Canada Trust Co. v. The Queen, 81 DTC 5248, [1981] CTC 319 (FCTD)

Gibson, J:—This action and six other actions were tried on common evidence, namely, actions T-4034-76, T-4035-76, T-4037-76, T-4038-76, T-4047- 76, T-4048-76.

The issue in these actions is whether or not an Ontario corporation by the name of KDS Commercial Enterprises Ltd was a personal corporation within the meaning of section 68 of the Income Tax Act, (in force in 1970 and 1971 ) during the 1970 and 1971 taxation years of all the plaintiffs in the seven actions except the Joan Myrna Soble 1957 Trust; and in respect to this latter trust it is the 1970 taxation year only that is relevant.

The parties agree that KDS Commercial Enterprises Ltd satisfies the conditions of paragraphs 68(b) and (c) of the Act so that the only issue is whether or not the conditions of paragraph 68(1 )(a) are satisfied.

Paragraph 68(1 )(a) of the Income Tax Act (in force 1970 and 1971) reads as follows in the English and French versions:

68(1) In this Act, a “personal corporation” means a corporation that, during the whole of the taxation year in respect of which the expression is being applied,

(a) was controlled, whether through holding a majority of the shares of the corporation or in any other manner whatsoever, by an individual resident in

Canada, by such an individual and one or more members of his family who were resident in Canada or by any other person on his or their behalf;

68(1) Dans la présente loi, l’expression "corporation personnelle” signifie une corporation qui, pendant la totalité de l’année d’imposition à l’égard de laquelle l’expression s’applique,

(a) était contrôlée, soit au moyen d’une majorité des actions de la corporation soit de toute autre manière, par un particulier résidant au Canada, ou par un tel

particulier et un ou plusieurs membres de sa famille qui résidaient au Canada, ou par toute autre personne agissant en son nom ou au nom desdits membres.

KDS Commercial Enterprises Ltd is an Ontario Corporation incorporated in 1957. In 1957 the late Kenneth Soble settled three trusts for each of his three daughters, Joan, Donna and Marlene. In each the trustees were the Canada Trust Company and Frances Soble (wife of Kenneth Soble).

In the taxation years 1970 and 1971 the common shares of KDS Commercial Enterprises Ltd were held as follows:

Based on these shareholdings the question is whether or not KDS Commercial Enterprises Ltd was a personal corporation within the meaning of section 68 of the Income Tax Act (in force 1970 and 1971) during the 1970 and 1971 taxation years of the plaintiffs.

The plaintiffs’ submission is that KDS Enterprises Ltd during the taxation years 1970 and 1971 was not controlled by any one individual resident in Canada or by an individual and one or more members of his family who are resident in Canada.

The defences are two and are in the alternative, namely:

(1) KDS Commercial Enterprises Ltd was at all material times controlled by Frances Soble, a resident in Canada since:

(i) Frances Soble was the absolute owner of 3,004 shares of KDS Commercial Enterprises Ltd;

(ii) Frances Soble, as co-trustee with the Canada Trust Comapny could, by refusing to agree with Canada Trust Company, prevent any of the votes attaching to these shares being cast at any meeting of shareholders, since trustee shareholders must vote as a unit.

(2) In the alternative, KDS Commercial Enterprises Ltd was controlled by Frances Soble, an individual resident in Canada and Frances Soble and the Canada Trust Company as trustees for Frances Soble’s three daughters, persons on their behalf within the meaning of paragraph 68(1 )(a) of the Income Tax Act.

The meaning of control in section 68 of the Act is exemplified in the decision of Jackett, P (as he then was) in Buckerfield’s Ltd et al v MNR [1965] 1 Ex CR 299; [1965] CTC 504; 64 DTC 5301:

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 of the Board of Directors is, however, clearly not intended by section 39 when it contemplates control of one corporation by another as well as control of a corporation by individuals (see subsection (6) of section 39). The word “control” might conceivably refer to de facto control by one Or more shareholders whether or not they hold a majority of shares. I am of the view, however, that in section 39 of the Income Tax Act, the word “controlled” contemplates the right of control that rests in ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the Board of Directors. See British American Tobacco Co. v. I.R.C., [1943] 1 All E.R. 13, where Viscount Simon L.C. at page 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] A.C. 109 [2 DTC 927] per Lord Greene, M.R., 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.”

