Alteco Inc. v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2087

Bell, T.C.C.J.:—This appeal was heard under the informal procedure. The issue in this case is whether, for its 1989 taxation year, the appellant was entitled to take into account in the computation of its income an “allowable business investment loss” within the meaning of paragraph 38(c) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). This involves the determination of whether, in the computation of "business investment loss" within the meaning of paragraph 39(1)(c) of the Act a debt disposed of by it in that taxation year was owing to it by a Canadian- controlled private corporation with which it dealt at arm's length. The debt in question was owed to the appellant by a company named 581387 Saskatchewan Ltd. ("387").

Facts

The appellant owned 51 of the 100 issued Class A voting shares of 387 and a company called National Record Distributors Ltd. ("National") owned the balance of those shares. These were the only shares of 387 that were issued and outstanding during the relevant period. No evidence was adduced respecting the shareholdings of the appellant and National. It is assumed, by virtue of the silence of counsel for the respondent respecting same, that such shareholdings would not affect the determination of the issue herein. Such evidence would have served two purposes:

1. to show whether the shareholders of the appellant were related to the shareholders of National, this being necessary to determine whether appellant and 387 dealt with each other at arm's length, and

2. to show whether 387 was a “Canadian-controlled private corporation" as required by paragraph 39(1)(c) of the Act.

One of the respondent's assumptions of fact, set out in paragraph 3(n) of the reply to the notice of appeal was that:

The appellant did not incur a business investment loss in the amount of $35,962 and an allowable business investment loss in the amount of $23,976 in respect of 581387 [387] for the 1989 taxation year.

Further, not only did appellants counsel not take issue with the statement by respondents counsel that:

. . . the only issue that this Court must address is whether. . . the debt owed to Alteco was owed by a small business corporation with which it did not deal at arm's length, that being the numbered company.

but he referred specifically, in his argument, to paragraph 39(1)(c) of the Act which sets out the prerequisites of a business investment loss. [1]

Appellants counsel introduced in evidence copy of an agreement described as a joint venture agreement between National and the appellant, unsigned, and bearing the words “this agreement entered into the

day of March, A.D. 1987”. The appellant's only witness, a Mr. Al Warkentin, stated that an agreement including the terms of such exhibit was executed and that he had made a search for but could not find same. No evidence was presented to indicate that it was so executed before the commencement of the appellant's 1989 taxation year which can be seen from its return of income for that year to have commenced on August 1, 1988. Although the articles of incorporation of 387 are undated, they bear endorsement of registration in the Province of Saskatchewan Corporations Branch on December 30, 1986 and it is therefore assumed, no objection having been made in this regard, that the joint venture agreement was in existence during the entire 1989 taxation year of 387. This document provided for the incorporation of a company known as 387 for the purpose of operating a Music City record/audio retail store franchise in Saskatchewan using assets being purchased by National. It then provided, inter alia:

(a) for the share ownership as above set forth,

(b) that National would advance $65,000 to 387, and the appellant and National would cause 387 to repay that sum to National over a term of three years at a specified interest rate with specified monthly instalments,

(c) that in consideration of the advance by National aforesaid the appellant would guarantee repayment by 387 of such amounts to a maximum of 51 per cent of the principal amount thereof,

(d) that 387 obtain the following financing from the Canadian Imperial Bank of Commerce, Main Branch, Saskatoon, Saskatchewan which loans would be guaranteed proportionately by the appellant and National in accordance with their percentage ownership interest in 387, namely:

(i) the sum of $35,000 to be secured by inventory of 387 and to be utilized for the purpose of purchasing such inventory to a minimum value of $50,000,

(ii) the sum of $18,000 to be utilized for payment of leaseholds, fixtures and equipment,

(iii) the sum of $10,000 to be utilized as an operating revolving line of credit,

(e) that no shares of 387 held by the appellant or National would be pledged, hypothecated, mortgaged or otherwise sold or transferred without the prior written consent of the other party and that both parties would have the right of first refusal to acquire the shares of the other party in the event that either National or the appellant wished to dispose of same,

(f) for the appointment of specified officers,

(g) that the number of directors be fixed at five,

(h) the names of those directors, with the provision that such directors shall not:

looked a 1991 amendment to paragraph 39(1)(c), applicable to the 1987 and subsequent

be changed without the unanimous agreement in writing of the parties hereto

(i) that without the unanimous written agreement of the parties,

(i) there would be no increase or decrease in the number of directors of 387,

(ii) the capital of 387 would not be varied,

(iii) for the purpose of constituting a quorum for any meeting of directors there must be present a minimum of one director representing each party,

(iv) any vacancy in the board of directors would be replaced only by the unanimous resolution of remaining directors,

(j) that the parties thereto would irrevocably instruct their nominees or representatives upon the board of directors always to vote and act in accordance with the terms of the agreement so as to give full force and effect thereto,

(k) that the parties would cause 387 to execute a franchise agreement, a sublease, debenture and registered user agreement upon National's standard form in respect to the operation of National's "Music City” franchise,

(l) that funds of 387 would be deposited in an operating account to be maintained by 387 at a specified branch of the Bank of Nova Scotia and that all other funds of 387 and general operating accounts be deposited and maintained by 387 at the Canadian Imperial Bank of Commerce, main branch, with the signing officers to be established in accordance with the banking resolutions required by the aforesaid two banks as approved by the directors of 387.

