Oakfield Developments (Toronto) Ltd. v. Minister of National Revenue, [1971] SCR 1032

Supreme Court of Canada

Oakfield Developments (Toronto) Ltd. v. Minister of National Revenue, [1971] S.C.R. 1032

Date: 1971-04-27

Oakfield Developments (Toronto) Limited Appellant;

and

The Minister of National Revenue Respondent.

1970: November 5, 6; 1971: April 27.

Present: Abbott, Martland, Judson, Ritchie, Hall, Spence and Pigeon JJ.

ON APPEAL FROM THE EXCHEQUER COURT OF CANADA

Taxation—Income tax—Assessment on basis corporation controlled by certain shareholders and therefore associated with other corporations controlled by same shareholders—Whether corporation so controlled—Income Tax Act, R.S.C. 1952, c. 148, s. 39(4) [re-en. 1960, c. 43, s. 11(1)]

The appellant company was formed by amalgamation in 1964. One of its predecessor corporations was Polestar, of which there were 5,000 issued common shares. These shares, each carrying one vote

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per share, were held by a group of corporate shareholders, referred to as the “inside group”. Supplementary letters patent for Polestar, which inter alia authorized the issue of 5,000 voting preference shares, were signed and sealed on February 15, 1961, but bore the date of December 20, 1960. On December 21, 1960, the directors purported to allot and issue the preferred shares to two individuals, both strangers to the inside group.

In respect of two fiscal periods ending in 1963, Polestar was assessed by the Minister on the basis that it was “controlled” by the inside group of shareholders within the meaning of s. 39(4) of the Income Tax Act and, therefore, associated with other companies controlled by the same shareholders. The effect of this assessment was to disentitle Polestar to the lower tax rate on its first $35,000 of taxable income as provided in s. 39(1).

The assessments were confirmed on appeal to the Exchequer Court, where it was held that the Minister was not precluded from establishing that in fact the supplementary letters patent bore a date antecedent to their actual issue. It followed that no preference shares were validly issued by Polestar and that the common shareholders never lost control of the company.

Held: The appeal should be dismissed.

The inside group controlled 50 per cent of the voting power through their ownership of the common shares. They were entitled to all the surplus profits on a distribution by way of dividend after the payment of the fixed cumulative dividend to the preferred shareholders. On a winding-up of Polestar, they were entitled to all of the surplus after return of capital and the payment of a 10 per cent premium to the preferred shareholders. Their voting power was sufficient to authorize the surrender of the company’s letters patent. These circumstances were sufficient to vest control in the group even if the owners of non-participating preferred shares held the remaining 50 per cent of the voting power. Accordingly, it was unnecessary to deal with the grounds relied on by the Court below in dismissing the appeal from the assessment.

Minister of National Revenue v. Dworkin Furs (Pembroke) Ltd. et al., [1967] S.C.R. 223, distinguished.

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APPEAL from a judgment of Cattanach J. of the Exchequer Court of Canada[1], confirming an assessment of income tax. Appeal dismissed.

W.D. Goodman, Q.C., and F.E. Cappell, for the appellant.

G.W. Ainslie, Q.C., and G.J. Rip, for the respondent.

The judgment of the Court was delivered by

JUDSON J.—The appellant, Oakfield Developments (Toronto) Limited, is a private company provincially created by letters patent of amalgamation dated October 8, 1964. One of its predecessor corporations was Polestar Developments Limited. In respect of its two fiscal periods ended March 31, 1963, and August 27, 1963, Polestar was assessed by the Minister on the basis that it was “controlled” by certain corporate shareholders within the meaning of s. 39(4) of the Income Tax Act and, therefore, associated with other companies controlled by the same shareholders. The effect of this assessment was to disentitle Polestar to the lower tax rate on its first $35,000 of taxable income as provided in s. 39(1). On appeal to the Exchequer Court, these assessments were confirmed and Oakfield now appeals from that decision. The sole point in issue is whether Polestar was so controlled during its two 1963 taxation years.

Polestar was incorporated on March 22, 1960, pursuant to the provisions of the Ontario Corporations Act. There were 5,000 common shares issued, each carrying one vote per share, and held as follows:

The shares in 42 other companies, referred to as the “Okun group”, were also held by these

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five corporations, except that El Cindad Limited frequently replaced Loring. These corporate shareholders, referred to as the “inside group”, were assumed to control each of the other companies in the Okun group for the purpose of this appeal.

