Her Majesty the Queen v. Duha Printers (Western) Limited, [1996] 3 CTC 19, 96 DTC 6323

Linden J.T.C.C.: — The issue in this appeal is whether the respondent taxpayer, Duha Printers (Western) Ltd., is permitted to deduct from its 1985 taxable income non-capital losses of $460,786. The taxpayer claims that the right to deduct the losses was validly obtained through an amalgamation with a related corporation, Outdoor Leisureland of Manitoba Ltd., the company that actually suffered the losses. This case turns mainly on whether the two companies were “related”, as the taxpayer claims, which in turn depends on who “controlled” Duha Printers “immediately before” the amalgamation.

Statutory provisions

The relevant provisions of the Income Tax Act! [1] are as follows:

87(2.1) Where there has been an amalgamation of two or more corporations, for the purposes only of

(a) determining the new corporation’s non-capital loss, net capital loss, restricted farm loss or farm loss, as the case may be, for any taxation year,

and

(b) determining the extent to which subsections 111(3) to (5.4) apply to restrict the deductibility by the new corporation of any non-capital loss, net capital loss, restricted farm loss or farm loss, as the case may be,

the new corporation shall be deemed to be the same corporation as, and a continuation of, each predecessor corporation, except that this subsection shall in no respect affect the determination of

(c) the fiscal period of the new corporation or any of its predecessors,

(d) the income of the new corporation or any of its predecessors, or

(e) the taxable income of, or the tax payable under this Act by, any predecessor corporation.

111(1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such portion as he may claim of

(a) his non-capital losses for the 7 taxation years immediately preceding and the three taxation years immediately following the year; ...

(5) Where, at any time, control of a corporation has been acquired by a person or persons (each of whom is in this subsection referred to as the “purchaser”)

(a) such portion of the corporation’s non-capital loss or farm loss, as the case may be, for a taxation year ending before that time as may reasonably be regarded as its loss from carrying on a business is deductible by the corporation for a particular taxation year ending after that time

(i) only if throughout the particular year and after that time that business was carried on by the corporation for profit or with a reasonable expectation of profit ...

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

(c) any two corporations

(i) if they are controlled by the same person or group of persons ...

256(7) For the purposes of subsections 66(11) and (11.1), 87(2.1), 88(1.1) and

(1.2) and section 111

(a) where shares of a particular corporation have been acquired by a person after March 31, 1977, that person shall be deemed not to have acquired control of the particular corporation by virtue of such share acquisition if that person

(i) was, immediately before such share acquisition, related (otherwise than by virtue of a right referred to in paragraph 251(5)(b)) to the particular corporation ...

These sections are part of a complicated network of provisions that prescribe the various circumstances under which losses may be utilized by certain specified corporations. The provisions above are specifically directed at corporations recently subject to a reorganization. They begin with the general proposition, in subsection 111(1), that a corporation may deduct from its taxable income for a year non-capital losses that arose in any of the years specified. Subsection 87(2.1) then adds that, where two or more corporations are amalgamated, the resulting corporation is deemed, for the purpose of determining loss deductibility, to be the same corporation as each predecessor corporation. By the combination of these two provisions, recently amalgamated corporations are allowed to share losses between them.

However, subsection 87(2.1) also adds that subsections 111(3) to (5.4) may apply to restrict loss deductibility. Subsection 111(5), the provision relevant to this case, states that in an amalgamation where control changes hands, losses may be shared only to the extent that the business of the loss corporation is carried on by the amalgamated corporation as a going concern. To understand what is meant by “control” and how it can change hands, one must first refer to subparagraph 251(2)(c)(i). It states that two corporations are related if they are controlled by the same person or by the same group of persons. Subparagraph 256(7)(a)(i) then clarifies that control of a corporation will be deemed not to have been acquired in a share acquisition where the corporations at issue were related “immediately before” to the acquisition. The notion of “control” is therefore central to the working of subsection 111(5).

As complicated as these provisions might seem, the goal they seek is an implementation of certain basic principles governing income computation. These principles are fundamental to the taxing scheme implemented by the Act. Briefly described, this scheme contemplates the taxation of overall net increases in an individual taxpayer’s income. In computing such income, the Act allows losses to be shared between income sources so long as those sources are referable to a single individual taxpayer. This is the net income concept. What is not allowed, however, is income or loss sharing between individuals. The reason for this is that the Act allocates tax burdens differentially across different income strata. Certain policy initiatives are thereby implemented, and these initiatives would be frustrated by income or loss sharing between individuals.

Within this scheme, corporations present a special challenge. Corporations are individuals, legally speaking, and as individuals are liable to pay tax. But they are also fictional creations of law whose income is ultimately distributed to the shareholders who own them. They are furthermore very portable and are easily created, traded, bought, and sold. Specific corporate taxation rules exist, therefore, to harmonize the taxation of corporate and shareholder income, and to prevent loss sharing that can result from inappropriate corporate manipulation. One example of the latter concerns the stop-loss provisions of section 111, which quarantine losses to the corporations that created them. Subsection 111(5), however, provides the exception that related corporations may share losses without restriction. Such corporations are, for this purpose, treated by the Act as a single taxable unit, and may be claimed as such by the corporate taxpayer. The main issue in this case concerns the proper application of subsection 111(5).

Facts

This case was put forward on an agreed statement of facts which may be summarized as follows. Emeric Duha indirectly controlled the respon- dent printing company, Duha Printers. [2] William Marr and his wife, Noah Marr, indirectly controlled Outdoor Leisureland, a recreational vehicle retail outlet. [3] The Duha business was successful and the Marr business was not. [4] Outdoor Leisureland had utilizable losses on its books and Duha Printers had taxable income which could be reduced if it could use those losses. It was therefore arranged that Duha Printers would amalgamate with Outdoor Leisureland such that the former could take advantage of the latter’s non-capital losses.

To complete the transaction successfully, however, the parties had to comply with subsection 111(5). To this end they looked to subparagraph 256(7)(a)(i) and implemented the following scheme. On February 7, 1984, Duha Printers (Duha Printers #1) amalgamated with a shell company to trigger a year end for the former. On February 8, 1984, the Articles of the new amalgamated Duha Printers (Duha Printers #2) were amended to increase its authorized capital by creating an unlimited number of Class C preferred shares. These shares entitled the owners to dividends of a specified amount, and their redemption price was set at the stated capital for each share. The shares also carried the right to vote, and were subject to the following restrictions: the voting right ceased upon the transfer of the shares or upon the death of the holder; the shares were redeemable by Duha Printers #2 upon consent of the holder; and the shares were redeemable by Duha Printers #2 without holder consent in the event of their transfer. The amended Articles provided that upon the death of any holder of a Class C share, or upon the transfer of any of them, the entire class would cease to carry a voting right.

