
arbitration.
On
February
9,
1984,
Duha
No.
2
purchased
all
of
the
outstanding
shares
of
Outdoor
from
Marr’s
for
$1.
On
the
same
date,
64099
Manitoba
Ltd.,
a
wholly
owned
subsidiary
of
Duha
No.
2,
purchased
from
Marr’s
Leisure
Products
(1977)
Ltd.
(“Marr’s
Leisure”),
a
wholly
owned
subsidiary
of
Marr’s,
a
receivable
in
the
amount
of
$441,253
owed
by
Outdoor
to
Marr’s
Leisure.
Half
of
the
total
purchase
price
of
$34,559
was
payable
on
June
1,
1984,
and
the
balance
was
payable
upon
the
redemption
of
the
2,000
Class
“C”
shares
of
Duha
No.
2
held
by
Marr’s.
On
February
10,
1984,
Duha
No.
2
and
Outdoor
effected
a
statutory
amalgamation
under
the
Corporations
Act
to
form
Duha
Printers
(Western)
Limited
(“Duha
No.
3”).
The
shares
of
Outdoor
were
cancelled
and
the
shareholders
of
Duha
No.
3
received
the
same
number
and
class
of
shares
as
they
had
previously
owned
in
Duha
No.
2.
On
March
12,
1984,
the
shareholders
of
Duha
No.
3
elected
Emeric
Duha,
Gwendolyn
Duha
and
Paul
Quinton
as
the
three
directors
of
Duha
No.
3.
On
January
4,
1985,
Duha
No.
3,
with
the
consent
of
Marr’s,
redeemed
the
2,000
Class
“C”
shares
owned
by
Marr’s
for
a
redemption
price
of
$2,000.
On
February
15,
1985,
the
Agreement
was
terminated
and
Paul
Quinton
resigned
as
a
director
of
Duha
No.
3.
In
its
corporate
tax
return
filed
on
June
28,
1985,
Duha
No.
3
deducted
from
its
income
non-capital
losses
in
the
amount
of
$463,820,
of
which
$460,786
had
been
incurred
by
Outdoor
in
previous
years.
The
Minister
of
National
Revenue
disallowed
the
deduction
on
the
basis
that
Marr’s
did
not
control
Duha
No.
2
prior
to
its
amalgamation
with
Outdoor,
and
that
the
transactions
at
issue
were
artificial
and
a
sham.
The
Tax
Court
of
Canada
allowed
Duha
No.
3’s
appeal,
but
this
decision
was
overturned
on
appeal
to
the
Federal
Court
of
Appeal.
II.
Relevant
Statutory
Provisions
Income
Tax
Act,
R.S.C.
1952,
c.
148,
as
amended
87.
...
(2.1)
Where
there
has
been
an
amalgamation
of
two
or
more
corporations,
for
the
purposes
only
of
(a)
determining
the
new
corporation’s
non-capital
loss,
net
capital
loss,
restricted
farm
loss
or
farm
loss,
as
the
case
may
be,
for
any
taxation
year,
and
b)
determining
the
extent
to
which
subsections
111(3)
to
(5.4)
apply
to
restrict
the
deductibility
by
the
new
corporation
of
any
non-capital
loss,
net
capital
loss,
restricted
farm
loss
or
farm
loss,
as
the
case
may
be,
the
new
corporation
shall
be
deemed
to
be
the
same
corporation
as,
and
a
continuation
of,
each
predecessor
corporation,
except
that
this
subsection
shall
in
no
respect
affect
the
determination
of
(c)
the
fiscal
period
of
the
new
corporation
or
any
of
its
predecessors,
(d)
the
income
of
the
new
corporation
or
any
of
its
predecessors,
or
(e)
the
taxable
income
of,
or
the
tax
payable
under
this
Act
by,
any
predecessor
corporation.
111.
(1)
For
the
purpose
of
computing
the
taxable
income
of
a
taxpayer
for
a
taxation
year,
there
may
be
deducted
such
portion
as
he
may
claim
of
(a)
his
non-capital
losses
for
the
7
taxation
years
immediately
preceding
and
the
3
taxation
years
immediately
following
the
year;
(5)
Where,
at
any
time,
control
of
a
corporation
has
been
acquired
by
a
person
or
persons
(each
of
whom
is
in
this
subsection
referred
to
as
the
“purchaser”)
(a)
such
portion
of
the
corporation’s
non-capital
loss
or
farm
loss,
as
the
case
may
be,
for
a
taxation
year
ending
before
that
time
as
may
reasonably
be
regarded
as
its
loss
from
carrying
on
a
business
is
deductible
by
the
corporation
for
a
particular
taxation
year
ending
after
that
time
(i)
only
if
throughout
the
particular
year
and
after
that
time
that
business
was
carried
on
by
the
corporation
for
profit
or
with
a
reasonable
expectation
of
profit...
251.
...
(2)
For
the
purposes
of
this
Act
“related
persons”,
or
persons
related
to
each
other,
are
(c)
any
two
corporations
(i)
if
they
are
controlled
by
the
same
person
or
group
of
persons...
256.
...
(7)
For
the
purposes
of
subsections
66(11)
and
(11.1),
87(2.1),
88(1.1)
and
(1.2)
and
section
111
(a)
where
shares
of
a
particular
corporation
have
been
acquired
by
a
person
after
March
31,
1977,
that
person
shall
be
deemed
not
to
have
acquired
control
of
the
particular
corporation
by
virtue
of
such
share
acquisition
if
that
person
(i)
was,
immediately
before
such
share
acquisition,
related
(otherwise
than
by
virtue
of
a
right
referred
to
in
paragraph
251
(5)(Z>))
to
the
particular
corporation...
Corporations
Act,
R.S.M.
1987,
c.
C225
6(3)
Subject
to
subsection
(4),
if
the
articles
or
a
unanimous
shareholder
agreement
require
a
greater
number
of
votes
of
directors
or
shareholders
than
that
required
by
this
Act
to
effect
any
action,
the
provisions
of
the
articles
or
of
the
unanimous
shareholder
agreement
prevail.
6(4)
The
articles
may
not
require
a
greater
number
of
votes
of
shareholders
to
remove
a
director
than
the
number
required
by
section
104.
20(1)
A
corporation
shall
prepare
and
maintain,
at
its
registered
office
and,
subject
to
subsection
(5),
at
any
other
place
in
Manitoba
designated
by
the
directors,
records
containing
(a)
the
articles
and
the
by-laws
and
all
amendments
thereto,
and
a
copy
of
any
unanimous
shareholder
agreement;
97(1)
Subject
to
any
unanimous
shareholder
agreement,
the
directors
of
a
corporation
shall
(a)
exercise
the
powers
of
the
corporation
directly
or
indirectly
through
the
employees
and
agents
of
the
corporation;
and
(b)
direct
the
management
of
the
business
and
affairs
of
the
corporation.
140(2)
An
otherwise
lawful
written
agreement
among
all
the
shareholders
of
a
corporation,
or
among
all
the
shareholders
and
a
person
who
is
not
a
shareholder,
that
restricts,
in
whole
or
in
part,
the
powers
of
the
directors
to
manage
the
business
and
affairs
of
the
corporation
is
valid.
140(5)
A
shareholder
who
is
a
party
to
a
unanimous
shareholder
agreement
has
all
the
rights,
powers
and
duties
and
incurs
the
liabilities
of
a
director
of
the
corporation
to
which
the
agreement
relates
to
the
extent
that
the
agreement
restricts
the
discretion
or
powers
of
the
directors
to
manage
the
business
and
affairs
of
the
corporation,
and
the
directors
are
thereby
relieved
of
their
duties
and
liabilities
to
the
same
extent.
240
If
a
corporation
or
any
director,
officer,
employee,
agent,
auditor,
trustee,
receiver,
receiver-manager
or
liquidator
of
a
corporation
does
not
comply
with
this
Act,
the
regulations,
articles,
by-laws,
or
a
unanimous
shareholder
agreement,
a
complainant
or
a
creditor
of
the
corporation
may,
in
addition
to
any
other
right
he
has,
apply
to
a
court
for
an
order
directing
any
such
person
to
comply
with,
or
restraining
any
such
person
from
acting
in
breach
of,
any
provisions
thereof,
and
upon
such
application
the
court
may
so
order
and
make
any
further
order
it
thinks
fit.
A
few
explanatory
words
regarding
this
rather
complex
legislative
scheme
may
be
useful
at
this
stage.
Under
s.
87(2.1)
of
the
Income
Tax
Act,
where
there
has
been
an
amalgamation
of
two
or
more
corporations,
for
the
purposes
of
determining
the
non-capital
loss
of
the
new
corporation
for
any
taxation
year,
the
new
corporation
is
deemed
to
be
the
same
corporation
as,
and
a
continuation
of,
each
predecessor
corporation.
Therefore,
for
the
purposes
of
s.
111(1),
the
new
corporation
is
entitled
to
deduct
from
its
taxable
income
for
a
year
its
non-capital
losses
for
the
seven
years
immediately
preceding,
and
the
three
years
immediately
following,
the
year
in
question.
However,
this
is
subject
to
at
least
one
important
qualification:
under
s.
111(5),
where
“control”
of
a
corporation
has
been
acquired
by
another
person
(the
“purchaser”),
that
corporation’s
non-capital
losses
from
the
carrying
on
of
a
business
are
only
deductible
by
the
purchaser
in
a
subsequent
taxation
year
if,
throughout
that
year
and
after
that
time,
the
business
in
question
was
carried
on
by
the
corporation
with
a
reasonable
expectation
of
profit
-
that
is,
as
a
going
concern.
The
foregoing
provisions
of
the
Corporations
Act
are
relevant,
potentially,
as
indicators
of
where
“control”
of
a
corporation
lay
at
the
material
time
or
times.
III.
Judicial
History
A.
Tax
Court
of
Canada,
(1994),
[1995]
1
C.T.C.
2481
(T.C.C.)
Rip
J.T.C.C.
observed
first
that,
if
Marr’s
acquired
control
of
Duha
No.
2
on
February
8,
1984,
then
ss.
251(2)
and
256(7)(a)(i)
of
the
Income
Tax
Act
would
deem
there
to
have
been
no
change
of
control
when
its
shares
were
acquired
the
next
day
by
Duha
No.
2,
given
that
the
two
companies
would
have
been
related
to
one
another.
As
such,
s.
111(5)
would
not
prevent
Duha
No.
3
from
deducting
from
its
income
the
non-capital
losses
previously
incurred
by
Outdoor,
pursuant
to
s.
87(2.1),
even
though
the
business
of
Outdoor
was
not
carried
on
by
Duha
No.
