Tremblay,
T.C.J.
[Translation]:—These
two
appeals
were
heard
on
common
evidence
in
Québec,
Québec.
1.
Points
at
Issue
In
the
case
of
Quincaillerie
Brassard
Inc.
the
issue
is
whether
the
appellant
[sic]
was
correct
to
claim
the
small
business
deduction
pursuant
to
subsection
125(1)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act"),
in
the
computation
of
its
income
for
the
taxation
years
1980
and
1981
and,
consequently,
in
not
paying
additional
taxes
of
$11,068
and
net
interest
of
$5,235.
In
the
case
of
Ferronnex
Inc.
the
issue
is
whether
the
appellant
was
correct
to
claim
the
small
business
deduction
under
subsection
125(1)
of
the
Income
Tax
Act
in
the
computation
of
its
income
for
the
taxation
year
1982,
and
consequently,
not
to
pay
additional
taxes
of
$3,816
and
net
interest
of
$473.
The
respondent
disallowed
the
small
business
deductions,
contending
that
Quincaillerie
Brassard
Inc.
and
Ferronnex
Inc.
were
associated
with
Fercomat
Inc.
under
paragraph
256(1)(b)
of
the
Income
Tax
Act,
or
in
other
words
that
during
the
years
in
question
Quincaillerie
Brassard
Inc.
and
Fercomat
Inc.
in
1980
and
1981,
and
Ferronnex
Inc.
and
Fercomat
Inc.
in
1982,
were
controlled
by
the
same
group
of
persons.
When
two
companies
are
associated
in
this
manner
the
deduction
account
is
cumulative,
as
if
only
one
company
were
involved.
According
to
the
re-
spondent,
at
the
end
of
each
of
the
taxation
years
in
question
Fercomat's
cumulative
deduction
account
had
reached
the
maximum
amount
allowed
of
$1,000,000.
Consequently,
the
deduction
set
out
in
subsection
125(1)
of
the
Act
is
not
allowed.
2.
Burden
of
Proof
2.01
The
appellants
have
the
burden
of
showing
that
the
respondent's
assessments
are
incorrect.
This
burden
of
proof
results
from
several
judicial
decisions,
including
a
judgment
of
the
Supreme
Court
of
Canada
in
Johnston
v.
M.N.R.,
[1948]
S.C.R.
486;
[1948]
C.T.C
195;
3
D.T.C.
1182.
2.02
The
facts
as
presumed
by
the
respondent
are
described
in
paragraph
3
of
the
respondent's
reply
to
the
notice
of
appeal
in
each
of
the
appeals.
2.02.1
The
respondent
based
his
reassessment
of
the
appellant,
Quincaillerie
Brassard
Inc.,
for
its
taxation
years
1980
and
1981
on
the
following
presumptions
of
fact:
(a)
At
the
end
of
the
appellant's
1980
and
1981
taxation
years,
the
voting
shares
of
the
appellant
and
Fercomat
Inc.
were
distributed
as
follows:
|
Shareholders
|
Quincaillerie
Brassard
Inc.
|
Fercomat
Inc.
|
|
Paul
Murdock
|
0
%
|
44.9%
|
|
Josette
Murdock
|
0
%
|
19.8%
|
|
Elisabeth
Murdock
|
0
%
|
19.8%
|
|
John
Murdock
|
0
%
|
9,9%
|
|
Gaston
Ouellet
|
20.7%
|
2.5%
|
|
J.
André
Cardinal
|
20.7%
|
2.5%
|
|
Eddy
Lalancette
|
0
%
|
0.9%
|
|
Jean-Pierre
St-Gelais
|
8.6%
|
0
%
|
|
Fercomat
Inc.
|
50.0%
|
0
%
|
|
100
%
|
100
%
|
(b)
Quincaillerie
Brassard
Inc.
and
Fercomat
Inc.
were,
during
their
1980
and
1981
taxation
years,
corporations
controlled
by
the
same
group
of
individuals,
namely
Paul
Murdock,
Josette
Murdock,
Elisabeth
Murdock,
John
Murdock,
Gaston
Ouellet
and
J.
André
Cardinal.
(c)
At
the
end
of
Fercomat
Inc.'s
1980
and
1981
taxation
years,
its
cumulative
deduction
account
exceeded
$1,000,000.
2.02.2
In
reassessing
the
appellant
Ferronnex
Inc.
for
its
1982
taxation
year,
the
respondent
relied
on
certain
presumptions
of
fact,
including:
(a)
On
December
31,
1982
the
voting
shares
of
Ferronnex
Inc.
and
Fercomat
Inc.
were
held
as
follows:
|
Shareholders
|
Ferronnex
Inc.
|
Fercomat
Inc.
|
|
Gaston
Ouellet
|
2.5%
|
2.5%
|
|
J.
André
Cardinal
|
2.5%
|
2.5%
|
|
Eddy
Lalancette
|
0
%
|
0.9%
|
|
Carol
Simard
|
26.7%
|
0
%
|
|
Alain
Brassard
|
10.0%
|
0
%
|
|
Jacques
Lacoursiére
|
8.3%
|
0
%
|
|
Paul
Murdock
|
0
%
|
44.6%
|
|
Josette
Murdock
|
0
%
|
19.8%
|
|
Elisabeth
Murdock
|
0
%
|
19.8%
|
|
John
Murdock
|
0
%
|
9.9%
|
|
Fercomat
Inc.
|
50.0%
|
0
%
|
|
100
%
|
100
%
|
(b)
Ferronnex
Inc.
and
Fercomat
Inc.
were,
during
their
1982
taxation
year,
corporations
controlled
by
the
same
group
of
individuals,
namely
Gaston
Ouellet,
J.