On February 8, 1984, the company that controlled Outdoor Leisureland, Marr’s Leisure Holdings (Marr’s), purchased 2000 Class C Duha Printers #2 shares at $1 per share, giving Marr’s a 55.71 per cent ownership of, and ostensible control over, Duha Printers #2. On the same date, a unani- mous shareholders agreement was signed between all the shareholders and Duha Printers #2. The agreement stipulated, among other things:

1. Duha #2 was to be managed by a Board of Directors comprised of any three of the following: Mr. Duha, Mrs. Duha, Paul Quinton, and William Marr;

2. no shares could be transferred without the consent of the majority of the directors; and

3. shareholders were prohibited from selling, assigning, transferring, donating, mortgaging, pledging, charging, hypothecating or otherwise encumbering its shares in any manner.

Paul Quinton was a long-time friend of Emetic Duha and William Marr, and, as accepted by the Trial Judge, for ten years had been a director of Duha Printers. Quinton’s status as a director was also evidenced by his signature on a director’s resolution dated February 8, 1984.

On February 9, 1984, a numbered company owned by Duha Printers #2, 64099 Manitoba Ltd., [5] purchased a receivable owing to Marr’s by Outdoor Leisureland in the amount of $441,253. The purchase price was $34,559, which was calculated as 7« per cent of Outdoor Leisureland’s non- capital losses. The purchase of this receivable effectively represented the purchase price for Outdoor Leisureland’s non-capital losses, obtained so as to be deducted from the income of Duha. The agreement stipulated that one-half of the purchase price would be paid to Marr’s on June 1, 1984, with the remainder payable upon the day Marr’s shares were redeemed. This latter stipulation guaranteed that Marr’s would divest its shares after the amalgamation had completed its purposes.

On February 10, 1984, Duha Printers #2 and Outdoor Leisureland amalgamated, creating Duha Printers #3. By resolution dated March 12, 1984, the shareholders of Duha Printers #3 elected Mr. Duha, Mrs. Duha, and Paul Quinton once again as directors of Duha Printers #3. By this election, the Duha family retained the day to day control over their company that they had in the past.

On January 4, 1985, Duha Printers #3 redeemed Marr’s Class C shares. Finally, on February 15, 1985, after a single taxation year, the unanimous shareholders agreement was terminated, and Paul Quinton resigned as director.

The net effect of this sequence of transactions is that Marr’s was given ostensible shareholder control over Duha Printers, a successful, family- owned business, for $2,000. The purpose of the share transaction, in particular, was to comply with subsection 111(5) of the Act. By virtue of it, the parties considered Outdoor Leisureland and Duha Printers to be con- trolled by the same person, Marr’s Leisureland. Relevant subsequent tax filings were, accordingly, computed on the basis that the two companies were related, and Duha Printers claimed unrestricted use of Outdoor Leisureland’s losses for the 1985 taxation year. Immediately after these purposes were fulfilled, Marr’s Leisureland and William Marr completely dissociated themselves from any relation with or participation in Duha Printers.

The primary issue raised by these facts is whether Duha Printers was “controlled” by Marr’s immediately prior to the amalgamation of Duha Printers and Outdoor Leisureland.

Tax Court decision and arguments on appeal

The Tax Court Judge found that the share and amalgamation transactions were solely motivated by tax purposes. Despite this finding, he decided in favour of the taxpayer. On the first issue put before him, that of “control,” the judge held that Marr’s controlled Duha Printers by virtue of its majority share ownership and that subsection 111(5), therefore, did not apply. Duha Printers and Outdoor Leisureland were related through common control and Outdoor Leisureland’s losses were fully deductible.

This first issue was assessed primarily on whether the unanimous shareholders agreement restricted Marr’s control such that it was in law a fiction. The Judge found that the agreement had no effect on the legal control vested by the shares. By virtue of this control, Marr’s had the right to elect all the Directors, and could change the composition of the Board at any time, notwithstanding that it could choose only among the four candidates named in the shareholders agreement. The Judge found that nothing external to the share register restricted the control vested by the 2000 Class C shares. He stated:

The Articles of Amendment of Duha #2 are not before me but a brief description is set out in paragraph 16 of the Agreed Statement of Facts. A copy of the by-laws of the company also is not in evidence. A copy of the Article of Amendment has been produced. There is nothing before me to suggest that any of these documents preclude the holders of the Class “C” preferred shares from voting their shares in the normal course. There was also no suggestion, let alone evidence, that Marr’s was not the beneficial owner of the shares and thus not the person who was to make the call on how these shares were to be voted at an election for directors.

The Judge also found that the amalgamation did not offend the object and the spirit of the Act. He stated that an “arrangement adopted by the taxpayer purely for tax purposes” is clearly allowed by the plain wording of the Act: the Act allows related companies to share losses upon amalgamation; related companies are defined as those controlled by the same person; and control is defined by the jurisprudence as de jure control (majority share ownership). According to the Judge, each of these conditions was met in this case. Finally, no sham was found on the facts, and the Judge found that subsection 245(1) did not apply. The case was dismissed.

As a note before proceeding, the Tax Court Judge at one point commented on what he thought was the real effect of the disputed transactions. He stated:

I agree with respondent’s counsel that the sole purpose of the transaction was to enable the appellant to make use of the losses incurred by Outdoor. There was no other reason. The issuance of the 2000 Class “C” voting preference shares to Marr’s did not transfer de facto or real control to Marr’s. All three Duha corporations reported net income for the fiscal period January 1, 1983 to December 31, 1983 of $182,223 and of $96,695 for the 41 days ending February 10, 1984. The respective companies had retained earnings of $296,486 and $393,181 as at December 31, 1983 and February 10, 1984. Surely a person controlling such a corporation would not surrender control to a stranger for the consideration of $2000. And in reality the Duha family shareholders did not relinquish control and Marr’s never intended to control the company. The majority of persons elected to the Board of Duha #2 by Marr’s were members of the Duha family. There is no evidence Mr. Marr was ever involved in the business carried on by Duha #2 or was even interested in the affairs of the company. Marr’s could not transfer its shares or allow them to be encumbered in any way; obviously one may infer the Duhas did not want a person other than Marr’s to own the shares. The Class “C” preferred shares were redeemed on January 4, 1985, eleven months after Marr’s “invested” in Duha #2. With such facts before an assessor it is not too difficult to appreciate the reason for the assessment and perhaps these facts may be considered again in another forum.

