Hutchinson, J.:— The appellant, Harvard International Resources Ltd., (HIRL) appeals pursuant to subsection 50(2) of the Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, (the “Alberta Act") from two decisions of the provincial treasurer in respect of corporate income tax reassessments wherein HIRL was deemed to be associated with another corporation, Centipede Holdings Ltd., ("Holdings") and therefore required to aggregate its income entitled to royalty tax credit with that of Holdings for each of the appellant's taxation years ending on May 31 in each of 1983 and 1984.
In the agreed statement of facts, it is said that at all material times all of the corporations mentioned were taxable Canadian corporations as defined in paragraph 89(1)(i) of the Income Tax Act (Canada), S.C. 1970-71-72, c. 63 as amended (the"Federal Act"). The remaining facts are quoted as follows:
4. During both of the appellant's 1984 and 1985 taxation years, 150 voting preferred shares (the"preferred shares") in the capital of Holdings were outstanding, each share entitling the holder thereof to one vote. All of the preferred shares were owned by Centipede Energy Ltd. ("Energy").
5. . . . All of the issued and outstanding shares in the capital of Energy were owned by William and Lois Mooney (the "Mooneys"). The Mooneys did not own any shares in the capital of the appellant.
6. During both the appellants 1984 and 1985 taxation years, 100 common shares (the “Common shares") in the capital of Holdings were outstanding, each entitling the holder thereof to one vote. The common shares were owned by the appellant as to a 99.3280 per cent undivided interest and Energy as to a 0.67192 per cent undivided interest.
7. Other than as set forth above, there were no other issued and outstanding shares in the capital of Holdings during either of the appellant's 1984 and 1985 taxation years.
8. Other than as set forth above, there were no other agreements relating to the issuance, redemption or repurchase of shares of Holdings.
9. On June 27, 1983, the appellant, Energy and 295564 Alberta Ltd. (the ” Partners”) formed a partnership (the" Partnership”) to carry on an oil and gas business under the firm name “Harvard Energy" and executed a partnership agreement (the “partnership agreement”). The appellant held 98.83144 per cent of the shares of the partnership, while Energy held 0.66856 per cent and the remaining 0.50 per cent were held by the Numbered Company.
10. The partnership agreement provided, inter alia, that:
(a) Energy would provide certain management services to the Partnership and Holdings;
(b) subject to the direction of the Partners, Energy would have full discretion and authority in the management, supervision and control of the partnership business and affairs and of the acquisition and disposition of its properties and assets in the ordinary course of the business during the currency of the partnership agreement except that it was precluded from:
(i) making or committing to make any expenditures or sale in excess of $100,000 on any single project, or
(ii) selling or disposing of any physical equipment of the Partnership in excess of $25,000,
without the consent and, in the case of (ii), the approval of the partnership;
(c) each Partner was entitled to one vote for each Participation Unit held by him and a quorum for Partnership meetings shall constitute Partners being present thereat representing a majority in numbers of the Partners and 50 per cent of total units issued at that time; and
(d) upon 180 days’ notice in writing to Energy by the Partnership Energy could be relieved from its obligations to provide all or any portion of the management services to the Partnership and Holdings and vice versa.
11. By agreement made as of June 30, 1983, among the appellant, Holdings and Energy.
(a) Holdings granted to Energy an option (the “ Option”) to acquire that number of its common shares that after issuance would constitute 60 per cent of its issued and outstanding common shares at a purchase price of $14,400,000 by notice in writing to be received by Holdings after June 7, 1983 and before June 7,1985;
(b) If notice terminating the provision of services by Energy was given pursuant to the partnership agreement on or prior to June 7, 1984, Holdings had the right, upon shareholders' resolution and by notice thereof delivered by Energy within 90 days after the termination date to either:
(i) redeem the preferred shares for the sum of $50,000, being the costs thereof to Energy plus 25 per cent per annum less any dividend paid;
(ii) repurchase the common share at the cost thereof to Energy plus 25 per cent of such cost per annum.
(c) If notice terminating the provision of services by Energy was given pursuant to the partnership agreement after June 7, 1984 but before June 7, 1987, Holdings had the right upon shareholders’ resolution by notice thereof delivered to Energy within 90 days of the termination date to redeem the preferred shares and/or purchase the common shares at their then current fair market value less 10 per cent thereof;
(d) If notice terminating the provision of services by Energy was given pursuant to the partnership agreement after June 7, 1987, Energy could by notice in writing given within 90 days of the termination date, require Holdings to redeem the preferred shares and repurchase the common shares at their then current fair market value;
(e) Energy was to refrain from voting the common share and the preferred shares in respect of the shareholders’ resolution of Holdings referred to in (b) and the agreement dated June 30, 1983 as referred to in this paragraph 11; and
(f) Except as provided in (e) above, Energy was not restricted from exercising any and all of its rights in respect of the preferred shares and the common share.
12. The option was extended to June 7, 1987 by agreement made on June 6, 1985. The Option was never exercised.
14. The appellant claimed a royalty tax credit ("ARTC") in respect of Alberta Crown royalties for each of its 1984 and 1985 taxation years pursuant to section 26.1 of the Alberta Act.
15. By notice of reassessment dated May 29, 1989 (the "Reassessments"), the provincial treasurer reassessed the appellant in respect of each of its 1984 and 1985 taxation years on the basis that the appellant was associated with Holdings in each of those taxation years with the result that the ARTCs which had been claimed were not available to the appellant.