It also provided that the appellant would have the right to purchase all shares of 387 owned by National:

(a) upon written request to National to that effect, or

(b) upon the lease agreement then existing for 387’s premises being renewed for a period of at least five years upon the expiry date of August 1, 1990.

The agreement also set forth two circumstances under which National would have the right to purchase all the outstanding shares of 387 held by the appellant. A further clause in the agreement provided for the determination of the purchase price of such shares under all the circumstances described above.

Mr. Warkentin testified that the five persons listed in the joint venture agreement as directors were in fact appointed as directors of 387. Two of the five directors were designated by the appellant and the remaining three directors were designated by National.

The amount of the allowable business investment loss to be taken into the computation of the appellant’s income, assuming the appellant is entitled to same, is $23,976.

No written notice of the execution of the joint venture agreement was filed as required by section 140(5) of the Business Corporations Act of Saskatchewan ("B.C.A."). That section reads:

Where a unanimous shareholder agreement is executed or terminated, written notice of that fact together with the date of the execution or termination thereof shall be filed with the Director within 15 days.

Appellant's argument

Appellant's counsel advanced the arguments that:

(a) the joint venture agreement was a" unanimous shareholder agreement": . . . which is on par with the articles of association . .. discussed in the Dworkin Furs case.

(b) the appellant did not control 387:

. I. .because the joint venture agreement provides that the majority of the board of directors are affiliates of National Records, that National Records in fact controlled [387]

and

. . .the fact that that position could not be changed except by unanimity and the fact that the unanimous shareholder agreement provisions are like or are comparable to articles of association we suggest mean that Alteco was at no time in control of the numbered corporation.

and that the

. . .concept of control, as has been developed in the case law, centres around ability to elect board of director members, in other words the ability essentially with 50 per cent plus one of the vote to elect the majority of the members to the board.

He then referred to the decision in Buckerfield's Ltd. v. M.N.R., [1964] C.T.C. 504, 64 D.T.C. 5301, subsequently discussed, as authority for that statement.

(c) because the appellant did not control 387 those two companies were not “related persons" as that term is defined in subsection 251(2) of the Act and, accordingly, shall be deemed to deal with each other at arm's length with the result that the appellant is not disqualified from claiming an allowable business investment loss within the meaning of paragraphs 38(c) and 39(1)(c) of the Act.

With respect to his first argument, appellant's counsel referred to section 2(1)(gg) of the B.C.A. as follows:

“unanimous shareholder agreement" means an agreement described in subsection 140(2) or a declaration of a shareholder described in subsection 140(2.1).

and to section 140(2) of the B.C.A. as follows:

An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and a person who is not a shareholder, that restricts, in whole or in part, the powers of the directors to manage the business and affairs of the corporation is valid.

He then referred to the provisions in the joint venture agreement requiring the company to enter into certain forms and types of financing, stating that these decisions are decisions of the board of directors but that the agreement took the power to make same away from the board of directors. He also referred to the facts in paragraphs (e), (g), (k) and (I) contending that these were restrictions on the powers of the directors to manage the business and affairs of 387.

His argument to the effect that the unanimous shareholder agreement was on a par with the articles of association, although obscure in presentation, related to the decision in M.N.R. v. Dworkin Furs (Pembroke) Ltd., Aaron's Ladies Apparel Ltd., [1967] S.C.R. 223, [1967] C.T.C. 50, 67 D.T.C. 5035. The Supreme Court of Canada directed that appeals of the Minister of National Revenue against five named respondents be heard together and that a joint factum be filed applicable to all five appeals. The Minister’s appeal was dis- missed in all five cases but it is the judgment in respect of Aaron's Ladies Apparel to which appellant’s counsel has reference in these proceedings.

In that case, the issue was whether Aaron's Ladies Apparel was, for income tax purposes, associated with another corporation. The question under consideration was whether during a period ending on July 14, 1961 Isidore Aaron and Alexander Aaron, who controlled another corporation, also controlled Aaron's Ladies Apparel and whether after that period a company called Aaron's (Prince Albert) Ltd. (controlled by those gentlemen) controlled Aaron's Ladies Apparel. Subsection 39(4) of the Act in respect of the period under examination read as follows:

39(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.

Mr. Justice Hall stated that there could be no argument that, but for article 6 of the articles of association, Isidore Aaron and Alexander Aaron controlled the respondent company by reason of holding 698 out of 1008 shares in their own names prior to July 14, 1961 and thereafter by controlling a corporation that controlled that respondent company. Article 6 to which reference is made above read as follows:

That all motions put before any meeting of shareholders or directors of the company shall require the unanimous consent of all its members, and paragraphs 46, 47 and 82 of the said Table A shall be amended accordingly.