The Crown appeals the Tax Court decision on the basis that Marr’s did not control Duha Printers immediately before the amalgamation and that control, therefore, changed hands in the amalgamation. Subsection 111(5) was triggered and, because Outdoor Leisureland was a moribund business and was not carried on by Duha Printers with a reasonable expectation of profit, Outdoor Leisureland’ losses were not deductible by Duha Printers.

The taxpayer responds by asserting that control was vested in Marr’s by the share transaction and that the losses were deductible.

Analysis

1. Sham

Counsel for the Crown argues that the share transaction was a sham, that is, an attempt by the taxpayer to deceive Revenue Canada by a manipulation of legal formalities. In support of this argument, counsel points to the following factors. The purchase by Marr’s of 56 per cent of the voting shares was intended to avoid the application of subsection 111(5) of the Act by giving control to Marr’s; in reality, however, it only

^This latter issue was not pressed on appeal.

gave the appearance of control because of the operation of the unanimous shareholders agreement. Furthermore, the $2,000 price paid by Marr’s for these shares bore no relation to what these shares would have been worth if they had given their owner real control. Finally, notice of the unanimous shareholders agreement was not filed in the public registry as required by subsection 140(6) of the Corporations Act, notwithstanding that the agreement, according to counsel, prevented Marr’s from exercising control. Therefore, it is said that things were arranged to camouflage the fact that Marr’s had not in fact gained control of Duha Printers.

I have not been persuaded that this transaction can be classified as a sham. To be found to be a sham, the transaction must have been conducted “so as to create an illusion calculated to lead the tax collector away from the taxpayer or the true nature of the transaction.” Stubart Investments Ltd. v. R. (sub nom. Stubart Investments Ltd. v. The Queen), [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, at page 545 (C.T.C. 298), per Estey J. This is a narrow test that has not been met here. No illusion was created by the transaction. Despite the failure to register the unanimous shareholders agreement, which of itself is of little probative value, the legal obligations created by the parties were real. They accomplished a sale of a certain type of company stock for a specified price and subject to the various obligations set out in the shareholders agreement. No deception is apparent.

But this does not mean that these legal realities were sufficient to do what the parties wanted to achieve. As I have stated elsewhere, just because a transaction is not a sham does not mean that it necessarily will have accomplished its intended result.

2. Control

Before proceeding with an analysis of the “control” concept, a few words might be said about the approach of this Court to the interpretation of tax legislation. Counsel for the Crown has argued, as a separate issue, that the transactions in question should fail because they violate the object and spirit of the relevant provisions. I do not think it wise to treat as a distinct issue the “object and spirit” of a provision. It seems to me that an interpretation of any given section of the Income Tax Act should reflect the objects intended by it. This seems only reasonable, and is merely to repeat here what has been affirmed by this Court in the past as the proper approach to interpreting tax legislation. This approach has been named the “words-in-total context” approach by MacGuigan J.A. in Lor-Wes Contracting Ltd. v. R. (sub nom Lor-Wes Contracting Ltd. v. Minister of National Revenue), [1985] 2 C.T.C. 79 (sub nom Lor-Wes Contracting Ltd. v. The Queen), 85 D.T.C. 5310 (F.C.A.), at pages 83-84. This “context,” as stated in British Columbia Telephone Co. v. R. (sub nom. British Columbia Telephone Co. v. Minister of National Revenue, [1992] 1

C. T.C. 26 (sub nom. British Columbia Telephone Co. v. Canada), 92 D.T.C. 6129, at page., may be comprised of four elements:

...the words themselves, their immediate context, the purpose of the statute as manifested throughout the legislation, and extrinsic evidence of parliamentary intent to the extent admissible.

Each of these elements is important and must be taken into account in the interpretation, and each aids the search for a provision’s intended application. This approach was recently reaffirmed by the Supreme Court of Canada in Québec (Communauté Urbaine) v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3 (sub nom. Notre-Dame de Bon-Secours (Corp.) v. Quebec (Communauté urbaine)), [1995] 1 C.T.C. 241 (sub nom. Corp. Notre-Dame de Bon-Secours v. Québec (Communauté urbaine)), 95 D.T.C. 5017, at page 17 (C.T.C. 250), where Gonthier J., advocating a “Teleological approach”, declared:

[T]here is no longer any doubt that the interpretation of tax legislation should be subject to the ordinary rules of construction. At page 87 of his text Construction of Statutes (2nd ed. 1983), Driedger fittingly summarizes the basic principles: “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”.

I might also note that the object and spirit of a section will only be practically relevant when the application of that section to factual circumstances admits of some doubt. This was stated in Antosko v. Minister of National Revenue (sub nom. Canada v. Antosko), [1994] 2 S.C.R. 312 (sub nom. Antosko v. R.), [1994] 2 C.T.C. 25, 94 D.T.C. 6314 where lacobucci J. stated:

While it is true that the courts must view discrete sections of the Income Tax Act in light of the other provisions of the Act and of the purpose of the legislation, and that they must analyze a given transaction in the context of economic and commercial reality, such techniques cannot alter the result where the words of the statute are clear and plain and where the legal and practical effect of the transaction is undisputed. [7]

In the most recent case on this subject, Piggott Project Management Ltd. v. Land-Rock Resources Ltd., [1996] 1 C.T.C. 395, [1996] 5 W.W.R. 153, 38 Alta L.R. (3d) 1, Cory J. affirmed that the object and spirit of a section becomes relevant only where any doubt as to a section’s application is apparent. He stated at page 163 (Alta. L.R. 11-12):

Thus, when there is neither any doubt as to the meaning of the legislation nor any ambiguity in its application to the facts then the statutory provision must be applied regardless of its object or purpose. I recognize that agile legal minds could probably find an ambiguity in as simple a request as “close the door please” and most certainly in even the shortest and clearest of the ten commandments. However, the very history of this case with the clear differences of opinion expressed as between the trial judges and the Court of Appeal of Alberta indicates that for able and experienced legal minds, neither the meaning of the legislation nor its application to the facts is clear. It would therefore seem to be appropriate to consider the object and purpose of the legislation. Even if the ambiguity were not apparent, it is significant that in order to determine the clear and plain meaning of the statute it is always appropriate to consider the “scheme of the Act, the object of the Act, and the intention of Parliament”. [8]

The controversy, then, over this polite little phrase “object and spirit” seems to boil down to this. Where the meaning and application of a section is entirely clear and free from ambiguity or doubt, and where nothing external to that section suggests anything otherwise, one can reasonably be sure that the object and spirit of the section is apparent on the face of its wording, and that the section is to be applied accordingly. But where the any ambiguity or doubt in either the meaning or application of the section are apparent, the Court must resort to looking and determining for itself what application Parliament must be seen to have intended as derived in part from the purposes of the section, from the scheme, if any, of which the section forms a part, and from the overall intention of Parliament so far as it can be discerned.

