Ronda Holdings Limited, Checker Industrial Rubber & Tire Limited, Cartier Parking Limited v. Minister of National Revenue, [1984] CTC 2357, 84 DTC 1331

Tremblay, TCJ:—These cases were heard on common evidence on June 6, 1983 in London, Ontario.

1. The Point at Issue

The general point at issue is whether the three appellants were correct in the computation of their income, (Ronda Holdings Limited (Ronda) for the 1976 to 1979 taxation years inclusive; Checker Industrial Rubber & Tire Limited (Checker Industrial) for the 1979 and 1980 taxation years; and, Cartier Parking Limited (Cartier) for the 1980 taxation year) not to consider themselves as associated pursuant to the Income Tax Act.

2. The Burden of Proof

2.01 The burden is on the appellants to show that the respondent’s assessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based the assessments or reassessments are also deemed to be correct. In the present case, the assumed facts are described in the replies to notice of appeal as follows:

5. In finding that Ronda, Checker Industrial, Checker Cab and Cartier were associated companies under the Income Tax Act, supra, and reassessing the Appellant as stated in paragraph 2 of the Notice of Appeal, the Minister found or assumed:

(a) the facts hereinbefore pleaded or admitted;

(b) that David Mechanic and Ronald Atkinson voted their shares in concert in Ronda and Checker Industrial;

(c) that David Mechanic and Ronald Atkinson share the day-to-day management responsibilities of Checker Industrial and Ronda receiving identical salaries as compensation therefore;

(d) that David Mechanic and Ronald Atkinson normally act in concert in exercising

control over the policy and affairs of Ronda and Checker Industrial;

(e) that Checker Cab, Cartier and Checker Industrial are, as admitted by these

corporations in their respective Income Tax Returns associated corporations;

(f) that since Checker Cab, Cartier and Ronda are associated with a common corporation ie, Checker Industrial, they are associated with each other.

3. The Facts

3.01 Facts admitted

At the beginning of the trial, it was admitted by counsel for both parties that:

(a) at all material times, Checker Industrial, Checker Cab Windsor Limited (Checker Cab) and Cartier have declared themselves in their respective income tax returns as being associated corporations as that term is understood under the Income Tax Act;

(b) at all material times, the shareholders of Ronda, Checker Industrial, Checker Cab and Cartier with their holdings were as follows:

(c) the central point is, what group of shareholders controls Checker Industrial; the appellants say it is Mr (David) and Mrs (Lorraine) Mechanic. The respondent says it is on the basis of paragraph 251(5)(a) of the Act, and Mr Mechanic and Mr Ronald Atkinson on the basis of paragraph 256(1 )(b).

3.02 Mr David Mechanic testified in chief examination that:

A. General

(a) he is 63 years old and married to Lorraine Mechanic since 1946; they have four children, the youngest being 18 (SN p 11 and 12);

(b) he was 13, when he started to work for Checker Cab, his father being the main shareholder when the latter died in 1946 at the age of 50 years old, the appellant took control of the company and became the managing director (SN p 12 and 13);

(c) the total of the shares was then 3,025, he owned (with his mother) 1,506 shares; Mr Christopher Spillman (his father’s original partner) also owned 1,506 shares; Mr Hamish MacDonald, the company auditor, owned one share, Malcolm Banks and Henry Jensen also owned some shares;

(d) in 1952 he bought the 1,506 shares from Mr Christopher Spillman; he sold 150 shares to a Gordon Cammidge (who had joined the company at the age of 19); he also sold a certain amount of shares to Malcolm Banks;

(e) Cartier was incorporated around 1948;

(f) in 1963, he inherited his mother’s shares; he then had personal control in excess of 60 per cent in Cartier and Checker Cab;

B. Checker Industrial

(g) also in 1963, Checker Industrial was incorporated; Mr Ronald Atkinson, the former bookkeeper of Industrial Rubber & Supply Limited became an important shareholder in the new company, Checker Industrial; the new company acquired the various assets of Industrial Rubber and of Checker Cab Tire Service;

(h) on May 10, 1963, a resolution of the shareholders of Checker Industrial (Exhibit A-l) showed the names of the shareholders, their functions and the number of shares they owned:

