H.A. Fawcett & Son, Ltd. v. The Queen, 80 DTC 6195, [1980] CTC 293 (FCA)

Ryan, J:—This is an appeal from the judgment of the Trial Division, dated June 4, 1979, dismissing with costs the appeal of the appellant, H A Fawcett & Son, Limited (“Fawcett Limited”), from an assessment for income tax for the taxation year 1975. The Minister assessed the appellant, relying on subsection 256(1), paragraph (b) of the Income Tax Act,* on the basis that it was associated in the taxation year with Fawcett Enterprises Ltd (“Fawcett Enterprises”) and Son Valley Ranch Ltd (“Son Valley”); in doing so the Minister assumed that George C Fawcett controlled all three corporations. The trial judge dismissed the appeal. He held that the Minister had not erred in finding that the corporations were associated; he agreed that George C Fawcett controlled all three of them.

The main issue on the appeal is, of course, whether the trial judge erred in so finding. There are, however, as it seems to me, two precise questions involved in resolving the major issue. These questions arise because George C Fawcett was both the executor of the will of the controlling shareholder of Fawcett Limited—who died during the taxation year— and the legatee of the controlling shares of the corporation, and it was by virtue of his position as executor and legatee that he was said to have attained control.

Paragraph 256(1)(b) of the Income Tax Act, SC 1970-71-72, c 63, as amended, provides:

256.(1) For the purpose of this Act one corporation is associated with another in a taxation year if at any time in the year,

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

One of these questions is whether, under subsection 3(1) of the New Brunswick Devolution of Estates Act,* George C Fawcett, as executor, took title to the personal assets of the corporation, including the control shares, immediately on the death of the testator or only on probate of the will. The other, which arises if the first is answered in the affirmative, is whether, though Fawcett may have taken title to the shares, as executor, immediately on the death of the testator and may have held them, as such, as trustee for himself as legatee, he could be said to control the corporation during the taxation year if he could not legally, as it was submitted he could not, have obtained letters testamentary before the end of the year; this question involves determining whether, during the interval between the death of the testator and the end of the taxation year, he was in a legal position to assert control, or to put himself in a position to assert control, by exercising the voting rights attached to ownership of the shares.

There is, I would note, no question that George C Fawcett controlled Fawcett Enterprises and Son Valley during 1975. I would also note that, in its Notice of Objection to the reassessment, the appellant had taken the position that George C Fawcett, as executor, was by virtue of subsection 104(2) of the Income Tax Act a different person from George C Fawcett in his own right and as owner of the shares in Fawcett Enterprises and in Son Valley, and that this distinction was pertinent in interpreting and applying subsection 256(1), paragraph (b) of the Act. Before us, counsel for the appellant disclaimed—properly, in my view—any reliance on the distinction, having in mind MNR v Consolidated Holding Company Limited, [1974] SCR 419; [1972] CTC 18; 72 DTC 6007.

Up until November 28, 1975, two days before the end of its taxation year, Fawcett Limited was controlled by Henry A Fawcett, George C Fawcett’s father, because he was the registered owner of 7,195 (the “control shares”) of its 8,000 voting shares. George F Fawcett, Henry A Fawcett’s brother, owned 21 common shares, and George C Fawcett 784 common shares, each in his own name.

Henry A Fawcett died testate the morning of November 28, 1975. By his will he had appointed his son, George C Fawcett, as his executor and bequeathed the control shares to him. The Minister took the position, which the trial judge sustained, that, by virtue of section 3 of the New Brunswick Devolution of Estates Act, both the legal and the equitable ownership of the control shares vested in George C Fawcett at the time of his father’s death, and thus, on the authorities')-, George C Fawcett controlled Fawcett Limited. In MNR v Dworkin Furs, Mr Justice Hall said, at 227 and 228, in respect of the meaning of “control”:

Subsection 3(1) of the Devolution of Estates Act, RSNB 1973, c D-9, reads as follows:

3.(1) All real and personal property that is vested in any person, without a right in another person to take by survivorship, shall on his death, notwithstanding any testamentary disposition, devolve upon and become vested in his personal representative from time to time as trustee for the persons entitled thereto, and subject to the payment of his debts and so far as such property is not disposed of by deed, will, contract or other effectual disposition, shall be administered, dealt with and distributed as if it were personal property not so disposed of.

T See Buckerfield’s Limited v MNR, [1965] 1 Ex CR 299; MNR v Dworkin Furs and others, [1967] SCR 223; Vina-Rug (Canada) Ltd v MNR, [1968] SCR 193.

