Peter Cundill & Associates Ltd. v. Her Majesty the Queen, [1991] 2 CTC 221, 91 DTC 5543

Mahoney, J.A. [Marceau and MacGuigan, JJ.A concurring]:—This is an appeal from a reported decision of the Trial Division [1991] 1 C.T.C. 197; 91 D.T.C. 5085, which dismissed the appellant's appeal against its 1985 and 1986 income tax assessments imposing a 25 per cent withholding tax on fees paid to it to Peter Cundill & Associates (Bermuda) Ltd., hereafter "the Bermuda company". The tax imposed pursuant to paragraph 212(1)(a) of the Income Tax Act; the appellant invoked the exemption of paragraph 212(4)(a).

212. (1) Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of,

(a) a management or administration fee or charge;

(4) For the purposes of paragraph (1)(a), a “management fee or charge” does not include any amount paid or credited or deemed by Part I to have been paid or credited to a non-resident person as, on account or in lieu of payment of, or in satisfaction of,

(a) a service performed by the non-resident person if, at the time he performed the service,

(i) the service was performed in the ordinary course of a business carried on by him that included the performance of such a service for a fee, and

(ii) the non-resident person and the payer were dealing with each other at arm's length, or. . .

to the extent that the amount paid or credited was reasonable in the circumstances.

251. (1) For the purposes of this Act,

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

(b) it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length.

The agreement under which the payments in issue were made was dated February 17, 1984, and stated to be effective for the period April 1, 1984 to March 31, 1987. The Bermuda company was incorporated February 17, 1984; F. Peter Cundill was beneficial owner of all of its shares. Prior to March 31, 1984, the shares of the appellant were owned 75 per cent by F. Peter Cundill and 25 per cent by Guest Holdings Ltd. Thereafter, the shareholdings were: F. Peter Cundill—50 per cent, Guest Holdings Ltd.—25 per cent, Ursula Kummel—15 per cent and Margaret Vrabel—10 per cent. The shareholders were not related.

The appellant challenged both the finding by the learned trial judge that what was paid to the Bermuda company was a management fee and that the appellant and the Bermuda company were not dealing at arm's length when they entered into the agreement. We did not hear the respondent on the first issue. The entire reasons of the learned trial judge in his conclusions on the second issue follow.

In Interpretation Bulletin IT-419 Revenue Canada suggested the following factors will determine whether or not dealings are at arm's length:

(a) the existence of a common mind which directs the bargaining for both parties to the transaction,

(b) parties to a transaction acting in concert without separate interests, and

(c) "de facto” control.

The criteria enunciated in IT-419 have also been the criteria consistently considered by the courts. In this case, it appears the factor that will illuminate the situation is determining the controlling mind of these two corporations. If the “mind” acting for one party is the same "mind" directing the second party, then they cannot be said to be dealing at arm's length.

[Citations omitted.]

It is apparent from the evidence presented at trial that while Peter Cundill only owns 50 percent of the shares of the plaintiff, he exercises an influence and control over the affairs and future of the plaintiff that is disproportionate to his shareholding. The financial well-being of the company is directly dependent upon the investment decisions which he makes. While the plaintiff stated that it did have replacement in mind should the plaintiff ever lose the services of Peter Cundill, it is clear that they considered him to be among the best, if not the best, investment counsellor in the field and that replacing him would have been a source of great disruption to the plaintiff's affairs. In many ways Peter Cundill was the “product” of the company and the source of most of its goodwill. It is clear that in negotiating the terms of compensation between [the Bermuda company] and the plaintiff, Peter Cundill was in a bargaining position of great strength because of the plaintiff's reliance on him. It is also worthy of note that a significant, if not the overriding, reason that Peter Cundill reduced his shareholding in the plaintiff to a 50 per cent holding was to comply with the wishes of securities regulators. Based on the foregoing, I find that the plaintiff and [the Bermuda company] were not dealing at arm's length and therefore the plaintiff does not come within the statutory exception.

[Emphasis added.]

It was accepted on appeal that IT-419 correctly and fully defined the factors determinative of whether or not dealings are at arm's length.

All of the findings of fact were supported by the evidence and are not open to be disturbed by us. On a fair reading of his reasons, it is clear that the learned trial judge concluded that Cundill was the directing mind of both parties to the negotiation of the agreement, not that he was in de facto control of both.

The principal challenge to the judgment is based on the finding, which I have emphasized and which plainly flows from the findings preceding it, namely, that Cundill's bargaining position was one of great strength. [1] The appellant says that there is no authority for the proposition that economic or other dependence or interdependence results in a non-arm's length relationship. I agree. However, it does seem to me that the existence of such dependence on an individual by both parties to a negotiation is not irrelevant to the question whether that individual may, in fact, be the directing mind of both in that negotiation.

The learned trial judge did have contradicted evidence, whose credibility he did not question, as to the independent advice taken by Gowan Guest, principal of Guest Holdings Ltd., who negotiated with Cundill on behalf of the appellant, and as to the intervention of an independent chartered accountant in mediating the quantum of the fee agreed to. The learned trial judge cannot, in my view, be found to have erred in preferring the inferences from other evidence he had and in concluding that Cundill was the directing mind of both parties to the negotiation. I would dismiss the appeal with costs.

Appeal dismissed.