André
Cardinal,
Paul
Murdock,
Josette
Murdock,
Elisabeth
Murdock
and
John
Murdock.
(c)
At
the
end
of
1982,
Fercomat
Inc.’s
cumulative
deduction
account
exceeded
$1,000,000.00.
3.
Facts
3.01
At
the
beginning
of
the
presentation
of
the
evidence,
the
appellants
admitted
that
the
number
of
shares
held
by
each
of
the
shareholders
of
the
appellants
and
of
Fercomat
was
as
detailed
in
subparagraph
3(a)
of
the
replies
to
the
notices
of
appeal.
Exhibits
A-1
and
A-2
are
to
the
same
effect.
The
appellants
also
admitted
that
Fercomat
Inc/s
account
of
cumulative
deductions
had
reached
the
maximum
level.
However,
they
denied
control
by
the
same
group
of
persons
(subparagraph
3(c)).
3.02
By
a
power
of
attorney,
executed
before
a
notary
on
February
10,
1978
and
filed
as
Exhibit
A-3,
Mrs.
Josette
Murdock
Donahue
and
Miss
Elisabeth
Murdock
appointed
their
father
Mr.
Paul
Murdock
as
their
proxy
and
mandatary,
as
follows:
Who
hereby
appoint
Mr.
Paul
Murdock,
their
father,
as
their
special
mandatary,
to
vote
for
them
and
on
their
behalf
at
all
general,
annual
or
special
meetings
of
the
company
Ferco
Mat
Inc.
(formerly
Ferronnerie
Boivin
Ltée)
and
to
do
so
for
all
issues
and
all
matters
dealt
with
at
these
meetings,
without
limitation.
The
present
power
of
attorney
shall
remain
in
force
so
long
as
Dame
Josette
Murdock
and
Miss
Elizabeth
Murdock
do
not
serve
the
company
Ferco
Mat
Inc.
with
notice
that
the
present
power
of
attorney
has
been
revoked.
During
proof
and
hearing
it
was
indicated
by
Mr.
Eddy
Lalancette,
the
only
witness
for
the
appellants,
that
this
power
of
attorney
was
never
revoked.
A—Examination-in-Chief
of
Mr.
Eddy
Lalancette
3.03
Mr.
Eddy
Lalancette,
president
of
Immeubles
Murdock
of
Chicoutimi,
testified
that
during
the
years
in
question
he
was
a
director
and
vice-president
of
Fercomat.
He
had
been
involved
in
the
company
since
1965,
when
he
was
its
controller
and
secretary-treasurer.
3.04
Fercomat
(previously
Ferronnerie
Côté
Boivin
Ltée,
which
merged
with
A.
Nazaire
of
Baie-Comeau
in
1972
to
become
Fercomat)
is
a
wholesaler
that
sells
its
retailers
(principally
Ferronnex
Inc.
and
Quincaillerie
Brassard
Inc.)
materials
related
to
construction,
hardware,
electricity
and
plumbing
as
well
as
heating
system
supplies.
3.05
Gaston
Ouellet
and
André
Cardinal,
former
employees
of
Ferronnerie
Côté
Boivin
Ltée,
and
subsequently
of
Fercomat,
were
rewarded
with
500
shares
of
Fercomat
each
in
February
1978,
for
services
rendered.
3.06
Messrs.
Ouellet
and
Cardinal
acquired
shares
of
Quincaillerie
Brassard
Inc.
of
Jonquiére
in
March
1975.
Fercomat
acquired
50
per
cent
of
the
shares
in
May
1980.
3.07
Ferronnex
Inc.
was
formed
following
the
purchase
of
J.H.
Duchesne
Ltée
of
La
Baie
by
Gaston
Ouellet
and
three
former
employees
of
this
firm,
Carol
Simard,
Jacques
Lacoursiére
and
Alain
Brassard.
Fercomat
also
took
a
50
per
cent
share
(3,000
shares)
in
this
purchase
of
J.H.
Duchesne,
as
the
latter
wanted
to
go
out
of
business.
The
first
meeting
of
Ferronnex’s
shareholders
occurred
in
February
1981.
3.08
Mr.
Lalancette
attended
all
meetings
of
Fercomat's
shareholders
and
directors.
Mr.
Paul
Murdock
was
the
chief
executive,
the
boss.
The
other
officers
reported
to
him.
B—Cross-Examination
of
Mr.
Lalancette
3
.09
The
respondent
filed
photocopies
of
the
T-2
tax
returns
of
Ferronnex's
(Exhibit
1-1)
and
Quincaillerie
Brassard's
(Exhibit
1-2)
T-2
tax
returns,
during
the
cross-examination
of
Mr.
Lalancette.
These
exhibits
also
included
the
notices
of
assessment
and
of
objection.
Fercomat's
statements
were
filed
as
Exhibits
1-3
and
1-4.
3
.10
Mr.
Lalancette
testified
that:
(a)
Fercomat
has
a
capital
stock
of
80,800
shares,
of
which
he
holds
800,
that
is,
0.09
per
cent;
Messrs.
Cardinal
and
Ouellet
each
hold
2,000,
that
is
2.5
per
cent;
(b)
Fercomat
started
in
business
on
December
12,
1977
(Exhibit
1-5);
(c)
during
the
years
in
question,
the
positions
held
in
Fercomat
were:
president
and
general
manager:
Gaston
Ouellet
vice-president,
marketing:
André
Cardinal
chairman
of
the
board:
Paul
Murdock
vice-chairman
of
the
board:
Eddy
Lalancette
director
(since
March
16,
1981):
Elisabeth
Murdock
(d)
Mr.
Gaston
Ouellet
referred
all
matters
to
Mr.
