Cattanach, J:—This is an appeal by way of trial de novo from a decision of the Tax Review Board dated September 21, 1981 whereby the plaintiff’s appeal from an assessment of the plaintiff for its 1979 taxation year was disallowed on the ground that the plaintiff was not a Canadian-controlled private corporation within the definition thereof in paragraph 125(6)(a) of the Income Tax Act throughout its 1979 taxation year and was therefore not entitled to the small business deduction claimed by the plaintiff under subsection 125(1) of that Act.
The plaintiff is a joint stock company incorporated pursuant to the laws of the Province of Ontario in August 1977 and prior to 1979 was the wholly owned subsidiary of a Swedish company resident in Sweden.
Gerald J. Lozinsky, a Canadian citizen and resident, was engaged as the manager of the plaintiff.
The plaintiff being owned by non-residents sought appoval essential to the conduct of its business in Canada under the Foreign Investment Review Act (FIRA) which was refused.
Accordingly the Swedish parent company was faced with the choice of discontinuing the business of the plaintiff, transferring the business of the plaintiff to the United States and operating there and from there or selling the shares of the plaintiff to a Canadian resident.
The Swedish parent company took the last choice.
It was agreed that all shares in the plaintiff would be sold to Mr Lozinski for $10 on April 30, 1978 (the end of the 1978 financial year of the Swedish corporate vendor) in order that that company might amalgamate with two other Swedish steel producers under the aegis of the Swedish government.
Negotiations were conducted by Mr Lozinski and officers of the Swedish company. I might say that Mr Lozinski was one of the most forthright and intelligent witnesses whom I have heard.
In his view to all intents and purposes the agreement for the purchase and sale of the shares by him and the vendor was verbally settled with effect from May 1, 1978 forward.
On that date he assumed all the attributes of ownership. His contract of employment with the Swedish owner of the plaintiff as manager of the plaintiff was terminated and the plaintiff company became the distributor of the Swedish company’s product. Financial adjustments were made. Certain financial obligations incurred by the plaintiff were discharged by the Swedish company. The assets side of the balance sheet was brought into balance by the infusion of stock payment. Certain responsibilities were assumed by the plaintiff and continued as obligations of the purchaser of the owner of the shares, others were not, and all profits and losses were to accrue to and operations were conducted by the plaintiff as a continuing corporation but for the benefit or detriment of Mr Lozinski as owner of the shares.
This circumstance is subsequently put forward by counsel for the plaintiff that there was a preliminary verbal contract consumated by a handshake.
This circumstance is also susceptible of being preliminary negotiations to be embodied in a written contract.
In either event the contract between the parties was reduced to writing.
That written contract is Exhibit P-22.
The agreement is stated as being made as of May 1, 1978. Provisions are made for conditions to be complied with by the purchaser and the vendor as well as conditions for the exclusive benefit of the vendor are to be fulfilled on or before the closing specified in the agreement as being December 8, 1978 or by mutual consent of the parties either earlier or later.
The Chairman of the Tax Review Board predicated his judgment and reasons therefor on the premise that the closing date was December 8, 1978 although he acknowledges that closing was some time subsequent to that date. Before him the parties accepted that the transaction was closed on December 8, 1978.
In fact one of the conditions was not fulfilled until January 1979 and the written contract was not executed by the parties thereto until Februay 1979.
The rival contentions are simple and straight forward.
On the facts as recited the plaintiff contends that from May 1, 1978 to April 30, 1979 throughout the plaintiff was a Canadian-controlled private corporation and as such is entitled to the small business deduction under subsection 125(1).
In contravention the defendant contends that the deduction claimed was properly disallowed by the Minister because the plaintiff was not a Canadian-controlled private corporation in that for the period from May 1, 1978 to December 8, 1978 it was controlled by a non-resident.
A Canadian-controlled private corporation is defined in paragraph 125(6)(a) as follows:
(a) “Canadian-controlled private corporation” means a private corporation that is a Canadian corporation other than a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations or by any combination thereof.
The word “controlled” as used in the context of the definition means de jure control and not de facto control.
In MNR v Dworkin Furs (Pembroke) Ltd et al [1967] S.C.R. 223, [1967] CTC 90; 67 DTC 5035, Hall, J said at 227:
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 Buckerfield’s Limited et al v Minister of National Revenue.
Many approaches might conceivable 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 coceivably 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 Minister of National Revenue v Wrights’ Canadian Ropes Ltd (1947) AC 109 per Lord Greene MR at page 118, where it was held that the mere fact that one corporation had less than 50 per cent of the shares of another was “conclusive” that the one corporation was not “controlled” by the other within section 6 of the Income War Tax Act.
Section 39 was the section under consideration in MNR v Dworkin (supra) and subsection 125(3) is derived from section 39.
Accordingly that definition of the word “controlled” applies in this appeal.
The question to be determined is whether ownership of all shares in the plaintiff vested in Mr Lozinski on May 1, 1978 or did ownership of those shares remain in the parent corporation until the closing of the written contract of purchase and sale on December 8, 1978 or later.
If the former is the case the small business deduction under subsection 125(1 ) is applicable. If the latter is the case that deduction is not deductible.
Which of the two circumstances in the case is dependent upon the applicability and interpretation of the contract, Ehibit P-22,, between Mr Lozinski and the Swedish corporation as vendor.