In the previous pages, I have set out the legislative provisions relevant to this case, and have given a cursory overview of the objects or purposes they contemplate. These purposes, as regards subsection 111(5) and subparagraph 256(7)(a)(i), are to permit a deduction of a loss if control has not changed hands but to deny it if control has changed hands. With this in mind, I now turn to an analysis of the concept of “control”.

Though the word “control” is not defined in the Income Tax Act, it has been considered many times in the jurisprudence. This jurisprudence has settled that control is based on de jure control and not de facto control, and that the most important single factor to be considered is the voting rights attaching to shares. In the past, the share register, by itself, has usually been the main basis for determining corporate control, even though the Income Tax Act did not adopt that idea expressly. The scope of scrutiny under the de jure test has wisely been extended more recently beyond a mere technical reference to the share register. This case raises the issue of the scope of this extension.

The Agreed Statement of Facts suggests that Marr’s had so- called “share register” control, which led the Tax Court Judge to decide as he did. The question arises as to whether he was correct in law based on the circumstances in this case. The answer to that question requires an examination of the jurisprudence in this area.

An analysis of the term “control” generally begins with the decision of the House of Lords, British American Tobacco Co., Ltd. v. Inland Revenue Commissioners, [1943] A.C. 335 (H.L.), per Viscount Simon L.C. The case turned on the meaning of the phrase “controlling interest” as it appeared in a finance statute. In interpreting the phrase, Viscount Simon L.C. suggested that the object of the enactment was to treat as a single group all companies who stood in a particular relation to each other. This relation, he said, is defined by control over the company’s affairs and operations. One must, therefore, look to those who hold ultimate control. These are the company’s shareholders, for they control the company’s directors. Viscount Simon L.C. stated (at page 339):

I find it impossible to adopt the view that a person who (by having the requisite voting power in a company subject to his will and ordering) can make the ultimate decision as to where and how the business of the company shall be carried on, and who thus had in fact control of the company’s affairs, is a person of whom it can be said that he has not in this connexion a controlling interest in the company. [9]

After stating that a bare majority is sufficient to vest control, the Lord Chancellor addressed the argument that for certain purposes a 75 per cent shareholder majority was required and that a bare majority, therefore, could not vest full control. To this he replied that control must be assessed within a larger legal context, which may require looking at some future contingency that might have a bearing on the present. This is the view of things “in the long run” at page 340:

It is true that for some purposes a 75 per cent majority vote may be required, as, for instance (under some company regulations), for the removal of directors who oppose the wishes of the majority, but the bare majority can always refuse to re-elect and so in the long run get rid of a recalcitrant board. [10]

Because of the legal position of the majority shareholder in the case, Viscount Simon L.C. found that a bare majority was sufficient to determine the issue of control.

The Lord Chancellor’s statements were followed by Jackett P. of the Exchequer Court in BuckerfiekT s Ltd. v. Minister of National Revenue, [1964] C.T.C. 504, 64 D.T.C. 5301 (Exch. Ct.), per Jackett P. The case concerned whether certain companies were controlled by the same person or group of persons so as to make them associated companies, in which case they would be denied the benefit of a tax reduction. In deciding that the companies were associated, Jackett P. stated that control is de jure control and must be assessed primarily by looking to the share register. He said at pages 507-08 (D.T.C. 5303):

Many approaches might conceivably be adopted in applying the word “control” in a statute such as the Income Tax Act. 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 the 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 Company v. LR.C. 1 All E.R. 13, where Viscount Simon L.C., at page 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.* [11]

Jackett P.’s definition has become the touchstone in Canadian jurisprudence for determining issues of control. Though his definition is cast somewhat narrowly, the definition is defensible on the ground articulated by Viscount Simon L.C. to the effect that ultimate legal control over those who control the day to day affairs of the company (the directors) is control over the company. Though legal control over the directors is but indirect control over the company, it is yet “effective control of [the company’s] affairs and fortunes,” to use Viscount Simon L.C.’s words.

I note that Jackett P. construed the control test narrowly so as to defeat the artificial multiplication of corporations for the purpose of inappropriately multiplying tax benefits. The object and spirit of the section in question, section 39 at the time, factored significantly in determining the scope of his test. He stated at page 509 (D.T.C. 5304):

The course of action that section 39 has been designed to discourage is the multiplication of corporations carrying on a business in order to get greater advantage from the lower tax rate. [12]

This observation contains an important point. Many of the early cases defining control concerned the application of section 39. The greater number of these cases followed the lead set by Jackett P. in denying a tax reduction to artificially created corporations. Such corporations were effectively “regrouped” by the Court in these cases by the application of the de jure test.

However, the later cases, including the present one, deal more often with the reverse scenario, where corporations have attempted to gain a tax benefit by synthesizing the relatedness denied corporations in the former cases. This reversal in the application of the de jure test should not go unnoticed. The application of the test must reflect the objects intended by the provisions in question. Whereas parties were required for the purposes of old section 39 to demonstrate that effective control was not shared, they must demonstrate the opposite for the provision presently in question.

Jackett P.’s definition was adopted in a somewhat modified form in Vineland Quarries & Crushed Stone Ltd. v. Minister of National Revenue, [1966] C.T.C. 69, 66 D.T.C. 5092 (Exch. Ct.), per Cattanach J. The case concerned whether three companies were related. The shareholding structure of the companies was uncomplicated, with each company having two shareholders and between whom voting control was equally divided. In one company, the shareholders were Mr. Sauder and a company wholly owned by Mr. Thornborrow. In the second company, the shareholders were Mr. Thornborrow and a company wholly owned by Mr. Sauder. In the third company, the shareholders were Mr. Thornborrow and Mr. Sauder. In deciding that, despite the interposition of a corporation in two of the companies’ share structures, the three companies were related, Cattanach J. modified the rule set down in Buckerfield’s by “looking through” the technical registration of the shares. He stated at page 83 (D.T.C. 5098):

On the authority of the British American Tobacco case, I do not think it is appropriate to end the inquiry after looking at the share registers of the appellant and Sauder and Thornborrow Ltd. It is proper and necessary to look at the share registers of Bold Investments (Hamilton) Limited and Sauder and Thornborrow Limited to obtain an answer to an inquiry whether the appellant and the two other companies are controlled by the same “group of persons”. Where the registered shareholder in the first instance is a body corporate, you must look beyond the share register. [13]

In looking through the register, Cattanach J. found the three companies associated. [14] On appeal to the Supreme Court of Canada, Cattanach J.’s decision was upheld and his reasons expressly adopted. Vineland Quarries & Crushed Stone Ltd. v. Minister of National Revenue, 67 D.T.C. 5283 (note) (S.C.C.) at page 5284, per Fauteux J. for the Court.