Paul
Murdock,
who
was
in
fact
the
chief
executive;
(e)
Gaston
Ouellet
and
André
Cardinal
were
employees
of
Fercomat;
(f)
Fercomat
acquired
50
per
cent
of
the
capital
stock
of
Quincaillerie
Brassard
Inc.
when
Mr.
Paul
Murdock
approved
the
idea
of
Messrs.
Ouellet
and
Cardinal
of
becoming
involved
in
retail
sales;
with
Mr.
Murdock's
agreement,
they
purchased
the
shares
of
a
Mr.
Lefrançois;
these
shares
were
resold
to
Fercomat;
Mr.
Lefrançois'
shares
were
the
only
ones
available
for
sale;
(g)
in
1982
Mr.
Lalancette
was
director
of
Quincaillerie
Brassard;
André
Cardinal
was
director
and
secretary
of
the
same
company
in
1982;
he
managed
this
company;
(h)
Fercomat
was
one
of
Quincaillerie
Brassard
Inc.'s
suppliers;
Fercomat
guaranteed
a
loan
by
Quincaillerie
Brassard
Inc.
of
about
$42,500;
Mr.
Lalancette
often
represented
Fercomat
at
meetings
of
Quincaillerie
Brassard;
sometimes,
however,
no
representative
was
present;
(i)
following
Ferronnex's
incorporation,
its
directors
were
Carol
Simard,
Gaston
Ouellet,
Alain
Brassard,
André
Cardinal
and
Jacques
Lacoursière;
Fercomat
was
one
of
Ferronnex's
suppliers;
in
1980,
Fercomat
guaranteed
a
$200,000
loan
for
Ferronnex;
financial
statements
for
1982,
included
in
Exhibit
1-2,
therefore
indicate
a
residual
debt
of
$87,000;
(j)
Fercomat
provided
advice
to
the
appellants
with
respect
to
management;
this
mainly
involved
sharing
experience
regarding
certain
clients
or
other
organizations
with
which
they
did
business.
C—
Re-examination
of
Mr.
Lalancette
3.10
(a)
It
was
disclosed
that
Miss
Elisabeth
Murdock
was
present
at
the
shareholders'
meetings
of
March
16,
1981
and
March
29,
1982.
(b)
At
these
shareholders'
meetings:
Q.
How
was
the
meeting
held?
How
were
decisions
made?
A.
Mr.
Murdock
merely
stated
the
decision
to
be
taken,
and
there
was
typically
no
vote
and
the
decision
was
made
unanimously;
so
you
could
say
that
Mr.
Murdock
voted
all
the
shares—his
and
those
that
he
represented,
as
well—since
there
was
no
vote
as
such,
it
was
unanimous.
Q.
O.K.
At
those
meetings
you
attended,
were
you
ever
present
in
a
situation
in
which
Mrs.
Murdock
revoked
the
power
of
attorney
that
she
gave
to
Mr.
Paul
Murdock?
A.
Never.
Q.
O.K.
All
of
the
meetings
were
held
in
the
normal
course
of
events,
without
there
being
any
such
statement,
or
.
.
.
were
held
as
if
the
power
of
attorney
had
never
been
revoked,
and
Mrs.
Murdock
never
stated
that,
either.
(Translation,
pages
112-13)
(c)
With
respect
to
the
fact
that
Fercomat
was
not
the
appellants
exclusive
supplier,
the
witness
stated
the
following:
A.
There
was
total
freedom
to
obtain
supplies
where
they
wished,
and
obviously,
whenever
it
was
advantageous
to
get
them
from
Fercomat,
well,
they
got
them
there.
But
they
were
not
obliged
by
contract
or
in
any
other
manner
to
get
supplies
from
Fercomat.
Q.
So
that
means
that
there
were
situations
.
.
.
A.
They
did
so
because
it
was
in
their
interest
to
do
so.
(Translation,
page
113).
(d)
With
respect
to
the
loan
guarantees,
the
shareholders
of
the
borrowing
companies
were
also
required
to
endorse
them.
4.
Act—Case
Law—Analysis
4.01
Act
The
provisions
of
the
Income
Tax
Act
pertaining
to
the
instant
appeals
are
subsection
125(1)
and
paragraphs
(6)(b),
251(5)(b)
and
256(1)(b).
The
interpretation
of
the
latter
two
provisions
are
[sic]
at
the
centre
of
the
debate.
They
read
as
follows:
251.
(5)
Control
by
related
groups,
options,
etc.—For
the
purposes
of
subsection
(2)
and
section
256
(a)
where
a
related
group
is
in
a
position
to
control
a
corporation,
it
shall
be
deemed
to
be
a
related
group
that
controls
the
corporation
whether
or
not
it
is
part
of
a
larger
group
by
whom
the
corporation
is
in
fact
controlled;
(b)
a
person
who
has
a
right
under
a
contract,
in
equity
or
otherwise,
either
immediately
or
in
the
future
and
either
absolutely
or
contingently,
to,
or
to
acquire,
shares
in
a
corporation,
or
to
control
the
voting
rights
of
shares
in
a
corporation,
shall,
except
where
the
contract
provided
that
the
right
is
not
exercisable
until
the
death
of
an
individual
designated
therein,
be
deemed
to
have
the
same
position
in
relation
to
the
control
of
the
corporation
as
if
he
owned
the
shares;
and
(c)
where
a
person
owns
shares
in
two
or
more
corporations,
he
shall
as
shareholder
of
one
of
the
corporations
be
deemed
to
be
related
to
himself
as
shareholder
of
each
of
the
other
corporations.
256.
