The Queen v. Lusita Holdings, 84 D.T.C 6346, [1984] CTC 335 (FCA)

Stone, J:—This appeal is brought against the judgment of the Trial Division which vacated the respondent’s 1975, 1976 and 1977 income tax assessments and referred its returns for those years back to the Minister of National Revenue for reassessment on the basis that the respondent was not associated with Ann-Gus Holdings Limited within the meaning of paragraph 256(l)(b) of the Income Tax Act* [1] The appellant also relied upon paragraph 256(1 )(d) of that statute. The shares of this latter corporation were held by Gustav Schickedanz, his wife Ann and the respondent, each to the extent of 33.3 per cent.

Counsel conceded at the outset that neither paragraph (b) nor (d) of subsection 256(1) has any application if the learned trial judge was correct in concluding that paragraph 25 l(5)(b) of the Act is inapplicable. That paragraph reads as follows:

251. (5) For the purposes of subsection (2) and section 256,

(a) . . .

(b) a person who has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to, or to acquire, shares in a corporation, or to control the voting rights of shares in a corporation shall, except where the contract provided that the right is not exercisable until the death of an individual designated therein, be deemed to have had the same position in relation to the control of the corporation as if he owned the shares; and

(c) ...

The appellant’s submissions that the respondent was associated with Ann-Gus Holdings Limited within the meaning of paragraph 256(l)(d) of the Act are that, in the years in question:

(i) Gustav Schickedanz controlled the respondent by virtue of paragraph 251(5)(b);

(ii) Gustav Schickedanz was related to the members of the group of persons who controlled Ann-Gus Holdings Limited, in that he was related to Ann Schickedanz by marriage, within the meaning of paragraph 251(2)(a), and to the respondent, within the meaning of paragraph 25 l(2)(b); and

(iii) Gustav Schickedanz owned directly or indirectly not less than 10 per cent of the issued shares of the respondent and Ann-Gus Holdings Limited.

Her alternative submissions that the association came about by virtue of paragraph 256(1 )(b) of the Act are that:

(i) Gustav Schickedanz controlled the respondent by virtue of paragraph 251(5)(b);

(ii) Gustav Schickedanz indirectly controlled Ann-Gus Holdings Limited by owning 33.3 per cent of the shares in it and by controlling the respondent which owned another 33.3 per cent of the shares in it.

It is unnecessary to review the essential facts bearing upon the relevance of paragraph 251(5)(b) at any length. They were agreed upon in advance and are recited in and form the basis of the decision below. The argument that Gustav Schickedanz controlled the respondent by virtue of paragraph 251(5)(b) of the Act is founded upon the terms of four trust indentures — identical in all material respects — pursuant to which a majority of the shares in the respondent were held. In each case, Gustav Schickedanz was one of two trustees required to be in office under each trust indenture. I cannot find among the elaborate provisions of the trust indentures any foundation for the assertion that Gustav Schickedanz had the “right . . . to control the voting rights of the shares’’ in the respondent within the meaning of paragraph 251(5)(b). It was argued that this “right” consisted of a power granted to him under each trust indenture whereby he could at any time require the resignation of his co-trustee and appoint a successor. In my view, that power did not invest Gustav Schickedanz with a “right” to control the voting rights of the shares. Of fundamental importance here is the requirement of the indentures that both co-trustees decide as to how the votes attaching to the shares should be cast from time to time. Moreover, they were also required “to exercise their duties and powers in a fiduciary capacity”. The right to control the voting rights resided in the co-trustees and not in either of them.

Counsel for the appellant placed heavy reliance upon the decision of Cattan- ach J in Vineland Quarries and Crushed Stone Limited v MNR, [1966] Ex CR 417; [1966] CTC 69; 66 DTC 5092 affirmed on appeal by the Supreme Court of Canada ([1967] SCR vii; 67 DTC 5283). In that case it was held, in effect, that the controlling shareholders of a corporation that owned the shares of a second corporation “controlled” that corporation for the purposes of the predecessor of paragraph 256(1 )(b). I am quite unable to see how the principle of that case can apply to the factual situation before us, where Gustav Schickedanz had no “right” to control the voting rights of the shares in the respondent within the meaning of paragraph 251(5)(b) of the Act.

In my view, as paragraph 25 l(5)(b) is inapplicable, the remaining contentions fall to the ground. The learned trial judge was correct in holding that the respondent was not associated with Ann-Gus Holdings Limited at any time during the years 1975, 1976 and 1977 within the meaning of paragraphs 256(l)(b) or (d) of the Act.

I would, therefore, dismiss the appeal with costs.