(i) in the forming of the company, he tried to protect his friends:

. . . in the forming of the company, which was approximately 1963, I arrange that Ron Atkinson would get some of the shares, a token amount of shares. In the Minutes of the company we had arranged that should shares be sold in the future, they had to be offered to existing shareholders. That was to protect those who were helping me build the company and also to protect myself, because now being handicapped, I felt I had to lean on people. So I build my strength on Thomas Banks, the son of one of my partners; on Malcolm Banks, who was much my senior; and on Ronald Atkinson and Gordon Cammidge, who was a contemporary of my own age.

Now, in so doing, in the years that came, we used the formula of 3 to 1. For every share in Checker Cab Windsor Limited we issued 3 shares in Cartier Parking. And then we issued an additional block of shares to accommodate Ronald Atkinson. (SN p 18 and 19)

(j) his weak health had to be taken into account:

Well, I was in ill-health, which eventually led to heart surgery and a stroke. I was in and out of hospital constantly. I now recognized that I couldn’t give the complete energy that I used to give and I had to lean on people. In order to bind these people, I tried to create some area where they had more security and some sort of glue, so that they would have a reason to feel secure and stay with me. (SN p 21)

(k) in 1967, a transfer of shares had to be made to Mr Atkinson to keep him in the company:

Mr Atkinson was offered what he considered an effective offer by another person involved in the same line of business in another town, and in fact he had served notice to me that he was leaving, and I then sat down with him and resolved his problems, adjusted his pay, and then consulted my father’s trusted friend and mine, Malcolm Banks, one of the partners in the Checker Cab and in the Cartier Parking group, and we decided that we would each, on a percentage basis, make a block of shares available to Mr Atkinson equal to 12 per cent of the company. So his gross would be 12 per cent of the company. With the idea that if he felt more secure and had an ownership in the company, his likelihood of leaving the company would not be as great. And I don’t wish to under-value Mr Atkinson. In my opinion he is without equal in the Province with his knowledge of this business, and his contribution to the success of the company, he’s played a great part in it. I considered him valuable, I did not want to lose him. (SN p 22-23)

In the minutes of a meeting of the board of directors of Checker Industrial on March 2, 1967, (Exhibit A-2), it appears that 694 shares were transferred to Mr R Atkinson at $7 per share; the shares came from: David Mechanic — 511 shares; Malcolm Banks — 63 shares; and Thomas Banks — 120 shares;

(l) in 1971, following the death of Malcolm Banks, a different transfer of shares was made mainly to R Atkinson; on December 16, 1971, it appears from the minutes of the annual meeting of shareholders of Checker Industrial (Exhibit A-3) that the present shareholders were:

Malcolm Banks died on Good Friday of 1971. In his family several members have died of some sort of illness related to clogging arteries, and he was aware that he too was suffering with this illness. He was one of eleven children. And when we discussed the issue — we were more than partners, we were extremely good friends, and in fact the father image was very dominant with the death of my father, and he being a contemporary, and it was a closer relationship than friends that existed between us. We discussed all the merits of the various companies and we came to the conclusion that his own son, who was operating the Checker Cab Windsor Limited operation, he was the Manager there, was weak in this company and showed very little interest in Checker Industrial Rubber & Tire, and therefore, after discussion with Malcolm Banks, he agreed that it would be wiser to offer his shares to Ronald Atkinson, who would be an asset to me and would give more security to the strength of the company. And Malcolm Banks, prior to his death, sold his shares to Ronald Atkinson. The exact amount I can’t remember, but it was a substantial number of shares.