(1)
Associated
corporations.—For
the
purposes
of
this
Act
one
corporation
is
associated
with
another
in
a
taxation
year
if
at
any
time
in
the
year,
(a)
one
of
the
corporations
controlled
the
other;
(b)
both
of
the
corporations
were
controlled
by
the
same
person
or
group
of
persons;
(c)
each
of
the
corporations
was
controlled
by
one
person
and
the
person
.
.
.
4.02
Case
Law
Counsel
referred
the
Court
to
the
following
case
law:
(1)
Section
256
of
the
Income
Tax
Act:
Control
1.
Buckerfield's
Ltd.
v.
M.N.R.,
[1964]
C.T.C.
504;
64
D.T.C.
5301;
2.
New
Hamburg
Mills
Ltd.
v.
M.N.R.,
[1965]
40
Tax
A.B.C.
89;
66
D.T.C.
53;
3.
M.N.R.
v.
Dworkin
Furs
(Pembroke)
Ltd.,
[1967]
C.T.C.
50;
67
D.T.C.
5035;
4.
International
Iron
&
Metal
Co.
v.
M.N.R.,
[1974]
S.C.R.
898;
[1972]
C.T.C.
242;
72
D.T.C.
6205;
Direct
Control
5.
Vineland
Quarries
and
Crushed
Stone
v.
M.N.R.,
[1966]
C.T.C.
69;
66
D.T.C.
5092;
“Group”
6.
Dad's
Cookie
Co.
(Ontario)
v.
M.N.R.
(1965),
39
Tax
A.B.C.
73;
65
D.T.C.
535;
7.
Floor
and
Wall
Covering
Distributors
Ltd.
v.
M.N.R.,
[1966]
C.T.C.
566;
66
D.T.C.
5373;
8.
Vina-Rug
(Canada)
Ltd.
v.
M.N.R.,
[1968]
S.C.R.
193;
[1968]
C.T.C.
1;
68
D.T.C.
5021;
9.
Radio
CFUN
Ltd.
v.
M.N.R.,
[1969]
Tax
A.B.C.
565;
69
D.T.C.
420;
10.
S.
Madill
Ltd.
v.
M.N.R.,
[1972]
F.C.
6;
[1972]
C.T.C.
47;
72
D.T.C.
6027;
11.
Regal
Wholesale
Ltd.
v.
The
Queen,
[1976]
2
F.C.
635;
[1976]
C.T.C.
216;
76
D.T.C.
6146;
12.
The
Queen
v.
Mars
Finance
Inc.,
[1980]
C.T.C.
216;
80
D.T.C.
6069;
13.
Entrepôt
Métropolitain
de
Meubles
Ltée
v.
M.N.R.,
[1981]
C.T.C.
425;
81
D.T.C.
5276;
14.
Express
Cable
Television
Ltd.
v.
M.N.R.,
[1982]
C.T.C.
2447;
82
D.T.C.
1431;
(2)
Subsection
251(5):
15.
Economy
Home
Builders
of
Windsor
Ltd.
v.
M.N.R.
(1965),
38
Tax
A.B.C.
148;
65
D.T.C.
302;
16.
Yardley
Plastics
of
Canada
Ltd.
v.
M.N.R.,
[1966]
C.T.C.
215;
66
D.T.C.
5183;
17.
Viking
Food
Products
Ltd.
v.
M.N.R.,
[1967]
C.T.C.
101;
67
D.T.C.
5067;
18.
M.N.R.
v.
Fritz
Werner
Ltd.,
[1972]
C.T.C.
274;
72
D.T.C.
6239;
19.
Distillers
Corporation—Seagrams
Ltd.
v.
M.N.R.,
[1980]
C.T.C.
2737;
80
D.T.C.
1649;
20.
Ronda
Holdings
Ltd.
v.
M.N.R.,
[1984]
C.T.C.
2357;
84
D.T.C.
1331;
By
Counsel
for
the
Appellants
21.
Southside
Car
Market
Ltd.
v.
The
Queen,
[1982]
C.T.C.
214;
82
D.T.C.
6179.
4.03
Analysis
4.03.1
The
respondent's
position
is
based
primarily
on
the
view
that,
on
issues
of
corporate
control,
it
is
de
jure
control
that
must
be
considered
rather
than
de
facto
control.
In
Dworkin
Furs,
supra,
in
1967,
the
Supreme
Court
affirmed
the
judgment
in
Buckerfield's,
supra,
rendered
in
1964
by
Jackett,
J.
of
the
former
Exchequer
Court.
In
1968,
the
Supreme
Court
reaffirmed
its
position
in
Vina-Rug,
supra.
The
Supreme
Court's
French
headnote
of
this
case
reads
almost
as
a
literal
translation
of
the
final
decision:
Applying
the
principles
enunciated
in
M.N.R.
v.
Dworkin
Furs
Ltd.,
[1987]
S.C.R.
223,
once
it
is
established
that
a
group
of
shareholders
owns
a
majority
of
the
voting
shares
of
a
company,
and
the
same
group
a
majority
of
the
voting
shares
of
a
second
company,
that
fact
is
sufficient
to
constitute
the
two
companies
associated
within
the
meaning
of
s.
39
of
the
Act.
Moreover,
in
determining
de
jure
control
more
than
one
group
of
persons
can
be
aptly
described
as
a
"group
of
persons"
within
the
meaning
of
s.
39(4)(b)
of
the
Act.
It
is
immaterial
whether
or
not
other
combinations
of
shareholders
may
own
a
majority
of
voting
shares
in
either
company,
provided
each
combination
is
in
a
position
to
control
at
least
a
majority
of
votes
to
be
cast
at
a
general
meeting
of
shareholders.