On March 31, 1960, the Minister of Finance announced that the provisions of the Income Tax Act were to be changed so that association of companies would be determined on the basis of “control” rather than on “ownership” which was the rule at that time. The proposed legislation was to be applicable to the 1961 and subsequent taxation years. This change was subsequently enacted by s. 11(1) of Statutes of Canada, 1960, c. 43, which amended s. 39(4) to read:

(4) For the purpose of this section, 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,

(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 one or more shares of the capital stock of each of the corporations,

(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 one of those persons owned directly or indirectly one or more shares of the capital stock of each of the corporations, 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 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.

In anticipation of the passage of this legislation, a plan of reorganization was devised so that the companies would still not be associated with each other. On December 20, 1960, Polestar applied to amend its letters patent so that it would be authorized to issue Class B voting non‑partici-

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pating cumulative redeemable preferred shares. Supplementary letters patent were subsequently signed and sealed on February 15, 1961, but bore the date of December 20, 1960.

On December 21, 1960, the directors of Polestar purported to allot and issue 5,000 Class B preferred shares, 4,999 to Lionel Schipper and 1 to his wife, both strangers to the members of the inside group. Each group then represented 50 per cent of the voting power. Mr. Okun personally guaranteed to the preferred shareholders a return upon 30 days’ notice of the moneys invested by them in the purchase of the shares, and the payment of 10 per cent per annum thereon.

The Class B preferred shares carried the right to a fixed cumulative preferential dividend at the rate of 10 per cent per annum, payable yearly, and the right to repayment of capital in priority to the common shares in the winding up of Polestar, but no rights as to further participation in profits or assets. The first dividend on the voting preference shares was declared on April 1, 1961, and all subsequent dividends were regularly paid.

At the same meeting on December 21, 1960, the number of directors was increased from three to four, and Mr. and Mrs. Schipper were elected as directors. Payment for the preferred shares was received by Polestar and certificates were duly issued.

Pursuant to the plan of reorganization, the supplementary letters patent also provided that the chairman presiding at any directors’ or shareholders’ meeting was not to have a casting vote in the case of an equality of votes. In addition, 50 per cent of the votes of shareholders entitled to vote could authorize a surrender of the company’s letters patent.

The taxation year of Polestar ordinarily ended on March 31 of each year. In August 1963, Polestar was amalgamated with another company, thereby ending a second taxation year in 1963. The taxation years under appeal are the fiscal periods ending March 31, 1963, and August 27, 1963.

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Section 11 of the Ontario Corporations Act provides that a corporation comes into existence on the date of the letters patent incorporating it. After the decision of the Court below, the following subsection was added to s. 11 by The Corporations Amendment Act, 1968-69 (Ont.), c. 16, s. 2:

(2) Letters patent of incorporation, letters patent of continuation, letters patent of amalgamation and supplementary letters patent, issued under this Act or any predecessor thereof, take effect on the date set forth therein.

The Minister assessed Polestar on the basis that it was associated with the other companies in Okun’s group. The validity of these assessments is dependent upon whether the “inside group” or common shareholders of Polestar controlled the company within the meaning of s. 39(4).

The inside group controlled 50 per cent of the voting power through their ownership of the common shares. They were entitled to all the surplus profits on a distribution by way of dividend after the payment of the fixed cumulative dividend to the preferred shareholders. On a winding-up of Polestar, they were entitled to all of the surplus after return of capital and the payment of a 10 per cent premium to the preferred shareholders. Their voting power was sufficient to authorize the surrender of the company’s letters patent. In my opinion, these circumstances are sufficient to vest control in the group when the owners of non-participating preferred shares hold the remaining 50 per cent of the voting power.

The decision of this Court in Minister of National Revenue v. Dworkin Furs (Pembroke) Ltd. et al.[2] can be distinguished from the present case. In the Dworkin Furs case, the voting was split equally between two groups also, but there was only one class of shares. Each group had the same de jure rights, and each shareholder was entitled to share rateably in the profits and assets of the company by dividends or on winding up. In addition, neither group could itself wind up the company.

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I would dismiss the appeal with costs.

Cattanach J., in the Exchequer Court, arrived at the same result but on different grounds. He held that the Minister was not precluded from establishing that the supplementary letters patent bore a date antecedent to their actual issue on the authority of Letain v. Conwest Exploration Co. Ltd.[3], and they were not in fact issued until February 15, 1961. It followed that no preference shares were validly issued by Polestar on December 21, 1960, as the capital stock of Polestar did not include such stock at that time, and the common shareholders never lost control of the company. It is unnecessary to deal with these grounds in view of my opinion that there was sufficient control even if the preferred shares were validly issued.

Appeal dismissed with costs.

Solicitors for the appellant: Goodman and Carr, Toronto.

Solicitor for the respondent: D.S. Maxwell, Ottawa.