16. The appellant duly filed notices of objection dated August 22, 1989 to each of the reassessments.
17. Holdings had previously been reassessed by the provincial treasurer in respect of each of its 1984 and 1985 taxation years on the basis that it is associated with the appellant. Those reassessments have not been appealed.
18. The provincial treasurer confirmed each of the reassessments in letters with accompanying notifications of confirmation to the appellant each dated the 28th day of March, 1990.
The appellant also refers to the following facts:
Subsection 26.1(2) of the Alberta Corporate Tax Act (the “Alberta Act”) (Tab 1) allows a corporation that has Alberta crown royalty in a taxation year an entitlement to a royalty tax credit calculated by reference to the lesser of its Alberta crown royalty for the year and an amount described as its crown royalty shelter.
Subsection 26.1(3) of the Alberta Act defines a corporation's crown royalty shelter and subsection 26.1(4) of the Alberta Act provides for an apportionment of the crown royalty shelter if a corporation is associated with one or more corporations in a taxation year. Subsection 26.1(5) of the Alberta Act then limits the amount of the aggregate crown royalty shelters to be allocated among two or more corporations that are associated in a taxation year to an amount similar to that of a corporation which is not associated with another corporation in the taxation year.
Section 1 of the Alberta Act provides that each of the provisions of Part XVII of the Federal Act apply for the purposes of the Alberta Act (except for certain terms which are not relevant in this matter).
Paragraph 256(1) of the federal Act provides that one corporation is associated with another in a taxation year if, inter alia, at any time in the year one of the corporations controlled the other. Paragraph 256(1)(b) of the federal Act provides that one corporation is associated with another in a taxation year if any time in the year both of the corporations were controlled by the same person or group of persons.
It was agreed that at no time was notice ever given terminating the provision of services by Energy pursuant to the provisions of the partnership agreement. Paragraphs 256(1)(a) and (b) of the federal Act are quoted as follows:
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,
In determining the single issue to be decided in the appeal, I must address the question whether HIRL was associated with Holdings in HIRL’s 1983 and 1984 taxation years. In order to decide this question, I must determine whether the appellant HIRL controlled Holdings. The appellant says that control of Holdings was through a group comprised of HIRL and Energy and therefore there was no association between HIRL and Holdings. On the other hand the provincial treasurer says that both in fact and in law, HIRL exercised control over Holdings and accordingly the appellant and Holdings were associated companies.
Counsel for the appellant identified two questions, the first being what is the meaning of "controlled" within paragraph 256(1)(a) of the federal Act? If the answer to that question leads to a finding that HIRL controlled Holdings pursuant to paragraph 256(1)(a), then the appellant fails because the appellant will be deemed to be associated with Holdings. If the answer to the definition of “controlled” leads to a finding that HIRL did not control Holdings pursuant to paragraph 256(1)(a), then counsel for the appellant says that a second issue or question arises. Did the right of Holdings to be able to acquire the shares of Energy as a result of a cancellation of the Management agreement trigger the application of paragraph 251(5)(b) of the federal Act in such a way that HIRL controlled Holdings for purposes of paragraph 256(1)(a)? Paragraph 251(5)(b) of the Federal Act is quoted as follows:
251.(5) Control by related groups, options, etc. — For the purposes of paragraph 125(7)(b), 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 had 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 had the same position in relation to the control of the corporation as if he owned the shares;
(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.
Counsel for the appellant says that control means de jure control, that is legal control that rests with the shareholder or shareholders holding a majority of the votes in the election of directors and that on the basis of that test on the above facts, Energy and not HIRL controls Holdings. Counsel for the appellant submits that there is nothing on the above facts to cause the Court to ignore the reality that control of Holdings was reflected in Energy's ownership of 150 voting preference shares of Holdings giving Energy the majority voting control.
As we shall see, in his counter-argument, counsel for the respondent says that he is not suggesting that paragraph 251(5)(b) of the federal Act applies. That was not the basis of the provincial treasurer's reassessment. His argument is that under paragraph 256(1)(a) of the provincial Act, HIRL controlled Holdings and that is the end of the matter.
The basic difference between the arguments presented on behalf of the parties lies on the one hand with the application of the traditional definition of control of a corporation adopted by the appellant, being de jure control as opposed to de facto control. On the other hand, the respondent suggests that the definition of control is found in the subsequent evolution of the traditional test of de jure control as exemplified by the majority decision of Estey, J. in the Supreme Court of Canada case, The Queen v. Imperial General Properties Ltd.,  2 S.C.R. 288,  2 C.T.C. 299, 85 D.T.C. 5500 a four to three decision with Madam Justice Wilson writing the dissenting judgment.
It is general agreed that we must start with the oft quoted case of Bucker- field's Ltd. v. M.N.R.,  C.T.C. 8504, 64 D.T.C. 5301, where President Jackett said at page 8507 (D.T.C. 5303):
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.
It is agreed that the section mentioned by President jackett is, for all intents and purposes, the same as paragraph 256(1)(a) of the present Alberta Act. Counsel for the appellant says that the test of control as set out in Bucker- field's, supra, has been adopted consistently by all of the courts that have subsequently dealt with this issue. He quotes from M.N.R. v. Dworkin Furs,  S.C.R. 223,  C.T.C. 50, 67 D.T.C. 5035, where Justice Hall said on behalf of the Supreme Court of Canada at page 52 (D.T.C. 5036):
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.