David Mechanic	3,722
Lorraine Mechanic	2,116
Gordon Cammidge	450
Ronald Atkinson	3,240
	9,528
The explanation of these transfers is as follows:

At a later date, after the death of Malcolm Banks, there were various forms of duties that had to be paid on the estate of Malcolm Banks. His son, Thomas . . . was short of cash, . . . and I encouraged Ron Atkinson and Thomas Banks, one to sell and the other to buy, and Ronald Atkinson acquired the shares of Thomas Banks. (SN p 24, 25)

(m) pursuant to paragraph 4.02 of the General By-Law No 1 A (Exhibit A-4) of Checker Industrial “A director need not be a shareholder.” (SN p 32);

(n) he and his wife attended all the meetings of directors and shareholders of Checker Industrial, except in cases of illness; his wife always voted with him;

(o) concerning the company policy, he consulted with the person in charge of the department involved by the decision, . . but the final decision was mine, the top officer. It’s been rare that my partners and myself have had a disagreement”. (SN p 33);

(p) Mr Atkinson had the right to sell his shares of Checker Industrial to other people after offering them to the other shareholders; he did not have the right to sell the entire undertaking of Checker Industrial because he (David Mechanic) had control (himself and his wife);

C. Ronda

(q) Ronda was incorporated in 1971; its only business was that of leasing real property to Checker Industrial from which property, Checker Industrial carried out its operations; Ronda’s only source of income was that derived from its lease with Checker Industrial; this real property (“. .. approximately 44,000 feet, with 15,000 feet of building” SN p 30) located on a main street had been bought by him (David Mechanic) for $70,000 (“. . . a remarkably good buy”, SN p 30);

(r) the reasons for the existence of Ronda was:

Now, in all these years that I’d worked with Mr Atkinson never once had he let me down with the running of the company or taking advantage of my impaired health. And being both of us conscious of early deaths — Ron Atkinson had also lost his father at an early age — we took the attitude that this would be an investment, that if we bought it our wives could control it in the event that anything happened to either of us. And the main purpose of this was to — I would buy the company, which by the way was made out — the original purchase was mine, but when the property was finally settled we split it 50/50. And I took no advantage of my exceptionally good buy, and we incorporated Ronda Holdings with the idea that it would be a holding that would protect either widow or family should anything happen to either one of us. While Mr Atkinson was younger, nobody knows when lightning will strike. I think every one of us can remember friends that are younger and gone, that at some time were in better health.

And it was something that they could control. It was a passive type of income. It didn’t require a lot of management. And the principal tenant was Checker Industrial Rubber & Tire. (SN p 30-31)

(s) Ronda was treated as passive income, hence no tax advantage:

Well, we treated it as a passive income and therefore it fell in that bracket. The auditors said that being as its only income was rent, it was therefore passive. And we paid the maximum bracket, whatever the Tax Act required at that time, and at no time did we ever consider it a part of Checker Industrial Rubber & Tire. And at that time, of course, our moving away from the minimum Small Businessman’s bracket — we were a long ways from there — it wasn’t even in the foreseeable future, we weren’t thinking that way, we weren’t earning that type of money at that time. The developments that the Tax Department took at a later date, that was something that happened, it wasn’t planned. (SN p 31).

3.03 In cross-examination, the appellant testified that:

(a) in substance, Checker Industrial started out as a division of Checker Cab after the acquisition of the assets of Industrial Rubber Limited;

(b) Mr Atkinson is a “golden goose”; he has the magic to make money in the rubber industry; “I don’t think he’s second to anybody” (SN p 37); he (David Mechanic) relied heavily on him; he consulted him on decisions to be made about Ronda; during the period under appeal, Mr Atkinson was president of Checker Industrial (SN p 38);

(c) he and Mr Atkinson have 50 per cent of Ronda, and are both shareholders; they are both directors;

(d) there is a term of a five-year lease between Ronda and Checker Industrial; the latter, the tenant, pays all things such as property tax, business improvements plus rent; in 1976 the rent was $36,300; in 1977 — $38,850; in 1978 $49,200, in 1979 — 49,100 and in 1980 — $60,000 (Exhibits R-l to R-4: Income Tax Returns from 1977 to 1980);

(e) the lease was prepared by the legal firm Yuffy and Yuffy, taking direction from Mr Atkinson and Mr Mechanic (SN p 40);

(f) once, after a capital addition of $100,000 was put on the building, the lease was re-adjusted (SN p 41);

(g) in the forming of Ronda, he did not consult with anyone about tax advantages or disadvantages; “My only concern was estate planning” (SN p 49);

(h) in 1976, he had heart'surgery; in 1979, he suffered a stroke; he knew his father had died of heart failure and with all these things in his mind:

I needed personal security and total control. I needed control in Checker Industrial Rubber, because now I was no longer, health-wise, able to function without the help of number one management.

