W Ralston & Co (Canada) LTD v. Minister of National Revenue, [1982] CTC 2108, 82 DTC 1128

Guy Tremblay:—This case was heard in Montreal, Quebec on November 3, 1980. The case was taken under advisement on January 15, 1981 when the documents concerning this case were received by the Board.

1. The Point at Issue

The point at issue is whether during the years 1970 to 1974 inclusively the appellant company was associated with the following companies: Canadian Technical Tape Ltd, Lenalco Holdings Inc and Technical Products (Cornwall) Ltd.

2. The Burden of Proof

2.01 The burden is on the appellant 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 reassessment are also deemed to be correct. In the present case the assumed facts are described in the Reply to Notice of Appeal as follows:

8. In assessing the Appellant for the 1971 to 1974 taxation years, the Respondent relied on the following assumptions of facts:

(a) During the 1970 to 1974 taxation years, the registered holders of the issued capital of Lenalco Holdings Inc, Canadian Technical Tape Ltd, Technical Products (Cornwall) Ltd and the Appellant was as follows:

Technical

Lenalco Canadian W Ralston & Co Products

Inc Tape Ltd Ltd Ltd

Voting

Common Common Preferred Common Common shares shares shares shares shares

Leonard Cohen 1048 1 49 1 Alice Cohen 1050 1 49

Louis Cohen 1 1

David Lack 2 1 1 1 Peter Lack 50

Claire Schecter 50 1 In trust for

Nosh H Cohen 350

Aren Jeffrey 350

Paul Joseph Cohen 350

Louis B Cohen 350

Lenalco Holdings Inc 1016

Canadian Technical

Tape Ltd 997

3500 1020 100 100 1000

(b) During these years, Lenalco Holdings Inc was controlled by the group (hereinafter called the Cohen group), composed of Alice Cohen, Leonard Cohen, Louis Cohen and David Lack;

(c) During these years, Canadian Technical Tape Ltd was controlled by Lenalco Holdings Inc;

(d) During these years, Technical Products (Cornwall) Ltd was controlled by Canadian Technical Tape Ltd;

(e) During these years, the Cohen group held all the Appellant’s issued common shares (100) and each member of this group was an officer and a director of the Appellant;

(f) During these years, Mr Peter Lack and Mrs Claire Schecter held the Appellant’s

voting preferred shares as nominees on behalf of the Cohen group;

(g) Mr Peter Lack acquired the Appellant’s preferred shares from Mrs Gilda

Mostovitch when she left her employment as Mr David Lack’s secretary in 1964;

(h) Mrs Gilda Mostovitch and Mr Peter Lack did not pay anything for these preferred shares;

(i) Mrs Claire Schecter acquired the Appellant’s preferred shares in 1962 while she was Mr David Lack’s secretary and did not pay anything for these preferred shares; she was still Mr David Lack’s secretary during the 1970 to 1974 taxation years;

(j) Mrs Claire Schecter and Mrs Gilda Mostovitch acquired those preferred shares as nominees on behalf of the Cohen group in 1962 pursuant to a plan of re-organization conceived by the Cohen group to artificially relinquish control;

(k) During the 1970 to 1974 taxation years, the Cohen group controlled the Appellant by way of the voting rights attached to the preferred shares held by Mr Peter Lack and Mrs Claire Schecter acting as nominees on its behalf;

(l) The Appellant’s preferred shares held by Mr Peter Lack and Mrs Claire Schecter carried the right to a fixed cumulative preferred dividend at a rate of 8% per annum and the right to repayment of capital in priority to the common shares in case of liquidation, dissolution, winding-up, bankruptcy or other distribution of the assets of the Appellant;

(m) The Appellant’s preferred shares held by Mr Peter Lack and Mrs Claire Schecter, did not carry rights as to further participation in the Appellant’s profits and assets;

