Urie, J. (Mahoney, J. concurring):—The sole issue in this appeal from a judgment of the Trial Division is a narrow one. That issue requires the Court to determine whether the respondent was associated with Willmar Window Industries Ltd. (“Willmar’’) in its 1975, 1976 and 1977 taxation years within the meaning of paragraph 256(1)(e) of the Income Tax Act, R.S.C. 1952, c. 148, as amended by S.C. 1970-71-72, c. 63, s. 1, (“the Act”) so that it would be disentitled, in those years, to the small business deduction provided by section 125 of the Act.
Briefly stated, the facts, which have been agreed upon, are these. The respondent, which was incorporated under the laws of Manitoba, is a Canadian controlled private corporation for the purposes of the Act. It is a corporate partner of three other Manitoba corporations carrying on business under the firm name and style of C. A. DeFehr & Sons, as a furniture merchant.
The shareholdings in the respondent were at all material times as follows:
| William Fast | 100 shares (20 per cent) |
| Dr. Bernhard Fast | 100 shares (20 per cent) |
| Cornelius B. Fast | 100 shares (20 per cent) |
| Louise Goosen | 100 shares (20 per cent) |
| Cornelia Dahl | 100 shares (20 per cent) |
| Total issued shares | 500 |
The respondent was controlled by a related group within the meaning of the Act, since all shareholders are brothers and sisters.
Willmar is also a Canadian controlled private corporation within the meaning of the Act and was also incorporated in Manitoba. At all material times all of its issued and outstanding common shares were owned as follows:
| William Fast | 150 shares (50 per cent) |
| Mrs. William Fast | 150 shares (50 per cent) |
| Total issued shares | 300 |
It, too, was controlled by a related group, its two shareholders being husband and wife.
The respondent and Willmar in each of the 1975, 1976 and 1977 taxation years each claimed the small business deduction permitted by section 125 of the Act. The reassessments which were the subject of the appeal to the Trial Division disallowed the small business deduction claimed by the respondent for the 1975, 1976 and 1977 taxation years on the basis that:
(a) at all material times the respondent was controlled by a related group,
(b) at all material times Willmar Ltd. was controlled by a related group, (c) each of the members of one of the related groups was related to all of the members of the other related group,
(d) either of the related groups owned directly or indirectly, in respect of each corporation, not less than 10 per cent of the issued shares of any class of the capital stock thereof.
As a consequence, according to the Minister of National Revenue ("the Minister”), the respondent was associated with Willmar within the meaning of paragraph 256(1)(e) of the Act. Therefore, it was said that it was not entitled to claim the small business deduction permitted by section 125.
The Tax Review Board dismissed the respondent's appeal from the reassessments, whereupon it appealed to the Trial Division. The appeal was allowed, the learned trial judge having held that the respondent and Willmar were not associated corporations within the meaning of the Act in that one of the three conditions imposed by paragraph 256(1)(e) of the Act for finding an association was not fulfilled, i.e. the condition that either of the related groups own directly or indirectly in respect of each corporation, not less than 10 per cent of the issued shares of the capital stock thereof, of any class was not met. He, therefore, set aside the reassessments and referred them back to the Minister for reassessment in accordance with his reasons.
It is from that judgment that this appeal is brought.
Section 125 of the Act, as earlier stated, authorizes a Canadian controlled private corporation to deduct from tax otherwise payable certain amounts within the business limits prescribed in the section unless the corporation is associated in the year with one or more Canadian controlled private corporations. Section 256 determines when companies are associated within the meaning of the Act. Paragraph 256(1 )(e) reads 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,
(e) each of the corporations was controlled by a related group and each of the members of one of the related groups was related to all of the members of the other related group, and either of the related groups owned directly or indirectly, in respect of each corporation, not less than 10% of the issued shares of any class of the capital stock thereof.