3
as
a
going
concern.
As
a
preliminary
matter,
Rip
J.T.C.C.
noted
that,
although
the
parties
had
referred
to
the
Agreement
as
a
“unanimous
shareholders’
agreement”,
the
Agreement
did
not
by
its
terms
restrict
the
powers
of
the
directors
of
Duha
No.
2
to
manage
the
business
and
affairs
of
the
company,
as
required
by
the
definition
of
“unanimous
shareholder
agreement”
in
s.
140(2)
of
the
Corporations
Act.
In
his
view,
the
Agreement,
while
admittedly
unanimous,
was
simply
an
ordinary
shareholders’
agreement,
not
the
special
type
of
“unanimous
shareholder
agreement”
contemplated
by
that
statute.
Turning
to
the
substantive
issues
on
the
appeal,
Rip
J.T.C.C.
began
by
stating
that
“control”
of
a
corporation,
for
the
purposes
of
the
Income
Tax
Act,
means
de
jure
control,
or
the
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,
and
not
de
facto
control:
Buckerfield’s
Ltd.
v.
Minister
of
National
Revenue,
[1964]
C.T.C.
504
(Can.
Ex.
Ct.)
(a
definition
adopted
by
this
Court
in
Dworkin
Furs
(Pembroke)
Ltd.
v.
Minister
of
National
Revenue.
[1967]
S.C.R.
223
(S.C.C.),
inter
alia).
Rip
J.
noted
also
that,
in
assessing
de
jure
control,
the
courts
may
examine
the
incorporating
or
con-
stating
documents
of
the
company,
which
are
“in
effect
an
agreement
between
the
shareholders
and
binding
upon
all
the
shareholders.”
The
Minister
had
argued
that,
although
Marr’s
owned
a
majority
of
the
voting
shares
of
Duha
No.
2,
the
Agreement
“totally
neutralized”
the
ability
of
Marr’s
to
manage
the
company,
since
it
effectively
prevented
Marr’s
from:
electing
a
majority
of
its
choice
to
the
board
of
directors,
dissenting
from
corporate
transactions
and
applying
to
the
court
for
redemption
of
its
shares,
or
selling
its
shares.
However,
after
an
extensive
review
of
the
case
law,
Rip
J.
was
unable
to
find
authority
for
the
proposition
that
the
Agreement
should
be
taken
to
vitiate
the
apparent
de
jure
control
of
Duha
No.
2
by
Marr’s.
At
the
relevant
time,
Marr’s
held
more
than
50
percent
of
the
voting
shares
in
Duha
No.
2
and,
in
the
view
of
Rip
J.T.C.C.,
nothing
in
the
constating
documents
prevented
Marr’s
from
voting
its
shares
in
the
normal
course,
nor
was
there
any
evidence
that
Marr’s
was
not
the
beneficial
owner
of
the
shares
and
thus
unable
to
decide
for
itself
how
the
shares
were
to
be
voted.
Even
if
Rip
J.T.C.C.
had
accepted
that
documents
other
than
the
constating
documents
could
be
considered,
he
found
that
nothing
in
the
Agreement
obliged
Marr’s
to
vote
its
shares
in
the
manner
in
which
it
did,
that
is,
to
vote
for
a
majority
of
directors
who
were
representatives
of
the
Duha
family.
Marr’s
was
in
a
position
to
alter
the
board
of
directors,
and
there
was
no
evidence,
in
the
view
of
Rip
J.T.C.C.,
that
Mr.
Quinton
was
a
nominee
of
the
Duha
family.
Therefore,
Marr’s
was
free,
by
electing
to
the
board
Mr.
Quinton,
either
Mr.
or
Mrs.
Duha,
and
Mr.
Marr,
to
ensure
that
neither
Marr’s
nor
the
Duha
family
would
have
a
majority
on
the
board
of
directors.
Rip
J.T.C.C.
thus
concluded
that
Marr’s,
by
virtue
of
its
ownership
of
the
majority
of
the
voting
shares
on
February
8,
1984,
controlled
Duha
No.
2
at
that
time.
Turning
to
whether
the
transaction
was
a
sham,
Rip
J.T.C.C.
acknowledged
that
the
sole
purpose
of
the
chain
of
events
was
to
enable
Duha
No.
3
to
make
use
of
the
losses
incurred
by
Outdoor,
that
de
facto
control
of
Duha
No.
2
was
never
transferred
to
Marr’s,
and
that
Marr’s
never
intended
to
control
the
company.
However,
he
could
not
agree
that
the
transaction
was
a
sham,
given
that
there
was
no
attempt
to
disguise
its
true
character.
The
various
transactions
were
binding
upon
the
parties
and
did
precisely
what
they
appeared
to
do.
As
for
the
argument
that
the
transaction
was
contrary
to
the
“object
and
spirit”
of
s.
Ill,
Rip
J.T.C.C.
simply
observed
that
the
purpose
of
the
section
was
to
permit
corporations
to
apply
non-capital
losses
against
income
earned
in
subsequent
years,
that
amalgamated
corpo
rations
are
entitled
to
deduct
the
losses
of
predecessor
corporations
in
this
manner
if
the
amalgamated
corporation
is
controlled
by
the
same
person
or
group
as
the
predecessor,
and
that
“control”
in
this
sense
refers
to
de
jure
and
not
de
facto
control.
In
his
view,
there
was
nothing
in
the
transaction
that
violated
the
“object
and
spirit”
of
the
provision.
Therefore,
Rip
J.T.C.C.
concluded
that
Marr’s
did
control
Duha
No.
2
on
and
immediately
prior
to
February
8,
1984,
when
Duha
No.
2
and
Outdoor
were
amalgamated,
and
that
it
controlled
Duha
No.
3
during
the
taxation
year
on
appeal.
Accordingly,
the
appeal
was
allowed.
B.
Federal
Court
of
Appeal,
[1996]
3
F.C.
78
(Fed.
C.A.)
(1)
Reasons
of
Linden
J.A.
(Isaac
C.J.
concurring)
Like
the
trial
judge,
Linden
J.A.
was
not
persuaded
that
the
transaction
was
a
sham.
The
legal
obligations
between
the
parties
were
real
and
accomplished
exactly
what
they
purported
to
do.
However,
this
was
not
sufficient
to
achieve
the
tax
results
ultimately
desired
by
the
parties.
It
remained
to
be
seen
whether
the
transactions
came
within
the
relevant
sections
of
the
Income
Tax
Act.
Linden
J.A.
refused
to
treat
as
a
distinct
issue
the
“object
and
spirit”
of
the
provisions
in
question,
stating
that,
instead,
the
interpretation
of
the
sections
should
reflect
their
objects.
The
object
and
spirit
of
a
section
will
only
be
practically
relevant
when
the
application
of
that
section
to
factual
circumstances
admits
of
doubt,
not
where
the
meaning
of
the
section
is
clear
and
free
of
ambiguity
or
uncertainty:
Canada
v.
Antosko,
[1994]
2
S.C.R.
312
(Fed.
C.A.).
In
the
view
of
Linden
J.A.,
the
purpose
of
the
provisions
at
issue
on
this
appeal
was
“to
permit
a
deduction
of
a
loss
if
control
has
not
changed
hands
but
to
deny
it
if
control
has
changed
hands”
(p.
109).
Linden
J.A.
acknowledged
that
control,
for
these
purposes,
means
de
jure
and
not
de
facto
control,
and
that
the
single
most
important
factor
to
consider
is
the
voting
rights
attaching
to
shares.
However,
he
was
equally
of
the
opinion
that
the
scope
of
scrutiny
under
the
de
jure
test
has
been
extended
“beyond
a
mere
technical
reference
to
the
share
register”
(p.
109).
After
an
exhaustive
review
of
the
case
law,
including
cases
which
he
interpreted
as
relying
upon
restrictions
in
the
constating
documents
and
“other
agreements”
as
an
indicator
of
de
jure
control
—
and,
in
particular,
Minister
of
National
Revenue
v.
Consolidated
Holding
Co.,
[1974]
S.C.R.
419
(S.C.C.)--Linden
J.A.
concluded
(at
p.
118)
that
it
is
important
to
look
to
the
legal
position
of
the
parties
as
displayed
in
the
wider
circumstances
of
the
parties’
affairs.
...
[T]rue
de
jure
control
is
just
what
it
is
stated
to
be,
control
at
law.
Any
binding
instrument,
therefore,
must
be
reckoned
in
the
analysis
if
it
affects
voting
rights.
Linden
J.A.
held
that,
“[i]n
determining
issues
of
corporate
control,
the
Court
will
look
to
the
time
in
question,
to
legal
documents
pertaining
to
the
issue,
and
to
any
actual
or
contingent
legal
obligations
affecting
the
voting
rights
of
shares”
(p.
121).
These
factors,
he
held,
“are
simply
facts
with
legal
consequences,
so
that
the
distinction
between
de
jure
and
de
facto
is
not
as
stark
as
it
once
was”.
In
his
view,
then,
“corporate
control
must
be
real,
effective
legal
control
over
the
company
in
question”
(p.
121).
Such
an
analysis,
he
continued,
incorporates
an
appreciation
for
various
considerations
which
might
affect
the
way
in
which
shares
are
or
could
be
voted.
He
concluded
that,
“if
majority
ownership
does
not
allow
for
real
legal
control
over
a
company,
the
de
jure
test
of
control
will
not
have
been
met”
(p.
124).
Applying
the
law
to
the
facts
of
the
instant
appeal,
Linden
J.A.
held
that
Marr’s
did
not
control
Duha
No.
2
because
the
Agreement
determined
that
the
majority
of
the
Board
of
Directors
would
always
be
nominees
of
the
Duha
family.
He
found
that
Mr.
Quinton
was
effectively
a
nominee
of
the
Duha
family
because
he
had
been
a
longtime
friend
of
Mr.
Duha,
had
been
a
director
of
Duha
No.
1
for
ten
years,
and
had
signed
the
resolution
authorizing
the
subscription
by
Marr’s
of
the
2,000
Class
“C”
shares,
the
entering
into
the
Agreement
by
the
corporation,
and
the
purchase
of
Outdoor’s
shares.
On
this
basis,
Linden
J.A.
concluded
that
an
election
of
any
combination
of
the
directors
listed
in
the
Agreement
assured
the
Duha
family
of
control
over
Duha
No.
2.
He
also
noted
that
Duha
No.
2
was
worth
almost
$600,000,
and
opined
that
no
reasonable
person
would
believe
that
a
$2,000
share
purchase
would
actually
yield
control
of
a
company
of
such
value.
