Special Risks Holdings Inc. v. The Queen, 84 DTC 6505, [1984] CTC 553 (FCTD), aff'd 86 DTC 6036, [1986] 1 CTC (FCA)

Reed, J:—This action is an appeal against the Minister of National Revenue’s assessments dated March 19, 1981, resulting from elections made by the plaintiff in March 1978, and December 1978, pursuant to the then subsection 83(1) of the Income Tax Act. The plaintiff pursuant to that section elected to pay dividends out of its tax paid undistributed surplus on hand account (TPUS) and its 1971 capital surplus on hand account (CSOH). The plaintiff paid a dividend of $185,000 on March 31, 1978, calculating that $181,604 of this was paid out of its TPUS account and $3,396 out of its CSOH account and another dividend on December 29, 1978 of $1,346,231 out of its 1971 CSOH account.

Whereas the plaintiff elected under subsection 83(1) on the basis that its 1971 CSOH account was $1,349,627 the Minister issued two notices of assessment whereby he declared these elections excessive. The Minister’s computation was based on the premise that the amount of $1,349,627 in the plaintiff’s 1971 CSOH account should be treated as a nil amount.

This conclusion was based on the assumption that the shares to which the sum of $1,349,627 related, had been the subject of a disposition by the taxpayer on December 23, 1976, which fell within subparagraph 89(5)(a)(ii) of the Income Tax Act.

The computation of 1971 CSOH as determined by paragraph 89(1)(1) of the Act is made subject to subparagraph 89(5)(a)(ii). Subparagraph 89(5)(a)(ii) provides:

(5) For the purposes of determining the 1971 capital surplus on hand . . . at any particular time, . . . the following rules apply:

(a) the amount referred to in sub-paragraph(s) (l)(l)(ii) . . . in respect of a capital property of the corporation shall be deemed to be nil, where the property disposed of is

(ii) a share of the capital stock of another Canadian corporation that was controlled within the meaning assigned by subsection 186(2), by the corporation immediately before the disposition and that was disposed of by the corporation after 1971 to a person with whom the corporation was not dealing at arm’s length immediately after the disposition, . . .

The relevant portion of subsection 186(2) reads:

. . . one corporation is controlled by another corporation if more than 50 per cent of its issued share capital (having full voting rights under all circumstances) belongs to the other corporation, to persons with whom the other corporation does not deal at arm’s length, or to the other corporation and persons with whom the other corporation does not deal at arm’s length.

Facts

The corporate plaintiff is Special Risks but its controlling mind was Mr Arthur Frederick Melling, the president and principal shareholder of the company. In the spring of 1976, the plaintiff decided it would be advantageous to seek business links with a United Kingdom corporation — the Hogg Robinson Group. Negotiations ensued for the purpose of enabling the Hogg Robinson Group to purchase an interest in Richards, Melling and Co Ltd (RMC) a company owned and controlled by the plaintiff. A decision was made to incorporate in Canada a corporation to be known as Melling, Hogg, Robinson Limited. It seems clear that from the beginning it was intended that the plaintiff would have the controlling interest in this Canadian Corporation.

The actual structuring and implementation of this new business relationship proceeded on the advice of the legal and tax advisers of the respective companies. The steps taken were as follows.

On December 1, 1976, the plaintiff owned 2,500 class “A” and 2,300 class “B” shares of Richards, Melling Company Limited (RMC). All shares carried voting rights and the plaintiffs holdings clearly constituted ownership of a majority of the issued shares of that company. On December 17, 1976, Richards, Melling’s authorized capital was increased by 100,000 common shares (of a par value of $1 each). On the same date a new corporation, Melling, Hogg, Robinson Limited was incorporated under the laws of Canada. On December 20, 1976, 50,000 common shares of Melling, Hogg, Robinson were purchased by the Hogg Robinson Group Limited, and 50,000 common shares were purchased by the plaintiff. On the same date Melling, Hogg, Robinson purchased 100,000 common shares (voting) of Richards, Melling (RMC) thereby acquiring control in terms of share ownership of RMC. On December 23, 1976, Richards, Melling’s (RMC’s) authorized capital was modified and new classes of preferred and common shares were issued and the plaintiff exchanged its old class “A” and “B” shares in Richards, Melling for new class “A”, “B” and “C” shares all of which were non-voting.