Further on, Justice Hall said at page 54 (D.T.C. 5037) that de jure control is the true test and not de facto control. Counsel for the appellant submits that on the facts of this case, de jure control rests with Energy. Energy owned 150 voting preferred shares in the capital of Holdings, and at best, HIRL had an interest in 100 common shares which meant that de jure control of Holdings was in the hands of Energy, which company had the right to vote the majority of the shares in the election of directors. This should be determinative of the issue.
Counsel for the appellant referred to three additional cases where the court has looked at special or peculiar circumstances surrounding the ownership of preferred shares but where the court was still looking at the test of de jure control. The first case is Donald Applicators Ltd. v. M.N.R.,  C.T.C. 98, 69 D.T.C. 5122. This is a decision of Mr. Justice Thurlow of the Exchequer Court of Canada dated February 20, 1969. At pages 101-02 (D.T.C. 5124) Justice Thurlow deals with the submission made by counsel for the Minister that court should take into account the de facto control which, in respect of each of the appellants, was admittedly and undoubtedly exercised entirely by Saje Management Ltd. through its employee Mr. Greenough under the direction of its two shareholders and should hold that Saje Management Ltd. controlled the appellant corporations. At page 102 (D.T.C. 5124-25) Justice Thurlow said:
I can deal with the alternative submission by saying that in my opinion de facto control is not to be taken into account, that de jure control is what is contemplated by the statute and that in determining association for the purposes of the statute control itself and not some mere element or fragment of it is required to support a conclusion that corporations are in fact associated. This submission, in my opinion, accordingly fails.
And at page 103 (D.T.C. 5125):
If, therefore, in an ordinary situation control of a company rests in the voting power to elect directors but in the suggested situation does not rest in such voting power it seems to me that when the situation is not ordinary the question of de jure control of the company must be resolved as one of fact and degree depending on the voting situation in the particular company and the extent and effect of any restriction imposed by the memorandum and articles on the decision making powers of the directors.
The statement of the president of this Court in Buckerfield's Ltd. v. M.N.R.,  C.T.C. 504, 64 D.T.C. 5301 at page 507 (D.T.C. 5303), when he said, ”I am of the view, however, that in section 39 of the Income Tax Act, the word ‘controlled’ contemplates the right 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 should, I think, be read and understood as applying to a case where the directors when elected have the usual powers of directors to guide the destinies of the company”.
And pages 104-05 of Donald Applicators Ltd., supra (D.T.C. 5126):
Here, in the case of each appellant company, Saje Management Ltd. as the holder of 498 Class B shares had ample voting power, not merely to pass or to defeat any Ordinary resolution (other than one electing directors), but to pass or defeat any special resolution or any extraordinary resolution that might be proposed. That shareholder thus had the voting power to change the articles of the company. As I see it, it had the power to repeal article 55 and any other article conferring upon the directors authority to bind the company, and thus to reduce the directors to the status of errand boys, while reserving all decision making power not specifically conferred on the directors by the statute or by the memorandum of association for the shareholders as a whole, or of Class B shares only, in general meeting. It had the voting power to remove the directors from office. It had as well the voting power to pass a special resolution to eliminate the need for unanimous consent of all shareholders to the issue of additional shares and to vest in the Class B shareholders authority to issue additional Class A shares in sufficient numbers to outvote the two shares held by the Nassau residents.
A shareholder who, though lacking immediate voting power to elect directors has sufficient voting power to pass any ordinary resolution that may come before a meeting of shareholders and to pass as well a special resolution through which he can take away the powers of the directors and reserve decisions to his class of shareholders, dismiss directors from office and ultimately even secure the right to elect the directors is a person of whom I do not think it can correctly be said that he has not in the long run the control of the company. Such a person in my view has the kind of de jure control contemplated by section 39 of the Act.
Counsel for the appellant says that following a consideration of the Donald Applicators case, supra, there is nothing in the bylaws or constating documents of Holdings in the present cases which would afford to HIRL the ability to take the type of action referred to in the Donald Applicators case.
In the case of Oakfield Developments (Toronto) Ltd. v. M.N.R.,  C.T.C. 283, 71 D.T.C. 5175, certain companies were held to be associated where the control was found to be with the common shareholders who held an equal number of voting shares with the preferred shareholders because the common shareholders were entitled to all the surplus profits after payment of the fixed preferential dividend to the preferred shareholders and to all the surplus on winding up except the ten per cent premium payable on preferred shares and because their voting power was sufficient to authorize the surrender of the corporation's letters patent. It therefore followed that control of the corporation continued to vest in the common shareholders.
This case is cited as an illustration of the situation where the court has recourse to the incorporating documents and bylaws of the company in order to determine the question of control where the common shareholders owing 50 per cent of the company could effectively obtain distribution of all of the assets of the company on the winding up as being sufficient to maintain de jure control with the holders of the common shares. In the present case counsel for the appellant says that HIRL has no right or ability to pass a special resolution that could cause the winding up of HIRL.