The appellant Minister of National Revenue in that case contended that article 6 was illegal and ultra vires as being contrary to the provisions of the Companies Act of Saskatchewan, that it constituted an unreasonable restriction on the rights of a member to have a reasonable opportunity of bringing before the meeting any proposal or matter within the scope of the business of the meeting and was contrary to the fiduciary relationship which the directors at a directors’ meeting had towards the company which required them to give their entire ability to the best interest of the company and its shareholders. Mr. Justice Hall, at page 233 (C.T.C. 58, D.T.C. 5039), referred to the decision of Duff, J. (as he then was), in Theatre Amusement Co. v. Stone (1915), 50 S.C.R. 32,16 D.L.R. 855, 6 W.W.R. 1438 at page 36 S.C.R. (W.W.R. 1440) where he said:

The articles of association are binding upon the company, the directors and the shareholders, until changed in accordance with the law. So long as they remain in force, any shareholder is entitled, unless he is estopped from taking that position by some conduct of his own, to insist upon the articles being observed by the company, and the directors of the company. This right he cannot be deprived of by the action of any majority. In truth, the articles of association constitute a contract between the company and the shareholders which every shareholder is entitled to insist upon being carried out.

He then discussed a similar situation dealt with by the Supreme Court of Canada in Ringuet v. Bergeron, [1960] S.C.R. 672, 24 D.L.R. (2d) 449 and ultimately concluded, at page 236 (C.T.C. 61, D.T.C. 5041), that:

Control of a company within Buckerfield rests with the shareholders as such and not as directors. A contract between shareholders to vote in a given or agreed way is not illegal. The Articles of Association are in effect an agreement between the shareholders and binding upon all shareholders. Article 6 in question here was neither illegal nor ultra vires.

Accordingly, the appeal of the Minister of National Revenue was dismissed. As stated above, appellant's counsel suggests that the joint venture agreement constitutes a“ "unanimous shareholder agreement” under the B.C.A. of Saskatchewan and is therefore valid and, for some reason in respect of which no authority was cited, should be treated as was article 6 in the articles of association in the case referred to above. [2]

In the appellant's second argument regarding control, with direct reference to Buckerfield's above, appellant’s counsel said:

. . .it talks about the word “controlled” in the middle of the first column [C.T.C. 507, D.T.C. 5303] and it says that the right of control is that right in ownership of such numbers of shares as carries with it the right to a majority of the votes in the election of the board of directors. In other words, the way that I’m suggesting that can be read. . .is to say that the right or ability to have majority of the board of directors is the control of the corporation.

He then submitted the following with respect to control of 387:

So my suggestion to you, based on the Dworkin case, is that this is a provision where the majority of the board of directors was not appointed and/or received by Alteco and, therefore, Alteco did not exercise control in these circumstances. If Alteco did not exercise control of the numbered corporation then the losses as outlined in its original tax return are permitted the way they are claimed.

Appellant’s counsel's attempt to establish that a unanimous shareholder agreement would have the same effect as the articles of association was not supported by any substantive argument.

With respect to the third argument advanced by counsel for the appellant, the Court was literally left to ascertain the statutory path he sought to pursue. A distillation of his thesis would be that the appellant was not, within the meaning of subsection 251(2) of the Act, a person who controlled 387 and that the appellant and 387 were not, therefore, “related persons". The relevant portions of that subsection read as follows:

For the purpose of this Act “related persons", or persons related to each other, are. . .

(b) a corporation and

(i) a person who controls the corporation, if it is controlled by one person. . . .

If the appellant did not control 387 those two companies could not be deemed not to deal with each other at arm's length within the meaning of paragraph 251 (1)(a) of the Act, the pertinent portions of which read as follows:

For the purposes of this Act,

(a) related persons shall be deemed not to deal with each other at arm's length;

Accordingly, the appellant would be able to deduct the “allowable business investment loss" within the meaning of paragraph 38(c) of the Act in computing its income for its 1989 taxation year. Paragraph 38(c) of the Act reads as follows:

For the purposes of this Act

(c) a taxpayer's allowable business investment loss for a taxation year from the disposition of any property is A of his business investment loss for the year from the disposition of that property.

A 1988 amendment to the Act provides that A should be read as A for the appellant's 1989 taxation year. This must be read in conjunction with paragraph 39(1)(c) of the Act, the pertinent portion of which read as follows for the taxation year in question, namely:

For the purposes of this Act,

(c) a taxpayer's business investment loss for a taxation year from the disposition of any property is the amount, if any, by which his capital loss for the year from a disposition. . .

(ii) to a person with whom he was dealing at arm's length

of any property that is. . .

(iv) a debt owing to the taxpayer by a Canadian-controlled private corporation (other than, where the taxpayer is a corporation, a debt owed to it by a corporation with which it does not deal at arm's length)

exceeds the aggregate of. . . , [3]

Respondent's argument

Counsel for the respondent took the position that:

(a) the joint venture agreement was not a unanimous shareholder's agreement within the meaning of the foregoing sections of the B.C.A.,

(b) if the Court found it did qualify as a unanimous shareholder agreement within the meaning of subsection 140(2) of the B.C.A., it could not be a unanimous shareholder agreement because of the failure of the appellant to comply with the filing of written notice of the execution of same with the Director as required by subsection 140(5) of the B.C.A.,

(c) the decision in Buckerfield's could not, for reasons advanced by him as outlined below, assist the appellant,

(d) the decision in Aaron's Ladies Apparel did not apply to the appellant because of the decision of the Supreme Court of Canada in International Iron & Metal Co. v. M.N.R., [1969] C.T.C. 668, 69 D.T.C. 5445 (Exchequer Court of Canada) affirmed by the Supreme Court of Canada, [1974] S.C.R. 898, [1972] C.T.C. 242, 72 D.T.C. 6205, and

(e) by virtue of subsection 251(5) of the Act the appellant, because of the options granted to the appellant to acquire all the shares of 387 owned by the respondent, would be deemed to have controlled 387 and therefore be related to 387 and accordingly for purposes of paragraph 39(1)(c) be deemed not to deal at arm's length with 387.