In
his
view,
it
was
not
coincidental
that
the
three
Duha
family
nominees
were
in
fact
elected
as
directors
and
that
Marr’s
did
not
elect
its
own
majority
shareholder
to
the
board.
Linden
J.A.
was
of
the
view
that
the
Agreement
likely
qualified
as
a
unanimous
shareholder
agreement
(“USA”)
under
s.
140(2)
of
the
Corporations
Act,
given
that
it
operated
to
restrict
the
powers
of
the
directors
both
directly
and
indirectly.
However,
he
also
held
that
the
Agreement
did
not
have
to
meet
this
statutory
requirement
before
it
could
be
considered
in
a
de
jure
control
analysis.
The
Agreement,
signed
by
all
the
shareholders
and
by
Duha
No.
2,
was
legally
binding
and
had
significantly
affected
how
the
shareholders
could
vote
their
shares.
These,
in
his
view,
were
the
minimum
conditions
to
be
met
before
the
Agreement
could
be
considered
in
a
de
jure
control
examination,
given
that
“[c]ertain
cases
of
the
Supreme
Court
of
Canada
explicitly
state”
(p.
125)
that
external
agreements
are
not
to
be
considered
irrelevant
to
the
issue
of
de
jure
control.
He
distinguished
the
case
of
International
Iron
&
Metal
Co.
v.
Minister
of
National
Revenue
[1974]
S.C.R.
898
(S.C.C.),
affg
(1969),
69
D.T.C.
5445
(T.C.C.),
on
the
basis
that
the
agreement
in
that
case
was
“contrived
to
multiply
a
tax
benefit”
(p.
126)
and
that
the
parties
to
whom
control
was
supposedly
transferred
by
the
agreement
were
not
parties
to
it,
per
se.
Moreover,
there
was
other
evidence
that
Marr’s
did
not
control
Duha
No.
2.
Linden
J.A.
noted
that
the
amended
articles
of
Duha
No.
2
stated
that
the
company
could
not
issue
new
voting
shares
without
unanimous
shareholder
consent
and
found
that
this
meant
that
Marr’s
could
not
change
its
restricted
choice
of
directors
by
using
its
majority
share
position.
He
held
that
Marr’s
ability
to
dissolve
Duha
No.
2
was
not
determinative
and
was
little
more
than
“‘a
chimera”
because,
upon
a
dissolution,
Marr’s
would
receive
nothing
beyond
the
stated
value
of
its
shares,
would
forfeit
the
receivable
and
would
actually
suffer
a
net
loss.
Linden
J.A.
concluded
that
the
intentions
of
the
parties
had
been
that
Marr’s
would
not
control
Duha
No.
2,
that
the
legal
obligations
between
the
parties
ensured
that
the
Duha
family
would
retain
control
over
the
company,
and
that
this
was
the
legal
effect
of
the
transactions.
In
his
view
(at
p.
129),
the
appellant
had
“used
the
technicalities
of
revenue
law
and
company
law
to
conjure
a
legal
remedy
for
restrictions
to
which
it
would
otherwise
be
subject.
They
did
not
succeed.”
He
concluded,
therefore,
that
Outdoor
and
Duha
No.
2
were
not
related
prior
to
the
amalgamation,
that
Duha
No.
2
never
carried
on
the
business
of
Outdoor
as
a
going
concern
or
with
a
reasonable
expectation
of
profit,
and
that
the
appellant
therefore
could
not
make
use
of
Outdoor’s
non-capital
losses.
(2)
Reasons
of
Stone
J.A.
(Isaac
C.J.
concurring)
Like
Linden
J.A.,
Stone
J.A.
would
have
allowed
the
appeal,
but
for
different
reasons.
In
his
view,
the
Agreement
was
to
be
considered
along
with
the
constating
documents
of
the
corporation
because
it
was
a
USA
within
the
meaning
of
the
Corporations
Act.
Stone
J.A.
noted
that
s.
97(1)
of
the
Corporations
Act
gives
directors
the
power
to
direct
“the
business
and
affairs
of
the
corporation”
and
that
s.
1(1)
defines
“affairs”
as
including
“the
relationships
among
a
body
corporate,
its
affiliates
and
the
shareholders,
directors
and
officers
of
those
bodies
corporate
but
...
not
...
the
business
carried
on
by
those
bodies
corporate”.
He
further
held
that,
to
be
a
USA
for
the
purposes
of
s.
140(2)
of
the
Corporations
Act,
the
Agreement
had
to
restrict
the
powers
of
the
directors
to
manage
the
business
and
affairs
of
the
corporation.
Stone
J.A.
noted
that
Article
2.1
of
the
Agreement
required
the
shareholders
to
“cause
the
affairs
of
the
Corporation
to
be
managed
by
a
board
of
three
(3)
directors”
(emphasis
added),
and
reasoned
that
this,
by
exclusion,
did
not
leave
the
directors
with
the
power
to
manage
the
business
of
Duha
No.
2.
Further,
Article
6.1
of
the
Agreement
provided
for
the
resolution
by
arbitration
of
any
dispute
arising
among
the
shareholders
with
respect
to
the
“business
or
accounts
or
transactions”
of
the
company.
Ordinarily,
in
his
view,
no
dispute
as
to
the
“business”
of
the
company
would
arise
between
the
shareholders,
as
the
business
of
a
corporation
is,
in
the
absence
of
a
USA,
to
be
directed
by
the
board
of
directors.
On
this
basis,
he
concluded
that
the
Agreement
restricted
the
powers
of
the
directors
and
was
thus
a
USA
within
the
meaning
of
the
Corporations
Act.
Thus,
in
his
view,
the
Agreement
had
to
be
considered
when
examining
de
jure
control.
In
the
circumstances
of
this
case,
Stone
J.A.
concluded
that
the
Agreement
prevented
Marr’s
from
obtaining
the
de
jure
control
that
it
otherwise
might
have
held
by
virtue
of
owning
55.71
percent
of
the
voting
shares
of
Duha
No.
2.
Even
though
Marr’s
could
in
theory
determine
the
composition
of
the
board
of
directors,
its
ability
to
elect
a
board
that
could
manage
only
the
“affairs”
and
not
the
“business”
of
Duha
No.
2
was
not
de
jure
control.
Stone
J.A.
also
observed
that
the
referral
to
arbitration
of
irreconcilable
differences
between
shareholders
implied
that
the
unanimous
agreement
of
all
shareholders,
not
simply
a
majority
of
votes,
was
required
for
business
decisions.
In
this
respect,
Marr’s
clearly
lacked
de
jure
control
over
Duha
No.
2.
Stone
J.A.
concluded,
therefore,
that
Outdoor
and
Duha
No.
2
had
not
been
related
before
they
amalgamated
and
that
Outdoor’s
losses
could
not
be
utilized
by
Duha
No.
3.
While
it
was
not
necessary
to
the
manner
in
which
he
proposed
to
dispose
of
the
case,
Stone
J.A.
also
held
that
the
transaction
was
not
a
sham,
as
the
Minister
alleged,
given
that
the
requisite
element
of
deceit
as
to
the
true
nature
of
the
transaction
was
not
present
in
the
circumstances.
IV.
Issues
The
ultimate
issue
on
this
appeal
is
whether
Duha
No.
3
should
have
been
entitled
to
deduct
from
its
1985
business
income
non-capital
losses
incurred
in
previous
years
by
Outdoor,
pursuant
to
s.
111(5)
of
the
Income
Tax
Act.
To
answer
this
question,
it
will
be
necessary
to
decide
whether
documents
other
than
the
constating
documents
of
a
corporation
should
be
considered
in
determining
de
jure
control
of
a
company
for
the
purposes
of
ss.
111(5)
and
251(2)(c)
of
the
Act,
and
whether
USAs
enjoy
any
special
status
in
this
regard.
If
either
or
both
of
these
questions
are
resolved
in
the
affirmative,
it
will
then
be
necessary
to
establish
whether
or
not
the
Agreement
was
a
USA
within
the
meaning
of
s.
140(2)
of
the
Corporations
Act
and,
if
so,
whether
it
in
fact
deprived
Marr’s
of
de
jure
control
over
Duha
No.
2.
On
appeal
to
this
Court,
the
Minister
did
not
pursue
the
argument
that
the
transaction
was
a
sham.
V.
Analysis
A.
“Control”
of
a
corporation
It
has
been
well
recognized
that,
under
the
Income
Tax
Act,
“control”
of
a
corporation
normally
refers
to
de
jure
control
and
not
de
facto
control.
This
Court
has
repeatedly
cited
with
approval
the
following
test,
set
out
by
Jackett
P.
in
Buckerfield’s,
supra,
at
p.
507:
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
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
former
section
dealing
with
associated
companies],
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.
[Emphasis
added.]
Cases
in
which
this
Court
has
applied
the
foregoing
test
have
included,
inter
alia,
Dworkin
Furs,
supra,
and
Vina-Rug
(Can.)
Ltd.
v.
Minister
of
National
Revenue,
[1968]
S.C.R.
193
(S.C.C.).
Thus,
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.
However,
it
must
be
recognized
at
the
outset
that
this
test
is
really
an
attempt
to
ascertain
who
is
in
effective
control
of
the
affairs
and
fortunes
of
the
corporation.
That
1s,
although
the
directors
generally
have,
by
operation
of
the
corporate
law
statute
governing
the
corporation,
the
formal
right
to
direct
the
management
of
the
corporation,
the
majority
shareholder
enjoys
the
indirect
exercise
of
this
control
through
his
or
her
ability
to
elect
the
board
of
directors.
Thus,
it
is
in
reality
the
majority
shareholder,
not
the
directors
per
se,
who
is
in
effective
control
of
the
corporation.
This
was
expressly
recognized
by
Jackett
P.
when
setting
out
the
test
in
Buck-
erfield’s.
Indeed,
the
very
authority
cited
for
the
test
was
the
following
dictum
of
Viscount
Simon,
L.C.,
in
British
American
Tobacco
Co.
v.
Inland
Revenue
Commissioners
(1942),
[1943]
1
All
E.R.
13
(U.K.
H.L.),
at
p.
15:
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.
[Emphasis
added.
]
Viewed
in
this
light,
it
becomes
apparent
that
to
apply
formalistically
a
test
like
that
set
out
in
Buckerfield’s,
without
paying
appropriate
heed
to
the
reason
for
the
test,
can
lead
to
an
unfortunately
artificial
result.
The
task
before
this
Court,
then,
is
to
determine
whether,
just
prior
to
the
amalgamation,
Marr’s
was
in
effective
control
of
the
affairs
and
fortunes
of
Duha
No.