4.03.2
Nevertheless,
this
is
not
to
say
that
de
facto
control
is
not
useful
at
times
to
determine
which
group
controls
a
corporation.
For
example,
where
several
groups
could
possibly
have
legal
control,
the
one
which
has
de
facto
control
must
be
chosen,
that
is,
the
one
which
sets
company
policy
that
must
be
implemented
by
the
board
of
directors.
In
Yardley
Plastics,
supra,
as
in
Floor
and
Wall,
supra,
the
appellants
contended
that
another
group
also
having
de
jure
control
had
de
facto
control
as
well.
The
appeals
were
dismissed
because
the
appellants
were
not
able
to
prove,
which
they
had
the
burden
of
doing,
that
the
group
chosen
by
the
respondent
was
not
the
group
that
in
fact
controlled
the
companies.
Certain
cases
have
developed
criteria
for
identifying
de
facto
control
by
a
group
over
a
corporation:
the
presence
of
a
common
set
of
interests,
objectives
and
existing
relationships
between
a
number
of
shareholders
that
could
constitute
a
majority
group
(S.
Madill,
supra,
Express
Cable,
supra,
Regal
Wholesale
Ltd.,
supra.
4.03.3
The
respondent
argued
that
the
group
consisting
of
Paul
Murdock,
John
Murdock,
Josette
Murdock,
Elisabeth
Murdock,
Gaston
Ouellet
and
André
Cardinal
had
99
per
cent
de
jure
control
of
Fercomat.
Further,
through
Fer-
comat
Inc.
this
same
group
indirectly
held
50
per
cent
of
Ferronnex
Inc.
and
50
per
cent
of
Quincaillerie
Brassard.
Moreover,
Messrs.
Gaston
Ouellet
and
André
Cardinal
each
held
25
per
cent
of
the
shares
in
Ferronnex
and
20.7
per
cent
in
Quincaillerie
Brassard.
Therefore,
the
respondent
contended,
the
same
group
of
individuals
controlled
Fercomat,
Ferronnex,
and
Quincaillerie
Brassard,
and
these
were
consequently
associated
companies
within
the
meaning
of
paragraph
256(1)(b).
4.03.4
Counsel
for
the
appellant
companies
referred
the
Court
to
a
decision
that
is
more
recent
than
those
cited
by
counsel
for
the
respondent,
except
for
Express
Cable,
supra.
This
judgment
was
rendered
on
May
11,
1982
by
Mr.
Lucien
Cardin,
then
Chairman
of
the
Tax
Review
Board
which
became
the
Tax
Court
of
Canada
in
1983.
It
is
Southside
Car
Market,
supra,
heard
by
Cat-
tanach,
J.
of
the
Federal
Court-Trial
Division,
judgment
in
which
was
rendered
on
April
27,
1982.
Cattanach,
J.
established
that
the
word
"or"
appearing
in
paragraph
256(1)(b),
in
the
expression
”.
.
.
the
same
person
or
group
of
persons
controls
the
two
corporations
.
.
.”,
should
be
read
disjunctively.
The
learned
judge
said
the
following
at
pages
222-23
(D.T.C.
6185-86)
:
Reverting
to
paragraph
256(1)(b)
quoted
above,
two
separate
and
distinct
circumstances
are
contemplated
thereby.
One
corporation
is
associated
with
another
if
both
corporations
are
controlled
by
(1)
the
same
person,
or
(2)
the
same
group
of
persons.
Further,
it
seems
to
me,
that
subsection
256(1)
purports
to
provide
for
all
the
circumstances
by
virtue
of
which
one
corporation
is
associated
with
another
and
to
be
associated
the
corporation
must
fall
precisely
within
one
of
the
circumstances
provided
therein.
Accordingly,
since
the
language
of
paragraph
256(1)(b)
sets
forth
two
distinct
circumstances
when
two
corporations
are
associated,
namely,
when
controlled
by
(1)
the
same
person
and
(2)
the
same
group
of
persons,
the
two
sets
of
circumstances
are
mutually
exclusive.
That,
in
my
view,
is
the
precise
meaning
of
the
language
of
paragraph
256(1)(b).
The
word
"or"
in
the
phrase
of
the
paragraph
reading
"by
the
same
person
or
group
of
persons"
is
used
in
its
disjunctive
sense.
It
cannot
be
otherwise
in
the
context.
The
conclusion
that
the
two
phrases
are
mutually
exclusive
by
their
plain
meaning
is
confirmed
by
the
cardinal
rule
in
the
interpretation
of
statutes,
if
resort
need
be
taken
thereto,
in
the
maxim
expressio
unius
est
exclusio
alterius.
Notwithstanding
the
high
and
deserved
approval
accorded
to
Mr
justice
Jack-
ett’s
definition
of
control
in
the
Buckerfield’s
case
for
the
purposes
of
subsection
39(4)
of
the
Income
Tax
Act
then
in
force,
and
with
equal
application
to
paragraph
256(1)(b)
presently
in
force,
which
is
that
de
jure
control
that
rests
in
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,
the
next
following
paragraph
in
his
reasons
for
judgment
has
not
achieved
the
same
prominence.
That
this
is
so
is
that
the
cases
that
have
come
to
trial
before
judges
in
courts
of
co-ordinate
jurisdiction
with
me
or
in
courts
by
the
decisions
of
which
I
am
bound
have
been
concerned
with
control
by
the
same
group
of
persons,
and
not
cases
where
control
in
one
company
is
exercised
by
a
group
of
persons
in
which
the
single
person
who
controls
the
other
company
is
a
member
of
the
group.
That
is
the
fact
in
the
present
appeal.