(n) The Cohen group holding the issued common shares was entitled to hold the surplus profits on a distribution by way of dividends after the payment of the fixed cumulative dividend to the preferred shareholders and to hold the surplus after return of capital and payment of the 8% dividends to the preferred shareholders in the case of liquidation, dissolution or winding-up;

(o) The preferred shares held by Mr Peter Lack and Mrs Claire Schecter were redeemable at any time pursuant to a resolution of the Board of Directors upon a 30-day notice to the preferred shareholders;

(p) Under by law XI-(B), the directors could, by resolution at any time and at their whole discretion, allot the whole or any parts of the authorized and unissued stock of the Appellant;

(q) The Cohen group controlled the Appellant by reason of the extraordinary rights vested in the Appellant directors and the restrictions attached to the preferred shares.

3. The Facts

3.01 The nature of the business of the appellant company as declared in the income tax return is “Manufacturers of Plastic & Allied Products”.

3.02 It was admitted at the beginning of the trial that:

(a) the three companies Canadian Technical Tape Ltd, Lenalco Holdings Inc and Technical Products (Cornwall) Ltd are associated;

(b) the point in dispute is whether the appellant company is associated with those three companies;

(c) the assumptions of fact given in subparagraph 8(a) of the Reply to Notice of Appeal (quoted above in para 2.02) well described the reality;

(d) Alice Cohen is Leonard Cohen’s wife and Louis Cohen is Leonard Cohen’s brother;

(e) “the contest is about subparagraphs ‘F’, ‘G’, ‘H’, ‘l’, and ‘J’” of section 8 of the Reply to Notice of Appeal (Mr Vineberg, counsel for the appellant, SN p 11, lines 19 and 20).

3.03 By mutual consent, a letter dated January 11, 1977 written by Mr Vineberg to the respondent was filed as Exhibit A-1. This exhibit includes a document issued on September 21, 1962 by the Secretariat of the Province of Quebec approving a By-law No XXII of the appellant converting 500 common shares into 500 preferred shares in conformity with article 45 of the Companies Act of the Province of Quebec. It was admitted that the preferred shares were legally and validly issued.

3.04 By mutual consent, a letter dated October 9, 1975 addressed to the respondent and signed by Barry Clamen was also filed as Exhibit R-1. One part of this document discussed the application of the Oakfield case (see para 4.03.6.1) on the possibility of invoking section 247 of the Act. The testimony of Mr Clamen also is to that effect (SN p 140).

3.05 Testimony of Peter Robert Lack

3.05.1 Mr Peter Robert Lack (39 years old), attorney, testified that on November 30, 1964 he made out a $500 cheque to the order of Gilda Mosto- vitch (Exhibit A-2). On the reverse side of the cheque is written: “Re: fifty (50) times ten dollars (x $10) par value — or par preferred shares of W Ralston Co (Canada) Ltd”. It is endorsed by Gilda Mostovitch. The said 50 preferred shares were filed as Exhibit A-3. It is signed by Mr Lack and Mrs Gilda Mostovitch (SN p 22).

3.05.2 Referring to the allegation 8(h) of the respondent in the Reply to Notice of Appeal, the witness said he was never questioned by anyone from the Income Tax Department about the payment of these shares or in connection with the appellant (SN p 24).

3.05.3 Mr Lack affirmed he had never had any agreement (verbal or written) with Mr or Mrs Leonard Cohen or with Mr Louis Cohen about these preferred shares, or to the effect that he had to act as a nominee on behalf of one of those persons (SN pp 25, 26).

He also said he never received a guaranty from a member of the Cohen family that he could get back his money on these preferred shares.

3.05.4 He received $40 per year as dividends and reported them each year to the Income Tax Department. He showed his income tax returns to the Board and a T-5 slip issued by the appellant for the year 1972 was filed as Exhibit A-4.