2
by
virtue
of
its
majority
shareholdings.
There
is
no
real
dispute
between
the
parties
that
the
de
jure
control
test
is
applicable
in
the
present
circumstances.
Rather,
the
dispute
is
as
to
which
factors
may
be
considered
in
assessing
de
jure
control.
In
the
submission
of
the
appellant,
both
Linden
and
Stone
JJ.A.
erred
in
their
respective
applications
of
the
test:
Linden
J.A.
by
holding
that
this
Court
has
widened
the
test
such
that
bare
contractual
agreements
between
shareholders
may
be
considered,
and
Stone
J.A.
by
concluding
that
the
agreement
here
in
question
was
a
unanimous
shareholder
agreement
within
the
definition
of
that
term
in
the
Corporations
Act,
and
that
a
USA
may
be
considered
in
assessing
de
jure
control
for
the
purposes
of
ss.
111(5)
and
251
(2)(c)
of
the
Income
Tax
Act.
I
will
examine
each
of
these
submissions
in
turn.
(1)
External
agreements
In
his
reasons,
after
reviewing
a
number
of
authorities,
Linden
J.A.
concluded
(at
p.
118)
that
..true
de
jure
control
is
just
what
it
is
stated
to
be,
control
at
law.
Any
binding
instrument,
therefore,
must
be
reckoned
in
the
analysis
if
it
affects
voting
rights.
In
the
view
of
Linden
J.A.
(at
p.
118)
“it
is
important
to
look
to
the
legal
position
of
the
parties
as
displayed
in
the
wider
circumstances
of
the
parties’
affairs.”
But
while
this
might
seem
a
sensible
approach
at
first
glance,
I
can
find
no
general
support
in
the
extensive
authorities
cited
for
Linden
J.A.’s
application
of
it.
The
general
approach
to
the
determination
of
control,
as
I
have
already
noted,
has
been
to
examine
the
share
register
of
the
corporation
to
ascertain
which
shareholder,
if
any,
possesses
the
ability
to
elect
a
majority
of
the
board
of
directors
and,
therefore,
has
the
type
of
power
contemplated
by
the
Buckerfield’s
test,
supra.
The
case
law
seems
to
point
only
to
limited
circumstances
in
which
other
documents
may
be
examined,
and
then
only
to
a
narrow
range
of
documents
which
may
be
considered.
In
my
view,
this
is
readily
apparent
even
in
the
case
law
cited
by
Linden
J.A.
in
support
of
the
opposite
position,
which
I
shall
now
briefly
discuss.
The
first
case
in
which
the
Buckerfield’s
test
was
applied
by
this
Court
was
Dworkin
Furs,
supra.
Of
the
five
appeals
decided
together
in
Dworkin
Furs,
the
one
that
is
most
relevant
to
the
instant
case
is
Aaron’s
Ladies
Apparel
Limited,
which
involved
a
provision
in
the
articles
of
association
of
the
corporation
which
required
the
unanimous
consent
of
all
shareholders
or
directors,
as
the
case
may
be,
for
the
successful
passage
of
any
resolution.
A
group
of
shareholders
held
two-thirds
of
the
total
voting
shares
of
the
corporation
and
the
issue
before
the
Court
was
whether
the
aforementioned
provision
deprived
this
group
of
de
jure
control.
Hall
J.,
writing
for
the
Court,
held
that
the
provision
did
nullify
the
shareholders’
control
of
the
company
(at
p.
236):
Control
of
a
company
within
Buckerfield
rests
with
the
shareholders
as
such
and
not
as
directors.
A
contract
between
shareholders
to
vote
in
a
given
or
agreed
way
is
not
illegal.
The
Articles
of
Association
are
in
effect
an
agreement
between
the
shareholders
and
binding
upon
all
shareholders.
Article
6
in
question
here
was
neither
illegal
nor
ultra
vires.
In
his
reasons,
Linden
J.A.
appears
to
have
taken
this
statement
to
support
the
proposition
that
the
court
is
entitled
to
consider
ordinary
contracts
between
shareholders
to
assess
control.
However,
the
flaw
in
this
interpretation
is
immediately
obvious:
in
Dworkin,
Hall
J.
was
dealing
not
with
an
“ordinary”
contractual
arrangement
but
with
a
provision
of
the
company’s
articles
of
association,
one
of
its
constating
documents.
It
is
entirely
proper
to
look
beyond
the
share
register
when
the
constating
documents
provide
for
something
unusual
which
alters
the
control
of
the
company.
To
consider
every
legally
binding
arrangement
between
shareholders
as
such,
however,
is
another
matter
entirely.
As
I
will
explain
in
more
detail
below,
the
distinction
between
contractually
binding
agreements
outside
the
constating
documents
on
the
one
hand,
and
legally
binding
provisions
within
the
con-
stating
documents
on
the
other,
is
crucial.
With
respect,
Linden
J.A.’s
interpretation
of
Dworkin
Furs
cannot
be
sustained.
In
fact,
Gibson
J.
in
International
Iron
&
Metal
Co.
v.
Minister
of
National
Revenue,
[1969]
C.T.C.
668
(Can.
Ex.
Ct.),
expressly
distinguished
the
shareholders’
agreement
there
at
issue
from
the
“contract”
considered
in
Dworkin
Furs,
which
was
“part
of
the
constitution
of
the
Company”
(p.674).
Attempted
analogies
to
other
case
cited
by
Linden
J.A.
suffer
from
similar
frailties.
For
example,
Linden
J.A.
cites
Donald
Applicators
Ltd.
v.
Minister
of
National
Revenue
(1969),
69
D.T.C.
5122
(Can.
Ex.
Ct.),
aff’d
(1971),
71
D.T.C.
5202
(S.C.C.),
as
standing
for
the
proposition
that
de
jure
control
is
to
be
determined
in
light
of
the
overall
voting
structure
of
the
company,
including
“the
effect
of
any
restrictions
imposed
on
the
decisionmaking
powers
of
the
directors
by
the
memorandum,
the
Articles,
and
by
any
shareholders
agreements”
(pp.
115-16).
In
fact,
Thurlow
J.
(as
he
then
was)
made
no
reference
whatsoever
in
that
case
to
shareholders’
agreements
as
an
indicator
of
de
jure
control,
restricting
his
analysis
and
comments,
at
p.
5125,
only
to
the
memorandum
and
articles
of
the
company.
What
does
emerge,
however,
from
Donald
Applicators,
is
the
notion
that,
in
determining
de
jure
control,
the
court
is
not
limited
to
a
strictly
technical
and
narrow
interpretation
of
the
share
register
and
associated
share
rights
of
a
corporation.
Rather,
as
this
Court
confirmed
in
R.
v.
Imperial
General
Properties
Ltd.,
[1985]
2
S.C.R.
288
(S.C.C.),
at
p.
295,
“these
rights
must
be
assessed
in
their
impact
‘over
the
long
run’”.
However,
this
view
of
control,
at
least
as
enunciated
by
Thurlow
J.
in
Donald
Applicators,
still
depends
upon
the
share
rights
and
other
powers
granted
by
the
corporate
constitution,
not
upon
any
external
shareholders’
agreement.
Donald
Applicators
turned
on
the
power
of
the
shareholders
to
pass
any
ordinary
resolution
as
well
as
special
resolutions
by
which
they
could
remove
the
powers
of
the
directors
and
reserve
decisions
to
their
particular
class
of
shareholders.
Given
that
extensive
power,
it
could
not
be
said
that
the
particular
shareholders
lacked
de
jure
control
“in
the
long
run”.
However,
as
shall
be
seen,
the
question
of
control
“in
the
long
run”
does
not
arise
in
the
instant
case,
as
the
majority
shareholder
group
retained
the
immediate
voting
power
to
elect
directors.
Similarly,
in
Imperial
General
Properties,
supra,
the
issue
of
control
arose
following
a
corporate
reorganization
which
saw
the
original
majority
owners
of
the
corporation
create
non-participating
preference
shares
which
were
issued
to
another
group
of
shareholders.
While
each
class
of
shareholders
then
held
50
percent
of
voting
shares,
meaning
that
neither
enjoyed
clear
majority
control,
the
corporate
constitution
provided
that
a
50
percent
vote
was
sufficient
to
wind
up
the
company,
in
which
case
the
assets
of
the
corporation
would
be
distributed
only
among
the
common
shareholders.
Therefore,
Estey
J.,
writing
for
the
majority
of
this
Court,
held
that
the
common
shareholders
had
a
clear
advantage
over
the
preferred
shareholders
and
thus
enjoyed
de
jure
control.
While
the
apparent
equality
of
voting
power
in
this
case
made
it
necessary
for
the
majority
to
resort
to
the
constating
documents
of
the
corporation
to
assess
the
reality
of
the
situation,
Estey
J.,
at
p.
298,
made
clear
that
this
was
no
extraordinary
step
in
the
law:
The
approach
to
“control”
here
taken
does
not
involve
any
departure
from
prior
judicial
pronouncements
nor
does
it
involve
any
“alteration”
of
the
existing
statute.
The
conclusions
reached
above
merely
result
from
applying
existing
case
law
and
existing
legislation
to
the
particular
facts
of
the
case
at
bar.
The
application
of
the
“control”
concept,
as
earlier
enunciated
by
the
courts,
to
the
circumstances
now
before
the
court
is,
in
my
view,
the
ordinary
progression
of
the
judicial
process
and
in
no
way
amounts
to
a
transgression
of
the
territory
of
the
legislator.
With
this
admonition
in
mind,
I
do
not
believe
that
Imperial
General
Properties
assists
the
Minister’s
case.
The
approach
taken
by
the
majority
in
deciding
the
case
flows
logically
from
its
facts,
and,
in
particular,
the
voting
equality
that
was
apparent
on
the
share
register.
Indeed,
the
limitation
of
this
case
to
the
corporate
structure
and
combination
of
share
interests
of
its
particular
circumstances
was
explicitly
acknowledged
by
Estey
J.
at
p.
298.
No
such
parity
of
shareholding
is
present
in
the
circumstances
of
the
instant
appeal.
In
addition,
in
the
emphatic
words
of
Wilson
J.,
dissenting
(McIntyre
J.
and
Lamer
J.,
as
he
then
was,
concurring),
at
pp.
307-8:
Although
the
scope
of
scrutiny
under
the
de
jure
test
has
been
extended
beyond
a
mere
examination
of
the
share
register
in
order
to
determine
who
really
has
voting
control,
there
has
been
no
deviation
from
the
principle
that
voting
control
is
the
proper
indicium
of
control
until
[Oakfield
Developments
(Toronto)
Ltd.
v.