Jackett P.’s test was also affirmed in Minister of National Revenue v. Dworkin Furs (Pembroke) Ltd., [1967] S.C.R. 223, [1967] C.T.C. 50, 67 D.T.C. 5035, per Hall J. In applying the test to the five appeals before it, the Supreme Court of Canada recognized the important role played by contractual agreements. [15] Speaking for the Court in that case at page 228

(C.T.C. 56), Hall J. found 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 in the name of Aaron’s (Prince Albert) Limited which they also controlled. [16]

Article 6 required unanimous shareholder consent before any motion could be passed. Despite the actual number of shares registered in the Aarons’ names, Hall J. held that Article 6 legally nullified the Aaron’s “share register” majority. In so deciding, the Judge referred to Ringuet v. Bergeron, [1960] S.C.R. 672, 24 D.L.R. (2d) 449, per Judson J. which dealt with a similar modification of voting rights through contract, except that this latter contract was not incorporated into the company’s Articles. It was, rather, just an external agreement. In recognizing its relevance to the issue of control, Judson J. stated:

Shareholders have the right to combine their interests and voting powers to secure such control of a company and to ensure that the company will be managed by certain persons in a certain manner. This is a well-known, normal and legal contract and one which is frequently encountered in current practice and it makes no difference whether the objects sought are to be achieved by means of an agreement such as this or a voting trust. [17]

On the authority of this statement, Hall J. concluded that the contractual agreement in the Aaron’s Ladies Apparel appeal nullified any majority based on a simple share count. He stated:

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.

The appeal in respect of Aaron’s Ladies Apparel Limited will accordingly also be dismissed with costs. [18]

An interesting application of the de jure test is found in another decision of the Supreme Court of Canada, Vina-Rug (Canada) Ltd. v. Minister of National Revenue, [1968] S.C.R. 193, [1968] C.T.C. 1, 68 D.T.C. 5021, per Abbott J. for the Court. The question once again was whether two companies were associated and therefore denied the benefit of a tax reduction. All the shares of one company were held by a father, his two sons, and a fourth party. The principal shareholders of the second company were the two sons and the same fourth party. In deciding that the two companies were controlled by the same group of persons, Abbott J. stated at page 196

(C.T.C. 3):

The learned trial judge held that John Stradwick, Jr., W.L. Stradwick and H.D. McGilvery, who collectively owned more than 50 per cent 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.... [19]

The Court here recognized that any combination of shareholders that can exert majority control are linked by a “sufficient common connection” for the purposes of the de jure test, and therefore, in law, control the corporation. Actual demonstrated control by any such group is not strictly required. Rather, such shareholders need be only be in “a position to exercise control.”

Another instructive case is Donald Applicators Ltd. v. Minister of National Revenue, [1969] C.T.C. 98, 69 D.T.C. 5122, per Thurlow J.; affirmed at [1971] C.T.C. 402, 71 D.T.C. 5202 (S.C.C.). Ten appellant companies were assessed by the Minister as associated companies on the basis that each was associated with an eleventh company and, therefore, associated with each other. Each company had authorized the issuance of 200 Class A shares and 19,800 Class B shares. Class A shares carried the right to vote on any question including the exclusive right to elect directors. Each company actually issued only two Class A shares, one each to two persons who then elected themselves directors. Each company also actually issued only 498 Class B shares to the eleventh company. These shares carried the right to vote on any question except the election of directors. The Court stated that control of a company does not necessarily rest on the immediate right to elect directors. Rather, the question of de jure control is resolved as one “of fact and degree'^ [20] depending on the overall voting structure within the company, and including the effect of any restrictions imposed on the decision making powers of the directors by the memorandum, the Articles, and by any shareholders agreements. Also important is the question of voting rights over time. In deciding that the eleventh company controlled each of the ten appellant companies, Thurlow J. stated:

A shareholder who, though lacking immediate voting power to elect directors, has sufficient voting power to pass any ordinary resolution that may come before a meeting of shareholders and to pass as well a special resolution through which he can take away the powers of the directors and reserve decisions to his class of shareholders, dismiss directors from office and ultimately even secure the right to elect 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 con- plated by section 39 of the Act. [21]

The phrase “in the long run” was taken from British American Tobacco. As used above by Thurlow J., it contemplates the notion of “sufficient voting power” which was articulated in Vina-Rug, supra.

In the next significant case, Oakfield Developments (Toronto) Ltd. v. Minister of National Revenue, [1971] S.C.R. 1032, [1971] C.T.C. 283, 71 D.T.C. 5175. the Supreme Court of Canada was faced with a situation where the voting rights were divided equally between two groups and two different classes of shares. One group, the so-called inside group, held all the common shares and 50 per cent of the voting power. The other group held all the preferred shares and the other 50 per cent voting power. Under the Buckerfield’s test, neither group, strictly speaking, could claim majority control. In deciding that one of the groups had control, nevertheless, Judson J. stated for a unanimous Court at page 1037 (C.T.C. 286):

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. [22]

In this case, the Court moved away from its prior emphasis on control over the election of directors. Instead, it looked to control over the right to dissolve the company. I note that the Court impliedly suggested that this dissolution power must be more than a mere power to dissolve. The power must have some compelling or persuasive force about it, which usually involves the capital structure of the company and specifically the capital return accruing to the shares.

In Minister of National Revenue v. Consolidated Holding Co., [1974] S.C.R. 419, [1972] C.T.C. 18, 72 D.T.C. 6007, the notion of “sufficient control” was expanded to include possible control. In the case, the Court dealt with a shareholding arrangement complicated by the presence of a trust. The question was whether two companies were related. The first company was controlled by two sons of a deceased businessman. Each son owned 50 per cent of the voting shares.

The second company was controlled by three executors, being the two sons and the Montreal Trust Company. In the will of the deceased, a provision stipulated that:

... in carrying out the duties of the 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.