3.05.5 Mr Peter Lack is the son of David Lack but he is not related to any members of the Cohen Family.

3.05.6 A letter sent by Gilda Mostovitch to the appellant for the attention of David Lack was filed as Exhibit A-5. It is a letter of subscription for 50 preferred shares, saying a $500 cheque is enclosed.

3.05.7 The witness said that Claire Schecter (the owner of the other 50 preferred shares of the appellant company) was his father’s secretary for a number of years. She has been living in Hong Kong since 1977. Gilda Mostovitch was also a former secretary of Peter Lack’s father for 6 years. In 1964 the latter got married and moved to the United States.

3.05.8 Under cross-examination, the witness said he was a law student when he bought the appellant’s preferred shares in 1964. “Gilda had told me that she was getting married and was leaving the province of Quebec, and she asked me to purchase her shares in Ralston, and I agreed to that and I issued the cheque to her” (SN p 37).

3.05.9 The sum of $500 was money he had earned during his 5 or 6 former summer vacations ($45 per week). He then had two bank accounts: one with the Bank of Montreal and another with the Royal Bank of Canada. Thus he had investment income. He affirmed that his father had not given him the $500 to buy the said shares (SN pp 45, 46).

3.06 Leonard Cohen’s Testimony

3.06.1 Mr Leonard Cohen, an industrialist and shareholder of the appellant, testified that:

(a) two letters, one from Gilda Mostovitch dated September 26, 1962 (Exhibit A-5) and another one from Claire Schecter dated September 26, 1962 (Exhibit A-6) addressed to the appellant (each transferring a cheque of $500 to pay for 50 voting preferred shares of the appellant) are records of the company;

(b) the money used for these payments was not given or reimbursed by him or by his wife;

(c) he (or his wife) had no agreement of any kind (verbal or written) with Miss Mostovitch, Mrs Schecter and Mr Peter Lack. There was no discussion and no attempt to show how they would vote their shares;

(d) he (or his wife) did not guarantee to buy the shares back;

(e) the employees of the respondent never asked him questions about the said preferred shares;

(f) the shareholders of the appellant on January 4, 1972 were Claire Schecter, Peter Lack, Leonard Cohen, Alice Cohen, Louis Cohen and David Lack. The latter four were elected directors on the above date for that year;

(g) there was no agreement of any kind that Miss Mostovitch, Mrs Schecter and Mr Peter Lack be his agents and his nominees to hold the shares;

(h) he and his wife are not related to Miss Mostovitch, Mrs Schecter, David Lack and Peter Lack.

3.06.2 By-law No 22 of the appellant company, creating preferred shares from existing shares, was filed as Exhibit A-7. This by-law was approved by the Government of Quebec on October 3, 1962.

3.06.3 In cross-examination, Mr Leonard Cohen testified that:

(a) Canadian Technical Tape was incorporated in 1950, its main object being manufacture of pressure sensitive tapes;

(b) in 1950 he then owned 50% of the shares of the said company, the other 50% being owned by Americans. In 1957, he acquired control of Canadian Technical Tape;

(c) the appellant company was incorporated in January 1955. Then the shareholders were David Lack, Pearl Auerbach (Mr Lack’s secretary), Baruch Pollack (an advocate working for Mr Lack) and Leonard Cohen;

(d) the letters patent filed as Exhibit R-2 were those of the appellant;

(e) the appellant was “set up to manufacture extruded polyethylene film” (garbage bags, wrapping, etc.).

3.06.4 The respondent filed as Exhibit R-3 the appellant’s returns for the years 1960, 1961 and 1962. Those returns indicated that Canadian Technical Tape Ltd is an associated company. The two companies have the same directors and officers (the three Cohens and David Lack). Their head office is located at the same address.

3.06.5 The witness, after studying the financial statements of 1962, said that in that year the appellant had enough money to operate and did not require capital. To explain the issue of By-law No 22 concerning the 500 voting preferred shares at $10 each, he first said that:

it was done on the basis of professional counsel (SN p 104).