From the standpoint of getting a relationship which would make it easier to keep the association between Mr Atkinson and myself, by showing my good faith of allowing him to gain a capital gain — not talking tax-wise but a gain in true value, by a property which I had bought at a remarkably good price, and by him now owning 50 per cent, I had something that kept him bound to me, an association, sort of a marriage, and because of this association I felt more secure. I had had no reason to doubt Mr Atkinson, but I wanted to make sure that my family would be protected in case I should have a premature demise, and I wanted to make sure that in my impaired health I had someone who I could trust and rely upon to protect my interest. As a working Manager I don’t believe, and I’ve said this before, I believe he’s without equal. But there was no way I was going to give up control, because I’m a cripple, and that’s the only way I could protect what I have. (SN p 51-52).

3.04 In her chief examination, Mrs Lorraine Mechanic, spouse of Mr David Mechanic testified that:

(a) since their marriage, 37 years ago, she never had employment outside the home (SN p 55); they have always lived together; these years were very fulfilled years;

(b) in Checker Industrial, she attended all the board meetings, except for one over the years; she was in the hospital and signed a proxy in favour of her husband; she always voted with her husband; there never was any disagreement about company matters between her and her husband; she never questioned his business decisions (SN p 57-58);

(c) she does not recall when Mr Atkinson and her husband did not vote in the same sense (SN p 58).

3.05 In his chief examination, Mr Ronald Atkinson testified that:

(a) between 1976 to 1980, his shareholdings were 34 per cent in Checker Industrial and 50 per cent in Ronda;

(b) Mr Mechanic controlled Checker Industrial:

. . . I started there many years ago and Dave was good enough to give me what I’ve got today. It’s always been Dave and Lorraine as far as I’m, concerned. I’ve come from that small up a little bigger (indicating), but it’s always been the Mechanic family. (SN p 60)

(c) at the beginning of 1983, he was approached to purchase the whole undertaking of Checker Industrial; he told that person that: “. . . I can do nothing without Dave Mechanic’s say-so”; that person had a meeting with Mr Mechanic; the business was not sold (SN p 60-61); a few years before, the same thing occurred with an Oshawa firm; it was referred to Mr Mechanic;

(d) as a shareholder, he cannot sell Checker Industrial assets, but Mr and Mrs Mechanic, they can do it together;

(e) Mr David Mechanic directs the company policy in Checker Industrial ‘‘on the whole”.

3.06 In cross-examination, Mr Atkinson testified that:

(a) at the shareholders meetings of Checker Industrial, he and David Mechanic never voted their shares in conflict (SN p 62);

(b) he and Mr Mechanic had “normal business meetings” telling “what’s going on day-to-day”, and giving his views as to the best way to proceed; sometimes Mr Mechanic took his views;

(c) he is president, secretary and director of Checker Industrial;

(d) he attended all the directors’ meetings of the said company;

(e) he would have with Mr Mechanic sufficient shares to sell the assets of the company.

3.07 In his examination-in-chief, Mr Arthur Grainger testified that:

(a) he is a chartered accountant, a senior partner with the firm of accountants, Deloitte, Haskins & Sells; he had been with that firm since 1952; and since that time, he has been in charge of the acccounts of Checker Cab, Checker Industrial, Ronda and Cartier;

(b) there was no tax advantage that he could see in incorporating Ronda in late 1971; it was not subject to the small business deductions; it paid tax at the “expensive” rate;

(c) he attended almost all the meetings of the different companies, Checker Industrial, Cartier and Checker Cab;

(d) Mr David Mechanic ran the companies; indeed Mr Mechanic had “always been the man in control of all of the operations that I’ve had anything to do with” (SN p 68);

(e) he received all his instructions from Mr Mechanic, concerning tax matters or corporate matters;

(f) during the meetings, Mrs Mechanic took part of the discussions; she always voted with her husband;