By this provision, control of the second company was seen by the Court to be vested in any two of the three trustees to the estate. On this basis of possible control, the Court held that the two sons had sufficient control over the second company. Judson J. stated:

In determining whether a group of persons control 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 cotrustees as to the manner in which the voting rights attaching to the shares are to be exercised. ... Merely to look at the share register is not enough when the question is one of control. [23]

This decision emphasizes that it is important to look to the legal position of the parties as displayed in the wider circumstances of the parties’ affairs. As Judson J. put it, one must look at the parties’ true “position … at law.” In the case, the deciding factor was a trust deed. It was not a constating document. Nor was it a document that would necessarily show up on a share register or in any other official corporate filings. It was, however, a document with legal force. In looking to it as a determining feature, the Supreme Court suggested that true de jure control is just what it is stated to be, control at law. Any binding instrument, therefore, must be reckoned in the analysis if it affects voting rights. The Court expressly accepted this point of view when it stated:

The problem here is not solved by a decision that a company is not bound to see to the execution of trusts to which its shares are subject or that it may take the vote of the first named trustee on its share register. These are merely protective provisions in favour of the company and do not touch the question of control. [24]

The Court stated that because the two sons had possible voting control, they had, to use Judson J.’s characterization in Oakfield, “sufficient” voting power in law to control the company. Judson J. stated:

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 are, in the words of Abbott J. in Vina Rug, supra

in a position to control at least a majority of votes to be cast at a general meeting of shareholders. [25]

To summarize the significance of this case, the Court specifically endorsed a notion of possible control while at the same time assessing this control on factual and legal evidence confined neither to the share register nor to corporate filings in a corporations branch.

Similar principles were used in R. v. Lusita Holdings Ltd. (sub nom. Lusita Holdings Ltd. v. Minister of National Revenue), [1984] C.T.C. 335 (sub nom. Lusita Holdings Ltd. v. The Queen), 84 D.T.C. 6346 (F.C.A.), per Stone J.A. The question in the case concerned whether two companies were associated. The first company, Lusita Holdings, had 12 issued shares. These shares were held in trust for certain named beneficiaries. The trusts relating to these shares provided for two trustees, Gustav Schickendanz and another. The shares were in each case registered in the name of the latter trustee. The question concerned whether Mr. Schickendanz controlled the companies by his being able to force his co-trustee to resign. In deciding this issue, Stone J.A. ultimately referred to a provision of the trust indentures which required that the shares were to be voted in every case by the two co-trustees in unison. And because the Trustee Act R.S.O. 1980, c. 512, per subsection 6(c). at the time required that Mr. Schickendanz could not force a resignation until a replacement trustee was found, the obligations arising from the trust settled the matter. Stone J.A. stated:

Of fundamental importance here is the requirement of the indentures that both co-trustees decide as to how the votes attaching to the shares should be cast from time to time. Moreover, they were also required “to exercise their duties and powers in a fiduciary capacity”. The right to control the voting rights resided in the co-trustees and not in either one of them. [26]

The principle expressed above follows the ratio in Consolidated Holding. Both cases suggest that real de jure control must be decided by looking to the wider legal position of the parties at the relevant time in question. This legal position, furthermore, is more than a question of actual rights, but includes possible legal contingencies. Two such contingencies in Lusita Holdings concerned subsection 6(c) of the Trustee Act and the fiduciary capacity of trustees. As factors to consider in assessing control, such contingencies stand a good distance removed from the share register.

The issue of control was recently reconsidered by the Supreme Court of Canada. In Q. v. Imperial General Properties Ltd., Imperial General Properties Ltd. v. R. (sub nom. Imperial General Properties Ltd. v. Minister of National Revenue; The Queen v. Imperial General Properties Ltd. (formerly) Speedway Realty Corp. Ltd.), [1985] 2 S.C.R. 288, [1985] 2 C.T.C. 299, 85 D.T.C. 5500. Estey J. reviewed the jurisprudence and noted that the distinction drawn between de jure and de facto is not a fully accurate description of the analysis required of the Court. He stated:

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 section 39(4). [27]

Estey J. here recognized that a variety of legally relevant factors may have a bearing on any given analysis of corporate control. This should not be surprising. Corporate organization can be highly complex. This “natural” complexity, furthermore, can be, and many times 1s, further complicated by the presence of a tax avoidance motivation. While perhaps perfectly permissible, the Courts are not unaware of such realities. And a Court will not turn a blind eye to the “stark unreality of a situation” [28] where the bounds of the permissible have been plainly breached. Tax considerations are important for the running of one’s business affairs, and parties are free to take advantage of transactions or forms of organization that benefit them. However, parties must demonstrate the existence of a substantive legal reality in all the relevant circumstances of a case. As Dickson C.J. stated in Bronfman Trust v. R. (sub nom. Bronfman Trust v. Minister of National Revenue; Bronfman Trust v. The Queen), [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059, per Dickson C.J., at pages 52-53 (C.T.C. 128).

[T]he recent trend in tax cases [has] been towards attempting to ascertain the true commercial and practical nature of the taxpayer’s transactions. There has been in this country and elsewhere, a movement away from tests based on the form of transactions and towards tests based on what Lord Pearce has referred to as a “common sense appreciation of all the guiding features” of the events in question....

This is, I believe, a laudable trend provided it is consistent with the text and purposes of the taxation statute. Assessment of a taxpayer’s transactions with an eye to commercial and economic realities, rather than juristic classification of form, may help avoid the inequity of tax liability being dependent upon the taxpayer’s sophistication at manipulating a sequence of events to achieve a patina of compliance with the apparent prerequisites for a tax deduction.

In determining issues of corporate control, the Court will look to the time in question, to legal documents pertaining to the issue, and to any actual or contingent legal obligations affecting the voting rights of shares. These factors are simply facts with legal consequences, so that the distinction between de jure and de facto is not as stark as it once was, as Estey J. has emphasized. A control analysis must not be foreshortened by an oversimplified view of “de jure.” Transactions must be assessed in the context in which they appear and with “an eye to commercial and economic realities.” This is merely to say that corporate control must be real, effective legal control over the company in question. This does not change the law at all; it merely encourages us to focus on the true legal position of the parties, not only the formal one. Estey J. put this succinctly when he stated:

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. [29]

In continuing the analysis of Imperial General Properties, Estey J. then cited the development in the Oakfield case and stated at page 295 (C.T.C. 302-03):

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 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”. [30]

The phrase “in the long run” has been accepted by the jurisprudence for over 50 years. The reference incorporates into an analysis of control an appreciation for temporal considerations that might have a bearing on how shares either are or could be voted. In considering such factors in the case before him, Estey J. found that control “in the real sense of the term” [31] was not surrendered by a share transaction purporting to give majority “share register” control.