Did somebody bring up the question of income tax in relation to this? A I can’t specifically remember, but everything that happens in business has a relationship to income tax. I would say that as a statement. Q It is an important aspect. A It’s a very important aspect. (SN p 107) Q Logically, if you issued preferred shares, would you not issue them to members of your family? A the only . . . 1 think at the time, the only immediate members of my family were my wife and myself who were principals, there was nobody else of any great significance in my family. Q Why didn't you take preferred shares? A As I say, l . . . Q Was this done for tax purposes? A It’s a difficult question to answer . . . Q Well, is there a reason why you created those shares other than tax reasons? A I don’t know whether I can answer you that directly — you know — everything that one does in business today — you have the two (2) facets: one is the operations, and the other is the financial, if you want, and it is very complex, especially to a person such as myself, and I do depend upon professional counsel. I don’t have time frankly to — most of this I don’t understand as to what is happening anyway. I’m involved in operations .. . Q Yes, I can very well understand that, Mr Cohen, but you know, you were issuing special types of shares . . . A Yes. Q . .. voting power . . . A Yes. Q These shares could vote at a meeting . . . A Yes. Q . . . and did you know at the time that fifty percent (50%) of the voting rights in the shares would go to other people than yourself . . . A Yes. Q . . . and members of your family? . . . A Yes. Q You knew that? A Yes. (SN pp 107-109)

3.06.6 As Exhibit R-4, the respondent filed By-law No 1 which was adopted on January 7, 1955. A part of article XII (a) of this By-law reads as follows:

No transfer of shares shall be made without the consent of the Directors and no share shall in any event be transferable until all previous calls thereon have been fully paid in.

Mr Cohen said that he presumed that he had approved the transfer of shares to Peter Lack.

3.06.7 In cross-examination, the witness also testified about Miss Mosto- vitch’s and Claire Schecter’s way of voting:

Q In Mr Lack’s office.

You’ve testified to the effect that you had no agreement or, written or otherwise with either Gilda Mostovitch and Claire Schecter? . . . A Yes Sir. Q . . . concerning the way that the shares would be voted, or the way, the way that they would handle the shares, and you said that your wife didn’t either. How can you speak for your wife, or did you ask her, or whatever? A No but my wife will trust my judgment the way I would trust the judgment of . . . Q . . . Mr Lack? A . . . Mr Lack, or Mr Usher, yes. Q So that therefore, Mr Lack told you that there shouldn’t be any problem — is that what we can assume? A I think it’s a fair assumption. Q A fair assumption — there would be no problem with these preferred shares? . . . A That's right. Q . . . that you would continue on as before? ... A Yes Sir. Q .. . there would be no problem. (SN pp 119, 120)

3.07 Testimony of Mr Markus Bonzee

Mr Bonzee, who has been Chief Accountant for the appellant since 1955, testified that:

(a) in 1962 the records (Exhibit A-8) of the company showed that Gilda Mostovitch and Claire Schecter paid $500 each for 50 preferred shares bearing 8% interest. Payments were made by cheques (SN p 129);

(b) according to records (Exhibit A-9) payments of $40 interest were paid to the owners of the preferred shares;

(c) nobody from the Income Tax Department approached him to ask him whether the shares were paid for or not paid for (SN p 130).

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the present case are paragraph 39(4)(b), subsection 39(5) and paragraph 139(5d)(b) of the former Act and amendments and paragraphs 251 (5)(b), 256(1)(b) and subsection 256(2) of the 1972 Act and amendments. The provisions of the new Act (which are similar to those of the former Act) read as follows:

251. (5) Control by related groups, options, etc. For the purposes of subsection (2) and section 256,

(b) a person who had a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to, or to acquire, shares in a corporation, or to control the voting rights of shares in a corporation, shall, except where the contract provided that the right is not exercisable until the death of an individual designated therein, be deemed to have had the same position in relation to the control of the corporation as if he owned the shares; and

256. (1) Associated corporations. For the purpose of this Act 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.