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 said in Bucker- field’s Limited et al v MNR:

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 AER 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 Tax Act.

Counsel for the appellant disputed the finding that George C Fawcett acquired control before the end of the taxation year. His position was that the vesting of the legal title to the control shares in the executor under section 3 of the Devolution of Estates Act was conditional on proof of the will which ordinarly would occur in proceedings taken under the Probate Courts Act. As I understood his submission, it was that the executor named in an unprobated will cannot take title immediately because, until proof, it cannot be assumed that the document purporting to be the will is, in truth, the will of the testator. It was conceded that, once the will is probated, title is deemed to have been in the executor from the date of the death of the testator but, for purposes of paragraph 256(1 )(b) of the Income Tax Act, it could not, it was submitted, be said that during the interval the executor had control because during that period the locus of the title was uncertain.

In this case, letters testamentary were issued to George C Fawcett on December 11, 1975, two weeks after the death of the testator, and after the close of the taxation year. It was not until then, it was argued, that the executor obtained legal title to the control shares, and that George C Fawcett obtained beneficial title in his own right.

I am of opinion that counsel’s submission on this point must fail. It would seem that, even in the absence of section 3 of the Devolution of Estates Act, the title to the control shares, as personal property, would have vested by force of the will itself in George C Fawcett, as executor, at the moment of his father’s death*. But, at any rate, section 3 is clear, and there is nothing in its terms to indicate that the general rule concerning the time of vesting of personal property in an executor should not operate. The vesting of legal title in George C Fawcett, as executor, was immediate on the death of the testator, and the title vested in him as trustee for himself as legatee. The vesting was not conditional on proof of the will. If in the probate proceedings the document purporting to be the will had not, for some

See, for example, Clair, Administrator v Levesque, [1939] 14 MPR 53, at p 59 (NBChD).

reasons, been proven to be such, the consequence would have been that George C Fawcett was not what the document purported to make him. But, of course, the will was proven. Its proof had the effect of confirming what was already the case: George C Fawcett was indeed the executor.

It follows, then, that if the test of control applicable in this case is merely whether George C Fawcett had the legal and beneficial title to the control shares, that is to say, to a majority of the shares carrying votes at general meetings of shareholders or, more particularly, carrying the power to elect a majority of the directors, George C Fawcett was in control of Fawcett Limited during the last two days of its taxation year.

There may, however, be cases in which ownership of a majority of the voting shares would not carry control. In MNR v Dworkin Furs and others, (supra), for example, a group of persons owning a majority of voting shares in one of the corporations in question were held not to control the corporation because one of its articles of association required unanimous consent of the shareholders to carry resolutions. In the present case there was, it was submitted, circumstances that would at law have prevented George C Fawcett from exercising the voting rights ordinarily appurtenant to the control shares from the time of his father’s death until the close of the taxation year.

Before proceeding to consider these circumstances and their possible consequences, however, I would observe that, even if I were wrong in holding that title to the control shares vested in George C Fawcett, as executor, on the death of the testator, he would nonetheless appear to me to have been in control during the closing days of the taxation year by virtue of the 784 common shares which he owned in his own name; these shares would have constituted a majority of the 805 common shares owned by George C Fawcett and his uncle. Only these shares could have been voted had a meeting been held during those days if one assumes that what otherwise would have been the control shares could not have been voted because their ownership had not been determined. I say this, however, subject to this reservation. Section 6, paragraph (a) of By-Law No 1 of the corporation provides that a quorum at a meeting of shareholders consists of two shareholders present in person and representing sixty per cent of the paid up capital stock of the company. If the appellant’s submision were correct, it would appear that it would not have been legally possible to hold a meeting of shareholders during the closing days of the taxation year.* Becasue of the view I have taken on the devolution of title, I do not find it necessary to determine the effect of this on the control issue.

I proceed to consider the circumstances, relied on by the appellent, that would, it was submitted, have denied to George C Fawcett, as executor, the legal right to vote the control shares before the end of the taxation year, and thus have denied him control of the corporation. I proceed on the basis that

Section 9 of the New Brunswick Corporations Act, RSNB 1973, c C-24, appears to apply to annual meetings only. The section is in these terms:

9. At any annual meeting, the stockholders there present or represented by proxy, such proxy being a shareholder authorized in writing so to act, may proceed to business and by the votes of a majority of stock represented at said meeting, elect a board of directors, any rule or by-law of the company to the contrary notwithstanding, and transact such other business as may be incident to or appear necessary for the management of the business and affairs of the company.

the legal and equitable title to the control shares vested in George C Fawcett on the death of the testator.