After
the
frequently
quoted
definition
of
control
by
Jackett,
CJ
in
Buckerfield's,
he
said
in
the
very
next
paragraph:
Where,
in
the
application
of
subsection
39(4)
a
single
person
does
not
own
sufficient
shares
to
have
control
in
the
sense
to
which
I
have
just
referred,
it
becomes
a
question
of
fact
as
to
whether
any
"group
of
persons"
does
not
own
such
a
number
of
shares.
The
learned
judge
then
drew
the
following
conclusions:
In
my
view,
it
is
implicit
from
the
language
quoted
that
if
a
single
person
owns
a
sufficient
number
of
shares
in
a
company,
there
is
no
necessity
to
consider
the
question
of
fact
as
to
what
group
of
persons
owns
such
a
number
of
shares.
Thus,
if
a
single
person
owns
sufficient
shares
to
exercise
control,
resort
to
whether
a
group
of
persons
holds
control
is
precluded.
The
condition
precedent
to
the
consideration
of
control
in
a
group
is
that
no
single
person
has
control.
That,
in
my
view,
is
the
precise
meaning
of
paragraph
256(1)(b).
In
the
event,
however,
that
the
language
of
paragraph
256(1)(b)
is
susceptible
of
the
interpretation
that
a
single
person
having
control
of
a
company
may
be
included
in
a
group
of
persons
having
control
of
the
company
for
the
purposes
of
the
paragraph,
which
I
do
not
think
to
be
the
case,
then
if
a
provision
in
a
penal
or
taxing
statute
is
capable
of
two
alternative
meanings
the
courts
will
defer
to
that
meaning
more
favourable
to
the
taxpayer.
4.03.5
It
was,
moreover,
following
this
decision
that
paragraph
256(1.2)(b)
was
included
in
the
Act,
in
1988.
It
reads
as
follows:
(1.2)
Control
etc.—For
the
purposes
of
subsections
(1)
to
(5):
(a)
a
group
of
persons
in
respect
of
a
corporation
means
any
two
or
more
persons
each
of
whom
owns
shares
of
the
capital
stock
of
the
corporation;
(b)
for
greater
certainty,
(i)
a
corporation
that
is
controlled
by
one
or
more
membersof
a
particular
group
or
persons
.
.
.
shall
be
considered
to
be
controlled
by
that
group
of
persons,
and
(ii)
a
corporation
may
be
controlled
by
a
person
or
a
particular
group
of
persons
notwithstanding
that
the
corporation
is
also
controlled
or
deemed
to
be
controlled
by
another
person
or
group
of
persons
.
.
.
The
technical
notes
published
by
the
Minister
on
September
13,
1988,
with
respect
to
this
amendment
read
as
follows:
New
paragraph
(1.2)(b)
provides
that
a
corporation
can
be
considered
to
be
controlled
by
a
person
or
particular
group
of
persons
notwithstanding
that
the
corporation
is
also
controlled
by
another
person
or
group
of
persons.
As
a
consequence,
under
this
paragraph,
a
corporation
can
be
considered
to
be
controlled
at
the
same
time
by
several
persons
or
group
of
persons.
Paragraph
(1.2)(b)
also
provides
that
where
a
group
of
persons
owns
shares
of
the
capital
stock
of
a
corporation,
the
fact
that
an
individual
member
of
the
group
owns,
by
himself,
enough
shares
to
control
the
corporation
will
not
alter
the
fact
that
the
group
also
controls
the
corporation.
The
above
prompted
the
following
remark
from
counsel
for
the
appellants:
”
.
.
.
the
action
of
the
legislature
demonstrates
that,
in
the
absence
or
such
an
amendment,
the
legislature
recognized
the
correctness
of
Cattanach
J.'s
decision
in
Southside
Car
Market!'
4.03.6
Counsel
for
the
appellants,
in
accordance
with
Cattanach,
J.'s
interpretation
that
paragraph
256(1)(b)
should
be
understood
to
have
a
disjunctive
meaning,
submitted:
“.
.
.
in
order
to
succeed,
the
Minister
must
show
that
a
corporation
is
controlled
either
by
one
person
or
by
one
group,
and
cannot
merely
show
that
a
relationship
exists
between
one
person
and
the
members
of
a
group.”
4.03.7
After
referring
to
the
notarized
power
of
attorney
of
Mrs.
Josette
Murdock
and
Miss
Elisabeth
Murdock,
appointing
their
father
Paul
Murdock
as
their
proxy
and
mandatary,
counsel
for
the
appellants
continued
as
follows
in
his
pleadings:
During
the
proof
and
hearing
it
was
shown
that
no
such
revocation
had
been
served
on
Fercomat
Inc.,
and
consequently
their
power
of
attorney
is
still
in
force.
The
effect
of
this
power
of
attorney
is
thus
clearly
that
Mr.
Paul
Murdock,
who
holds
44.5%
of
the
capital
stock,
controls
the
company,
because
by
virtue
of
this
power
of
attorney
he
may
exercise
the
votes
held
by
Josette
Murdock
(19.8%)
and
Elizabeth
Murdock
(19.8%),
for
a
grand
total
of
84.1%.
The
result
of
this
factual
situation
is
that
Fercomat
Inc.
is
controlled
by
a
single
individual
and
not
by
a
group
of
persons.
In
this
respect,
it
is
important
to
interpret
the
text
of
the
power
of
attorney
in
the
light
of
s.
251
(5)(b)
of
the
Act
which
provides
that:
For
the
purposes
of
paragraph
125(7)(b)
and
subsection
(2)
and
of
section
256,
(b)
a
person
who
has
a
right
under
a
contract,
in
equity
or
otherwise,
either
immediately,
or
in
the
future
and
either
absolutely
or
contingently
to,
or
to
acquire,
shares
in
a
corporation,
or
to
control
the
voting
rights
of
shares
in
a
corporation,
shall,
except
where
the
contract
provides
that
the
right
is
not
exercisable
until
the
death,
bankruptcy
or
permanent
disability
of
any
individual
therein,
be
deemed
to
have
the
same
position
in
relation
to
the
control
of
the
corporation
as
if
he
owned
the
shares
.