The third case referred to by counsel for the appellant which demonstrates unusual or exceptional circumstances considered by the courts in determining de jure control by shareholders of a company is The Queen v. Imperial General Properties, supra, another Supreme Court of Canada case which was decided on October 31, 1985. Here again the Court considered another situation where there was a 50-50 per cent split in the voting rights owned by different groups or persons and the questions of association and control were in issue. As in the Oakfield case, supra, on liquidation, the preferred shareholders would only receive a return of their par value plus dividends, but would not participate in the surplus. The company could be wound up on a vote of 50 per cent of the holders of the voting rights. The Court held that the majority of the common shareholders holding 50 per cent of voting rights retained the critical right to cause the winding up of the company and therefore control of that company.
In analysing the judgment of the majority delivered by Estey, J., counsel for the appellant says that Estey, J. was conscious of the de jure test of control established in the Buckerfield case and followed by the Supreme Court of Canada in the Dworkin Furs case, supra. At page 302 (D.T.C. 5502-03) of Imperial General Properties, supra, of his judgment, Justice Estey distinguished the above two cases as in each case neither of the two groups representing 50 per cent of the voting shares had the right to wind up the company or indeed had the right to do anything with reference to the affairs of the company or to its structure without the support of a voting power of the other group.
Referring to the Oakfield case and attempting to reconcile it with the Dworkin Furs case, Justice Estey said at page 303 (D.T.C. 5503):
I do not think that the fulcrum upon which that case turned (Oakfield) was the presence of two classes of shares in Oakfield as against only one class in Dworkin. The repeated reference by Judson, J to the significance of the final omnipotent right to wind up the company retained by the prior controlling stockholder was the bedrock upon which the Oakfield judgment was founded. When the Wingolds purported to terminate their control of the respondent causing the respondent to issue 80 preference shares for $80 to the 10 per cent minority shareholder Gasners, the Wingolds retained one central critical right, which they then passed on to Validor, namely the right, should their interest ever require, to wind up the respondent. The only penalty to be suffered by the Wingolds, and later Validor, upon such a wind-up (in addition to the nominal payments on return of capital on the preference shares and any accrued but unpaid dividends) remained a 10 per cent distribution to Meyer Gasner which was precisely the same penalty as existed prior to the alleged termination of the Wingolds' control.
As in Oakfield, the continued existence, after the 1960 reorganization, of the right to terminate the corporate existence should the presence of the minority common and preference shareholders become undesirable to the 90 per cent common stockholder, Validor, is, in my view, the linchpin of the tax plan introduced following the 1960 amendments to the tax statute. Control, in the real sense of the term, was not surrendered by the Wingolds (and their successor, Validor) in 1960 upon the issuance to the Gasner group of $80 in preference shares. Accordingly, the respondent remains controlled by Validor within the meaning of the term as it is employed by the Parliament in subsection 39(4).
Counsel for the appellant submits that the Supreme Court of Canada in the Imperial General Properties case is applying certain extraneous facts apart from the actual ownership of shares of a company in order to establish whether de jure control remains with a group of shareholders, that is to say that de jure control remains as the test to be applied. In the present circumstances he says that there was no particular right or ability for HIRL to cause the winding up of Holdings as was the case in Oakfield and Imperial General Properties. Estey, J. was still making a judicial pronouncement in the context of de jure control.
Wilson, J.'s dissenting judgment in Oakfield proceeds on the basis of a straight interpretation of the de jure control test. Counsel for the present appellant says that the very limited circumstances in which a court should go beyond the de jure test must be something more than a contractual arrangement that exists outside of the constating documents or bylaws of the corporation.
In his argument counsel for the appellant raised the question as to whether paragraph 251(5)(b) was applicable to the present situation. That paragraph has already been quoted. He contends that the fact that Holdings could buy back the shares held by Energy in Holdings on termination of Energy's Management agreement which was provided for in the partnership agreement, did not have a bearing on the issue of control primarily because such arrangement was outside of the constating documents of Holdings. The fact that there may be agreements outside of the incorporating documents of the corporation is not to be taken account of in determining the question of control. Counsel for the provincial treasurer indicated that he was not relying on paragraph 251(5)(b) to establish control of Holdings in the appellant. However, a short review of the appellant's position is in order as it bears on the larger issue of control.
The first case mentioned by counsel for the appellant is Arctic Geophysical Ltd. v. M.N.R.,  C.T.C. 571, 68 D.T.C. 5013. This is a decision of Justice Cattanach of the Exchequer court of Canada dated December 6, 1967 where the M.N.R. sought to associate two companies on the basis that the directors of Arctic Geophysical could eliminate the 50 per cent Class B shares on any redemption date on payment of the redemption amount plus any unpaid dividends. Mr. and Mrs. Mayfield, the two directors of Arctic Geophysical, owned 50 per cent of that company represented by common shares and 100 per cent of Heiland Exploration Canada (1959) Ltd. At pages 576-77 (D.T.C. 5016-17), Cattanach, J. said:
In my view paragraph (b) of subsection (5d) of section 139 has no application in the facts of the present appeal. Under that paragraph a person in order to be deemed to be in the same position in relation to control of a corporation as if he owned the shares, that person must have a right under a contract in equity or otherwise (1) to the shares, (2) to acquire the shares, or (3) to control the voting rights of the shares. The only conceivable right which Mr. and Mrs. Mayfield may have had under the redeemable feature attaching to the Class B shares in the appellant would be to bring about, by corporate action, the cancellation or elimination of those shares which is a right entirely different from a right to those shares or to acquire those shares. The voting rights attaching to the Class B shares were vested in the holders thereof, namely, Mr. Fuller and Mr. Van Sant, Jr. who were strangers, in the tax sense, to Mr. and Mrs. Mayfield. There is no suggestion in the agreed statement of facts, nor was any evidence adduced to suggest, that Mr. and Mrs. Mayfield had any right by contract, in equity or otherwise to exercise any control over the voting rights of the Class B shares. The clear implication is that the voting rights of those shares were the sole prerogative of the holders thereof. Therefore none of the conditions precedent to a person being deemed to be in the same position in relation to control of a corporation as if owned the shares as contemplated by paragraph (b) of subsection (5d) of section 139 is present here.