(g) he always considered Checker Cab, Cartier and Checker Industrial as associated because David Mechanic alone controlled both Checker Cab and Cartier, and he and his wife controlled Checker Industrial;

(h) Ronda was treated as a related company, but not associated; Ronda indeed was not controlled by David Mechanic; his wife had no shares in Ronda;

(i) he was not approached by Mr Mechanic concerning tax advantages in incorporating Ronda;

(j) reasons of possible financial difficulties and reasons of estate based the decision why Ronda was set up in the manner it was:

My recollection is that there was discussion with regard to the fact that this was a building that was going to be occupied by Checker Industrial for the most part, and there was some suggestion that perhaps the building should not be included with Checker Industrial by reason of the fact of possible financial difficulties in Checker Industrial; the building might be outside of that corporation.

It was also suggested, and I don’t know how much this weighed in the decision, that Mr Mechanic’s wife and Mr Atkinson’s wife might at some future time after either one of the other men passed on, might be able to get rental income by way of dividends through that corporation, without being involved in the day-to-day operation of the operating company, Checker Industrial. And it was thought it was a vehicle that they might be able to get money into their wives’ hands at some future time, without having them involved in the day-to-day operation of the company. Those were some of the considerations. (SN p 70-71).

3.08 In cross-examination, Mr Grainger testified that:

(a) his firm prepared the income tax returns of the four companies since 1971;

(b) he recognized a document (Exhibit R-5) filed by his firm entitled “Agreement among Associated Corporation” (it is a T-2013 Form of the Department of National Revenue, Taxation); on this document, Ronda is considered as an associated company with the three others to allocate in 1972 the $35,000 subject to the lower rate, and the $50,000 business limit.

3.09 In the re-examination of Mr Grainger, an amended form T-2013 (and two pages) for the 1976 taxation year was filed as Exhibit A-6. It explains on an added page that their positions were that Checker Industrial and Ronda were not associated for the 1976 to 1979 taxation years inclusive. The tax calculation for each of the said years was treated as if the companies have not been associated.

3.10 Mr Grainger pointed out that there was an error in the tax calculation on the notice of reassessment of Checker Industrial for the 1979 taxation year. According to him, one must read federal tax of $22,596.12, and not of $36,796.08. Consequently there also would be an error in the computation of $3,703.41 in interest. The said reassessment dated October 30, 1981, was filed as Exhibit A-5 with two forms entitled T-7 WC and T7W-T2. The error would be an amount of $68,220 which was considered as total business limit on the T7W-T2 form, rather than $94,717 as it appears on the T-7WC. However, it was admitted by Mr Grainger that the amount of $36,092 shown as “excess to be taxed at high rate in hands of Checker Industrial Rubber & Tire Limited” is correct (SN p 75). It was proposed by counsel for the respondent and agreed that the matter be referred back to the Minister for reassessment on the basis that the latter fact is correct and that the calculation be made correct as well (SN p 75).

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in this case are 251(2)(a), 251(5)(a), 256(l)(a) to (e) and 256(2). They read as follows:

251 (2) For the purpose of this Act “related persons”, or persons related to each other, are

(a) individuals connected by blood relationship, marriage or adoption;

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

(a) where a related group is in a position to control a corporation, it shall be deemed to be a related group that controls the corporation whether or not it is part of a larger group by whom the corporation is in fact controlled;

256 (1) For the purposes of this Act 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, 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 other 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.

(2) When two corporations are associated, or are deemed by this subsection to be associated, with the same corporation at the same time, they shall, for the purpose of this Act, be deemed to be associated with each other.

4.02 Cases at law

The cases at law referred by both parties were:

1. Floor & Wall Covering Distributors Limited and Vina-Rug (Canada) Limited v MNR, [1966] CTC 566; 66 DTC 5373;

2. Viking Food Products Ltd v MNR, [1967] CTC 101; 67 DTC 5067;

3. Buckerfield’s Limited, Green Valley Fertilizer & Chemical Co Ltd, Westland Elevators Limited, and Burrard Terminals Limited v MNR, [1965] 1 Ex CR 299; [1964] CTC 504; 64 DTC 5301;