With respect to the first two positions stated by respondent's counsel, no reason was given why, but for subsection 140(5) of the B.C.A., the joint venture agreement did not constitute a unanimous shareholder agreement. His statement at the hearing was:

I cannot give the Court submissions as to what the legal effect is if the unanimous shareholder’s agreement is not filed but we know in the instance at hand this agreement, this joint venture agreement, if it can be categorized as a unanimous shareholder agreement, which we submit it cannot, was not filed in this instance, so it is an agreement to which the Act does not apply.

When the Court asked what authority he had for that statement he replied that when a unanimous shareholder agreement was filed it became part of the constating documents of the corporation so that anyone interested in purchasing shares would have notice of the existence of the agreement. It seems appropriate here to state that the Court, at the end of the hearing, asked counsel for both parties to provide written submissions with respect to the effect of failure to file a written notice pursuant to subsection 140(5) of the B.C.A. on the validity of the proposition that the joint venture agreement was a unanimous shareholder's agreement. I will refer to those submissions later in these reasons.

With respect to counsel's third position, he referred to the decision in Buckerfield's and quoting from page 507 (D.T.C. 5303) read, inter alia, the following words of President Jackett in an analysis of whether companies were associated:

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. C.R.I., [1943] 1 All E.R. 13, [1943] A.C. 335, where Viscount Simon, L.C., at page 15 (A.C. 340), 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.

He then submitted simply that it was ownership of such number of shares as could elect a majority of the board that was the determining feature and not whether those shares were subject to some agreement.

With respect to counsel's fourth position, he referred to International Iron, supra, judgment being given by Mr. Justice Hall who delivered reasons for judgment in Aaron's Ladies Apparel. This case involved the question of whether an agreement between shareholders with respect to the designation of directors of a company would change the test of control set forth in Buckerfield’s. The Minister of National Revenue assessed the appellant as an associated corporation ruling that it and B Ltd. were both controlled directly or indirectly by the same group of persons consisting of nine children of four fathers. It was admitted for the appellant that B Ltd. was controlled by the group designated by the Minister and admitted that the appellant would also be controlled by the same group except for the effect of an agreement between the shareholders of the appellant made in 1957. Most of the shares of the appellant were held by the nine children (through holding companies), the four fathers holding one share each. By the terms of the aforesaid agreement, the voting power of the children was restricted to the election of the four fathers as directors of the children’s holding companies. The appellant argued that the four fathers therefore constituted the group of persons that controlled it. Mr. Justice Gibson, in rejecting the proposition that the aforesaid agreement was effective in granting control of the appellant company to certain individuals, said at pages 673-74 (D.T.C. 5448):

The meaning of "controlled" in section 39 of the Income Tax Act in reference to a corporation means the right of control that is vested in the owners of such a number of shares in a corporation so as to give them the majority of the voting power in a corporation.

The fact that a shareholder in such a corporation may be bound under contract to vote in a particular way regarding the election of directors (as in this case), is irrelevant to the said meaning of controlled” because the corporation has nothing to do with such a restriction.

Instead, the only relevant fact is that the voting power in such a corporation remains in the owners of such a number of shares. In other words, they do not in any lesser way control the corporation because they themselves may be liable to certain externa! control created by such a contract.

As a consequence, in my view, this said agreement was not the kind of contract among shareholders discussed in the said decision in the M.N.R. v. Dworkin Furs (Pembroke) Ltd., supra, which has the effect of accomplishing what was the intention of the parties herein, namely, to give to a certain group, the kind of de jure control contemplated by section 39 of the Income Tax Act so as to avoid certain income tax consequences, because in that case, by virtue of the statute it became part of the constitution of the company.

Mr. Justice Hall, in the Supreme Court affirmation of that decision, said at page 901 (C.T.C. 244, D.T.C. 6207):

Gibson J, dismissed the appeals of the appellant, holding that the four fathers did not have de jure control of appellant in the taxation years 1961 to 1964 inclusive and upheld the contention of the Minister that appellant was a company controlled by the same group of persons as controlled Burland.

I agree with the trial judge. The meaning of" control” in s. 39(4)(b) which reads:

39(4) For the purpose of this section, one corporation is associated with another in a taxation year if, at any time in the year. . . .

(b) both of the corporations were controlled by the same person or group of persons.

means the right of control that is vested in the owners of such a number of shares in a corporation so as to give them the majority of the voting power in the corporation. . . .

With respect to his fifth position respondent's counsel submitted that by virtue of subsection 251(5) of the Act the appellant would be deemed to have controlled 387 and therefore be related to same. The pertinent portion of that subsection reads as follows:

For the purposes of paragraph . . . and subsection (2). . . .

(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

(i) to, or to acquire, shares in a corporation, or to control the voting rights of shares in a corporation, shall, except where the contract provides that the right is not exercisable until the death, bankruptcy or permanent disability of an individual designated therein, be deemed to have the same position in relation to the control of the corporation as if he owned the shares. . . .

