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.
[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 Ouel- let 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 Lacoursière | 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—Exami nation-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. Pau 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) bath 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.
1 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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