Her Majesty the Queen v. Imperial General Properties Limited (Formerly Speedway Realty Corporation Limited), [1983] CTC 27, 83 DTC 5055

Le Dain, J:—This is an appeal from a judgment of the Trial Division allowing an appeal from a decision of the Tax Review Board with respect to a reassessment for the 1962, 1963, 1966 and 1967 taxation years.

The issue is whether the respondent company, which for convenience will be referred to hereinafter as “Speedway”, was associated with Validor Limited (“Validor”) within the meaning of paragraph 39(4)(a) of the Income Tax Act, RSC 1952, c 148, as amended by SC 1960, c 43, subsection 11(1), which reads as follows:

(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;

Speedway was incorporated on August 29, 1955. A total of 86 of the 100 issued common shares of the company were held by Morris and Louis Win- gold and their respective wives. Ten common shares were held by Meyer Gasner, who was a personal friend and business associate of Morris Win- gold but was not related to the Wingolds or their wives. The remaining four shares were held by incorporating counsel. Supplementary letters patent dated December 16, 1960 authorized the issue of an additional 9,900 common shares without par value and 10,000 voting, non-participating cumula tive preference shares with a par value of $1 each, carrying the right to a fixed cumulative preferential dividend at the rate of ten per cent (10%) per annum on the amount paid up on the preference shares, and the right in the event of the liquidation or the winding up of the company to repayment of capital in priority to the common shares, but without the right to participate in profits or assets. The supplementary letters patent also provided that the surrender of Speedway’s charter could be authorized by a majority of the votes cast at a general meeting or by at least 50% of votes of all the shareholders entitled to vote at such meeting. On December 27, 1960 forty preference shares of Speedway were issued to Meyer Gasner and forty preference shares were issued to his wife Goldie Gasner. On December 21, 1960 the incorporating counsel’s four common shares were transferred to the Win- golds, one to Morris Wingold and one to his wife, and two to Louis Wingold. On December 28, 1960 the Wingolds transferred their 90 common shares in Speedway to Validor, the common shares of which were held entirely by the Wingolds. The Gasners were not shareholders of Validor. Thus at the end of December, 1960 the voting shares, common and preference, in Speedway were held as follows: Validor held 90 of the 100 issued common shares; Meyer Gasner held the remaining 10 of the issued common shares, and he and his wife held the 80 issued preference shares. In other words, Validor held fifty per cent of the voting shares and the Gasners held fifty per cent. The Gasners held their shares in Speedway until October 31, 1968 when they transferred them to Validor.

The issue on the appeal is whether by virtue of this distribution of the common and preference shares of Speedway Validor controlled Speedway within the meaning of paragraph 39(4)(a) of the Act.

On October 31, 1968 Speedway and other companies in which Validor owned all the common shares were amalgamated to form the respondent Imperial General Properties Limited.

By notices of reassessment dated January 7, 1972 the Minister of National Revenue reassessed Speedway as a division of Imperial General Properties Limited on the basis that it was associated with Validor during its 1962, 1963, 1966 and 1967 taxation years within the meaning of subsection 39(4) of the Act. An appeal to the Tax Review Board in respect of that reassessment was dismissed. The Trial Division allowed the appeal from the Board’s decision. In its reasons for judgment the Court said:

The submission of the defendant is that even though 50% voting control or votes which can be cast at a meeting of shareholders were held equally by Validor and the Gasners, nevertheless Validor held control of Speedway within the meaning of section 39(4) of the Act because the preferred shares held by the Gasners did not have the same de jure rights as the common shares; and for this proposition the defendant relied on Oakfield Developments (Toronto) Limited v MNR, (SCC) [1971] SCR 1032, 71 DTC 5175.

In my view the principle in the Oakfield case is not applicable to the facts of this case. Instead the principle that should be applied is exemplified in Buckerfield’s Limited et al v MNR, [1965] 1 Ex CR 299; 64 DTC 5301; MNR v. Dworkin Furs (Pembroke) Limited et al [1966] Ex CR 228; 65 DTC 5277; (SCC) [1967] SCR 223; 69 DTC 5035; and Himley Estates Ltd and Humble Investments, Ltd v The Commissioners of Inland Revenue [1932] DTC 367 at p 379.

On the argument in this Court it was agreed that the issue, as reflected in the reasons of the trial judge, was whether the definition of control that was applied in Buckerfield’s et al v MNR, [1965] 1 Ex CR 299; [1964] CTC 504; 64 DTC 5301 and MNR v Dworkin Furs (Pembroke) Limited et al, [1967] SCR 223; [1967] CTC 50; 67 DTC 5035 is the proper test in this case or whether the approach that was adopted in Oakfield Developments v MNR, [1971] SCR 1032; [1971] CTC 283; 71 DTC 5175 should be applied.