He submitted that the appellant had the right at any time to purchase the shares of National and also had an option to do so upon the renewal of the lease. He stated further that one right was a right that was absolute and the other was a right that was contingent. He then stated:

On that basis, Your Honour, Alteco is deemed to have been in the same position as if it owned the shares so it is deemed to control the corporation and as such it would be related, not dealing at arm's length, and subparagraph 39(1)(c)(iv) would state that this is not a business investment loss.

Counsel for the appellant made no response to this argument.

Analysis

After considering all of the foregoing in detail I concluded that the arguments of and authorities presented by counsel for both parties assisted only partially in the determination of the issue herein. It was my view that additional research, particularly in the area of control, was necessary in order to resolve the issue. Before proceeding with an analysis of other cases on that subject I shall deal with the respondent's last argument.

I agree with the respondent that the appellant, within the meaning of paragraph 251(5)(b) of the Act, by virtue of the rights given to it under the joint venture agreement, had the right to acquire the 49 shares of 387 owned by National and, within the meaning of the aforesaid paragraph of the Act would be deemed to have the same position in relation to the control of 387 as if it owned those 49 shares. However, this does not bring about the result sought by respondent's counsel. My reason for this statement is that that subsection creates a legal fiction which does not assist the Court in these circumstances. Even if the appellant was deemed to have the same position in relation to those 49 shares of 387 as if it owned the shares, the joint venture agreement still existed and the rights and obligations of the appellant and National created under such agreement continued. In other words, the nominees or representatives of those two companies on the board of directors of 387 would still be obliged to vote and act in accordance with the terms of that agreement to give it full force and effect and to carry out its intent. It should be remembered that the directors could not be changed without the unanimous agreement in writing of the parties thereto. Accordingly, the application of that subsection does not resolve the issue.

A review of the cases already previously discussed and of other cases dealing with control portrays the evolution in the change of the concept of control in the income tax context in different fact situations.

In Buckerfield's company P and company F each owned half the shares of Buckerfield’s and half the shares of Green Valley and there was an agreement to the effect that their shareholdings would be maintained at the same level and that each would have an equal voice in the control and operation of Buckerfield’s and Green Valley. Company P and company F had agreed in writing that their shareholdings in Buckerfield’s were to be maintained at the same level, that notwithstanding the number of shares held or controlled by either of them each of them was to have an“ equal voice . . . in the control and operation of Buckerfield's", that each of them was to be entitled to nominate 50 per cent of the board of directors of Buckerfield’s, that "the management of Buckerfield’s . . . shall be such as shall at all times . . . be acceptable to both parties” and that each of them should have a right of first refusal in respect of the other's shares in Buckerfield’s. The question to be determined was simply whether Buckerfield’s and Green Valley were controlled by the same group of persons. If so, those companies would be associated” with each other within the meaning of section 39 of the Act as it then read.

In coming to the above quoted words at page 507 (D.T.C. 5303) that:

The word “control” might conceivably refer to de facto control by one or more shareholders whether or not they had 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.

Jackett, P. referred to British American Tobacco Co. v. C.R.I., [1943] 1 All E.R. 13, [1943] A.C. 335, where Viscount Simon, L.C., using less limiting language, at page 15 (A.C. 340) said:

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. [4]

In analyzing whether control could be exercised by management officials or the board of directors, the learned president said that such was clearly not intended by section 39 when it contemplated control of one corporation by another as well as control of a corporation by individuals.

The circumstances in the Aaron’s Ladies Apparel, heard by the Supreme Court of Canada some three years later, were more complex in that, as set out above, the articles of association provided that all motions put before any meeting of shareholders or directors would require the unanimous consent of all shareholders. Mr. Justice Hall, speaking for the Court, said at page 236 (C.T.C. 61, D.T.C. 5041):

Control of a company within Buckerfield rests with the shareholders as such and not as directors. A contract between shareholders to vote in a given or agreed way is not illegal. The articles of association are in effect an agreement between the shareholders and binding upon all shareholders.

Although the Buckerfield's reasoning was adopted, there exists, in this case, a factor in addition to the simple ownership of shares, namely the above quoted article 6.

The 1969 decision of the Exchequer Court of Canada in Donald Applicators Ltd. v. M.N.R., [1969] C.T.C. 98, 69 D.T.C. 5122, affirmed by the Supreme Court of Canada, [1971] S.C.R. v, [1971] C.T.C. 402, 71 D.T.C. 5202, is of some assistance in the quest to comprehend the evolution of the meaning of "control" for taxation purposes. In this case there were ten companies. Each such company had Class A shares which carried the right to vote on any question and the exclusive right to vote on the election of directors, a right which could not be altered without the unanimous consent of the Class A shareholders. Each company also had Class B shares which carried the right to vote on all questions except the election of directors. In each case the memorandum of association provided that no share or shares might be transferred without the consent of the directors. In each company two Class A shares were held by two unrelated persons resident in Nassau in the Bahamas and in no case did the same two persons hold the shares in more than one of the companies. In each case the Class A shareholders had elected themselves to be the directors of the company. In each case 498 Class B shares had been issued to Saje Management Ltd. ("Saje"). The only functions carried out by the directors as such were to sign financial statements and the minutes of directors’ and shareholders' meetings all of which were prepared in Edmonton and taken to Nassau by one of the two holders of all the shares of Saje.