On December 31, 1976, the Hogg Robinson Group sold 1,000 of its shares in Melling, Hogg, Robinson to the plaintiff; the plaintiff thereby acquired 51 per cent of the shares of that corporation.

It is clear from the evidence that the structure of the transaction was designed solely in order to avoid taxes which the plaintiff would otherwise be required to pay. On August 16, 1976, the plaintiff, in the person of Mr Melling wrote to the Hogg Robinson Group stating: “I am writing as promised to set out the basis of the deal that we agreed together on Thursday”. The deal so described involved the exchange by the plaintiff of its existing common shares in Richards, Melling

(RMC) for preference (non-voting) shares; the issue of 100,000 common (voting) shares of Richards, Melling to the new corporation to be held 51 per cent by the plaintiff and 49 per cent by the Hogg Robinson Group. Subsequent correspondence between Mr Melling and the Hogg Robinson Group during August and September proceeded on the basis that the 51 per cent — 49 per cent split was agreed upon. The plaintiffs evidence was that there was no “agreement” at this time respecting the final disposition of the share ownership. His evidence was that it was unimportant whether he held a 50 per cent share or a 51 per cent share in the new corporation. I do not accept this evidence. At the very least such a difference in a normal business transaction would have been reflected in the purchase price offered. In explaining the reason for the purchase of the one per cent controlling interest on December 31, 1976, Mr Melling’s evidence was:

. . . back at that time it seemed to me that it might be advantageous to be able to wave a Canadian flag while trying to offer the services in Canada, and on this basis, I suggested to Hogg Robinson that it might be advantageous to do that, and I could do that if they were willing to sell me the one thousand shares. That’s the reason I bought those shares.

In the context of negotiations which had been going on between the parties since the previous spring, this is not a credible explanation.

The plaintiff tendered in evidence a statutory declaration, dated July 22, 1983, signed by a representative of the Hogg Robinson Group. It stated that “‘there was no obligation whatsoever on the part of the Hogg Robinson Group” to transfer the 1,000 shares to the plaintiff on December 31, 1976. The declaration also states: “No option was given to A F Melling, Special Risks or any nominee or assignee on their behalf to buy additional Melling Hogg Robinson Limited shares’’. It seems clear that there was no formal written agreement respecting the transfer of the shares on December 31, 1976; there was no trust arrangement; there was no way in which the plaintiff could have legally forced the Hogg Robinson Group to sell the 1,000 shares on December 31, 1976, had Hogg Robinson decided not to do so. Also, it must be noted that the Hogg Robinson Group is a public corporation much larger in size than the plaintiff. To borrow a very graphic phrase used by Mr Melling in comparing the size and strength of his business enterprise with that of the Hogg Robinson Group — “It is a peanut compared with Hogg Robinson”.

The conclusion is inescapable, however, that despite the legal ownership of 50 per cent of the shares of MHR, there was never any intention that Mr Melling should lose de facto control of RMC. The correspondence of August and September 1976, in my view describes the constant intention of the parties. This conclusion is buttressed by the fact that no shareholders agreement was prepared or signed respecting the December 20, 1976, 50 per cent — 50 per cent arrangement, but a 30-page agreement was signed governing the 49 per cent — 51 per cent arrangement of December 31, 1976. Similarly, no subscription agreement exists respecting the December 20, 1976, agreement. No premium was paid by the plaintiff for the controlling shares acquired by it on December 31, 1976. It is clear that the transaction was structured, as the defendant argued, as “an accommodation to plaintiff to suit his requirements”.

Evidence — Admissibility

At the beginning of the trial there was a dispute as to the admissibility of certain documents. These might all be classified as documents relating to the negotiations between the plaintiff and Hogg Robinson in the summer and fall of 1976 regarding the proposed acquisition of an interest in RMC by Hogg Robinson. Counsel for the plaintiff objected to the admissibility of the documents on three grounds: (1) this Court in judgments of Mr Justice Walsh on May 11, 1982, and December 16, 1983, and in judgments of the Court of Appeal on December 30, 1982, and January 11, 1984, had refused to order production of these documents; (2) the documents were irrelevant; and (3) the documents were not properly admissible on the basis of the pleadings.

I allowed these documents to be admitted.

I think the first two arguments of counsel are answered by a careful reading of the decision of this Court and the Court of Appeal.