.
.
Southside
Car
Market
should
thus
apply
for
groups
of
persons.
4.03.8
Counsel
for
the
appellants
further
explained
the
implications
of
Southside
Car
Market
if
"one
person"
has
control:
”
.
.
.
cited
above
means
that,
once
it
been
established
that
one
person
controls
a
corporation,
it
is
pointless
to
go
further
and
determine
if,
in
fact,
control
could
also
be
held
by
a'
group
of
persons'."
Counsel
also
adopted
a
portion
of
the
text
of
Cattanach,
J.
already
cited:
In
my
view,
it
is
implicit
from
the
language
quoted
that
if
a
single
person
owns
a
sufficient
number
of
shares
in
a
company,
there
is
no
necessity
to
consider
the
question
of
fact
as
to
what
group
of
persons
owns
such
a
number
of
shares.
Thus,
if
a
single
person
owns
sufficient
shares
to
exercise
control,
resort
to
whether
a
group
of
persons
holds
control,
is
precluded.
The
condition
precedent
to
the
consideration
of
control
in
a
group
is
that
no
single
person
has
control.
That,
in
my
view,
is
the
precise
meaning
of
paragraph
256(1)(b).
4.03.9
Counsel
for
the
respondent,
however,
contended
that
Southside
Car
Market
does
not
apply
to
this
appeal.
He
contended
that,
to
begin
with,
it
is
only
through
paragraph
251(5)(b)
that
counsel
for
the
appellants
can
claim
that
Mr.
Murdock
holds
control
of
Fercomat’s
shares,
but
this
provision
cannot
apply
to
the
case
at
bar.
He
referred,
first,
to
the
judgment
in
Economy
Home,
supra,
rendered
in
1965
by
Mr.
Fordham
of
the
Tax
Review
Board.
The
latter
decided
that
the
additional
control
conferred
by
paragraph
139(5d),
which
later
became
251(5)(b),
does
not
oust
the
control
resulting
from
actual
possession
of
the
shares.
In
Yardley
Plastics,
supra,
Noël,
J.
decided
that
paragraph
139(5d)
was
intended
to
enlarge,
rather
than
restrict,
the
notion
of
"control".
This
principle
was
also
upheld
in
1967
in
Viking
Food,
supra,
by
Jackett,
J.
Finally,
in
1972
Walsh,
J.
stated
the
following
(at
pages
281-82
(D.T.C.
6245))
in
Fritz
Werner,
supra,
affirming
what
had
been
said
earlier:
Under
this
interpretation
of
the
effect
of
paragraph
139(5d)(b)
of
the
Act
it
is
a
section
which
can
be
applied
by
the
Minister
in
order
to
find
that
two
corporations
are
associated
within
the
meaning
of
paragraph
39(4)(b)
of
the
Act
but
cannot
be
used
by
the
taxpayer
to
claim
that
the
two
corporations
are
not
associated
because
his
voting
shares
which
control
the
second
corporation
have
been
optioned
to
another
person,
and
this
even
if
the
option
were
not
given
with
the
intent
of
avoiding
taxation
but
rather
as
the
result
of
a
bona
fide
business
transaction
between
two
parties
dealing
at
arm’s
length,
as
is
clear
in
the
present
case.
While
I
might,
on
the
facts
before
me,
have
reached
a
different
conclusion
had
the
issue
come
before
the
Court
for
the
first
time,
I
believe
that
unless
and
until
a
different
interpretation
is
given
to
the
meaning
of
paragraph
139(5d)(b)
by
a
judgment
of
a
higher
court,
I
should
follow
the
present
jurisprudence
of
this
Court
established
by
Jackett,
CJ
in
the
Viking
Food
Products
case,
supra.
Counsel
for
the
appellants
however
contended
that
the
cases
previously
cited
by
counsel
for
the
respondent
involved
an
option
on
shares,
while
in
the
instant
case
a
power
of
attorney
is
involved.
Does
this
really
change
anything?
On
the
one
hand,
it
is
true
that
the
options
mentioned
in
these
various
judgments
had
not
yet
been
exercised,
while
the
powers
of
attorney
were
fully
in
force.
On
the
other
hand,
is
it
not
the
nature
of
an
option
to
exist
only
so
long
as
it
is
not
exercised,
and
to
cease
being
an
option
only
when
it
is
exercised?
Similarly,
is
it
not
the
nature
of
a
power
of
attorney
to
be
in
force
while
it
exists
and
to
cease
existing
when
it
is
withdrawn?
The
right
mentioned
in
251(5)(b)
(formerly
139(5d)),
whether
originating
from
an
option
or
a
power
of
attorney,
is
there
to
provide
additional
control.
That
is
the
purpose
of
this
provision.
Can
it
serve
to
alter
the
control
of
a
corporation
that
is
actually
in
the
hands
of
a
group
and
transfer
it
to
an
individual?
No:
I
believe
it
is
fundamental
that
such
new
control
resulting
from
the
existence
of
paragraph
251(5)(b),
whether
it
be
in
the
hands
of
an
individual
or
a
corporation,
does
not
remove
the
real
control
held
by
a
group
that
already
exists
under
section
256
of
the
Act.
It
might
be
answered
that
paragraph
256(1)(b)
makes
no
distinction
between
real
or
additional
control
when
it
provides
“by
the
same
person
or
group
of
persons”.