(2) Idem. 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

Counsel for both parties referred the Board to the following cases at law:

1. Anglo-BC Distributors Ltd v MNR, [1970] CTC 138; 70 DTC 6105;

2. Lou’s Service (Sault) Limited v MNR, [1967] CTC 315; 67 DTC 5201;

3. Aaron’s Ladies Apparel Limited et al v MNR, [1966] CTC 330; 66 DTC 5244;

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

5. Alpine Drywall & Decorating Ltd v MNR, [1966] CTC 359; 66 DTC 5263;

6. Oakfield Developments (Toronto) Ltd v MNR, [1971] CTC 283; 71 DTC 5175;

7. M F Esson & Sons Limited v MNR, [1966] CTC 439; 66 DTC 5303;

8. Les Magasins Continental Ltée v HMQ, [1978] CTC 688; 78 DTC 6557; [1981] CTC 428, 79 DTC 5213;

9. Ghimpelman v Bercovici, [1957] SCR 128;

10. Marc Beauchamp v Les Contenants Sanitaires C S Inc et al, [1979] C CS 414;

11. Pillsbury Canada Limited v MNR, 19 Tax ABC 431; 58 DTC 428;

12. Conway Estate v MNR, [1965] CTC 283; 65 DTC 5169;

13. Buckerfield’s Limited et al v MNR, [1964] CTC 504; 64 DTC 5301;

14. British-American Tobacco Co Ltd v IRC, 29 TC 49;

15. MNR v Wright’s Canadian Ropes Ltd, [1947] CTC 1; 2 DTC 927;

16. Dominion Fibre Drum Corp v MNR, 40 Tax ABC 79; 66 DTC 46;

17. Regal Wholesale Ltd v HMQ, [1976] CTC 272; 76 DTC 6146;

18. Vina-Rug (Canada) Limited v MNR, [1968] CTC 1; 68 DTC 5021.

4.03 Analysis

4.03.1 First, it is clear to everybody that the basis of the reassessment is not subsection 247(2) of the new Act or 138A(2) of the former Act.

The provision is used only if the Minister so directs. In the present case there is no direction from the Minister.

Even if there was discussion between the representatives of the parties in October 1975 (Exhibit R-1) concerning the possibility of invoking subsection 247(2), in fact the said provision was not the basis of the assessments issued on April 30, 1976. this clearly appears from the “Notification by the Minister’ dated February 25, 1977 in answer to the Notice of Objection. In this notification the Minister refers to paragraph 39(4)(b) and subsection 39(5) of the old Act and paragraph 256(1)(b) and subsection 256(2) of the new Act. It cannot be said in the present case, as contended by the appellant, that there is an alternative plea. The quotation of the Conway case (supra) “The onus of supporting the assessment under the alternative plea was accordingly not on the appellant, but on the Minister” has no application in the present case.

4.03.2 The appellant has admitted most of the assumptions of fact of the respondent “the contest is about subparagraphs ‘F’, ‘G’, ‘H’, ‘l’, and ‘J’” of section 8 of the Reply to Notice of Appeal said Mr Vineberg (para 3.02(e)). Those subparagraphs assumed that Peter Lack, Gilda Mostovitch and Claire Schecter were nominees on behalf of the Cohen group.

The preponderance of the evidence is that they are not nominees on behalf of the Cohen group. The uncontradicted testimonies, most of them confirmed by document, indeed are to the effect that:

(a) Miss Gilda Mostovitch and Claire Schecter had personally bought the preferred shares from the appellant (paras 3.06.1(a) and 3.07(a));

(b) Peter Lack had bought from Miss Gilda Mostovitch and paid for them with his own money (paras 3.05.1, 3.05.6 and 3.05.9, Exhibits A-2 and A-5);

(c) the owners of the preferred shares had received every year the eight percent interest (paras 3.05.4, 3.07(b) and Exhibit A-4);

(d) there was no agreement to the effect that the owners of the preferred shares had acted as nominees of the Cohen family, or that they had received a guaranty from a member of the Cohen family to buy the shares back (paras 3.05.3 and 3.06.1(b), (c) and (d)); and,

(e) nobody from the Income Tax Department had approached the witnesses and asked them questions about the preferred shares (paras 3.05.2, 3.06.1(e) and 3.07.1(c)).