Minister
of
National
Revenue,
[1971]
S.C.R.
1032].
I
am
of
the
view,
therefore,
that
the
decision
in
Oakfield
is
anomalous
and
should
not
be
followed.
For
the
courts
suddenly
to
change
direction
in
face
of
well-settled
and
long-standing
authority
in
our
tax
jurisprudence
is,
in
my
view,
quite
inappropriate....
I
do
not
think
that
this
is
a
suitable
area
for
judicial
creativity.
People
plan
their
personal
and
business
affairs
on
the
basis
of
the
existing
law
and
they
are
entitled
to
do
SO.
Apart
from
whether
or
not
it
is
good
authority
in
light
of
the
foregoing
dictum
of
Wilson
J.,
Oakfield
Developments
(Toronto)
Ltd.
v.
Minister
of
National
Revenue.
[1971]
S.C.R.
1032
(S.C.C.),
which
was
also
cited
by
Linden
J.A.
in
the
instant
appeal,
is,
in
my
view,
clearly
distinguishable
from
the
case
at
bar.
In
that
case,
as
in
Imperial
General
Properties,
the
Court
had
recourse
to
the
constating
documents
of
the
corporation
only
because
there
was
no
other
clear
indicator
of
de
jure
control,
as
each
of
two
shareholder
groups
held
50
percent
of
the
overall
voting
shares
of
the
company.
Therefore,
the
Court
considered
the
share
rights
attached
to
each
class
of
shares
and
concluded
that,
because
the
holders
of
one
class
had
the
power
to
dissolve
the
company
and
to
receive
all
surplus
upon
its
dissolution,
that
class
had
de
jure
control
even
though
its
voting
power
was
no
greater
than
that
of
the
other
class.
Perhaps
more
importantly,
though,
there
is
no
indication
that
the
Court
in
either
case
looked
to
any
external
shareholder
agreement
as
an
indicium
of
control;
rather,
only
the
specifics
of
the
constating
documents
were
considered.
Equally
distinguishable,
in
my
view,
are
Consolidated
Holding,
supra,
and
R.
v.
Lusita
Holdings
Ltd.
(1984),
84
D.T.C.
6346
(Fed.
C.A.),
two
cases
in
which
the
courts
considered
documents
other
than
the
constating
documents
only
because
the
majority
of
the
shares
in
the
companies
in
question
were
held
by
trustees.
It
was
therefore
necessary
to
examine
the
trust
instruments
in
order
to
determine
what,
if
any,
limitations
existed
on
the
trustees’
powers
to
vote
the
shares.
As
it
happened,
in
both
cases,
the
trustees
could
be
constrained
in
their
voting
of
the
shares
by
the
actions
of
their
co-trustees:
in
Consolidated
Holding,
the
will
of
the
deceased
shareholder
provided
that
“the
views,
discretion
or
direction
of
any
two
of
my
trustees
shall
be
binding
upon
the
other
of
my
trustees”
(p.
422),
while
in
Lusita
Holdings
it
was
found
as
a
fact
by
Stone
J.A.
that
“[t]he
right
to
control
the
voting
rights
resided
in
the
co-trustees
and
not
in
either
of
them”
(p.
6348).
These
factors,
in
my
view,
clearly
demonstrate
the
distinction
between
a
trust
instrument
and
other
external
documents
for
the
purposes
of
assessing
de
jure
control.
A
trust
imposes
upon
the
trustee
a
fiduciary
obligation
to
act
within
the
terms
of
the
trust
instrument
and
for
the
benefit
of
the
beneficiary.
That
is,
the
trustee
is
not
free
to
act
other
than
in
accordance
with
the
trust
document,
and
if
the
trust
document
imposes
limitations
upon
the
capacity
of
the
trustee
to
vote
the
shares
then
these
must
accordingly
be
taken
into
account
in
the
de
jure
control
analysis.
By
contrast,
any
limitations
which
might
be
imposed
by
an
outside
agreement
are
limitations
freely
agreed
to
by
the
shareholders,
and
not
at
all
inconsistent
with
their
de
jure
power
to
control
the
company.
In
other
words,
limitations
on
the
voting
powers
of
trustees
must
be
seen
as
limitations
on
their
capacity
as
free
actors
in
the
circumstances.
No
such
limitations
encumber
the
ordinary
share
holder
in
his
or
her
exercise
of
de
jure
control,
even
if
an
outside
agreement
exists
to
limit
actual
or
de
facto
control.
In
any
event,
I
certainly
do
not
think
it
can
be
said
that
Consolidated
Holding
supports
the
very
broad
proposition
gleaned
from
it
by
Linden
J.A.
(at
p.
118),
that
“[a]ny
binding
instrument
...
must
be
reckoned
in
the
analysis
if
it
affects
voting
rights”.
For
precisely
the
reasons
expressed
by
Wilson
J.
in
the
above-quoted
passage
of
her
dissent
in
Imperial
General
Properties,
and
in
keeping
with
the
approach
taken
by
courts
since
Buckerfield’s,
it
is
clear
that
the
general
test
for
de
jure
control
remains
majority
voting
control
over
the
corporation,
as
manifested
by
the
ability
to
elect
the
directors
of
the
corporation.
While
this
Court
has
occasionally
been
willing
to
examine
factors
other
than
the
share
register
of
the
company,
its
assessment
has
been
restricted
only
to
the
constating
documents,
not
external
agreements.
The
only
exception
to
this
rule
has
been
in
cases
like
Consolidated
Holding,
where
the
shareholders’
very
capacity
to
act
has
been
limited
by
external
documents,
but
this
has
to
date
been
manifested
only
in
cases
where
the
shares
are
held
by
trustees.
Thus,
I
would
conclude
that,
as
a
general
rule,
external
agreements
are
not
to
be
taken
into
account
as
determinants
of
de
jure
control.
This
is
consistent
with
the
relatively
recent
decision
of
the
Alberta
Court
of
Queen’s
Bench
in
Harvard
International
Resources
Ltd.
v.
Alberta
(Provincial
Treasurer)
(1992),
93
D.T.C.
5254
(Alta.
Q.B.),
in
which
Hutchinson
J.
declined
to
interpret
the
reasons
of
Estey
J.
in
Imperial
General
Properties,
supra,
as
inviting
the
consideration
of
agreements
other
than
constating
documents,
other
than
possibly
as
an
indicium
of
de
facto
control.
For
Linden
J.A.
to
rest
his
disposition
of
the
instant
case
on
the
basis
that,
in
determining
issues
of
corporate
control,
“the
Court
will
look
to
the
time
in
question,
to
legal
documents
pertaining
to
the
issue,
and
to
any
actual
or
contingent
legal
obligations
affecting
the
voting
rights
of
shares”
(p.
121)
was,
with
respect,
inconsistent
with
the
Canadian
jurisprudence
in
this
area.
Moreover,
as
Wilson
J.
correctly
observed
in
her
dissent
in
Imperial
General
Properties,
supra,
taxpayers
rely
heavily
on
whatever
certainty
and
predictability
can
be
gleaned
from
the
Income
Tax
Act.
As
such,
a
simple
test
such
as
that
which
has
been
followed
since
Buckerfield’s
is
most
desirable.
If
the
distinction
between
de
jure
and
de
facto
control
is
to
be
eliminated
at
this
time,
this
should
be
left
to
Parliament,
not
to
the
courts.
In
fact,
while
it
is
not
directly
relevant
to
the
outcome
of
this
appeal,
I
would
observe
nonetheless
that
Parliament
has
now
recognized
the
distinction
between
de
jure
and
de
facto
control,
adopting
the
latter
as
the
new
standard
for
the
associated
corporation
rules
by
means
of
s.
256(5.1)
of
the
Income
Tax
Act,
enacted
in
1988.
In
addition,
I
do
not
think
that
the
respondent’s
case
is
assisted
by
the
decision
of
the
Tax
Court
of
Canada
in
Alteco
Inc.
v.
R.,
[1993]
2
C.T.C.
2087
(T.C.C.).
Alteco
concerned
an
agreement
which
provided,
inter
alia,
that
no
shares
in
the
corporation
could
be
sold
or
pledged
without
unanimous
shareholder
consent,
that
the
five-member
board
of
the
company
could
not
be
altered
without
unanimous
consent,
and
that
the
minority
(49
percent)
shareholder
was
entitled
to
three
of
the
five
seats
on
the
board.
This
agreement
was
indeed
considered
in
deciding
that
the
minority
shareholder
enjoyed
de
jure
control
over
the
company.
But
two
significant
distinctions
separate
Alteco
from
the
case
at
bar.
For
one,
Bell
J.T.C.C.
found
that
the
agreement
at
issue
in
Alteco
was
a
“unanimous
shareholder
agreement”
within
the
definition
of
that
term
in
the
Saskatchewan
Business
Corporations
Act.
While
it
may
be
that
the
agreement
in
the
present
case
was
also
a
USA,
a
possibility
which
I
shall
consider
below,
this
was
not
the
basis
for
the
reasoning
of
Linden
J.A.,
and
it
simply
cannot
be
said
that
giving
effect
to
a
USA
as
a
determinant
of
de
jure
control
necessarily
opens
the
door
to
the
consideration
of
all
shareholder
agreements
for
this
purpose.
Secondly,
the
agreement
in
Alteco
guaranteed
the
minority
shareholder
a
majority
of
seats
on
the
board
of
directors.
As
I
see
it,
it
is
not
clear
in
the
case
at
bar
that
either
party
enjoyed
this
type
of
guaranteed
control.
While
it
is
true
that
Marr’s
could
only
elect
one
direct
nominee
of
its
own,
it
would
have
been
possible,
as
the
trial
judge
found,
for
it
to
elect
its
own
nominee,
one
Duha
nominee,
and
Paul
Quinton,
who
could
not
be
said
to
be
a
nominee
of
either
party.
While
Mr.
Quinton
was
a
longtime
friend
of
the
Duha
family
and
a
director
of
Duha
No.
1,
he
was
also
a
friend
of
William
Marr
and
no
actual
evidence
was
adduced
to
suggest
that
his
loyalties
lay
with
the
Duhas.
If
anything,
this
assessment
must
have
come
down
to
a
question
of
credibility,
and
with
respect,
it
was
not
open
to
Linden
J.A.
to
interfere
with
such
a
finding
of
the
trial
judge
in
the
absence
of
palpable
and
overriding
error.
In
any
event,
however,
the
major
concern
of
the
de
jure
test
is
to
ascertain
which
shareholder
or
shareholders
have
the
voting
power
to
elect
a
majority
of
the
directors.