A motion was brought before Mr Justice Walsh in April 1982, in which the plaintiff sought to amend its pleadings to delete therefrom a paragraph (paragraph 8 of the statement of claim) which referred to the negotiations in 1976 for the acquisition of Richards, Melling Co. Ltd. by Hogg Robinson. The defendant objected to the deletion on the ground that it was an attempt by the plaintif to avoid questioning in connection therewith. Mr Justice Walsh allowed deletion on the ground that the paragraph was merely narrative in nature. He equally ordered parts of paragraphs struck from the defence, which alleged that the transaction was a scheme entered into by the taxpayer for the purpose of avoiding tax on the distribution of dividends. It is well established that a taxpayer is perfectly entitled to arrange his affairs in such a manner as to minimize tax consequences. (The amendment of these pleadings is dealt with in greater detail infra, when discussing the arguments of the plaintiff based on the pleadings.)

At the same time that the plaintiff brought its motion to amend its pleadings, the Crown sought an order for the production of (a) documents relating to negotiations between Hogg Robinson and the plaintiff as to the acquisition of an interest in Richards, Melling and Company, and (b) documents as to the capital reorganization of that company. Mr Justice Walsh held that:

Details of the reorganization have already been produced, and any writings or memoranda of any discussions go to motive and are irrelevant.

He added that:

. . . in the absence of allegations of sham this information need not be provided.

Mr Justice Walsh dismissed the motion to produce by order of May 11, 1982.

The Court of Appeal in a decision of December 1, 1982, overturned this decision in part.

With respect, I am unable to agree with the decision by the Motions* Judge to dismiss the appellant’s motion for an order compelling the respondent to make and file and serve the list of documents contemplated by Rule 448(1). As noted earlier herein, the appellant has denied Paragraph 13 of the Statement of Claim, thereby putting in issue the question of control of RMC. Paragraph (a) of the letter which is referred to in the reasons of the Motions’ Judge (supra) asks for “documents relating to negotiations between Hogg Robinson and plaintiff as to acquisition of Richards, Melling & Co Ltd.” Such documents might well be relevant to the question of control of RMC. The request for documents relative to the acquisition of control of RMC connotes wider parameters than “writings or memoranda of any discussions” going to motive. I therefore conclude that the appellant is entitled to have a Rule 448(1) list in respect of any and all such documents. Likewise I think that Paragraph (e) of the letter, in asking for all documents and agreements between the Hogg Robinson Group and the respondent respecting control of MHR, is asking for documents which might well relate to the issue of control of RMC because of the transactions between the respondent, the Hogg Robinson Group and MHR concerning RMC shares. Accordingly I think the appellant is also entitled to have a Rule 448(1) list in respect of any and all documents which are within the purview of paragraph (e) of subject letter.

I read this decision to mean that the disputed documents are relevant and produceable in so far as they may relate to the question of control; they are not relevant in so far as they explain motive.

For some reason the defendant in this action appears to have been “asleep at the switch” until the eve of trial. The disputed documents were not produced by the plaintiff and the defendant did not make any immediate concerted effort to pursue the matter. Eventually, on November 25, 1983, a requirement pursuant to paragraph 231(3)(b) of the Income Tax Act was served on Clarkson, Gordon and Company, which led to the production to the defendant of the documents in question. Consequently, on December 1, 1983, a trial date having been set for December 7, 1983, the defendant filed a motion asking for adjournment of the trial and for an order compelling the plaintiff to give full discovery in accordance with the December 30, 1982 judgment of the Federal Court of Appeal.

In his judgment of December 16, 1983, refusing the defendant’s request for an adjournment and for an order for full discovery, Mr Justice Walsh said:

Some 8 or 9 subpoenas had already been issued for the trial. I indicated to counsel for Defendant at the hearing that I considered this very belated motion to be an abuse of the process of the Court, for reasons which I will set out, and also that I did not believe it should succeed on the merits . . .

The defendant had responded to the order of the Court of Appeal on January 18, 1982, with a list of documents. Mr Justice Walsh noted:

These appear to me to be a very complete compliance with the allegations of paragraphs 13, 15 and 17 with respect to which the production of documents was ordered, unless Defendant is permitted to indulge in a “fishing expedition” or go into motive which has already been rejected, . . .