Mr. Justice Thurlow, of the Exchequer Court, referred to a number of cases including Dworkin Furs, Buckerfield's, British American Tobacco and Aaron's Ladies Apparel and, at pages 102-03 (D.T.C. 5125) said:

Nor was there involved in these cases any question as to the functions and authority of directors when elected, it having been, I think, assumed that the directors had the usual general authority to exercise the powers of the company. It therefore appears to me that while these cases afford principles by which one may be guided they offer no foregone conclusion for a case such as the present. Thus, while in an ordinary situation control may reside in the voting power to elect directors such power to choose directors in my opinion would not afford control of a company in which, by the memorandum and articles, the directors had been shorn of authority to make decisions binding upon the company and such decisions had been reserved for the shareholders in general meeting. If, therefore, in an ordinary situation control of a company rests in the voting power to elect directors but in the suggested situation does not rest in such voting power it seems to me that when the situation is not ordinary the question of de jure control of the company must be resolved as one of fact and degree depending on the voting situation in the particular company and the extent and effect of any restrictions imposed by the memorandum and articles on the decision making powers of the directors.

The statement of the president of this Court in Buckerfield's case, [1965] 1 Ex. C.R. 299, [1964] C.T.C. 504, 64 D.T.C. 5301 at page 303 (C.T.C. 507, D.T.C. 5303), when he said "I am of the view, however, that in section 39 of the Income Tax Act, the word “controlled” contemplates the right 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" should, I think, be read and understood as applying to a case where the directors when elected have the usual powers of directors to guide the destinies of the company.

The learned justice then stated that the directors had ample authority to commit the companies to various contracts and other arrangements and could not, on that account alone, conclude either that control of those companies did not rest in the owners of the Class A shares or that control rested in the voting power of the Class B shareholders. However he found that Saje's Class B shares of each of the ten companies had ample voting power, not merely to pass or to defeat any ordinary resolution (other than one electing directors) ut to pass or defeat any special resolution or any extraordinary resolution that might be proposed. Accordingly, that shareholder had the voting power to change the articles of the company and to repeal any article conferring upon the directors authority to bind the company while reserving all decision making power not specifically conferred on the directors by the statute or by the memorandum of association for the shareholders as a whole or of Class B shares only, in general meetings. Saje had the voting power to remove the directors from office and had the voting power to pass a special resolution to eliminate the need for unanimous consent of all shareholders to the issue of additional shares, etc. The learned justice, in finding that the companies were associated, stated, at page 105 (D.T.C. 5126), that a shareholder who, though lacking immediate voting power to elect directors, had sufficient voting power to pass any ordinary resolution as well as a special resolution which could remove the powers of the directors, dismiss directors and ultimately even secure the right to elect the directors:

. . . is a person of whom I! do not think it can correctly be said that he has not in the long run the control of the company. Such a person in my view has the kind of de jure control contemplated by section 39 of the Act.

In a judgment of the Exchequer Court of Canada dated November 17, 1969, namely Consolidated Holding Co. v. M.N.R., [1969] C.T.C. 633, 69 D.T.C. 5429 the issue was whether the terms of a will affecting shares of a company owned by the estate could be considered in the determination of control. In that company H.D.G. and R.D.G. each owned 50 per cent of the voting shares of the appellant which owned 13,110 of the 30,000 issued shares of M & R Ltd. ("M & R"). H.D.G. and R.D.G. also owned one share each of M & R and were, together with a trust company, executors of an estate which owned 13,777 shares of M & R. Clause 15 of the will of the deceased read as follows at page 634 (D.T.C. 5430):

In carrying out the duties imposed upon my Trustees save as aforesaid, I direct that the views, discretion or direction of any two of my trustees shall be binding upon the other of my Trustees.

The Minister of National Revenue maintained that the appellant and M & R were associated since H.D.G. and R.D.G. controlled the appellant and also had voting control, not only of the 13,110 shares of M & R owned by the appellant but also of the 13,777 shares owned by the estate. Sheppard, D.J. found that the terms of the will affecting the estate could not be considered and that the Articles of Association of M & R were the determining factor. Under these articles, the voting of the executors had to be unanimous in voting the shares of the estate. Accordingly, the trust company had equal voice with the two coexecutors and could prevent them from exercising that control which was accorded by the will.

On December 20, 1971, on an appeal by the Minister of National Revenue, [1974] S.C.R. 419, [1972] C.T.C. 18, 72 D.T.C. 6007, Mr. Justice Judson, delivering the majority decision reversing the Exchequer Court, stated, without reference to any authority, at pages 422-23 (C.T.C. 20, D.T.C. 6008) that:

In determining whether a group of persons controls a company, it is not sufficient in the case of trustees who are registered as shareholders to stop the inquiry at the register of shareholders and the articles of association. It is necessary to look to the trust instrument to ascertain whether one or more of the trustees have been put in a position where they can at law direct their co-trustees as to the manner in which the voting rights attaching to the shares are to be exercised.

and

Here, if one looks at the facts as a whole, one finds that the two Gavins, by combining, can control the vote of the estate shares. They already control the voting of Consolidated”. In this case, therefore, both corporations are controlled by the same group of persons, namely the two Gavins.