The term “related group” is used throughout subsection 256(1) and is defined in subsection 251(4) to mean
"... a group of persons each member of which is related to other members of the group, . .. ”
It can be seen that the definition recognizes the distinction between the group and those individuals who make up the group, i.e. the group comprises the sum of its members. As to paragraph 256(1)(e), it can readily be seen that for the respondent to be found to be associated with Willmar three conditions would have to have been fulfilled:
(1) each of the corporations was controlled by a related group;
(2) each of the members of one of the related groups was related to all of the members of the other related group; and
(3) either of the related groups owned directly or indirectly in respect of each corporation, not less than 10 per cent of the issued shares of the capital stock thereof of any class.
It is not disputed that the first two conditions of association were met in this case. the sole issue then is whether or not the third condition has been met. The trial judge correctly stated: “The question is whether either related group owned, in respect of each corporation, not less than 10 per cent of the issued shares of that corporation”. In answering the question in the negative and thus finding that the respondent and Willmar were not associated, he said:
Mr. William Fast owned 50% of Willmar and 20% of the plaintiff corporation. Mrs. Fast owned 50% of Willmar and nothing at all of the plaintiff corporation. Then, did the marital group consisting of Mr. and Mrs. Fast own directly or indirectly in respect of the plaintiff corporation not less than 10% of the issued shares of the plaintiff corporation. Despite the highly articulate and lucid arguments of the defendant's counsel, the short answer to that question is “no”, because Mrs. Fast owned none of the shares of the plaintiff corporation and, since a group, as president Jackett held in Buckerfield's Limited et al v. Minister of National Revenue 64 D.T.C. 5301 at 5304, means “any number of persons from two to infinity”, it follows that the marital group of two, of which she was a member did not own not less than 10% of the issued shares of the plaintiff corporation. Her husband, a member of that exclusive marital group owned, in his own right, 20% of the shares in the plaintiff corporation, but since those shares were not owned jointly or in common or in any other species of partnership with Mrs. Fast, it cannot be said that the group owned them. Only one of the members of the group owned that 20% and one human individual of a group — even a group of two — cannot be equated with the whole group.
In my opinion, he was correct in so finding for the following reasons. First, read in their ordinary and grammatical sense, in the context in which they are used, the words are neither ambiguous nor imprecise. In fact sections 251 and 256, read together, provide a glossary for the meaning to be accorded to the term “related group” and this meaning was not shown to be at variance with the meaning accorded it in the remainder of the statute. Given the complexity of the Act, it is difficult, of course, to state categorically that in the context of the whole statute the meaning attributable to it in the context of section 256 is consistent with its use, if any, in the remainder of the statute. But given the obvious object for which section 125 was enacted which appears to be to encourage and facilitate the growth of small Canadian controlled corporate business enterprises in Canada and since a meaning can be derived from the immediate context of the term in the section defining a term used in section 125, which is not inconsistent with the purpose for which that section was enacted, it is difficult for me to see any ambiguity or imprecision in the term's meaning.
The term “related group” is used four times in paragraph 256(1 )(e). There can be no doubt that in the first three instances, it is referable to a plurality of persons making up the group. the fourth instance in which it is used, is in the third condition of association imposed by clause (e), i.e. in the phrase “.. . either of the related groups ...” (emphasis added). In its context “the” can only relate to the groups referred to in the preceding words of the clause. In two of the three preceding usages the members of the group are distinguished by words from the group itself. In their context, then, the words should be given their ordinary meaning which clearly distinguishes a group as an entity from the members making up the group.
Second, support is found for this interpretation from the legislative history of paragraph 256(1 )(e) which was enacted in its present form in S.C. 1970-71-72, c. 63, and became effective in January 1972. Its predecessor was paragraph 39(4)(e) of the Act. It read as follows:
39(4) Idem. For the purpose of this section, one corporation is associated with another in a taxation year, if at any time in the year,
(e) each of the corporations was controlled by a related group and each of the members of one of the related groups was related to all of the members of the other related group, and one of the members of one of the related groups owned directly or indirectly one or more shares of the capital stock of each of the corporations. [Emphasis added.]
The 1972 amendment made two important changes in the old clause:
(1) The required share ownership was increased from “‘one or more shares” to "not less than 10% of the issued shares of any class of the capital stock”, and, for the purposes of this appeal, most importantly,
(2) The words "one of the members of the related group owned” were replaced by "either of the related groups owned”.