The appellant counsel here argues that likewise paragraph 151(5)(b) (the same as paragraph 139(5d)(b) in the Arctic Geophysical case, supra), cannot apply to the present case because HIRL did not have the right to acquire the shares of Holdings from Energy. There is nothing here to suggest that HIRL had any contractual right to exercise control over the voting rights of the 150 redeemable preferred shares.
At page 578 (D.T.C. 5017), Justice Cattanach said:
In my view the words ” in a position to control" must refer to a presently existing ability to control by voting power attached to ownership of shares, rather than being in a position to acquire or obtain such control predicated upon some future act such as the redemption of Class B shares.
Furthermore, the act of redeeming Class B shares is the act of the corporation even though that action could be instigated by Mr. and Mrs. Mayfield in their capacity as directors.
The above quotation is relied upon by the appellant to suggest that the termination of the Management agreement and the exercise of the right to buy back the shares did not in fact occur and that the court must look to the situation as it actually existed and not at the potential situation. Here the Management agreement would first have to be terminated and it was Holdings and not HIRL that had the right to buy back the shares.
The case of The International Iron & Metal Co. Ltd. v. M.N.R.,  C.T.C. 668, 69 D.T.C. 5445, is a 1969 decision of the Exchequer Court of Canada. There 117,199 shares of the appellant were owned by each of four holding companies which were owned by four children whose fathers owned one snare each of the appellant company and who were made lifetime directors of the children's holding companies pursuant to an agreement. It was argued that the fathers controlled the appellant and the children controlled another company called Busland Realty & Equipment Co. so that there was not common control by a group. The appellant admitted that if it were not for the agreement the two companies were controlled by the same group. Reliance was placed on the fact that there was a contractual agreement among the children that the fathers would be the permanent lifetime directors of the holding companies. At page 673 (D.T.C. 5448), Gibson, J. said:
The fact that a shareholder in such a corporation may be bound under contract to vote in a particular way regarding the election of directors (as in this case), is irrelevant to the said meaning of "controlled" because the corporation has nothing to do with such a restriction.
Counsel for the appellant suggests that the statement made by Mr. Justice Gibson indicates that while there may be outside contracts to which a shareholder has subjected himself, and if he breaches those contracts he may be subject to some penalties, such agreements are not to be taken into account because you must look at the constating documents to see where the control resides on the basis of the share characteristics. No import is to be placed on the existence of an agreement not found in the constating documents of the corporation so that in the present case where there is an agreement by Energy not to vote its shares in any resolution calling for the redemption of the preferred shares and the purchase of common shares held by Energy, that is not an agreement that is relevant to the determination of the issue of control and associated corporations.
The case of International Mercantile Factors Ltd. v. Canada,  2 C.T.C. 137, 90 D.T.C. 6390, is a decision of the Federal Court, Trial Division dated June, 1990 which refers to many of the above cases. There the plaintiff company was owned as to 50 per cent by two public companies and the other 50 per cent was owned by a private company which in turn was owned by a Mr. Bissell. Mr. Bissell also owned all of the shares of Bissell Ltd. which had a management agreement with the plaintiff company. On termination of the management agreement there was an agreement that the two public companies could buy the shares of the private company. The two public companies had four nominees on the Board of the plaintiff company and the private company had one. All of the representative nominees would stay on the Board of Directors unless all agreed to elect a new board. The issue was whether the plaintiff company was controlled by the two public companies giving rise to a lower rate of tax in respect of a Canadian controlled public company. At pages 147-48 (D.T.C. 6398-99), Justice Teitelbaum said:
From the wording of paragraph 125(6)(a) of the Act as it was in 1982 inclusively and from the jurisprudence submitted and considered, I would have found that the public corporations did not have control over the plaintiff corporation either directly or indirectly in any manner whatsoever had the issue voting shares of the corporation been equally divided between the two groups, Rieris and Charter and Hamilton and both groups would have had equal voice in determining all matters relating to the plaintiff corporation. As I have stated, the fact that the plaintiff corporation could, if it so desired, terminate the management agreement causing Charter and Hamilton to purchase the shares of Rieris thus giving Charter and Hamilton control is immaterial, in that during the years in issue the management agreement was not terminated and Charter and Hamilton, only having 50 per cent of the voting shares did not have control of plaintiff. The same can be said about the submission that the Class "A" shares could, at any time, be redeemed by the plaintiff. The Class “A” shares were not redeemed.