None of the documents listed in the plaintiffs response of January 18, 1982, however, related to the negotiations of the summer and fall of 1976 which, in my interpretation of the reasons of the Court of Appeal, it seemed to indicate, were relevant to the question of control.

Mr Justice Walsh went on to say:

Following January 18, defendant took no further steps. If defendant did not consider that the documents listed by plaintiff were in full and complete compliance with the Order of the Court of Appeal she could have moved for an order requiring a further list at any time thereafter. Some eight months later, on September 9th, 1983 defendant joined with plaintiff in a joint application for a time and place of trial to last not more than one day, . . .

On October 6th, 1983 an order was issued for a hearing to take place on December 7th, 1983. No objection was made to this . . . What is more important is that . . . it had completed an examination for discovery of a representative of plaintiff and that it had had the discovery of plaintiffs documents under rules 447 and 448.

Plaintiff quite properly objects to the present motion, contending that it is a further last minute attempt to delay the trial of the action, and moreover to introduce material the production of which would certainly be objected to, which is probably irrelevant, and which in any event was not required in order to comply with the precise terms of the Order of the Court of Appeal . . . no proceeding should be entertained, even if it might be found to have some relevance, when it seeks the introduction of material which the parties could have sought to introduce many months earlier,. . . [Emphasis added]

The Court of Appeal heard an appeal from the December 16 decision of Mr Justice Walsh on January 11, 1984. There was obviously no time to issue extensive reasons; the trial in this matter was scheduled for January 16, 1984. The Court of Appeal issued a judgment dismissing the appeal: “we have not been persuaded that the decision of the Trial Judge should be interfered with”.

Reading all these judgments together, the conclusion which I drew was that the documents relating to the negotiations between the plaintiff and Hogg Robinson for acquisition of a part of Richards, Melling Company Limited are admissible and relevant in so far as they relate to the issue of control; they are not relevant in so far as they relate to motive. Secondly, even though the documents might have some relevance to the issue of control, the defendant was not to be granted an order for full discovery and adjuournment of trial on the eve of trial when the delay in seeking full discovery was of its own making.

Counsel for the plaintiff argued strenuously, indeed unrelentingly, that these decisions of the Court of Appeal precluded me from admitting the documents in question. However, I could find in the decisions nothing to indicate that the documents must be inadmissible at trial, even though the defendant had not had a prior opportunity to examine the plaintiff with respect to them. I could not think that the plaintiff would be unduly surprised by their introduction. Indeed, his state of preparedness evidenced by his conduct of the case, seemed to me to anticipate such a possibility. Also, I do not think the plaintiff should be allowed to take advantage of its ostrich-like behaviour with respect to the documents, and now prevent their admissibility on a supposed ground of surprise.

In any event, my reading of the several decisions of this Court led me to conclude that the decision of Mr Justice Heald for the Court of Appeal of December 16, 1982, is clear authority for the proposition that the documents are relevant.

One last point concerning the evidence needs to be addressed. During the cross-examination of Mr Melling he referred to a statutory declaration signed by an officer of the Hogg Robinson Group which I have referred to above and which corroborates Mr Melling’s evidence that there was no option given to the plaintiff; (there was no trust set up) there was no written “agreement”. The admissibility of this document was objected to. I reserved judgment. After read- ing the decisions in the “Security” and the “Daniel M’’, [1967] 2 Lloyds L L 498 and Re McDonald and Town of Listowel (1903), 6 OLR 556 (cited to me by counsel) and Sopinka and Lederman, Evidence in Court Cases at p 465. I have decided to exercise my discretion to admit the document in question. But, in any event, the conclusion from the evidence stands with or without this document since I accept Mr Melling’s oral evidence that there was no formal written agreement entitling the plaintiff to purchase the 1,000 shares; there was no trust arrangement; there was no legally enforceable agreement. There was, however, an informal understanding, an accommodation by the Hogg Robinson Group of the plaintiff. Mr Melling relied on the good will of Hogg Robinson to keep its bargain.

Issues Raised in the Pleadings

The plaintiff argues that the documents in question (and the arguments they are adduced to support) are not admissible because they do not relate to issues raised in the pleadings.