So far as I can ascertain the evidence before the Chairman of the Tax Review Board was substantially the same as that before me as were the cotentions advanced before me.
I have read the reasons for which the Chairman concluded ownership of the shares in the plaintiff did not pass to a Canadian resident on May 1, 1978 but remained in the ownership of a non-resident corporation until after December 8, 1978 from which it followed that the plaintiff was not a Canadian- controlled private corporation and not entitled to the small business deduction claimed by it in its 1979 taxation year.
I accept and adopt as my own the Chairman’s lucid and logical reasons and I agree with the conclusion of the Chairman which follows therefrom. However I add further remarks supplementary to or like reasoning to that of the Chairman in my own words.
Counsel for the plaintiff contended that there had been a verbal contract between Mr Lozinski and the Swedish parent for the sale of the shares concluded by a handshake as a consequence of which certain steps were taken. This he termed an “executory contract”.
My understanding of an executed contract has always been that it is one where nothing remains to be done by either party and where the transaction is completed at the moment the agreement is made. The classical example is where an article is sold and delivered and payment made on the spot. That did not happen in this instance.
My understanding of an “executory contract” is one where some future act is to be done, that is where some act is to be done on or before some future day.
It may well be that the discussions between Mr Lozinski and the officers of the Swedish company fell into that category,
However there is no doubt whatsoever that both parties accepted the fact that the contract between the parties would be reduced to writing as was done. There were prolonged discussions between the solicitors resident in Canada acting for the respective parties. That such should be done followed logically from the legal advice that had been obtained as to how the status of a Canadian-controlled private corporation could be achieved or the refusal of FIRA to authorize the continued operation of the Swedish corporation could best be handled otherwise. These were the choices which led ultimately to the sale of the shares of the plaintiff.
Thus, in my view, the discussions between the parties to the contract were most likely negotiations to the basic terms thereof or at the very highest level no more than a preliminary verbal contract.
Accepting merely as a premise that what was reached between the parties was a verbal executory contract or a verbal preliminary contract according to my view of the law of contract, both at common law and in equity, that when there is a preliminary contract in words which is afterwards reduced into writing, or where there is an executory contract to be carried out by a deed afterwards executed, the rights of the parties are covered in the first case entirely by the writing, and in the second case entirely by the deed.
That is the broad principle of law which is well known and acted upon. Where a preliminary contract of any description, whether verbal or otherwise, is intended (as was the case here) to be superseded by, and is in fact superseded by, one of superior character, then the later contract — the superior contract — prevails.
The rights of the parties are therefore governed by the terms of the written contract they entered, that is Exhibit P-22. Paragraph 12 of that contract so states and in so stating affirms in the written contract the principles which have been outlined.
There is no question that Mr Lozinski forthwith embarked upon the management of the plaintiff corporation as owner thereof. This he did at the sufferance or condonation of the Swedish corporation but it does not follow therefrom that the Swedish corporation would relinquish ownership of the shares other than in accordance with the terms of the contract which was upon closing when all conditions precedent thereto had been satisfied.
It was also contended on behalf of the plaintiff that as from May 1, 1978 forward Mr Lozinski was the beneficial owner of the shares in the plaintiff company and that they were held by the Swedish company merely as a nominee or bare trustee for him.
In the light of the express terms of the contract, Exhibit P-22, that contention is untenable.
For the reasons expressed by the Chairman of the Tax Review Board, with which I agree, the vendor did not forego its rights of ownership. It retained that ownership until the closing of the transaction in accordance with the written contract, Exhibit P-22. Therefore no trustee and cestui que trust relationship existed.
Even if such constructive trust may have existed, which I do not accept as being the case here, then the Swedish company remains the registered owner of the shares and votes those shares.
In IRC v J Bibby and Sons Limited, [1945] 1 All ER 667 and British American Tobacco v IRC, [1943] 1 All ER 13, the test of beneficial shareholding was rejected as indicative of control.
The Bibby case was quoted with approval in Vineland Quarries and Crushed Stone Limited v MNR, [1966] CTC 69; 66 DTC 5092 at 5097 as applicable to determining control under the Income Tax Act.
Sheppard, D J in Consolidated Holding Co Ltd v MNR, [1969] CTC 633; 69 DTC 5429 said at 5431 with reference to the judgments just cited:
It follows from these judgments that the control is determined by the owners of the majority of voting power and in determining that voting power the existence of any trust under which the registered shareholders are liable over is immaterial.
H A Fawcett & Son Limited v The Queen, [1980] CTC 293; 80 DTC 6195 relied upon by counsel for the plaintiff is not authority to the contrary.
A father’s will named his son as executor and beneficiary of the shares in the appellant corporation. No formal transfer of the shares into the son’s name was made. The Court found that title to the shares vested in the son as executor and as trustee for himself as beneficiary immediately upon his father’s death.
By virtue of the New Brunswick Companies Act the personal representative of a deceased shareholder has the right to the shares and to vote them although he may not have been registered as a shareholder in the company share register. Thus the son was in control by reason of being the executor and that was because of the applicable provincial legislation and not otherwise.
For the foregoing reasons the plaintiff remained under the control of a non-resident for the period from May 1, 1978 to December 8, 1978 in its 1979 taxation year from which it follows that it was not entitled to the small business deduction claimed and that such claim was properly disallowed by the Minister.
Accordingly the appeal is dismissed with costs to the defendant.
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