Justice Teitelbaum went on to find that because there was a requirement for unanimity in changing the Board of Directors and because the two public companies had a majority of the directors, the nominees of the public companies effectively controlled the corporation and therefore the public companies did in fact have control of the plaintiff. Counsel for the appellant HIRL says that what is particularly significant is that the right to terminate the management agreement and the right to acquire shares was not taken into account by Justice Teitelbaum and was not determinative of the issue of control. He looked to something more akin to the type of situation in the Donald Applicators case in that looking beyond the actual share ownership he found something peculiar in that particular situation which in fact gave de jure control to someone other than the owner of the majority of the shares.
Lusita Holdings Ltd. v. The Queen,  C.T.C. 351 is a decision of the Federal Court of Appeal dated September 27, 1982. There, Justice Mahoney considered Buckerfield's, Dworkin Furs, and Vina Rug (Canada) Ltd. v. M.N.R.,  S.C.R. 193,  C.T.C. 1, 68 D.T.C. 5021. In that case company A was controlled by Mr. and Mrs. Schickedanz and the appellant company, Lusita, was controlled by a series of trusts. In each of the trusts, Mr. Schickedanz was one of the trustees and had the right to replace the second trustee in each trust. The shares of Lusita owned by each of the trusts could only be voted by the two trustees. The Minister reassessed on the basis that Mr. Schickedanz in fact controlled the appellant, Lusita, because of his ability to terminate or cause trustees to resign and replace them. In those circumstances the Court disagreed. Mahoney, J. found that two trustees were always needed to vote the shares and therefore the right to remove a trustee was not something that effectively gave control to Mr. Schickedanz. Counsel for the appellant cites the case as support for the proposition that the right to replace trustees contractually, that is a right not found in the constating documents of a corporation, is not relevant for determining control. Is something that is outside the purview of relevant matters to be considered in determining the issue of control? He says that in the present case the contract that existed with respect to the repurchase of shares and the voting or not voting of shares is something that need not be taken into account in these circumstances in determining control.
I agree with counsel for the respondent that paragraph 251(5)(b) of the federal Act has no application to the present case. As argued by the appellant, HIRL did not have the right to acquire shares in Holdings or to control the voting rights in Holdings. The facts of this case do not fit within the paragraph and the respondent understandably did not press the issue.
The final argument presented by counsel for the appellant is to the effect that because the 100 common shares of the appellant were held jointly between HIRL and Energy, that is an undivided 99.32808 per cent by HIRL and an undivided 0.67192 per cent by Energy, the shares could only be voted by HIRL and Energy. Therefore, even disregarding the preference shares, Holdings was a company controlled by a group comprised of HIRL and Energy and in order for corporations to be associated they must be controlled either by the same person or the same group of persons and here Holdings was controlled by HIRL and Energy and HIRL was controlled by persons unrelated to the persons who controlled Energy. Accordingly, paragraph 256(1)(b) would not apply.
The appellant contends that paragraph 140(4) of the Canada Business Corporations Act must be considered in this situation. The paragraph provides:
140(4) Joint shareholders — Unless the by-laws otherwise provide, if two or more persons hold shares jointly, one of those holders present at a meeting of shareholders may in the absence of the others vote the shares, but if two or more of those persons who are present, in person, or by proxy, vote, they shall vote as one on the shares jointly held by them.
Section 10.14 of the appellant company's by-laws contains a similar provision, that is that joint owners shall vote as one the shares jointly held by them as well as providing in section 12.02 that if two or more persons are registered as joint holders of any share, any notice shall be addressed to all of such holders but notice to one of such persons shall be sufficient to all of them.
The appellant's argument has a number of flaws having to do with the assumption that the 100 common shares in Holdings can actually be said to have been owned jointly by HIRL and Energy. On the face of the one share certificate, the shares are held in undivided interests. Undivided interests are not necessarily the same thing as joint interests. Another problem exists with Energy's undertaking not to vote the common shares in the event that Energy's management is terminated. Presumably HIRL would be left to vote the shares pursuant to the Partnership agreement and the June 30, 1983 agreement. I am aware of the appellant's argument that the court is still not entitled in these circumstances to take such agreements into consideration just as the same when looking at the meaning of control under paragraph 256(1)(a).
I have not looked at the possibility of partitioning the ownership of the 100 common shares or the right of the shareholders to own fractional shares in Holdings pursuant to its charter and by-laws. These interesting questions need not be considered by me any further having regard to my ultimate decision in this case.
The respondent agrees that Buckerfield's is the starting point when discussing the cases related to control and the association of companies under the federal Act. He says that the law in this field is not static and that the Supreme Court of Canada can revisit principles of law as was done in the Oakfield and Imperial General Properties cases. He says that the law is shifting from the strict interpretation of the rules determining control set out in 1964 in Buckerfield's to the Imperial General Properties case decided in 1985. Starting with President Jackett’s de jure test of control in Buckerfield's through to a broader test adopted by Hall, J. in Dworkin Furs in 1967 and then to Oakfield Developments in 1971, Estey, J. had this to say at pages 302-03 (D.T.C. 5502) in Imperial General Properties in 1985:
It has been said that control for these purposes concerns itself with de jure and not de facto considerations (see Buckerfield's Ltd., supra, at page 507 (D.T.C. 5303) and Dworkin, supra, at page 52 (D.T.C. 5036)). Such a distinction, while convenient to express as a guide of sorts in assessing the legal consequences in factual circumstances, is not, as we shall see, an entirely accurate description of the processes of determination of the presence of control in one or more shareholders for the purpose of subsection 39(4).