It was submitted that George C Fawcett was not in a legal position to obtain letters testamentary in respect of the estate of his father during the closing days of the taxation years. I agree. Section 43 of the New Brunswick Probate Courts Act, RSNB 1973, c P-17 provides:

43. Letters testamentary or of administration with the will annexed or of administration shall not issue until after the lapse of ten days from the death of the deceased, unless the judge otherwise orders upon its being made to appear to him that the estate is being wasted, or that there is other urgent special reason why letters should be sooner issued.

There was no evidence to establish that the estate was being wasted or that there was any other urgent reason why letters testamentary should be issued within ten days of the death of the testator.

It was then submitted that the consequence was that, absent letters testamentary, the executor could not have been registered as a shareholder in the books of the corporation, and thus could have been in a legal position to vote the control shares during the closing days of the taxation year. I am not convinced that the obtaining of letters testamentary is an indispensable legal condition to the registration of an executor as a shareholder. Some reliance was placed on subsections (3) and (4) of section 79 of the Companies Act* in support of the submission that it is. But, as I read it, subsection (3) appears to place a duty on an executor who does obtain letters testamentary in any of the jurisdictions specified to produce and deposit them, together with the specified declaration, with the appropriate official of the corporation. The consequence of the production and deposit of the letters testamentary is described in subsection (4). It does not appear to follow from subsections (3) and (4) that the executor could not at law be registered on the strength of other proof of his having become executor. In my view he could, on producing other adequate proof, insist on being registered.

Assuming, however, that Goerge C Fawcett could not, as executor, have been registered or could not legally have compelled registration, it does not

RSNB 1973, c C-13. Subsection 79(3) and (4) provide:

79.(3) If a transmission of shares or other securities of a company takes place by virtue of any testamentary act or instrument, or in consequence of an intestacy, and if the probate of the will or letters of administration or document testamentary, or other judicial or official instrument under which the title, whether beneficial or as trustee, or the administration or control of the personal estate of the deceased is claimed to vest, purports to be granted by any court or authority in Canada, or in Great Britain or Northern Ireland, or any other of Her Majesty’s dominions, or in any foreign country, the probate of the will, the letters of administration, the document testamentary or the other judicial or official instrument or any authenticated copy thereof, or official extract therefrom, shall together with a declaration in writing showing the nature of such transmission and signed and executed by the person or persons claiming by virtue thereof, be produced and deposited with the manager, secretary, treasurer or other officer or transfer agent named by the directors for the purpose of receiving the same.

79.(4) Subject to the provisions of the Succession Duty Act, chapter 12 of 24 George V, such production and deposit is sufficient justification and authority to the company for paying the amount or value of any dividend, coupon, bond, debenture or obligation or share, or transferring or consenting to the transfer of any bond, debenture or obligation or share, in pursuance of and in conformity with such probate, letters of administration or other such document.

in my view follow that he was not in a legal position to vote the control shares. I refer to the definition of “shareholder” in subsection 2(1) of the New Brunswick Companies Act and to section 103, paragraph (b). “Shareholders” is defined in this way:

2.(1) In this Act and in all letters patent and supplementary letters patent issued hereunder, unless the context otherwise requires, . . .

“shareholders” means every subscriber to, or holder of, stock in the company, and includes the personal representatives of the shareholder; . . .

Paragraph 103(b) provides in part:

103. In the absence of other provisions in that behalf in the letters patent or bylaws of the company,

(b) at all general meetings of the company, each shareholder is entitled to give one vote for each share then held by him, and such votes may be given in person or by proxy, if such proxy is himself a shareholder, . ..

I read these provisions as vesting in a personal representative of a deceased shareholder a right to vote the shares at a shareholders meeting though he may not have been registered as a shareholder in the books of the corporation.*

I have considered whether other sections of the Act adversely affect this right of the unregistered personal representative to vote, and have decided that they do not. Section 74 of the Companies Act provides:

74. Except for the purpose of exhibiting the rights of parties to any transfer of shares towards each other and of rendering any transferee jointly and severally liable with the transferor to the company and its creditors, no transfer of shares unless made by sale under execution or under decree, order or judgment of a court of competent jurisdiction, is valid for any purpose whatever until entry of such transfer is duly made in the register of transfers; but as to the stock of any company listed and dealt with on any recognized stock exchange by means of stock certificates, commonly in use endorsed in blank, and transferable by delivery, such endorsation and delivery, except for the purpose of voting at meetings of the company, constitutes a valid transfer.