In Buckerfield’s the issue was whether certain companies were associated within the meaning of section 39 of the Income Tax Act by reason of being “controlled” by a “group of persons” consisting, in two of the appeals, of two companies each of which held 50% of the issued shares in the two companies said to be associated, and consisting, in the other two appeals of three companies, each of which held one-third of the issued shares in the two companies said to be associated. In each case there was only one class of shares. The Minister had assessed the companies in question on the basis that they were associated within the meaning of section 39, and the Exchequer Court dismissed appeals from his assessments. Jackett, P considered various possible meanings of control, including de facto control by one or more shareholders whether or not they hold a majority of shares”, and concluded at 303 that “controlled” in section 39 contemplated “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”. He held that the two sets of shareholding companies, which he found to be groups of persons within the meaning of section 39, clearly controlled the companies in which they held the shares.

In Dworkin Furs there were five companies which the Minister had assessed as associated companies within the meaning of section 39. In each case there was only one class of shares involved. In determining whether the companies were controlled within the meaning of section 39 so as to make them associated companies, the Supreme Court of Canada approved and applied the definition of control adopted in Buckerfield’s. Hall, J, who delivered the judgment of the Court said at 227-8:

The word controlled as used in this subsection was held by Jackett J to mean de jure control and not de facto control and with this I agree. He said in Buckerfield’s Limited et al v MNR:

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 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 IRC, [1943] 1 AER 13 where Viscount Simon L C, 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.

See also MNR v Wrights’ Canadian Ropes Ltd (1947) AC 109 per Lord Greene M R at page 118, where it was held that the mere fact that one corporation had less than 50 per cent of the shares of another was “conclusive” that the one corporation was not “controlled” by the other within section 6 of the Income War Tax Act.

This definition of controlled applies to all five appeals.

In four of the five companies in Dworkin Furs no one person or group of persons held more than 50% of the issued shares. It was held that the fact a shareholder who held 50% of the shares had, as President of the company, a casting vote at meetings of shareholders and directors did not give him control. In one of the four companies there was an agreement that one of the shareholders holding 50% of the shares would attend to the running of the day-to-day business of the company. Hall, J held that while this agreement might be said to give the shareholder de facto control, it did not give him de jure control, “which is the true test”. In the fifth company a group held two- thirds of the shares but there was a provision in the company’s articles of association which required that all motions at meetings of shareholders or directors could only be passed by unanimous consent. The Minister had taken the position that this agreement was illegal, but the Court rejected this contention.

In Oakfield the common shares in the company (“Polestar”) assessed by the Minister as an associated company within the meaning of subsection 39(4) were held by an “inside group”. An equal number of voting preferred shares were issued to two individuals who were strangers to the inside group. Thus the voting power was distributed on a fifty-fifty basis between the inside group and the two individuals. The preferred shares carried the right to a fixed cumulative preferential dividend of 10% per annum and the right to repayment of capital in priority to the common shares in the winding up of the company but no rights to further participation in profits or assets. A member of the inside group personally guaranteed the holders of the preferred shares a return upon thirty days’ notice of the money paid by them for the shares and the payment of the 10% dividend. The chairman at meetings of directors of shareholders did not have a casting vote. A surrender of the company’s charter could be authorized by 50% of the votes of shareholders entitled to vote. The Supreme Court of Canada held that the company was controlled by the inside group, and was thus associated with other companies controlled by them. Judson, J, delivering the unanimous judgment of the Court, said at 1037:

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

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

With great respect, I have difficulty perceiving the precise rationale of the conclusion in Oakfield and the principle or criterion that is implied by it. There appear to be at least two possible views of its implications for cases in which 50% of the voting shares of a company are held by one person or a group of persons and 50% are held by another person or group of persons:

(a) that the definition of de jure control approved and applied in Dworkin Furs is to be confined to the case where there is only one class of shares (or at least, where all the shares have the same de jure rights) and that where there are two classes of voting shares having different de jure rights, control for purposes of section 39 is to be deemed to rest with the person or group of persons holding the greater number of shares having the greater de jure rights; or (b) that the concept of de jure control in Oakfield, which extends beyond voting rights, is an exception to or qualification of the traditional concept approved and applied in Dworkin Furs which is to be confined to as the case where, as in Oakfield, all the common shares (or shares having the greater de jure rights) are held by one of the persons or groups of persons holding 50% of the votes. (The fact that either of the persons or groups of persons holding 50% of the votes can authorize the winding up of the company appears to me, with respect, to be a neutral factor.) Given this uncertainty, the nature of the departure in Oakfield from the concept of de jure control approved and applied in Dworkin Furs, and the emphasis in the reasons of Judson, J that all of the shares having greater de jure rights were held by the inside group, I am of the respectful opinion that the second is the better view. Accordingly, since all of the common shares (or shares having the greater de jure rights) were not held by Validor I am of the opinion, applying the definition of control approved in Dworkin Furs, that Speedway was not controlled by Validor. Speedway was therefore not an associated company within the meaning of paragraph 39(4)(a) of the Act.

For these reasons I would dismiss the appeal with costs.