On December 5, 1969 Mr. Justice Gibson of the Exchequer Court of Canada delivered his judgment in International Iron. At pages 673-74 (D.T.C. 5448) the learned justice said, as above quoted: [5]

The meaning of" controlled" in section 39 of the Income Tax Act in reference to a corporation means the right of control that is vested in the owners of such a number of shares in a corporation so as to give them the majority of the voting power in a corporation.

The fact that a shareholder in such a corporation may be bound under contract to vote in a particular way regarding the election of directors (as in this case), is irrelevant to the said meaning of "controlled" because the corporation has nothing to do with such a restriction.

Instead, the only relevant fact is that the voting power in such a corporation remains in the owners of such a number of shares. In other words, they do not in any lesser way control the corporation because they themselves may be liable to certain external control created by such a contract.

In support of this proposition he refers to the words of Sheppard, J. some 18 days earlier in Consolidated Holding, the reversal of which decision is discussed above. [6] On appeal to the Supreme Court of Canada, Mr. Justice Hall, for the Court referred to Mr. Justice Gibson’s dismissal of the appeals and said at page 901 (C.T.C. 244, D.T.C. 6207):

I agree with the trial judge. The meaning of "control" in paragraph 39(4)(b) which reads:

39(4) For the purpose of this Section, one corporation is associated with another in a taxation year if, at any time in the year. . . .

(b) both of the corporations were controlled by the same person or group of persons.

means the right of control that is vested in the owners of such a number of shares in a corporation so as to give them the majority of the voting power in the corporation. . . .

International Iron is the case upon which respondent's counsel relied. However, the emergence of a less rigid judicial interpretation of the doctrine of control is discernible.

In the Supreme Court of Canada case of The Queen v. Imperial General Properties Ltd., [1985] 2 S.C.R. 288, [1985] 2 C.T.C. 299, 85 D.T.C. 5500, the Crown's appeal in respect of the issue of association of companies was allowed. A majority of the Court was of the view that it was not limited to a highly technical and narrow interpretation of the legal rights attached to the shares of the taxpayer nor constrained to examine those rights in the context only of their immediate application in a corporate meeting. In this case V Ltd. owned 90 of the 100 issued common shares of Imperial General. The remaining ten shares were owned by G. In addition, G and his wife held 80 voting but non-participating preference shares of Imperial General. The common shares and the preference shares carried one vote each. The holders of the preference shares were entitled to a fixed cumulative preferential dividend of ten per cent per annum. On a liquidation or winding up of the taxpayer, the holders of the preference shares were entitled to recover the par value of the shares plus any accumulated but unpaid dividends in priority to the common shares. The holders of the common shares were entitled to the remaining surplus. In summary, V Ltd. held 90 per cent of the common shares but only 50 per cent of the voting power. A 50 per cent vote in favour was sufficient to wind up the company. The Minister had assessed Imperial General on the basis that it was controlled by V Ltd. and thus associated with V Ltd. The Tax Review Board confirmed that assessment but, on further appeal, both the Federal Court, Trial Division and the Federal Court of Appeal found that V Ltd. and the taxpayer were not associated because V Ltd. was not entitled to a voting majority.

After referring to Buckerfield's, Mr. Justice Estey, at page 294 (C.T.C. 302, D.T.C. 5502), referring to Dworkin Furs said that Mr. Justice Hall adopted a somewhat broader concept of control from British American Tobacco, when he quoted Viscount Simon, L.C. as saying:

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.

Mr. Justice Estey then goes on to say:

It has been said that control for these purposes concerns itself with de jure and not de facto considerations . . . . Such a distinction, while convenient to express as a guide of sorts in assessing the legal consequences in factual circumstances, is not, as we shall see, an entirely accurate description of the processes of determination of the presence of control in one or more shareholders for the purpose of subsection 39(4).

At pages 295-96 (C.T.C. 302-03, D.T.C. 5503) the learned justice said:

In determining the proper application of subsection 39(4) to circumstances before a Court, the Court is not limited to a highly technical and narrow interpretation of the legal rights attached to the shares of a corporation. Neither is the court constrained to examine those rights in the context only of their immediate application in a corporate meeting. It has long been said that these rights must be assessed in their impact "over the long run". See Thurlow, J. (as he then was) in Donald Applicators Ltd. v. M.N.R., [1969] C.T.C. 98, 69 D.T.C. 5122 at page 105 (D.T.C. 5126), aff'd by this Court at [1971] S.C.R. v, [1971] C.T.C. 402, 71 D.T.C. 5202.

At page 298 (C.T.C. 304, D.T.C. 5504) the learned justice said:

The approach to "control" here taken does not involve any departure from prior judicial pronouncements nor does it involve any “alteration” of the existing statute. The conclusions reached above merely result from applying existing case law and existing legislation to the particular facts of the case at bar. The application of the "control" concept, as earlier enunciated by the courts, to the circumstances now before the court is, in my view, the ordinary progression of the judicial process and in no way amounts to a transgression of the territory of the legislator.