4.03.3 On the one hand, it is true that the preponderance of the evidence is to the effect that the issuance of the preferred shares in 1962 and the reorganization of the company had a relationship to income tax and certainly to pay less income tax (para 3.06.5). On the other hand, the reassessments are based on paragraph 39(4)(b) of the former Act and paragraph 256(1) (b) of the new Act and not on the tax evasion provision in particular subsection 138A(2) of the former Act nor on subsection 247(2) of the new Act. In these latter provisions indeed, one of the main reasons for the separate existence of the companies was: “to reduce the amount of taxes that would otherwise be payable under this Act”. This requirement or reason is not provided in subsections 39(4) and 256(1).

Therefore the principle of Lord Atkin still stands. A taxpayer may arrange his business to pay the least possible tax.

4.03.4 It is clear to the Board that if the preponderance of the evidence had been that the owners of the preferred shares were nominees for the Cohen group, the appeal would have been dismissed on the basis that the Cohen group would have the actual control of the appellant company.

4.03.5 Now the problem is whether, considering the balance of the evidence, (admissions, testimonies and by-laws) the Cohen group legally or actually had the control of the appellant company during the years involved.

4.03.6 Respondent’s arguments

4.03.6.1 Oakfield case

In fact, the respondent based his arguments on the Oakfield case (supra) given by the Supreme Court of Canada. It is useful to refer to the facts summarized as follows:

The appellant company (under its original name) was assessed for its two fiscal periods ending in 1963 on the basis that it was associated with 42 other companies. The Minister took the position that the same group of persons (the “inside group”) controlled all the companies, since the large majority of the common shares of each of the 43 companies was held by the same five corporate shareholders. In 1960, in view of the impending enactment by Parliament of an amendment to section 39(4) of the Act, the appellant (and the 42 other companies) sought to increase its capital by issuing voting preferred shares equal in number to the common shares outstanding, which preferred shares were to be issued to persons who were strangers in the tax sense to the holders of the common shares. This was to be done in the belief that the inside group would no longer be in control of the companies since it would no longer have majority voting power. Supplementary letters patent were sought on December 20, 1960 to authorize the issue of voting, non-participating, cumulative, redeemable preferred shares, and the directors, acting on the assurance that the letters patent would be made effective from that date, proceeded on December 21, 1960 to issue and allot the shares, although the letters patent were not finally issued until February 15, 1961. (The letters, when issued, were made effective from December 20, 1960.) When the shares were issued, the principal shareholder of the companies making up the inside group personally guaranteed to the preferred shareholders a return of the money invested by them and also guaranteed the payment of the dividend. The Exchequer Court (69 DTC 5175) upheld the Minister’s assessment of the appellant company as an associated corporation, ruling that the inside group never lost control of the company. This ruling was based on the finding that no preferred shares were validly issued by the company on December 21, 1960 since its capital stock did not include such shares until the supplementary letters patent were issued at a later date. The company appealed this decision to the Supreme Court of Canada.

Held: The appeal was dismissed. The appellant company had been properly assessed as an associated corporation. The inside group (the common shareholders) controlled the company within the meaning of section 39(4)(b) even if the preferred shares were validly issued. 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 the company, they were entitled to all of the surplus after return of capital and the payment of a 10 per cent premium to the preferred shareholders. Their voting power was sufficient to authorize the surrender of the company’s letters patent. These circumstances were sufficient to vest control in the inside group even though the owners of non-participating preferred shares held the remaining 50 per cent of the voting power.