The plaintiffs statement of claim, originally, provided in part:

8. In 1976, negotiations for the acquisition of RMC were instituted by Hogg Robinson Group Ltd (herein “Hogg Robinson”) a United Kingdom company which owned shares in the three (3) following subsidiaries: Hogg Robinson Gardner Mountain International Ltd, Growth Enterprises Ltd and Hogg Robinson Cappel (Canada) Ltd, a company incorporated under the laws of Canada.

10. RMC’s authorized capital was increased by 100,000 common shares of a par value of $1.00 each and supplementary letters patent were issued accordingly.

11. Melling Hogg Robinson Ltd (herein “MHR”) was incorporated under the laws of Canada on 17 December, 1976.

12. On 20 December, 1976, 50,000 common shares without nominal or par value of MHR were allotted, issued to and purchased by Hogg Robinson and 50,000 common shares without nominal or par value of MHR were allotted, issued and purchased by the plaintiff.

13. On 20 December, 1976, MHR subscribed and purchased 100,000 RMC common shares at a par value of $1.00 thereby acquiring control of RMC.

14. On 23 December, 1976, RMC was continued under the Canada Business Corporations Act. RMC’s authorized capital was modified and new classes of preferred shares and common shares were created.

15. The new classes “A”, “B” and “C” shares were not entitled to vote at any of the shareholders’ meetings.

16. On 23 December, 1976, all RMC’s issued old class “A” and “B” shares were disposed of in consideration for the following new RMC preferred shares: 6,150 class “A” preferred shares, 30,700 class “B” preferred shares and 13,150 class “C” preferred shares.

The relevant provisions of the original statement of defence stated the defendant’s position as:

2. He ignores paragraph 8 of the Statement of claim and denies said paragraph;

3. He adimits paragraphs 10, 11, 12, 14, 16 and 18 of the Statement of Claim but adds that the plaintiff entered into a scheme discussed in said paragraphs with the hope and expectation of avoiding tax on the distribution of dividends;

4. He denies paragraphs 13, 15 and 17 of the Statement of Claim and adds that, in assessing the plaintiff, the Minister of National Revenue assumed that the plaintiff, in effect, controlled at all relevant times, Richards, Melling and Co Ltd. [Emphasis added]

5. Plaintiff was not dealing at arm’s length with Richards, Melling and Co Ltd immediately after it disposed of its shares.

It is the emphasized part of paragraph 4 of the statement of defence which is in issue.

As noted above, in April 1982, the plaintiff moved to amend his own statement of claim by deleting paragraph 8 and moved to strike from paragraph 3 of the defendant’s statement of defence the allegation:

. . . but adds that the plaintiff entered into a scheme described in said paragraphs with the hope and expectation of avoiding tax on the distribution of dividends.

This motion was granted by the decision of May 11, 1982, mentioned above. The plaintiff was allowed to amend its own pleading on the ground that paragraph 8 was purely narrative and the defendant’s pleading was struck out because it raised the irrelevant issue of motive.

The plaintiff now argues, however, that this decision and that of the Court of Appeal of December 1, 1982, dicatate that the defendant’s pleading in paragraph 4 of its statement of defence must be confined to putting in issue only the fact of control as a result of share ownership. The plaintiff argues that the paragraph does not raise any issue of control through a non-arm’s length relationship which might have existed between the various parties to the transaction.

It is to be noted that paragraphs 4 and 5 of the statement of defence track the wording of subparagraph 89(5)(a)(ii) of the Income Tax Act (control before the disposition of the shares is alleged and a non-arm’s length relationship after disposition is alleged). Control before disposition in the statutory context is defined, by subsection 186(2) of the Act, as existing when more than 50 per cent of the issue of shares of a corporation (having full voting rights): (1) belongs to another corporation; (2) belongs to a person with whom the other corporation does not deal at arm’s length; or (3) belongs to the other corporation and persons with whom the other corporation does not deal at arm’s length. The plaintiff argues that, on the basis of the pleadings, it is only open to the defendant to argue control through direct ownership (ie (1) above).

This follows, it is argued, from the fact that the defendant made no reference to “control as defined by section 186(2)" in its pleadings, and from the fact that the defendant pleaded control in paragraph 4 but non-arm’s length in paragraph

5. This last, it is argued, indicates that the defendant did not intend to raise any non-arm’s length issue in paragraph 4. I do not find these arguments compelling. As noted above, the pleadings track the language of the statute and they contain the allegation of facts that the defendant “in effect controlled’’ RMC. It seems to me overly selective to interpret control in paragraph 4 as only referring to the first branch of the subsection 186(2) definition.