The
test
neither
requires
nor
permits
an
inquiry
into
whether
a
given
director
is
the
nominee
of
any
shareholder,
or
any
relationship
or
allegiance
between
the
directors
and
the
shareholders.
Therefore,
as
I
have
indicated,
I
conclude
that
Linden
J.A.
erred
in
considering
the
Agreement
for
the
purposes
of
ascertaining
de
jure
control,
even
assuming,
for
the
sake
of
argument
only,
that
he
was
correct
in
treat-
ing
it
as
an
ordinary
shareholders’
agreement.
This
determination
is
generally
to
be
restricted
to
the
share
register
of
the
company,
as
is
clear
from
Buckerfield’s
and
the
related
case
law.
However,
as
I
have
already
mentioned,
it
would
be
unduly
artificial
to
restrict
the
analysis
in
this
way
if
something
exists
in
the
corporate
constitution
of
the
company
to
alter
the
picture
of
de
jure
control.
Thus,
to
ensure
an
accurate
result,
the
share
register
should
be
read
in
light
of
the
relevant
corporate
law
legislation
(in
this
case,
the
Corporations
Act)
and
the
constating
documents
of
the
corporation.
External
agreements,
however,
have
no
place
in
this
analysis;
they
are
relevant
only
to
de
facto
control.
Of
course,
all
of
this
begs
the
question
of
the
status
of
the
unanimous
shareholder
agreement,
in
its
statutory
form,
as
a
determinant
of
de
jure
control.
It
is
to
this
question
that
I
now
turn.
(2)
Unanimous
shareholder
agreements
(a)
The
nature
and
significance
of
the
USA
for
the
purposes
of
de
jure
control
Stone
J.A.
based
his
concurring
reasons
on
the
characterization
of
the
agreement
in
question
as
a
USA.
Important
references
to
such
agreements
in
the
Corporations
Act
are
to
be
found
in
ss.
97(1)
and
140(2).
Section
97(1
)(b)
contemplates
the
abrogation,
by
a
USA,
of
the
power
of
the
directors
to
“direct
the
management
of
the
business
and
affairs
of
the
corporation”,
while
s.
140(2)
confirms
the
validity
of
such
agreements
for
the
purpose
of
restricting
the
powers
of
the
directors
to
manage
said
business
and
affairs.
The
legal
status
of
the
USA,
which
is
a
unique
species
of
agreement
given
its
statutory
origin
and
recognition,
has
nonetheless
been
a
matter
of
some
uncertainty.
At
the
outset,
it
is
important
to
bear
in
mind
the
distinction
between
the
tests
of
de
jure
and
de
facto
control
developed
by
the
courts.
In
my
view,
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
myriad
of
indicators
which
may
exist
apart
from
these
sources.
See,
for
example,
F.
lacobucci
and
D.L.
Johnston,
“The
Private
or
Closely-held
Corporation”,
in
J.S.
Ziegel,
ed.,
Studies
in
Canadian
Company
Law
(1973),
vol.
2,
68,
at
pp.
108-12.
As
I
have
already
indicated,
agreements
among
shareholders,
voting
agreements,
and
the
like
are,
as
a
general
matter,
arrangements
that
are
not
examined
by
courts
to
ascertain
control.
In
my
view,
this
is
because
they
give
rise
to
obligations
that
are
contractual
and
not
legal
or
constitutional
in
nature.
Thus,
to
my
mind,
the
issue
comes
down
to
whether
the
USA
is
to
be
characterized
as
constitutional
or
contractual
in
nature.
If
it
is
the
former,
then
its
provisions
are
to
be
examined
under
the
de
jure
control
analysis;
if
it
is
the
latter,
then
its
provisions
are
beyond
the
scope
of
that
test.
For
a
discussion
of
the
origin
of
the
USA
in
Canadian
corporate
law,
see,
generally,
R.W.V.
Dickerson,
J.L.
Howard
and
L.
Getz,
Proposals
for
a
New
Business
Corporations
Law
for
Canada
(1971),
at
paras.
298-299.
Fortunately,
the
instant
case
provides
ample
opportunity
to
put
this
debate
to
rest.
In
my
view,
for
the
reasons
that
follow,
the
USA
is
to
be
considered
a
constating
document
for
the
purposes
of
determining
de
jure
control
of
a
corporation.
The
argument
for
treating
a
USA
as
part
of
the
corporate
constitution,
along
with
and
equivalent
to
the
articles
of
incorporation
and
the
by-laws,
is
strong,
given
the
role
of
such
an
agreement
in
the
overall
context
of
corporate
governance.
As
Professor
Welling
points
out
in
Corporate
Law
in
Canada
(2nd
ed.
1991),
at
p.
481
et
seq.,
prior
to
statutory
provision
for
USAs,
the
ability
of
shareholders
to
control
a
corporation
incorporated
in
Canadian
jurisdictions
(and
which,
I
would
add,
did
not
follow
the
English
memorandum
and
articles
of
association
system
of
incorporation)
was
in
reality
limited
to
the
power
to
elect
and
dismiss
directors.
Directors
generally
owe
a
duty
not
to
the
shareholders
but
to
the
corporation,
and
shareholders
could
not,
therefore,
control
the
day-to-day
business
decisions
made
by
the
directors
and
their
appointed
officers.
In
other
words,
although
the
shareholders
could
elect
the
individuals
who
would
make
up
the
board,
the
board
members,
once
elected,
wielded
virtually
all
the
decision-making
power,
subject
to
the
ability
of
the
shareholders
to
remove
or
fail
to
re-elect
unsatisfactory
directors.
However,
in
a
private
or
closely
held
corporation,
it
may
generally
be
assumed
that
the
dominant
interests
to
be
served
by
decision-making
are
the
expectations
and
needs
of
the
shareholders,
as
opposed
to
the
corporation
in
the
abstract.
These
corporations
were
modelled
to
some
extent
on
incorporated
partnerships,
and
the
underlying
economic
policy
was
thought
to
be
best
met
by
enabling
the
shareholders
to
arrange
the
organization
of
their
enterprise
as
they
choose:
see
Iacobucci
and
Johnston,
supra.
Because,
at
common
law,
shareholders
could
not
agree
to
fetter
or
interfere
with
the
discretion
of
the
directors,
even
unanimously
(see
Motherwell
v.
Schoof,
[1949]
4
D.L.R.
812
(Alta.
T.D.),
and
Atlas
Development
Co.
v.
Calof
(1963),
41
W.W.R.
575
(Man.
Q.B.),
legislative
intervention
was
needed
to
allow
shareholders
to
choose
their
corporate
control
and
management
structure.
See
Iacobucci,
“Canadian
Corporation
Law:
Some
Recent
Shareholder
Developments”,
in
The
Cambridge
Lectures
1981
(1982),
88
at
p.
92
et
seq.
The
advent
of
the
USA,
first
in
the
CBCA
and
then
in
other
statutes
modelled
after
it,
materially
altered
this
situation
by
providing
a
mechanism
by
which
the
shareholders,
through
a
unanimous
agreement,
could
strip
the
directors
of
some
or
all
of
their
managerial
powers
as
desired
by
the
shareholders.
Rather
than
removing
the
directors
from
their
positions,
a
USA
simply
relieves
them
of
their
powers,
rights,
duties,
and
associated
responsibilities.
This
may
be
accomplished
without
specific
formality;
all
that
is
required
appears
to
be
some
unanimous
written
expression
of
shareholder
will.
The
result,
however,
amounts
to
a
fundamental
change
in
the
management
of
the
company,
as
s.
140(5)
of
the
Corporations
Act
provides
that
the
shareholders
who
are
parties
to
the
USA
assume
all
the
rights,
powers,
duties
and
liabilities
of
the
directors
which
are
removed
by
the
agreement,
and
that
the
directors
are
relieved
of
their
duties
and
liabilities
to
the
same
extent.
As
I
have
already
intimated,
what
is
in
effect
created
is
an
“incorporated
partnership”
with
statutory
force.
Stone
J.A.
opined
that,
if
an
agreement
can
be
viewed
as
a
USA
within
the
definition
in
the
Corporations
Act,
it
is
to
be
read
alongside
the
corporation’s
constating
documents
in
determining
the
issue
of
de
jure
control.
I
agree.
The
fact
that
the
USA
has
supplanted
the
long-standing
principle
of
shareholder
non-interference
with
the
directors’
powers
to
manage
the
corporation,
an
exclusive
right
which
is
granted
by
the
statute
and
the
corporate
constitution,
clearly
indicates
that
it
is
at
least
as
important
as
the
“traditional”
constating
documents
in
assessing
de
jure
control.
It
would
be
truly
artificial
to
conclude,
only
on
the
basis
of
the
share
register,
the
articles
of
incorporation,
and
the
by-laws,
that
one
shareholder
has
de
jure
control
over
the
corporation
by
virtue
of
its
apparent
power
to
elect
the
majority
of
the
board
of
directors,
if
a
USA
exists
which
limits
substantially
the
power
of
the
board
itself.
In
other
words,
the
USA
is
a
corporate
law
hybrid,
part
contractual
and
part
constitutional
in
nature.
The
contractual
element
is
immediately
apparent
from
a
reading
of
s.
140(2):
to
be
valid,
a
USA
must
be
an
“otherwise
lawful
written
agreement
among
all
the
shareholders
of
a
corporation,
or
among
all
the
shareholders
and
a
person
who
is
not
a
shareholder”.
It
seems
to
me
that
this
indicates
not
only
that
the
USA
must
take
the
form
of
a
written
contract,
but
also
that
it
must
accord
with
the
other,
general
requirements
for
a
lawful
and
valid
contract.
More
generally,
the
USA
is
by
its
nature
able
to
govern
both
the
procedure
for
running
the
corporation
and
the
personal
or
individual
rights
of
the
shareholders:
see
lacobucci,
supra.
The
constitutional
element
of
the
USA
is
even
more
potent
than
its
contractual
features.
Numerous
provisions
of
the
Corporations
Act
that
govern
fundamental
aspects
of
the
running
of
the
corporation,
including
the
management
of
its
business
and
affairs
(s.
97(1)),
the
issuing
of
shares
(s.
25(1)),
the
passing
of
by-laws
(s.
98(1)),
the
appointment
of
officers
(s.
116),
and
the
situations
in
which
a
dissenting
shareholder
can
request
dissolution
of
the
company
(s.
207(1
)(b)),
are
expressly
made
subject
to
the
USA.
More
generally,
s.