It must be accepted, as I see it, that Parliament intended to make the change in the wording of the third condition in the paragraph so that the shareholdings of one of the members of the related group was insufficient to fulfil one condition of association. It had to be the shareholding of the group itself and, of course, group implies more than one. The change in words is so clear and unambiguous and the words contrast so sharply in form and concept with those they replaced, that I have difficulty in understanding how the appellant’s contention can be taken seriously. If the intention of Parliament had been to change only the percentage of shares required for ownership, as urged by counsel for the appellant, it simply could have retained the words “one of the members” from the former provision. It did not do so, so that the change must be taken to have been for the purpose of providing a different test than before.
Thirdly, it was argued that a "related group” is not a legal entity and, therefore, it could not "own” shares. Only its members could "own” them. Therefore, it was said, notwithstanding the use of the term “related group”, ownership must be referable to its members. Since William Fast was a member of both groups owning directly more than 10 per cent of each corporation, the respondent and Willmar were associated within the meaning of the Act. The answer to that submission is, as I see it, that Parliament must be taken to know the law and of the legal concepts of ownership notwithstanding which, in clear words, it chose to devolve on a group the ability to "own” shares for the limited purposes of the Income Tax Act. That it knew of the difference in concepts of ownership can be seen in both paragraphs (c) and (d) of subsection 256(1)*. In particular, paragraph (d) refers to “that person or that group of persons owned . . . shares ...”. The distinction between the two types of owners is unquestionably shown in those words. They are indicative of Parliament having in mind that, for purposes of the Act, the related group, as a non-legal entity, was to have the ability to own shares as though it were a legal entity. In my view, it had the power to provide the group with such an ability, just as it has the power to deem in any given set of facts that a certain result will follow although without such a deeming provision it would not.
Furthermore, for the appellant’s position in this regard to prevail, one person would have to be considered a “group". That this is not the meaning to be given the word is found in the case of Buckerfield's Limited et al v. M.N.R., [1964] C.T.C. 504 at 509; 64 D.T.C. 5301 at D.T.C. 5303-4 where Jackett, P. (as he then was), said:
... The word “group" in its ordinary meaning, as I understand it, can refer to any number of persons from two to infinity.
Since Jackett, P. had reference to the word “group" in the phrase “related group" in subsection 39(4), the predecessor to subsection 256(1), the meaning attributed to the word by him is wholly apposite in this case. William Fast, the only common relative in each group, could not by himself be a “group".
For all of the foregoing reasons, I am of the opinion that the trial judge did not err in finding that the respondent and Willmar were not associated for the purpose of determining the right of the respondent to the Canadian controlled private corporation deduction under section 125 of the Act.
Accordingly, I would dismiss the appeal with costs.
Marceau, J.:—As indicated by Mr. Justice Urie in the opening paragraph of his reasons for judgment, the issue raised in this appeal is narrow in the sense that it is to be determined on an agreed statement of very simple facts and involves the construction of an apparently straightforward provision of the Income Tax Act. It seems to me, nevertheless, that it is an issue of some consequence and I feel obliged to explain, with respect, my disagreement with the views expressed by my brother in regard thereto.
The provision to be construed is that contained in paragraph (e) of subsection 256(1) of the Income Tax Act where the rules relating to “associated corporations” are set out. It is important to read again the whole subsection so as to have clearly in mind the context, and I reproduce it in its entirety:
SEC. 256. Associated corporations.
(1) For the purposes of this Act one corporation is associated with another ina 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,
(c) each of the corporations was controlled by one person and the person who controlled one of the corporations was related to the person who controlled the other, and one of those persons owned directly or indirectly, in respect of each corporation, not less than 10% of the issued shares of any class of the capital stock thereof,
(d) one of the corporations was controlled by one person and that person was related to each member of a group of persons that controlled the other corporation, and that person or that group of persons owned directly or indirectly, in respect of each corporation, not less than 10% of the issued shares of any class of the capital stock thereof, or
(e) each of the corporations was controlled by a related group and each of the members of one of the related groups was related to all of the members of the other related group, and either of the related groups owned directly or indirectly, in respect of each corporation, not less than 10% of the issued shares of any class of the capital stock thereof.