There is no doubt that the pleadings could have been more explicitly worded but in the overall context of the pleadings filed in this case, and the interlocutory decisions relating thereto, I think the plaintiff has to use self-serving blinkers to interpret the wording of the statement of defence so narrowly. In argument before me, plaintiff s counsel took the position that he had not produced the negotiating documents which are in issue because the combined effect of the judgment of Mr Justice Walsh on May 11, 1982, and the Court of Appeal decision of December 1, 1982, made it clear that the pleadings should be interpreted as raising only the issue of control through share ownership and not that of control through a possible non-arm’s length relationship. As noted above, I did not read the Court of Appeal decision so narrowly.

The plaintiff argued that the Minister had not pleaded sufficient facts to raise the issue of control through a non-arm’s length relationship. He argued that the Minister should have made express reference to the Hogg Robinson Group, and Melling, Hogg, Robinson. At the time the pleadings were drafted, of course, the defendant did not have access to the documents later obtained from Clarkson Gordon. Also, the facts in this kind of case are more within the knowledge of the plaintiff than the defendant, (and remain that way as long as the plaintiff declines to produce relevant documents). While I agree that the pleadings could have been more adequately drafted, the Minister did plead that the plaintiff "in effect controlled at all relevant times Richards, Melling and Co”. I do not think the plaintiff could genuinely doubt that the non-arm’s length issue was being raised by the pleadings.

The plaintiff also argued that he was justified in reading the statement of defence as only putting in issue share ownership because paragraph 4 should be read solely in the context of denying paragraphs 13, 15 and 17 of the statement of claim, and these refer only to share ownership. The issue, thus, was whether pleadings which deny share ownership as alleged and add “the plaintiff in effect, controlled at all relevant times Richards, Melling and Company Ltd” (italics added) allows the Minister to plead control by virtue of a non-arm’s length relationship. I think, in the context of this case, it does. If share ownership alone was being put in issue it would have been sufficient for the defendant to deny paragraphs 13, 15 and 17 of the statement of claim, without adding more. If the plaintiff had serious doubts as to what was being raised in the pleadings, counsel could have brought a motion for particulars. I do not think there was any serious doubt.

Control

The issue then is whether RMC was controlled by the plaintiff (in the sense of being owned conjointly with someone with whom the plaintiff did not deal at arm’s length) immediately before the exchange of shares on December 23, 1976, and whether a non-arm’s length relationship existed between RMC [sic] and the plaintiff immediately after the disposition.

It is trite law that the burden of proof is on the plaintiff to disprove the first requirement above (control) since the plaintiff has pleaded such allegation as an assumption while the burden of proof is on the defendant to prove the second requirement above (non-arm’s length relationship) since this was not pleaded by the defendant as an assumption. The distinction in this case, however, is of little importance since the same factual situation is relied upon as the basis for both allegations. In addition, the facts are clear, even if the burden of proof rested with the defendant in both cases the outcome would not differ. The facts clearly disclose a non-arm’s length relationship.

It is clear that the purchase by Hogg Robinson of a 49 per cent interest in RMC (as the deal was finally consummated on December 31, 1976) was one which the parties negotiated from arm’s length positions. It was carried on in an arm’s length manner between parties having independent commercial interests. The question, however, is whether it can be said that the parties were dealing in a non-arm’s length manner with respect to that aspect of the transaction which saw Hogg Robinson hold for 11 days 50 per cent of the shares of MHR and thereafter transfer a one per cent interest to the plaintiff.

The defendant argues that the plaintiff in effect controlled RMC at all material times, despite the 11-day period during which Melling Hogg held 50 per cent of the shares of MHR. It is argued that Hogg Robinson, MHR, RMC, and the plaintiff were all acting in concert in accommodating the plaintiff for that short period of time with the directing mind being the plaintiffs. Consequently, it is argued the plaintiff could not be said to be dealing at arm’s length with MHR and Hogg Robinson during that period of time and the plaintiff therefore controlled RMC. It is clear from the evidence that this is so. Hogg Robinson’s temporary ownership was one of form only, to accommodate the plaintiffs purposes. It could not be said that the temporary ownership transactions reflected “ordinary commercial dealings between parties acting in their separate interests’’

— the test used by Laskin, J in Swiss Bank Corporation and Swiss Credit Bank v MNR, [1972] CTC 614; 72 DTC 6470 (Sup Ct).