According to the respondent the facts in the Oakfield case are substantially the same as in the present case. Therefore, the conclusion must be the same.

4.03.6.2 The present case can be distinguished from the Oakfield case on some points:

(a) The Cohen group did not guarantee to the preferred shareholders a return of the moneys invested in the purchase of the shares. The owners of the preferred shares were not nominees on behalf of the Cohen group;

(b) the preferred shares were legally and validly issued on that aspect (para 3.03). In the Oakfield case, it is necessary to quote the judgment in fine:

Cattanach J, in the Exchequer Court arrived at the same result but on different grounds. He held that the Minister was not precluded from establishing that the supplementary letters patent bore a date antecedent to their actual issue on the authority of Letain v Conwest Exploration Ltd (1961) SCR 98, and they were not in fact issued until February 15, 1961. It followed that no preference shares were validly issued by Polestar on December 21, 1960, as the capital stock of Polestar did not include such stock at that time, and the common shareholders never lost control of the company. It is unnecessary to deal with these grounds in view of my opinion that there was sufficient control even if the preferred shares were validly issued.

(c) it is my opinion that the voting power of the Cohen group (50% of the voting shares) was not sufficient to authorize the redemption of the preferred shares by the company. Two-thirds of the voting shares were required. On this point, the Board shares the opinion of Mr Barry Clamen (Exhibit R-1, para 3.04).

4.03.6.3 In fact, it seems that the only points which are common with the Oakfield case are the common shareholders (the Cohen group):

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, (let us say of Ralston, the appellant) 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.

Is it sufficient to say that the Cohen group controls the company? I cannot sustain this conclusion.

There remains, however, a last point which was pointed out by the respondent.

4.03.6.4 The respondent referred to the provision Xl(b) of By-law No 1 of the appellant (Exhibit R-4). It reads as follows:

(b) The Directors may from time to time allot the whole or any parts of the authorized and unissued stock of the Company to such person or persons, corporation or corporations as they shall by resolution determine.

The respondent contends that, as there remain 400 unissued common shares and 400 preferred shares, it is possible for the directors (the Cohen group) to acquire part or all of those shares and therefore they can, at any time in the future, control the company.

The respondent referred in the Reply to the Notice of Appeal, to paragraph 139(5d)(b) of the former Act which is similar to paragraph 251 (5)(b) of the new Act. It is quoted in paragraph 4.01. It is stipulated at the beginning of this provision:

For the purposes of subsection 2 and section 256.

We know that subsection 256(2) (also quoted in para 4.01) is the main one involved in the present case.

This paragraph 139(5d)(b) was found not applicable in the Distillers Corporation — Seagrams Limited case, [1980] CTC 2737; 80 DTC 1649. In the said case, the question was to determine whether the British company was a “subsidiary controlled corporation” of the appellant company; it was not a question of an associated company as in the present case. The said disposition 139(5d)(b) must apply only to the concept of associated company and at arm’s length transaction.

4.03.6.5 The point is whether in virtue of this provision the common shareholders, directors in 1962, were “deemed to have had the same position in relation to the control of the corporation as if they owned the shares”. At first glance, it seems that the answer must be given in the affirmative.

The common shareholders indeed are the directors of the appellant company. Therefore they may allot to themselves the whole or any parts of unissued shares. In that sense one can say they have a right to acquire.

However, the cited by-law says that the director may allot the said unissued stocks “to such person or persons, corporation or corporations as they shall by resolution determine”. Therefore the unissued stock of the company may be allotted to every individual and every company in the world. Everybody in the world in fact has the same right. It is the Board’s opinion that the word “right” contemplated in paragraph 251 (5)(b) is not a right which the person in question holds in common with all the others in the world.

5. Conclusion

The appeal is allowed and the matter is referred back to the respondent for reassessment in accordance with the above Reasons for Judgment.

Appeal allowed.