This
is
true,
but
it
does
not
change
the
fact
that
the
control
given
through
paragraph
251(5)(b)
is
additional
control
that
does
not
exclude
the
actual
existing
control.
It
was
in
fact
through
this
provision
(and
the
power
of
attorney
for
the
voting
rights
of
Mrs.
and
Miss
Murdock)
that
Mr.
Paul
Murdock
became
the
person
in
control,
not
because
he
actually
held
a
majority
of
shares.
It
is
only
in
a
case
where
there
is
actual
control
that
Southside
Car
Market,
supra,
applies.
Based
on
the
reasons
cited
above,
therefore,
the
group
formed
by
the
four
members
of
the
Murdock
family
plus
Messrs.
Ouellet
and
Cardinal,
which
has
de
jure
control,
must
take
precedence.
Consequently,
in
dismissing
the
appellants’
argument
I
must
affirm
the
respondent's
position.
4.03.10
Another
argument
may
be
raised
based
on
the
fact
that
a
power
of
attorney
is
not
an
option.
The
power
of
attorney
granting
voting
rights
to
Mr.
Paul
Murdock
and
given
by
the
two
Murdock
ladies
(paragraph
3.02)
was
not
provided
pursuant
to
any
contract.
It
could
in
fact
be
cancelled
at
any
time.
However,
the
option
right
and
the
right
to
control
the
right
to
vote
in
paragraph
251
(5)(b)
are
only
valid
if
they
are
stipulated
in
a
contract:
”
.
.
.
a
person
who
has
a
right
under
a
contract.
.
.
to
.
.
.
shares
.
.
.
or
to
control
the
voting
rights
of
shares
.
.
.”
as
is
stated
in
paragraph
251
(5)
(b).
Accordingly,
I
do
not
believe
that
the
power
of
attorney
as
it
exists
in
this
case
can
apply
pursuant
to
paragraph
251
(5)(b).
4
.04
However,
if
this
power
of
attorney
of
the
Murdock
ladies
cannot
apply
pursuant
to
paragraph
251(5)(b),
could
it
not
apply
pursuant
to
paragraph
256(1)(b)?
Basing
myself
on
the
precedents
in
Floor
and
Wall,
supra,
and
Yardley
Plastics,
supra,
Madill,
supra,
Express
Cable,
supra,
and
Regal
Wholesale,
supra,
I
must
ask
whether
there
is
a
group
other
than
that
chosen
by
the
Minister
which
controls
Fercomat,
and
which,
like
the
one
chosen
by
the
Minister,
has
de
jure
control
but
in
addition
has
de
facto
control
as
well,
without
however
controlling
the
two
appellants.
If
the
evidence
were
actually
to
that
effect,
however,
would
the
Court
still
be
bound
by
it,
even
in
the
absence
of
any
legal
argument?
The
Court
is
never
bound
by
the
parties'
legal
arguments.
It
is
always
free
to
allow
or
dismiss
an
appeal
on
the
basis
of
a
legal
argument
that
the
parties
have
ignored
or
at
least
failed
to
make.
In
any
event,
there
is
nothing
to
prevent
the
appellants
from
making
such
a
legal
argument
in
the
Federal
Court.
The
section
of
the
Act
involved
in
the
case
at
bar
is
the
same
as
that
which
was
at
issue
in
Floor
and
Wall,
supra,
and
Yardley
Plastics,
supra,
namely
paragraph
39(4)(b)
of
the
old
Act,
now
256(1)(b)
of
the
new
Act.
It
states
that:
both
of
the
corporations
were
controlled
by
the
same
person
or
group
of
persons
.
.
.".
What
does
the
evidence
show
in
this
regard?
To
begin
with,
the
fact
that
Mrs.
Josette
Murdock
and
Miss
Elisabeth
Murdock
gave
a
power
of
attorney
for
"a
special
mandatary
to
vote
for
them
and
on
their
behalf”
to
Mr.
Paul
Murdock
(paragraph
3.02);
the
fact
that
these
three
individuals
are
related
through
family
ties;
the
fact
that
Mr.
Paul
Murdock
was
the
one
who
made
decisions
at
shareholders'
meetings:
".
.
.
there
was
no
vote
as
such,
it
was
unanimous.
.
."
(paragraph
3.10(b)
);
the
fact
that
Mr.
Ouellet,
the
president
and
general
manager
of
Fercomat,
referred
everything
to
Mr.
Paul
Murdock,
the
chairman
of
the
board
of
directors
(paragraphs
3.10(c)
and
(d)).
Do
not
all
of
these
facts
show
that
there
was
a
community
of
interests
and
purposes
and
a
unity
sufficient
to
form
a
group?
I
believe
I
must
answer
in
the
affirmative,
even
though
Mr.
Paul
Murdock,
the
principal
person
concerned,
was
absent
from
the
trial
and
did
not
have
to
be
cross-examined.
Mr.
Lalancette
was
a
witness
whose
credibility
is
not
in
doubt,
and
the
evidence
is
strong
enough
to
support
my
conclusions.
I
would
like
to
emphasize
that
the
fact
that
the
power
of
attorney
cannot
have
effect
through
paragraph
251
(5)(b)
of
the
Act
does
not
in
any
way
diminish
its
value
as
evidence
of
the
community
of
interests,
establishing
that
a
group
other
than
the
one
chosen
by
the
respondent
pursuant
to
paragraph
256(1)(b)
may
exist.
4.05
I
must
therefore
reject
the
reassessments
issued
against
the
appellants.
5
.
Conclusion
The
appeals
are
allowed
with
costs
and
the
matter
is
referred
back
to
the
respondent
for
reconsideration
and
reassessment.
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