We were also invited by counsel for the respondent to consider other combinations of share interests and to consider those combinations in the light of varying economic circumstances of a taxpayer. We are here concerned only with the corporate structure of the respondent in the tax years in question. The courts will deal with other combinations and circumstances if and when those circumstances do indeed come before the courts in future appeals.

In International Mercantile Factors Ltd. v. Canada, [1990] 2 C.T.C. 137, 90 D.T.C. 6390 Mr. Justice Teitelbaum of the Federal Court, Trial Division found that control of International Mercantile Factors Ltd. rested in the hands of two shareholders who, although they owned only 50 per cent of the voting rights of the company, had the majority of nominees on its board of directors, which board could not be changed without a majority vote of the shareholders. The issue was whether International Mercantile Factors Ltd. was a Canadian- controlled private corporation within the meaning of that term as defined in the Act. His words, at page 148 (D.T.C. 6399) are:

The by-laws of plaintiff company clearly state that if a new board is not elected annually, and this can only be done by majority vote, then the then existing board remains as the board of directors. This gives Charter and Hamilton legal and effective control with regard to all major decisions of plaintiff.

This finding may not be "on all fours" with the findings in the cases of Buckerfield and Dworkin Furs, supra. As in the cases of Oakfield Developments Ltd. v. M.N.R., [1971] S.C.R. 1032, [1971] C.T.C. 283, 71 D.T.C. 5175, or Imperial Properties, supra the Supreme Court of Canada went further than the Buckerfield and Dworkin Furs cases by defining the issue of control not on the fact of equal voting rights, but by the fact that one 50 per cent shareholder could cause the liquidation of the company giving it control. I also, following the principle in Oakfield and Imperial Properties, am satisfied that because Charter and Hamilton have retained, for as long as they wish, the majority of the board of directors, they have retained legal and effective control of the plaintiff corporation as control was defined in paragraph 125(6)(a) of the Income Tax Act.

Paragraph 125(6)(a), defining ''Canadian-controlled private corporation” for the taxation years in question read as follows:

"Canadian-controlled private corporation” means a private corporation that is a Canadian corporation other than a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation) or by any combination thereof;

Conclusions

I find that the joint venture agreement, for the taxation year in question, was a "unanimous shareholder agreement” within the meaning of that term as defined in the B.C.A. I was referred to no authority to suggest that it was not an otherwise lawful written agreement between the two shareholders of 387. There is no doubt that it restricted some of the powers of the directors of that company in the management of its business and affairs. The written submissions with respect to the effect of failure to file written notice of such agreement with the director as required were of assistance only to the extent of outlining potential sanctions for such failure. I find also, counsel not having referred to any authority to the contrary, that failure to file such written notice did not invalidate the unanimous shareholder agreement. It is apparent that the joint venture agreement was not prepared as a unanimous shareholder agreement but the title given to it is irrelevant to the conclusion that, in law, it can qualify as such.

In this regard, section 97(1) of the B.C.A. reads as follows:

Subject to any unanimous shareholder agreement, the directors of a corporation shall:

(a) exercise the powers of the corporation directly or indirectly through the employees and agents of the corporation; and

(b) direct the management of the business and affairs of the corporations.

This provision is, not surprisingly, consistent with and endorsing of the definition of “unanimous shareholder agreement”. It supplements that definition and endorses the validity of the acts that directors may perform pursuant to the provisions of such an agreement. However, I have not been referred to any provision of the B.C.A. or to any case law that persuades me to conclude, as urged by appellant’s counsel, that a unanimous shareholder agreement is "on par with the articles of association”. It is noted that 387 is not a party to the agreement and therefore has no contractual obligation to comply with what the shareholders thereunder want to do. The result is that I cannot find the appellant successful on the basis of the Aaron's Ladies Apparel decision.

The appellant and National, the only two shareholders of 387 have agreed, inter alia, in the joint venture agreement, which contains no termination provision, that the number of directors of 387 be fixed at five. Five directors, three representing National and two representing the appellant were appointed and provision was made that such directors could not be changed without the unanimous agreement in writing of the appellant and National. In addition, those two parties agreed that there would be no increase or decrease in the number of directors of 387, that for the purpose of constituting a quorum for any meeting of directors there must be present a minimum of one director representing each party, that any vacancy would be replaced only by the unanimous resolution of remaining directors and that the parties would irrevocably instruct their nominees or representatives upon the board of directors always to vote and act in accordance with the terms of such agreement so as to give full force and effect thereto. In these circumstances, in spite of the fact that the appellant owned 51 per cent of the voting shares of 387, it was not in a position to alter the board of directors the composition of which had been agreed to by it.

Accordingly, I have concluded, based upon all the facts and the authorities cited herein, that the appellant did not control 387 and was not related to 387, the result being that those two companies were, on that basis, dealing with each other at arm's length. No evidence was adduced and no argument was advanced as to whether, as a question of fact, the appellant and 387 were dealing with each other at arm's length within the meaning of paragraph 251(1)(b) of the Act and so I assume that this is not a barrier to the appellant's success. Making the further assumptions referred to above, the conditions of paragraphs 39(1)(c) and 38(c) of the Act have been met and the appellant is entitled to take into account, in the computation of its income for the 1989 taxation year, an allowable business investment loss in the amount of $23,976.

The appeal is therefore allowed with costs.

Appeal allowed.