This notion of associated corporations was introduced by Parliament, it will be remembered, to prevent the division of an economic enterprise into several corporations as an attempt to take advantage of the reduced rate of tax applicable to small businesses. Two corporations are deemed to be associated with one another — and not both entitled to the small business deduction authorized by section 125 of the Act — either where one controls the other or they are both under common control (situations referred to in paragraphs (a) and (b) of subsection 256(1)), or where they are controlled by different persons or groups closely related to each other and there exists among these persons or groups an inter-ownership of shares in each of the corporations (situations covered by paragraphs (c), (d) and (e) of subsection 256(1)). It is an “association” which depends solely on the fulfilment of statutory conditions and exists regardless of the actual relationship between the two businesses carried on by the two corporations; but it is nevertheless an association based on reasonable presumptions. This is indeed the case not only for the two situations described in paragraphs (a) and (b) but likewise for the three others. The association of corporations controlled by different persons or groups closely related is in line with the provisions of section 251 of the Act which deem persons connected by blood relationship or marriage not to be dealing at arm’s length, and therefore not having separate economic interests.
Mr. Justice Urie, in his reasons, reviews in detail the facts of the case. Repetition is unnecessary. The question those facts raise is quite straightforward and need only be set out schematically. The question is whether two corporations, at the time when all the issued common shares of one were equally divided between a husband and his wife and all the issued common shares of the other equally divided between the husband and four of his brothers and sisters, were associated under paragraph 256(1)(e). Of course, the first two conditions required for the application of the provision were present: both corporations were controlled by related groups and each of the members of one group was related to all of the members of the other group. It is the third one which causes difficulty. Can it be said that “either of the related groups owned directly or indirectly, in respect of each corporation, not less than 10% of the issued shares of any class of the capital stock thereof"?
The learned trial judge expressed the view that, contrary to the Minister's contention, it could not be said that this third condition required for the application of paragraph 256(1)(e) was met since the husband alone was a shareholder in both corporations. His reasoning, which is totally based on the wording of the Act and is adopted in substance by Mr. Justice Urie, is essentially the following. What is expressly and formally required by the text is that either of the related groups owns shares in respect of each corporation. The word used is “group” and, in its grammatical and proper sense, the word group refers to more than one individual. There is, of course, a basic rule of interpretation which requires that words be given their proper sense unless the context strongly requires that it be otherwise. The context certainly does not so require here, but if more positive proof of that were needed one would only have to consider that the word “group" appears on three other occasions in that short paragraph and always undoubtedly in its normal meaning referring to a plurality of individuals: it is inconceivable that the fourth time the word would have a different meaning. Besides, when the law was changed in 1972 to increase, from one share to 10 per cent of the issued shares, the minimum of inter-corporate shareholding required to establish the link between the two corporations, the words “one of the members of one of the related groups owned” were replaced by the words “either of the related groups owned": such a change is so telling and clear that it is simply impossible not to give it effect. The ownership of the husband alone was sufficient before the amendment, but not so since.
Of course, the main propositions advanced in this reasoning are beyond dispute. No one would ever think of taking issue with the statement that a group is more than one person and that the husband alone cannot constitute a group. It is also quite obvious that there is absolutely no reason to think that Parliament may have used the word group without meaning group. If I am not persuaded by the learned trial judge's reasoning, it is simply because, as a whole, it does not appear to me to address the issue.