The plaintiffs “control” of Hogg Robinson was not such that he could compel either the 50 per cent purchase or the subsequent one per cent divestiture. But it was control through the abdication of Hogg Robinson in exercising any independent interest and its acquiescence in the transactions merely as an accommodation to the plaintiff.

In MNR v Estate of Thomas Roodman Merritt, [1969] CTC 207; 69 DTC 5159, Cattanach, J discussed the concept involved in the expression “dealing at arm’s length” in light of the Sheldons Engineering case [1955] CTC 174; 55 DTC 1110 (Sup Ct) and concluded (at 217 [5165]):

In my view, the basic premise on which this analysis is based is that, where the “mind” by which the bargaining is directed on behalf of one party to a contract is the same “mind” that directs the bargaining on behalf of the other party, it cannot be said that the parties are dealing at arm’s length.

In Swiss Bank Corporation et al v MNR, [1971] CTC 427; 71 DTC 5235, Chief Justice Thurlow adopted this reasoning by Mr Justice Cattanach and refined the concept further (at 437 [5241]):

To this I would add that where several parties — whether natural persons or corporations or a combination of the two — act in concert, and in the same interest, to direct or dictate the conduct of another, in my opinion the “mind” that directs may be that of the combination as a whole acting in concert or that of any one of them in carrying out particular parts or functions of what the common object involves.

Reference can also be made to MNR v Kirby Maurice Co Ltd, [1958] CTC 41; 58 DTC 1033, particularly at page 1037.

I would note also that in the Swiss Bank case at 438 [5242], Chief Justice Thurlow said:

Nor is the question to be decided by the test of whether the same transaction could be expected to take place between parties dealing at arm’s length, for it is the fact of the power of one party to influence or control another which, as I see it, determines the matter rather than either the effect of such influence or control or the fact of its exercise.

In the present case, the “influence or control” of the plaintiff arose out of Hogg Robinson’s abdication of an independent role.

The Supreme Court decision in the Sheldons Engineering case, (supra), is of little assistance to the plaintiff since, in that case, the bank, which had the controlling interest in the company at the relevant time, constituted an independent commercial interest. Chief Justice Thurlow’s comments in the Swiss Bank case, at 438 [5241] are directly relevant:

On the other hand if one of several parties involved in a transaction acts in or represents a different interest from the others, the fact that the common purpose may be to so direct the acts of another as to achieve a particular result will not by itself serve to disqualify the transaction as one between parties dealing at arm’s length. The Sheldons Engineering case, [1955] SCR 637 [55 DTC 1110], as I see it, is an instance of this.

Disposition — Control

The plaintiff argues that while there was a dispostiion of the shares of RMC on December 23, 1976, (when the old shares of RMC were surrendered in exchange for the new classes “A”, "B” and “C” shares) there was no disposition to a person as required by subparagraph 89(5)(a)(ii) in order to bring the transaction within the meaning of that section. The argument is that a corporation cannot own its own shares, and therefore the surrender of the class “A” and “B” common shares to the corporation cannot be characterized as a disposition to a person.

It is, of course, essential for the plaintiff that the surrender be a disposition. If it were not no 1971 CSOH would crystallize. The necessity of a disposition is a requirement of subparagraph 89(l)(l)(ii) on which the plaintiff relies for the computation of its capital surplus.

The plaintiffs argument is that while subparagraph 89(l)(l)(iii) [sic] requires a disposition; 89(5)(a)(ii) requires a disposition to a person, and this is something different. I do not think so. The necessity of a disposition is a requirement of subparagraph 89(l)(l)(ii) and not of subparagraph 89(5)(a)(ii). Subparagraph 89(5)(a)(ii) simply refers to the disposition of capital property that is registered in order that 89(l)(l)(ii) apply. It is not a different disposition. The plaintiff cannot have it both ways. It cannot claim that there was a disposition for the purposes of subparagraph 89(l)(l)(ii) but no disposition for the purposes of subparagraph 89(5)(a)(ii). The plaintiff disposed of its old shares to RMC which cancelled them and issued new shares to the plaintiff in consideration for the old.

For the reasons given the appeal will be dismissed.