6(3)
reads
as
follows:
6
(3)
Subject
to
subsection
(4),
if
the
articles
or
a
unanimous
shareholder
agreement
require
a
greater
number
of
votes
of
directors
or
shareholders
than
that
required
by
this
Act
to
effect
any
action,
the
provisions
of
the
articles
or
of
the
unanimous
Shareholder
agreement
prevail.
[Emphasis
added.]
Subsection
(4)
stipulates
only
that
the
articles
may
not
require
a
greater
number
of
votes
to
remove
a
director
than
that
required
elsewhere
in
the
Act,
but
does
not
place
any
such
limitation
on
a
USA.
This
denotes
the
equivalent
constitutional
status
of
the
USA
vis-à-vis
the
articles
of
incorporation.
This
status
is
greatly
reinforced
by
s.20(l)
of
the
Corporations
Act,
which
requires
that
a
copy
of
any
USA,
along
with
the
articles
and
by-laws
of
the
corporation,
be
contained
in
the
corporate
records
required
by
that
section
to
be
maintained
at
the
registered
office
of
the
corporation.
This
is
cogent
evidence
that
the
legislator
has
treated
the
corporation’s
constating
documents
and
the
USA
in
pari
materia.
It
is
also
significant
that
s.
240
of
the
Corporations
Act
includes
USAs
along
with
the
Act,
the
regulations
promulgated
thereunder,
and
the
articles
and
by-laws
of
a
corporation
as
documents
the
breach
of
which
entitle
a
complainant
or
a
creditor
to
seek
a
compliance
order
or
other
remedy
deemed
appropriate
by
the
court.
As
well,
the
provisions
of
a
USA
may
be
enforced
against
the
corporation
and
its
officers
and
directors
although
they
need
not
be
parties
to
the
agreement.
This
stands
as
a
further
indication
of
the
constitutional
character
of
the
USA.
Thus,
a
USA
can
play
a
vital
role
in
the
de
jure
control
analysis.
If
the
Buckerfield’s
test
were
to
be
followed
slavishly
and
the
inquiry
limited
only
to
the
share
register
of
the
corporation,
or
even
extended
to
the
articles
of
incorporation
and
by-laws
but
not
to
USAs,
then
a
company
could
circumvent
the
test
or
obfuscate
the
picture
of
corporate
control
simply
by
confining
to
a
USA
provisions
that
substantially
alter
the
way
in
which
corporate
decisions
are
made.
If,
by
a
USA,
the
board
of
directors
is
deprived
of
the
power
to
manage
the
business
and
affairs
of
the
corporation,
this
is
more
than
simply
an
issue
of
de
facto
control.
It
would
defy
logic
to
treat
de
jure
control
as
remaining
unaltered
by
an
agreement
which,
by
the
very
statute
which
governs
the
incorporation
of
the
company
and
the
governance
thereof
by
its
articles
and
by-laws,
is
given
the
same
power
as
the
articles
to
supersede
the
statutory
provisions
for
corporate
control.
Not
only
is
this
a
distinction
without
a
difference,
but
it
is
also
one
without
any
principled
foundation.
As
I
have
said,
the
essential
purpose
of
the
Buckerfield’s
test
is
to
determine
the
locus
of
effective
control
of
the
corporation.
To
my
mind,
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
a
majority
of
a
board
of
directors,
when
that
board
may
not
even
have
the
actual
authority
to
make
a
single
material
decision
on
behalf
of
the
corporation.
The
de
jure
control
of
a
corporation
by
a
shareholder
is
dependent
in
a
very
real
way
on
the
control
enjoyed
by
the
majority
of
directors,
whose
election
lies
within
the
control
of
that
shareholder.
When
a
constating
document
such
as
a
USA
provides
that
the
legal
authority
to
manage
the
corporation
lies
other
than
with
the
board,
the
reality
of
de
jure
control
is
necessarily
altered
and
the
court
must
acknowledge
that
alteration.
Therefore,
I
would
conclude
that,
while
“ordinary”
shareholder
agreements
and
other
external
documents
generally
should
not
be
considered
in
assessing
de
jure
control,
in
keeping
with
the
long
line
of
jurisprudence
to
this
effect,
the
USA
is
a
constating
document
and
as
such
must
be
considered
for
the
purposes
of
this
analysis.
To
this
end,
I
must
add
that,
to
the
extent
that
it
held
that
a
USA
is
not
one
of
the
constating
documents
of
a
corporation,
Alteco,
supra,
was
wrongly
decided.
It
is
true
that,
at
common
law,
a
unanimous
agreement
between
or
among
shareholders
would
have
been
considered
only
as
part
of
the
de
facto
analysis.
However,
in
my
view,
the
unique
status
of
the
statutory
form
of
USA
in
corporate
law,
when
compared
to
other
shareholder
agreements,
provides
a
complete
answer
to
the
appellant’s
concern
that
the
consideration
of
the
USA
for
the
present
pur-
pose
would
open
the
door
to
the
consideration
of
all
agreements
between
shareholders.
Unlike
an
“ordinary”
shareholder
agreement,
which
cannot
interfere
with
the
exercise
of
the
directors’
powers,
a
USA
can
and
must
do
so.
Moreover,
as
we
have
seen,
a
USA
can
in
fact
incorporate
provisions
that
would
otherwise
be
contained
in
the
articles.
Viewed
in
this
light,
I
fail
to
see
how
the
USA
can
be
ignored
as
a
vital
determinant
of
de
jure
control.
The
appellant
correctly
points
out
that
to
recognize
the
USA
as
affecting
de
jure
control
begs
the
question
of
how
much
power
must
be
removed
from
the
directors
before
one
may
safely
conclude
that
the
majority
voting
shareholder
no
longer
has
de
jure
control.
Certainly,
the
existence
of
a
USA
does
not
necessarily
imply
the
loss
of
de
jure
control.
But
I
cannot
agree
that
there
is
no
rational
basis
for
determining
when
a
majority
shareholder
loses
de
jure
control
on
the
basis
of
a
restriction
of
the
directors’
powers.
As
I
will
discuss
in
more
detail
below,
this
issue
comes
down
to
a
question
of
fact,
turning
on
the
extent
to
which
the
powers
of
the
directors
to
manage
are
restricted,
to
what
extent
these
powers
have
devolved
to
the
shareholders,
and
to
what
extent
the
majority
shareholders
are
thereby
able
to
control
the
exercise
of
the
governing
powers.
Accordingly,
two
questions
remain
to
be
answered:
whether
the
Agreement
in
this
case
was
a
USA,
and,
if
so,
whether
it
in
fact
deprived
Marr’s
of
de
jure
control
over
Duha
No.2.
(b)
Was
the
Agreement
a
USA?
Section
1(1)
of
the
Corporations
Act
defines
a
USA
as,
inter
alia,
an
agreement
of
the
type
described
in
s.
140(2).
Stone
J.A.
recognized
that
this
section
discloses
a
number
of
requirements
for
a
valid
USA:
the
agreement
must
be
“otherwise
lawful”,
must
be
among
all
the
shareholders
of
the
corporation
(as
well
as,
possibly,
a
non-shareholder),
and
must
restrict,
in
whole
or
in
part,
the
powers
of
the
directors
to
manage
“the
business
and
affairs
of
the
corporation”.
There
is
really
no
room
for
debate
as
to
whether
the
Agreement
satisfied
the
first
two
criteria.
To
the
extent
that
the
status
of
the
Agreement
is
in
question,
the
issue
is
whether
it
satisfied
the
third.
In
the
view
of
Stone
J.A.,
the
Agreement
satisfied
those
requirements
and
was
therefore
a
USA.
He
based
this
conclusion
on
a
technical
analysis
of
the
Agreement,
and
especially
Article
2.1,
which
provided
that
the
“affairs”
of
the
corporation
were
to
be
managed
by
the
board
of
directors,
and
Article
6.1,
which
provided
for
the
settlement
by
arbitration
of
disputes
between
shareholders
on
matters
concerning
the
“business”
of
the
corporation.
From
these
provisions,
Stone
J.A.
inferred
that
the
Agreement
deprived
the
directors
of
Duha
No.
2
of
the
power
to
manage
the
“business”
of
the
corporation,
leaving
them
with
control
only
over
its
“affairs”.
Because
s.
1(1)
of
the
Corporations
Act
defines
“business”
as
a
concept
separate
from
and
exclusive
of
“affairs”,
Stone
J.A.
concluded
that
the
Agreement
restricted
the
s.
97(1)
management
power
of
the
directors
and
was
therefore
a
USA
within
the
meaning
of
s.
140(2).
For
my
part,
I
find
this
conclusion
difficult
to
accept.
To
provide
that
the
directors
shall
have
the
power
to
manage
the
“affairs”
of
the
corporation
cannot,
without
more,
be
taken
to
exclude
them
from
the
management
of
the
“business”.
Despite
the
separate
definitions
of
the
two
concepts
in
s.
1(1),
it
seems
to
me
that
clearer
language
would
be
required
to
remove
such
a
fundamental
power
from
the
directors.
Moreover,
it
is
not
at
all
clear
that
“affairs”
must
be
defined,
for
the
purposes
of
the
Agreement,
by
reference
to
its
statutory
definition
—
especially,
as
I
will
discuss
below,
when
to
so
define
this
term
could
lead
to
a
rather
awkward
result.
Indeed,
the
Concise
Oxford
Dictionary
(9th
ed.
1995)
defines
“affairs”
as
including
“business
dealings”.
Considering
this
linguistic
ambiguity
in
addition
to
the
foregoing
concerns,
I
do
not
think
it
safe
to
conclude
that
the
intention
of
Article
2.1
was
to
deprive
the
directors
of
their
power
to
manage
the
business
of
Duha
No.
2.
I
take
a
similar
view
of
the
effect
of
Article
6.1.
The
presence
of
this
arbitration
clause
to
resolve
disputes
among
shareholders
does
not
lead
to
the
conclusion
that
all
business
of
the
corporation
was
to
be
transacted
by
unanimous
shareholder
resolution,
as
the
Minister
contends.
Again,
clearer
language
would
be
required
to
achieve
this
end,
particularly
when
it
is
considered
that
the
result
of
such
an
arrangement
would
be
that
the
entire
corporation
could
be
paralyzed
by
the
dissent
of
a
single
shareholder
on
a
very
minor
issue.
A
better
interpretation,
as
contended
for
by
the
appellant,
is
that
the
word
“business”
in
Article
6.1
was
used
to
refer
to
corporate
business
that
is
ordinarily
transacted
among
shareholders,
rather
than
business
of
the
corporation
which
is
within
the
power
of
the
directors
to
manage.
In
fact,
this
is
consistent
with
s.
129(5)
of
the
Corporations
Act;
which
makes
specific
reference
to
“business”
transacted
by
shareholders
at
an
annual
or
special
meeting
of
shareholders.