In determining the proper application of subsection 39(4) to circumstances before a court, the court is not limited to a highly technical and narrow interpretation of the legal rights attached to the shares of a corporation. Neither is the court constrained to examine those rights in the context only of their immediate application in a corporate meeting. It has long been said that these rights must be assessed in their impact "over the long run”. See Thurlow, J in Donald Applicators Ltd., et al v. M.N.R.
Justice Estey then went on to state the principles which he believed Dworkin Furs, Oakfield stood for, which have already been quoted above. At page 304 (D.T.C. 5504), Estey, J. said:
The approach to “control” here taken does not involve any departure from prior judicial pronouncements nor does it involve any "alteration" of the existing statute. The conclusions reached above merely result from applying existing case law and existing legislation to the particular facts of the case at bar. The application of the “control”, as earlier enunciated by courts, to the circumstances now before the court is, in my view, the ordinary progression of the judicial progress and in no way amounts to a transgression of the territory of the legislator.
Accordingly, the respondent says given the factual situation in this case, HIRL (in the taxation years 1984 and 1985) had the right (through its control of Holdings through the provisions of the partnership agreement and the agreement dated June 30, 1983 (Exhibits 8 & 9) ) to strip Energy of the control that Energy otherwise had in Holdings as a result of Energy's ownership of 150 voting preferred shares of Holdings. Energy was restricted up until June 7, 1984 in being able to vote its preferred shares upon receiving notice of termination of its management services. Energy could not defend itself and that is the type of control which should be taken into consideration in determining association under paragraph 256(1)(a). Energy was always looking over its shoulder as a result of the power given to HIRL to terminate Energy's services under the above-mentioned agreements.
As far as the common shares being held jointly, the respondent says that when it came to voting the 100 common shares, majority control rested with HIRL and there was nothing Energy could do to protect itself.
Counsel for the respondent says that in the present circumstances, control exists with the company with the velvet hammer over Energy resulting in effective control, control in the real sense being exerted by HIRL. What counsel for the respondent is saying is that because HIRL could terminate Energy's management services and cause Energy to have to redeem its preferred shares or sell its common shares to Holdings, then HIRL would, as the then majority owner of 100 common shares in Holdings, then control Holdings. However, control by HIRL over Energy is not the real issue. The real issue is whether HIRL controlled Holdings resulting in it being deemed to be associated with Holdings.
Counsel for the respondent refers to Wilson, J.'s reference in Imperial General Properties to the majority decision of Judson, J. for the Supreme Court of Canada in M.N.R. v. Consolidated Holdings Co.,  S.C.R. 419,  C.T.C. 18, 72 D.T.C. 6007. In that case Judson, J. applied Vina Rug (Canada) Ltd. v. M.N.R., supra, as going beyond the share register to determine who had voting control. Counsel for the respondent says that this is an example of an inroad on what had previously gone on as regards the de jure test, an example of the shifting from Buckerfield's to the Oakfield test to the Imperial General Properties case.
Finally, in dealing with the most recent decision of International Mercantile Factors, supra, counsel for the respondent suggests that that case does not deal in any meaningful way with the Supreme Court of Canada decision in Imperial General Properties and did not distinguish that case, the trial judge simply referred to it and then he left it.
Dealing with the last matter first, that is to say the application of the Imperial General Properties case to the Consolidated Holdings case, Teitelbaum, J. said in International Mercantile, supra, at page 148 (D.T.C. 6399):
I am satisfied that the deciding factor in determining control in the present case is not the issue of the 50-50 voting rights as clearly this does not give either side control but the fact that neither side can effectively change the Board of Directors, that the Board of Directors is composed of a majority of the nominees of the public corporation and that because of a majority vote is required to change the Board of Directors the public corporation has legal and effective control of plaintiff. Rieris cannot effectively do anything to cause a change in the Board of Directors. Charter and Hamilton do not have to do anything to cause a change as they now hold four of the five or six positions on the Board of Directors.
The by-laws of plaintiff company clearly state that if a new board is not elected annually, and this can only be done by majority vote, then the then existing board remain as the Board of Directors. This gives Charter and Hamilton legal and effective control with regard to all major decisions of plaintiff.
He then referred to Buckerfield's and Dworkin Furs as well as Oakfield and Imperial General Properties as follows at page 148 (D.T.C. 6399):
This finding may not be "on all fours” with the findings in the cases of Buckerfield and Dworkin Furs, supra. As in the cases of Oakfield or Imperial Properties, supra, the Supreme Court of Canada went further than the Buckerfield and Dworkin Furs cases by defining the issue of control not on the fact of equal voting rights, but by the fact that one 50 per cent shareholder could cause the liquidation of the company giving it control. I also, following the principle in Oakfield and Imperial Properties, am satisfied that because Charter and Hamilton have retained, for as long as they wish, the majority of the Board of Directors, they have retained legal and effective control of the plaintiff corporation as control as defined in paragraph 125(6)(a) of the Income Tax Act.