See Masten & Fraser, Company Law of Canada (4th ed, 1941), at p 224:

Where a shareholder of a company dies, his shares, as personal estate, vest in his executors or administrators . . . but the executors or administrators do not ipso facto become members of the company at common law, nor is the company entitled without their consent to register them as members. ... But in view of the definition of the term “shareholder” in s 3(n) personal representatives of a deceased shareholder, who have not caused themselves to be registered as shareholders are nevertheless shareholders in respect of the shares of the deceased shareholder. Semble, an executor, in the absence of any contrary provision in the charter or by-laws, would be entitled to vote in respect of the shares of the testator under the combined effect of s 3(n) and s 99(b).

The “s 3(n) and s 99(b)” mentioned in the quotation refer to those sections as they appeared in The Companies Act, 1934, RS c 27. They are, in relevant aspect, similar to the definition of “shareholder” in subsection 2(1) and to para 103(b) of the New Brunswick Companies Act.

^would also refer to Fraser & Stewart, Company Law of Canada (5th ed, 1962), at

As the definition of the word “shareholder” in s 3(n) of this Act includes the personal representatives of a deceased shareholder it would appear in the case of a company incorporated under this Act that, in the absence of a provision in the bylaws to the contrary, an executor although not registered as a shareholder could vote in respect of the deceased’s shares. See s 102 of this Act and s 77 of the Ontario Act.

I read the section as having application to the inter vivos transfer of shares, not to the transmission of shares to a personal representative on the death of a shareholder.

I have also considered whether subsection 79(2)* may be construed as indicating that an unregistered personal representative is not to be regarded as a shareholder for purposes of voting or otherwise. I read the section, however, as having as a purpose to make it clear that a personal representative, though not registered as such, may make a valid inter vivos transfer of shares. Subsection 79(2) is, I think, intended to be read with section 74.

Section 53 of the Companies Act is in these terms:

53. Every such executor, curator, guardian or trustee shall represent the stock held by him at all meetings of the company and may vote as a shareholder; and every person who pledges his stock may represent the same at all such meetings, and, notwithstanding such pledge, vote as a shareholder.

“Such executor’’ in the section refers back to subsection 52(1), and particularly to these words in that subsection: “No person, holding stock in the company as an executor . . . of . . . any person named in the books of the company as being so represented by him, is personally subject to liability as a shareholder;..Section 53 makes it clear that such an executor may vote as a shareholder. I do not, however, read the section as limiting the right to vote to an executor who is “such an executor”.

This brings me to a final consideration. Section 5, paragraph (a) of By- Law No 1 of Fawcett Limited requires that written notice of the annual or a special meeting of the shareholders must be given at least four days before the meeting is held. Paragraphs 5(b) and 6(a) are, however, in these terms:

5(b) A meeting of Shareholders may be held at any time or place without notice if all the Shareholders are present thereat or represented by proxy, or if the absent Shareholders have signified their assent in writing to such meeting or their consent to the business transaction thereat.

6(a) A quorum at any meeting of Shareholders shall consist of two Shareholders present in person and representing, in person or by proxy, not less than sixty per cent of the paid-up capital stock of the company.

Paragraph 30(d) of By-Law No 1 provides:

30(d) Any shareholder or director may at any time waive any notice required to be given under these By-Laws.

It is clear that a meeting of the shareholders of the company could not have been held between the death of Henry A Fawcett and the end of the taxation year unless George C Fawcett and his uncle, George F Fawcett, were both in attendance. I know of no legal way in which George C Fawcett could have compelled his uncle to attend such a meeting if his uncle had not chosen to do so.

In my view, however, it does not follow that George C Fawcett was not in control during the closing days of the taxation year merely because he was not in a legal position to require and to secure a valid meeting of the cor-

Subsection 79(2) of the Companies Act provides:

79.(2) Any transfer of the shares or other interest of a deceased shareholder, made by his personal representative, is, notwithstanding such personal representative is not himself a shareholder, of the same validity as if he had been a shareholder at the time of his execution of the instrument of transfer.

poration during those days, a meeting at which he could have voted his control shares in respect of resolutions or the election of directors. If a meeting had been held—as legally it could have been—George C Fawcett would have held voting control. I would note that, even if Henry A Fawcett had lived, he could not have succeeded in requiring a meeting during the last four days of the taxation year, had written notice not been given earlier; his son and brother would have had to consent. This would not have meant that he had lost control of the corporation during that period. I am of the view that the fact that George C Fawcett could not have required a valid meeting to be held after his father’s death and before the close of the year would not and did not prevent his acquisition of control on his father’s death.

I would dismiss the appeal with costs.