Generally
speaking,
USAs
exist
to
deal
with
major
issues
facing
a
corporation:
corporate
structure,
issuance
of
shares,
declaration
of
dividends,
election
of
directors,
appointment
of
officers,
and
the
like.
General
business
decisions
are
not
ordinarily
touched
by
such
arrangements,
and
with
good
reason:
it
would
not
be
efficient,
for
business
purposes,
to
remit
every
deci-
sion,
however
minor,
to
a
shareholder
vote,
let
alone
to
require
unanimous
agreement
among
the
shareholders
on
such
decisions.
Fundamental
disagreements
among
shareholders
are
ordinarily
dealt
with
by
different
means,
such
as,
for
example,
buy-sell
arrangements
or
other
methods
of
dispute
resolution.
In
exceptional
cases,
a
USA
may
provide
that
an
aggrieved
shareholder
may
apply
to
the
court
for
dissolution
of
the
corporation
and
the
return
of
his
or
her
share
capital.
But
these
are
long-term
solutions
which
are
agreed
upon
with
a
view
to
facilitating
the
ongoing
operation
of
the
business,
undisturbed
by
the
day-to-day
wrangling
and
disagreements
that
often
characterize
the
relationships
among
shareholders
in
closely-held
companies,
while
permitting
insurmountable
disputes
to
be
resolved
by
special
measures.
This
is
vastly
different
from
requiring
unanimous
consent
to
every
action
taken
in
furtherance
of
the
business
of
a
corporation.
Such
an
extraordinary
corporate
policy
would
require
specific
expression
in
the
constating
documents.
In
my
view,
the
provisions
cited
by
the
Minister
do
not
qualify
as
such.
However,
this
is
not
to
say
that
the
Agreement
does
not
affect
the
powers
of
the
directors
at
all
and,
as
such,
is
not
a
USA.
On
the
contrary,
Article
4.4,
which
prevented
the
corporation
from
issuing
further
shares
“without
the
written
consent
of
all
of
the
Shareholders”,
imposed
a
clear
restriction
upon
the
directors’
power
to
manage.
According
to
s.25(l)
of
the
Corporations
Act,
Subject
to
the
articles,
the
by-laws
and
any
unanimous
shareholder
agreement
...
shares
may
be
issued
at
such
times
and
to
such
persons
and
for
such
consideration
as
the
directors
may
determine.
[Emphasis
added.]
Thus,
by
reserving
to
themselves
one
of
the
powers
of
management
which
the
Act
expressly
grants
to
the
directors,
the
shareholders
obviously
restricted
in
part
the
ability
of
the
directors
to
manage
the
corporation.
Additionally,
the
language
of
s.
25(1)
makes
clear
that,
in
the
absence
of
a
specific
provision
in
the
constating
documents,
such
can
only
be
accomplished
by
means
of
a
USA.
To
my
mind,
there
is
no
doubt
that
this
brings
the
Agreement
within
the
terms
of
s.
140(2).
To
summarize
my
conclusions
on
this
point,
I
agree
with
Stone
J.A.
that
the
Agreement
constituted
a
USA,
within
the
meaning
of
s.
140(2)
of
the
Corporations
Act,
but
for
different
reasons.
While
the
provisions
of
Articles
2.2
and
6.1
did
not,
to
my
mind,
pose
any
restrictions
on
the
power
of
the
directors
to
manage
the
business
and
affairs
of
the
corporation,
Article
4.4
surely
did.
The
next
question,
therefore,
is
whether
this
particular
USA
had
the
effect
of
depriving
Marr’s
of
de
jure
control
over
Duha
No.
2.
(c)
The
effect
of
the
USA
As
I
have
already
said,
the
simple
fact
that
the
shareholders
of
a
corporation
have
entered
into
a
USA
does
not
have
the
automatic
effect
of
removing
de
jure
control
from
a
shareholder
who
enjoys
the
majority
of
the
votes
in
the
election
of
the
board
of
directors.
Rather,
the
specific
provisions
of
the
USA
must
alter
such
control
as
a
matter
of
law.
But
to
what
extent
must
these
powers
be
compromised
before
the
majority
shareholder
can
be
said
to
have
lost
de
jure
control
over
the
company?
In
my
view,
it
is
possible
to
determine
whether
de
jure
control
has
been
lost
as
a
result
of
a
USA
by
asking
whether
the
USA
leaves
any
way
for
the
majority
shareholder
to
exercise
effective
control
over
the
affairs
and
fortunes
of
the
corporation
in
a
way
analogous
or
equivalent
to
the
power
to
elect
the
majority
of
the
board
of
directors
(as
contemplated
by
the
Buck-
erfield’s
test).
There
need
be
no
concern
that
the
consideration
of
USAs
in
the
de
jure
analysis
will
lead
either
to
uncertainty
or
to
a
situation
where
every
USA
would
automatically
imply
a
loss
of
de
jure
control
by
the
majority
shareholder.
It
will
in
every
case
be
necessary
to
establish
this
result
by
examining
the
specific
provisions
of
the
USA
in
question.
In
my
view,
the
provisions
in
the
Agreement
at
issue
in
this
case
did
not
in
fact
result
in
the
loss
of
de
jure
control
by
Marr’s.
The
inability
to
issue
new
shares
without
unanimous
shareholder
approval,
while
surely
a
restriction
on
the
powers
of
the
directors
to
manage
the
business
and
affairs
of
Duha
No.
2,
was
not
so
severe
a
restriction
that
Marr’s
can
be
said
to
have
lost
the
ability
to
exercise
effective
control
over
the
affairs
and
fortunes
of
the
company
through
its
majority
shareholdings.
In
fact,
Thurlow
J.
expressly
found
in
Donald
Applicators,
supra,
at
p.
5125,
that
“the
authority
of
the
directors
of
the
appellant
companies
[was]
only
slightly
restricted
or
modified”
from
their
statutory
powers
by
their
inability
to
issue
new
shares,
and
that
this
restriction
did
not
have
“any
serious
effect
on
the
authority
of
the
directors
to
govern
the
business
of
the
company
and
generally
to
direct
its
affairs”.
These
holdings,
along
with
the
balance
of
the
reasons
in
Donald
Applicators,
were
affirmed
by
this
Court.
Thus,
I
would
conclude
that,
in
the
circumstances
of
this
case,
the
general
rule
holds.
Marr’s,
by
virtue
of
its
ability
to
elect
the
majority
of
the
board
of
directors,
enjoyed
de
jure
control
over
Duha
No.
2
immediately
prior
to
its
amalgamation
with
Outdoor.
Nothing
in
the
constating
documents,
including
the
USA,
served
to
alter
this
state
of
affairs.
Accordingly,
there
was
no
change
in
control
occasioned
by
the
amalgamation,
which
means
that
s.
111(5)
of
the
Income
Tax
Act
did
not
prevent
Duha
No.
3
from
deducting
from
its
1985
taxable
income
the
non-capital
losses
accumulated
in
previous
years
by
Outdoor,
regardless
of
whether
or
not
the
business
of
Outdoor
was
intended
to
be
or
was
actually
carried
on
by
Duha
No.
3
as
a
going
concern.
(3)
Summary
of
principles
and
conclusion
as
to
control
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.
B.
Object
and
spirit
In
light
of
the
foregoing
conclusions,
it
is
not
necessary
to
consider
whether
the
Federal
Court
of
Appeal
erred
in
considering
the
object
and
spirit
of
the
Income
Tax
Act
provisions,
the
intentions
of
the
parties,
and
the
commercial
reality
of
the
transactions,
given
that
the
relevant
provisions
of
the
Act
are
clear
and
unambiguous.
However,
I
would
like
to
comment
briefly
on
the
suggestion
by
the
appellant
that
Linden
J.A.
would
have
denied
the
taxpayer
the
benefit
of
the
provisions
of
the
Act
“simply
because
the
transaction
was
motivated
solely
for
tax
planning
purposes”.
It
is
well
established
in
the
jurisprudence
of
this
Court
that
no
“business
purpose”
is
required
for
a
transaction
to
be
considered
valid
under
the
Income
Tax
Act,
and
that
a
taxpayer
is
entitled
to
take
advantage
of
the
Act
even
where
a
transaction
is
motivated
solely
by
the
minimization
of
tax:
Stubart
Investments
Ltd.
v.
R.,
[1984]
1
S.C.R.
536
(S.C.C.).
Moreover,
this
Court
emphasized
in
Antosko,
supra,
at
p.
327
that,
although
various
techniques
may
be
employed
in
interpreting
the
Act,
“such
techniques
cannot
alter
the
result
where
the
words
of
the
statute
are
clear
and
plain
and
where
the
legal
and
practical
effect
of
the
transaction
is
undisputed”.
Although
Linden
J.A.
cites
these
principles
in
his
reasons,
he
appears
not
to
have
adhered
to
them
in
his
analysis.
At
various
junctures,
he
comments
broadly
about
the
apparent
structuring
of
transactions,
including
the
one
at
issue
in
this
appeal,
solely
for
tax
purposes,
and
seems
to
imply,
particularly
in
his
analysis
of
the
International
Iron
and
Buckerfteld’s
cases,
supra,
that
the
courts
will
not
permit
shareholders
to
attain
tax
benefits
by
means
of
“contrived”
transactions.
To
the
extent
that
this
analytical
approach
may
have
affected
his
ultimate
decision,
Linden
J.A.
was,
with
respect,
in
error.
It
was
entirely
open
to
the
parties
to
use
what
Linden
J.A.
referred
to
as
“technicalities
of
revenue
law”
to
achieve
their
desired
end:
to
transfer
de
jure
control
of
Duha
No.
2
to
Marr’s
while
preventing
Marr’s
from
exercising
actual
or
de
facto
control
over
the
business
of
the
corporation.
Indeed,
this
is
what
they
accomplished,
and
nothing
in
the
“object
and
spirit”
of
any
of
the
various
provisions
can
serve
to
displace
this
result.
That
is,
while
the
general
purpose
of
s.
111(5)
may
be
to
prevent
the
transfer
of
non-capital
losses
from
one
corporation
to
another,
the
parties
successfully
excepted
themselves
from
the
general
rule
by
bringing
the
two
companies
under
common
control
prior
to
their
amalgamation.
VI.
Disposition
For
these
reasons,
I
would
allow
the
appeal,
set
aside
the
judgment
of
the
Federal
Court
of
Appeal,
and
restore
the
judgment
of
the
Tax
Court
of
Canada,
with
costs
to
the
appellant
throughout.
Appeal
allowed.
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