In Settled Estates Ltd v MNR, [1960] SCR 607; [1960] CTC 173; 60 DTC 1128, the Supreme Court of Canada per Judson, J held:

The executors controlled this company during the taxation years in question on behalf of the beneficiaries of the estate. This, in my opinion, is not one of the three modes of control contemplated by section 68(1)(a). The three modes of control are:

(i) by an individual resident in Canada:

(ii) by such an individual and one or more members of his family who were resident in Canada (family being defined by statute);

(iii) by any other person on his or their behalf.

In my opinion, the individual first referred to must be a natural living person exercising cntrol on his own behalf. The word does not include executors, whether corporate or otherwise. I say this because that individual first referred to is next referred to in connection with his family. There is no room for executors, whether corporate or otherwise, in this scheme of control. The last mode of control is by any other person on behalf of an individual or on behalf of the individual and members of his family. I can think of situations where executors could exercise control under this third mode of control, for example, if T dies leaving all his shares in a personal corporation to executors and trustees in trust for an individual or for that individual and members of his family. But this is not the present case. Under the terms of the Will left by the late Mr Fiddes, the executors control on behalf of numerous beneficiaries. They do not control on behalf of an individual or the individual and members of his family. My conclusion therefore is that an executor cannot be the individual referred to in section 68(1)(a).

In Port Credit Realty Ltd v MNR [1937] ECR 88, [1935-37 ] [1937] ECR 88, [1935-37] CTC 311; 1 DTC 362, DTC 362, Angers, J held in respect of the word “individual” in the section concerning personal corporations of the Income War Tax Act as amended by 23-24 Geo V, c 14, Section 1 that the word "individual” only applies to a natural person and excludes an artificial person:

A personal corporation, according to paragraph (i) of section 2 of the Income War Tax Act, as amended by 23-24 Geo V, c 14, section 1, is a corporation or joint stock company controlled, directly or indirectly by

“one individual who resides in Canada, or

one such individual and his wife or any member of his family, or

any combination of them, or

any other person or corporation or any combination of them on his or their behalf.”

The substitution of the word “individual” for the word “person” by section 1 of chapter 14 of the statute 23-24 Geo. V, was made, it seems to me with the intent of avoiding the definition of the word “person” contained in paragraph (h) of section 2 of the Income War Tax Act; this definition reads thus:

“Person includes any body corporate and politic and any association or other body, and the heirs, executors, administrators and curators or other legal representatives of such person, according to the law of that part of Canada to which the context extends.”

The word “individual” only applies to a natural person whilst the word “person” may also apply as it does according to said paragraph (h), to an artificial person such as a corporation or association. I may say, however, that I do not think that the substitution of the word “individual” for the word “person” in paragraph (i) of section 2 has had the effect of restricting the scope of the definition therein contained; it is clear that the word “person” included in the definition of the personal corporation in paragraph (a) of subsection (10) of section 3 of the Income War Tax Act, as enacted by 16-17 Geo. V, c 10, section 3 applied only to a natural person, seeing that it refers to a person who resides in Canada, or to one such person and

his wife or any member of his family; the inclusion of the wife or any member of the family evidently excludes the artificial person.

In view of this jurisprudence Frances Soble in her capacity as co-trustee cannot be “an individual resident in Canada” within the meaning of paragraph 68(1 )(a) of the Act. In such capacity she is an artificial person as categorized by Angers, J in the Port Credit case and by Judson, J in the Settled Estates case.

So much for the first defence.

As to the second defence, the question is was there control “by any one person on his or their behalf”?

As to this third mode of control referred to in paragraph 68(1 )(a) of the Act as judicially defined in the Settled Estates Ltd and the Port Credit Realty Ltd cases the control must be on behalf of (1) an individual resident in Canada or (2) by an individual and one or more members of his family who were resident in Canada. This requirement is not satisfied in this case. Instead the defence submitted in this regard was in effect a submission that there was a fourth mode of control contemplated in paragraph 68(1 )(a) of the Act, which submission is not valid.

Accordingly, the appeal is allowed with costs and the assessment referred back for further reassessment not inconsistent with these reasons.