I am aware of the strong dissent in Imperial General Properties by Wilson J. and respect it for what it is saying. She stated the reason for her dissent as follows:

I do not think that this is a suitable area for judicial creativity. People plan their personal and business affairs on the basis of the existing law and they are entitled to do so. It is, I believe, important to recognize that any sudden departure by the courts from a well-settled line of authority in an area such as tax law can have a serious retroactive impact on the taxpayer. [32]

I agree with these observations, but would only suggest that the jurisprudence, though clarified, was not departed from by Estey J. Whether certain transactions were carried out “on the basis of the existing law” is a question to be answered by the Courts. The parties here created a novel corporate manipulation, and took a chance that it might work to save them some tax. It is up to this Court to decide the legal effect of the transactions they undertook.

In International Mercantile Factors Ltd. v. R. (sub nom. International Mercantile Factors Ltd. v. Canada), [1990] 2 C.T.C. 137, 90 D.T.C. 6390 (F.C.T.D.), per Teitelbaum J. a case of the Federal Court-Trial Division, the shares of a corporation were subject to a shareholders agreement which divided voting power equally between two groups, and the question concerned whether either group controlled the company. Teitelbaum J. found that the deciding factor was the make-up of the Board of Directors. Because the majority of the Board were nominees of the former group, the so-called public corporation, that group had de jure control over the company. However, the essential point in the case was that, because the composition of the Board could only be changed by a majority vote, the public corporation could vote down any attempt by the other party to increase its membership on the Board. Teitelbaum J. stated:

I am satisfied that the deciding factor in determining control in the present case is not the issue of the 50-50 voting rights as clearly this does not give either side control but the fact that neither side can effectively change the Board of Directors, that the Board of Directors is composed of a majority of the nominees of the public corporation and that because a majority vote is required to change the Board of Directors the public corporation has legal and effective control of Plaintiff. [33]

The de jure voting power of the public corporation, therefore, won the day.

Finally, in Atelco Inc. v. R. (sub nom. Alteco Inc. v. Canada), [1993] 2 C.T.C. 2087 (T.C.C.), per Bell J.T.C.C. the Tax Court of Canada found the deciding factor in a unanimous shareholders agreement signed by the parties. The appellant company, Alteco Inc., owned 51 per cent of the voting shares of “387.” In addition to its share ownership, Alteco was party to a joint venture agreement with the minority shareholder, National, for the establishment of 387. This agreement, to which, unlike the present case, the company was not privy, provided that the shares of 387 could not be transferred without the consent of the other party; that the structure and composition of the Board of 387 could not be changed without unanimous shareholder consent, even upon a vacancy; and that Alteco had the option to buy National’s shares. The agreement did not contain a termination provision. Under the circumstances where a majority of National’s nominees were elected to the Board, the Court found that despite Alteco’s 51 per cent share ownership, Alteco did not control 387. Bell J.T.C.C. stated:

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 on 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. [34]

This conclusion is very similar to the conclusion expressed by Teitelbaum J. in International Mercantile, and accords with the jurisprudence. In Alteco, the legal position of Alteco was insufficient to compel a conclusion that the appellant company “in the real sense of the term” [35] had control. In other words, if majority ownership does not allow for real legal control over a company, the de jure test of control will not have been met.

Application

In the present circumstances, I am not convinced that Marr’s controlled Duha Printers “immediately before” the share acquisition through which Duha Printers amalgamated with Outdoor Leisureland. I note, first, that at this time Marr’s was party to a unanimous shareholders agreement. This agreement was signed by all the shareholders. It was also signed by Duha Printers as it was meant to both directly and indirectly bind the directors of the company to the agreement’s provisions. The agreement, moreover, restricted Marr’s voting rights in a singularly important manner. It stipulated that three directors were to be elected to the Board of Directors and were to be chosen from a list of four candidates that included Emeric and Gwendolyn Duha, Paul Quinton, and William Marr. There is little question why these four persons were named: the choice of any three of them would necessarily ensure a majority of Duha family nominees on the Board of Duha Printers. Emeric and Gwendolyn Duha were husband and wife owners of Duha printers, and Paul Quinton was a long time friend of Emeric Duha. Paul Quinton had also been a director of Duha Printers for ten years, and was one of the three directors who signed the directors’ resolution of February 8, 1984, authorizing the subscription by Marr’s of the 2000 Class C shares, authorizing the corporation to enter the unanimous shareholders’ agreement, and authorizing the purchase of Outdoor Leisureland’s shares. This is sufficient for me to conclude that Paul Quinton was effectively a nominee of the Duha family, and for me to conclude as above that an election of any combination of these directors assured that control by the Duha family over their family business would not be lost.

I cannot see how the matter may be viewed otherwise. Successful, family-owned businesses do not cede control for the mere price of $2000. Duha Printers was worth almost $600,000. [36] No reasonable person on the street would believe that a share transfer $2000 would actually give away real control of a $600,000 company. Neither is it coincidental that the three Duha family nominees were in fact elected as directors. Marr’s did not even elect as a director its own majority shareholder. This is not a normal commercial result.

Counsel for the taxpayer argues that Canadian Courts have generally determined that shareholder agreements and other external agreements are not relevant in determining issues of control. Certain cases of the Supreme Court of Canada explicitly state otherwise, but in support of this argument, I was referred to the 1972 case of that Court, International Iron & Metal Co. v. Minister of National Revenue, [1974] S.C.R. 898, [1972] C.T.C. 242, 72 D.T.C. 6205, per Hall J. There, the question was whether two companies were associated. The shares of one of the companies were held by certain children of four fathers. The shares in the other were held by the fathers and by four holding companies controlled by the children. The fathers each held a single share in this second company. The holding companies controlled by the children held 117,499 shares each in it. The four fathers signed an agreement with the four holding companies which stipulated the fathers would be named as directors. The issue in the case was whether this agreement deprived the children of de jure control. Gibson J. of the Exchequer Court decided it did not, and the Supreme Court of Canada upheld this result. Hall J. stated for the Court that control remained vested in the children on the basis of their share ownership. The reason for the result seems obvious, for the nominal shareholding by the fathers was contrived to multiply a tax benefit. The Court, however, refused to allow the scheme to work and decided that control, for the purposes of the legislation, had not been transferred by the agreement. I also note in the case that the children per se were not parties to the agreement in question, which only affected the corporations which the children controlled. [37]

There is other evidence that Marr’s did not control Duha Printers. The amended Articles of Duha Printers, furthermore, stated that Duha Printers was to issue no new voting shares without unanimous shareholder consent. Marr’s shares, therefore, could not be diluted. If Marr’s had control, Duha Printers could not get it back. This makes it even more difficult to believe that real legal control was given to Marr’s, for the voting structure was galvanized by the amendment. The terms of the unanimous shareholders agreement, furthermore, could only be changed with unanimous shareholder consent. Marr’s, therefore, could not change his restricted ability to vote directors using its majority share position. Finally, by virtue of the agreement, Marr’s could not dissent from a corporate transaction and apply to a Court for the redemption of its shares. In these circumstances, Marr’s did not control Duha Printers.