Thus Teitelbaum, J. acknowledged that in both Oakfield and Imperial General Properties, the courts were giving recognition to the continued rights retained by the 50 per cent common shareholders to wind up the company and to participate in any surplus to the exclusion of the preferred shareholders thus retaining control of the company. Those rights were to be found in the incorporating documents and by-laws of the companies. The by-laws of the plaintiff company in International Mercantile Factors governed the continued presence of a majority of the directors representing the public companies as the 50-50 voting rights did not give either side control in order to effect a change of directors. Again the documents under review were the incorporating documents and company by-laws. Teitelbaum, J. in my view, did no violence to the principles set out in the four cases to which he referred.
The respondent's argument amounts to this, that the de jure test of control as set out in the Buckerfield's case and being "the right of control that rests in ownership of such number of shares as carries with it the right to a majority of votes in the election of directors” has been extended by both the Oakfield case and the Imperial General Properties case. Particularly in the latter case using the statements of Justice Estey at pages 302 and 303 already quoted above as well as his statement at page 304 (D.T.C. 5504) that:
The approach to "control" here taken does not involve any departure from prior judicial pronouncements nor does it involve any "alteration" of the existing statute. The conclusions reached above merely result from applying existing cases law and existing legislation to the particular facts of the case at bar. The application of the "control" concept, as earlier enunciated by the courts to the circumstances now before the Court is, in my view, the ordinary progression of the judicial process and in no way amounts to a transgression of the territory of the legislator.
The respondent urges the Court to find that in the present circumstances the legal rights attached to the shares of Holdings should not be limited to a highly technical and narrow interpretation in the context of their immediate application in a corporate meeting but that such rights should be assessed over the long run, to paraphrase Justice Estey. The court should deal with the central critical rights of control in the real sense of the term. Here control could be exercised by HIRL removing Energy from the picture and assuming control over Holdings by itself. By means of being able to give Energy notice of termination of its Management agreement, HIRL could keep Energy in line and maintain control of Holdings.
Is this the type of control that Justice Estey was talking about when he made the comments referred to above? I do not think so. What the respondent is contemplating is de facto control through the use of agreements which are outside of the documents of incorporation and the working by-laws of Holdings. I do not believe that Estey, J. intended to move outside of the boundaries of the test of de jure control although Justice Wilson was of the view that he was pushing the limits too far and that Oakfield was an anomalous decision. She had this to say about the Oakfield decision at page 305 (D.T.C. 5505) of the Imperial General Properties case:
In my view, Oakfield stands for the proposition that, when voting control is evenly divided, the other rights attaching to the shares held by the two groups must [sic] be examined to see if they provide a basis for attributing de facto control to one group rather than the other, whatever the breakdown of the share ownership by the two groups may be. Such control was inferred in Oakfield from the fact of greater participation by one group on a winding-up but I see no logical reason why the principle, if adopted, would not apply in other circumstances.
At page 309 (D.T.C. 5508), Madam Justice Wilson also had this to say:
The concept of corporate persona and the fact that shareholders have no proprietary interest in the assets of corporations until a winding-up of the enterprise has, I believe, led the courts to favour de jure rather than de facto control. The distinction between ownership and control of an operating corporate personality has been maintained.
Although the scope of scrutiny under the de jure test has been extended beyond a mere examination of the share register in order to determine who really has voting control, there has been no deviation from the principle that voting control is the proper indicium of control until Oakfield. I am of the view, there, that the decision in Oakfield is anomalous and should not be followed. For the court suddenly to change direction in face of well-settled and long-standing authority in our tax jurisprudence is, in my view, quite inappropriate.
Wilson, J. was obviously concerned that where de jure tests of control resulted in an equal division, de facto tests would be used to determine where control of a corporation lay and that de facto tests would become preeminent in violation of long-standing settled authority causing uncertainty and unexpected consequences to those taxpayers who relied on previously established principles which were used to establish control.
It would appear to me that Estey, J. did not move beyond a consideration of de jure control in concluding that control existed with that group of shareholders who had equal voting rights with another group but who would participate in the distribution of a company's surplus upon a winding-up which they could initiate. His remarks were kept within the confines imposed by the corporate charter of Imperial General Properties when he said at page 301:
Perhaps of the greatest significance is the further provision in the corporate charter of the respondent that the company may be wound up on a resolution for that purpose supported by 50 per cent of all voting rights in the company.
At page 304 (D.T.C. 5504), Estey, J. also said:
We are here concerned only with the corporate structure of the respondent in the tax years in question.
I believe that what Estey, J. was seeking throughout his decision was to establish where de jure control of the respondent lay through the incorporating documents and by-laws of the respondent Imperial General Properties. He was not looking to any outside agreements entered into between shareholders to establish de facto control.
In the present case de jure control of the appellant rested with Energy's ownership of 150 voting preferred shares. The respondent's argument that HIRL maintained control over Holdings through its unexercised right to force Energy to cause its shares to be redeemed or repurchased by Holdings, is an argument that de facto control existed and not de jure control. It was a right that was never exercised, presumably because HIRL did not wish to exercise such rights in any event. It was a right that is not to be found within the confines of Holdings’ charter and by-laws where the real test of de jure control must be found.
The appeal is allowed and the matter of 1984 and 1985 assessments is referred back to the provincial treasurer for reassessment on a finding that HIRL is entitled to an Alberta royalty tax credit on the basis that it is not associated with Holdings.
Costs may be spoken to if required.