4. Yardley Plastics of Canada Limited v MNR, [1966] 1 Ex CR 1027; [1966] CTC 215; 66 DTC 5183;

5. J-Euclide Perron Ltée, Mars Finance Inc and Les Immeubles Perron Liée v MNR, [1976] CTC 2263; 76 DTC 1190; [1980] CTC 216; 80 DTC 6069;

6. Express Cable Television Ltd v MNR, [1982] CTC 2447; 82 DTC 1431;

7. Southside Car Market Ltd, Coast Finance Ltd, Southside Datsun Ltd v The Queen, [1982] CTC 214; 82 DTC 6179;

8. W Ralston & Co (Canada) Ltd v MNR, [1982] CTC 2108; 82 DTC 1128;

9. MNR v Dworkin Furs (Pembroke) Limited et al, [1967] CTC 50; 67 DTC 5035.

4.03 Analysis

4.03.1 What group controls Checker Industrial, David and Lorraine Mechanic or David Mechanic and Ronald Atkinson? That is the main point.

If it is the latter group, the reassessment must be maintained because this group also controls Ronda and provision 256(1 )(b) quoted above must be applied.

However, if it is the Mechanic group, the appeal must be allowed because there is no provision which applies to render the two companies associated.

4.03.2 Mathematically the two groups control the said company (paragraph 3.01(b)). Moreover, since the group of Mr and Mrs Mechanic is a family group, it is deemed to control the corporation pursuant to paragraph 251(5)(a). It must be pointed out that the whole subsection 251(5) applied to section 256 which concerns associated corporations. Indeed the first words of the said subsection 251(5), one can read: “For the purposes of subsection (2) and section 256’’. In fact, it is admitted by both parties that it is because of the control of Mr and Mrs Mechanic in Checker Industrial that the latter, Checker Cab and Cartier are associated (paragraph 3.01(a) and paragraph 3.07(g)).

4.03.3 The respondent now chooses the group Mechanic-Atkinson to find out that Ronda and Checker Industrial are associated.

In the Yardley Plastics of Canada Limited case at 224 of the [1966] CTC it was said that:

I do not believe, as submitted by counsel for the Minister, that the latter is allowed to choose out of several possible groups any aggregation holding more than 50% of the voting power, even if the members of the group are common shareholders in both corporations and that such a group then becomes irrebuttably deemed to be the controlling group for the purposes of Section 39(4) of the Act as this could lead to an absurd situation where no two large corporations in this country would be safe from being held to be associated.

Can it be said that, following this, the respondent is now bound by his first choice, i.e. the choice of the group of Mr and Mrs Mechanic?

In the Mars Finance Inc et al affair, Addy, J made the following comment at 221 and 222 of the [1980] CTC after quoting the above excerpt of Yardley Plastics of Canada Ltd’.

It is important to note that Yardley Plastics did not involve corporations controlled by related groups within the meaning of paragraph 39(4)(e) of the old Act (paragraph 256(e) of the new Act); rather, the provision in question was paragraph 39(4)(b) (paragraph 256(1 )(b) of the new Act): the Court had to decide whether the two corporations were associated by reason of the fact that they were controlled by the same persons or the same group of persons, who might be complete strangers and not persons all related by blood. It appears clear in this latter case that the question is first and foremost one of fact, and that it is indeed de facto control that must be considered.

In the case at Bar, the corporations are controlled entirely by persons who are all related by blood relationship and for the reasons already stated these corporations meet all the conditions of paragraph 256(1 )(e). They are all therefore associated from the legal point of view, and it matters not in such a situation whether or not the related persons share the same views concerning control of these corporations. De facto control cannot be considered in such a situation, when there is de jure control based on an immediate family relationship between all the members.

In the instant case, the two groups are not formed by persons all related by blood or marriage as in the Mars Finance Inc case and they are not all strangers as in the Yardley Plastics of Canada Limited case. They are mixed. One group is related and the other is not.

However, from the decision of Addy, J can it be said that since, as in the instant case, there is a related group (Mr and Mrs Mechanic) which controls a corporation, Checker Industrial, and that the de facto control of another group formed by strangers (Atkinson and Mechanic) cannot be considered to decide whether there is association with corporation C (Ronda)?