The problem that one may have, in reading the phrase used by Parliament in defining the third condition required for the application of paragraph 256(1)(e), is not whether the word “group” therein can be given a sense other than its grammatical and obvious one: it clearly cannot. The problem is rather when, in the mind of Parliament, could a related group (formed of individual shareholders of one of the corporations who, between them, own more than 50 per cent of the shares of that corporation) be said to own shares in the other corporation. And this is so for a very compelling reason. Parliament, which, of course, must be taken to know the law, was quite aware that none of the two related groups in control of the two corporations could, as a group, own shares in a strict sense. This is indeed legally impossible, since those groups, made up of different shareholders, have no legal personalities. One could be tempted to think of a partnership or some form of co-ownership, but neither a partnership, which is merely an agreement between individuals with a view to gain, nor a co-ownership of any kind may have the effect of setting up a legal entity independent of the partners or the co-owners and capable of legally owning shares by itself. (I do not think authority is needed on any of those points which are all quite basic but, in any event, I should mention an interesting discussion thereof in an article “The Nature of Corporate Personality” by David H. Bonham and Daniel A. Soberman appearing in Studies in Canadian Company Law ed. J. S. Ziegel at page 4 et seq.; as to the legal nature of partnership, I will only refer to Lindley on Partnership (14th edition) pages 29-31). When Parliament said that the group had to own shares in each of the two corporations, it certainly did not mean that the group as a group had to own in the legal sense which would have been absurd. Parliament necessarily meant: (a) that the group had to own in a sense other than the strict legal sense, and (b) that that special so-called ownership attributed to the group would come as a result of (the only possibility) personal genuine ownership of its members. The only problem therefore is, as I put it, when, in the mind of Parliament, would the group, through personal legal ownership of its members, be said to “own” in the special sense in which this word “own” is necessarily taken when used in reference to the group.
Now, addressing the real problem, it seems to me that one would look in vain in the wording of the Act for an indication that, for Parliament, before the group could be seen as “owning” shares, all of its members or a certain number of them had to be shareholders. In other words, if there is no question of the group becoming owner in the legal sense, why would it be easier or more correct to consider it as “owning” when all of its members are shareholders than when only some of them are or only one is. A simple parallel comes to mind: when one says, in common parlance, that a family owns an enterprise or that a family has or owns several enterprises, one does not mean that each and every member of that family has or owns part of the enterprise or part of each of the several enterprises.
In my respectful opinion, therefore, the wording of paragraph 265(1)(e) does not lead to the conclusion that a requirement for its application is that all of the members of either related group be shareholders in both corporations. And I suppose it goes without saying that such a requirement is certainly not one that could be read into the provision without clear words. It would indeed be a requirement hardly in keeping with the purpose of the provision which is clearly designed to reach corporate structures having two branches controlled by related shareholders not dealing at arm's length, as soon as there is any significant cross-shareholding. And furthermore, it would be a requirement that could lead to quite surprising results. For example, a company where a husband holds 50 per cent of the shares, his wife 1 per cent and a stranger 49 per cent would not be associated with another company where the husband has 50 per cent of the shares, his son 1 per cent and a stranger 49 per cent, but would, by way of contrast, be associated with a company in which the husband has 9 per cent of the shares, his wife 1 per cent, a son 40 per cent and a stranger the balance. Further examples of such inexplicable results could easily be imagined by increasing the number of individuals in a group: in fact by taking care to leave out one member of the group in the shareholding of each corporation, as many corporations as there are members in the group could be set up.
Finally, the substitution in 1972 of the words "one of the members of one of the related groups owned ...” by the words “either of the related groups owned ...” cannot, I submit, be taken as indicative of a change of policy to which the interpreter would have to give effect. The change was merely one of form made necessary by the increase, in the inter-corporate shareholding required, from one share to 10 per cent of the shares. Obviously, Parliament did not mean to require that the same shareholder be owner of 10 per cent of the shares in the other corporation; the 10 per cent was a total amongst the members, so the text could not be left as it was. True, it was not absolutely necessary to delete words, since the point could have been covered simply by adding words, but then a long paraphrase would have resulted such as: "one of the members of one of the related groups owned or any number of members of that related group amongst them owned". I am afraid that, like the drafters of the Bill, I would have failed to anticipate this trial and would have suggested the short solution which Parliament retained.
In my respectful opinion, the trial judge has misread this paragraph 256(1 )(e) and I would have quashed his decision.
Appeal dismissed.
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