To answer this question, I think it is important to consider Vina-Rug (Canada) Ltd v MAT?, [1968] CTC 1; 68 DTC 5021, this decision was given by the Supreme Court of Canada in 1968. The facts in the said case are well summarized at 5021 of the 68 DTC:

Two companies were assessed by the Minister as associated companies (and thereby deprived of the benefit of paying a lower rate of tax on part of their income) on the basis that they were associated with a third company and consequently with each other. When the Exchequer Court upheld the Minister’s decision (66 DTC 5373), an appeal was taken to the Supreme Court of Canada by one of the companies. It maintained the same group of persons did not control both companies. All the shares of company A were owned by a father, his two sons and a fourth party, while the principal shareholders of company B were the two sons and the same fourth party.

The facts have a similarity with the instant case because there are two groups and the two groups are mixed ie one is formed of related persons and other of strangers.

Also the stranger (a Mrs McGilvery) attended all the meetings of directors and voted in the same sense as the others:

John Stradwick, Jr, testified that the group of shareholders consisting of himself, his brother and his father in fact controlled Stradwick’s Limited. It is perhaps not without significance that McGilvery attended and voted at all shareholders and directors’ meetings of Stradwick’s Limited, during the relevant periods, at which all resolutions were passed unanimously. However, in the view which I take of the issue in the appeal these facts are irrelevant.

The learned trial judge held that John Stradwick, Jr, W L Stradwick and H D McGilvery, who collectively owned more than 50% of the shares of Stradwick’s Limited, had at all material times a sufficient common connection as to be in a position to exercise control over Stradwick’s Limited and therefore constituted a “group of persons” within the meaning of subsection (4) of section 39 of the Income Tax Act (66 DTC 5373). I am in agreement with that finding.

This court considered the concept of “control” in Minister of National Revenue v Dworkin Furs Limited (67 DTC 5035) (1967) SCR 223. Hall J in delivering the judgment of the Court said at p 227:

The word controlled as used in this subsection was held by Jackett P to mean de jure control and not de facto control and with this I agree. He said in Buckerfield’s Limited et al v Minister of National Revenue (64 DTC 5301):

Many approaches might conceivably be adopted in applying the word “control” in a statute such as the Income Tax Act to a corporation. It might, for example, refer to control by “management”, where management and the Board of Directors are separate, or it might refer to control by the Board of Directors. The kind of control exercised by management officials or the Board of Directors is, however, clearly not intended by section 39 when it contemplates control of one corporation by another as well as control of a corporation by individuals (see subsection (6) of Section 39). The word “control” might conceivably refer to de facto control by one or more shareholder 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 IRC (1943) 1 AER 13 where Viscount Simon LC, at p 15 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.

Applying these principles, once it is established that a group of shareholders owns a majority of the voting shares of a second company, and the same group a majority of the voting shares of a second company, that fact is sufficient, in my opinion, to constitute the two companies associated within the provisions of section 39 of the Income Tax Act. Moreover, in determining de jure control more than one group of persons can be aptly described as a “group of persons” within the meaning of section 39(4)(b). In my view, it is immaterial whether or not other combinations of shareholders may own a majority of voting shares in either company, provided each combination is in a position to control at least a majority of votes to be cast at general meeting of shareholders.

I would dismiss the appeal with costs.

4.03.4 Can it be said that the instant case may be distinguished from the Vina- Rug (Canada) Limited case because the related group in Checker Industrial (Mr and Mrs Mechanic) was already the union to base the association with Checker Cab and Cartier pursuant to paragraph 251(5)(a)?

I do not think so. The reassessment must be maintained on this respect despite the fact that the preponderance of the evidence is to the effect that the transfer of the shares to Ron Atkinson in Checker Industrial and in Ronda was mainly due to the weak health of Mr Mechanic who wanted to keep Mr Atkinson with him, and to prepare his estate in favour of his wife in case of his death (paragraphs 3.02(j), (k), (1) and (r) and 3.03(b)).

4.03.5 However, the matter must be referred back to the Minister to revise the tax calculation as explained in paragraph 3.10.

5. Conclusion

The appeals are allowed in part and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.