Counsel for the taxpayer argues that Marr’s ability to dissolve Duha Printers is a significant element suggesting that Marr’s had control over Duha Printers. I do not agree. The courts have never said that dissolution power of itself is enough. From the case law above, the power to dissolve a company will be given weight only where the ability to elect directors is either equally shared or otherwise inconclusive on the issue of control. However, even apart from these considerations, the power to dissolve must have a persuasive force about it, and Marr’s ability to dissolve Duha Printers was effectively little more than a chimera. Upon the dissolution of Duha Printers, Marr’s was entitled only to the return of what was paid for the shares. Marr’s position was, furthermore, affected by the legal agreement that the one-half remainder of the payment for the receivable would be paid only upon the redemption of Marr’s shares by Duha Printers. The legal effect of this agreement is that, by dissolving the company, Marr’s would not only not receive any part of the distribution of Duha Printers assets beyond the stated value of the shares, Marr’s would also forfeit the remaining amount owing on the receivable sale, being a not insignificant $17,279.50, or one half of the primary motivation for subscribing to the Class C shares in the first place. This is a significant future legal contingency bearing on Marr’s ability to dissolve the company, as any dissolution of Duha Printers by Marr’s would result in a net financial loss to Marr’s. Marr’s legal power to dissolve, therefore, had no teeth and is not a significant factor in the present analysis.

In coming to my conclusion that Marr’s did not control Duha Printers, it makes little difference whether the agreement was a “unanimous shareholders agreement” for the purposes of the Manitoba Corporations Act.- [38] I am, first, not convinced that that Act requires that a shareholders agreement restrict the powers of directors in order to be a “unanimous shareholders agreement.” No binding case law was put to me on this issue, and I do not read the subsection 140(2) as unambiguously requiring this. However, even if the subsection did require such a restriction, I am not convinced that the agreement failed to restrict the powers of the directors. Certain of its provisions bound the directors directly, and others bound them indirectly by binding the company. This is, in my view, a sufficient restriction to meet the wording of subsection 140(2) of the Corporations Act. More importantly, though, the jurisprudence, and common legal sense, do not require a unanimous shareholders agreement to qualify under a definition in a corporations statute before it may be looked at in assess- ing corporate control. The agreement was legally binding and was signed by all the shareholders and Duha Printers. It was meant to have legal effect and did. It also significantly affected the legal position of the shareholders as to how they could vote their shares. These are the minimum conditions required before a Court will look at such an agreement in a control analysis. These conditions were all met in this case. By providing that two of any three elected directors would be nominees of the Duha family, the authors of the shareholders agreement ensured that real legal control would not be vested with Marr’s.

This was clearly what the parties intended. For $2000, Marr’s purchased shares that gave him the right to participate in a severely restricted election of directors, not control of a corporation. In reality, Marr’s had sold the potential right to deduct approximately one-half million dollars of losses in return for the payment of $34,559. The transaction might be described using the words of Lord Goff in Ensign Tankers (Leasing) Ltd. v. Stokes (Inspector of Taxes), [1992] B.T.C. 110, [1992] 2 All E.R. 275 at page 128 (All E.R.) where he wrote:

[T]here is a fundamental difference between tax mitigation and unacceptable tax avoidance. Examples of the former have been given in the speech of my noble and learned friend. These are cases in which the taxpayer takes advantage of the law to plan his affairs so as to minimise the incidence of tax. Unacceptable tax avoidance typically involves the creation of complex artificial structures by which, as though by the wave of a magic wand, the taxpayer conjures out of the air a loss, or a gain, or expenditure, or whatever it may be, which otherwise would never have existed. These structures are designed to achieve an adventitious tax benefit for the taxpayer, and in truth are no more than raids on the public funds at the expense of the general body of taxpayers, and as such are unacceptable. [39]

In the present instance, the taxpayer has used the technicalities of revenue law and company law to conjure a legal remedy for restrictions to which it would otherwise be subject. They did not succeed. The intentions of the parties that Marr’s would never really control Duha Printers are demonstrated in the legal obligations actually created by the parties. These obligations are such that, to quote the words of the Tax Court Judge, “in reality, the Duha family shareholders did not relinquish control.”

Because Outdoor Leisureland and Duha Printers were not related, because Outdoor Leisureland was an inactive company, and because there is no evidence before me that it was carried on with a reasonable expectation of profit, subsection 111 (5) of the Income Tax Act applies to deny Duha Printers the use of Outdoor Leisureland’s non- capital losses. For the many reasons given above, the appeal will be allowed and the reassessment of the Minister affirmed with costs.

Stone J.A.: — I have had the advantage of reading in draft the reasons for judgment of my colleague Mr. Justice Linden. Although I agree with his conclusion, I follow a somewhat different path and wish, therefore, to set forth my reasons for doing so.

The facts as agreed to by the parties are set forth in the reasons for judgment of the learned Tax Court Judge. The relevant statutory provisions are recited by my colleague.

This appeal concerns the deductibility of non-capital losses by the respondent which resulted from the amalgamation of Duha Printers Western Limited (“Duha Printers #2”) and Outdoor Leisureland of Manitoba Ltd. (“Outdoor”) on February 10, 1984. The respondent deducted from its taxable income for its 1985 taxation year the non- capital losses incurred by Outdoor pursuant to paragraph 111(1 )(a) and subsection 87(2.1) of the Income Tax Act, R.S.C. 1952, c. 148, as amended (the “Act”). Paragraph 11 l(l)(a) of the Act allowed a taxpayer to deduct his non-capital losses from his taxable income. In effect, subsection 87(2.1) allowed a corporate taxpayer that was formed as a result of an amalgamation of two or more corporations, subject to certain restrictions, to deduct from its taxable income the non-capital losses of the amalgamated corporations. One of these restrictions is that the new corporation could only deduct the non-capital losses of either of the amalgamated corporations if at the time of the amalgamation the amalgamated corporations were “related” to each other within the meaning of subparagraph 256(7)(a)(i) of the Act. To be so “related” the two corporations had to be “controlled by the same person or group of persons” as provided in subparagraph 251(2)(c)(i) of the Act.

As applied to the present case, in order for the respondent. to be entitled to deduct the non-capital losses incurred by Outdoor, Duha Printers #2 and Outdoor must have been “controlled by the same person or group of persons” immediately prior to the amalgamation of February 10, 1984. The Minister disallowed the deduction on the basis that Duha Printers #2 and Outdoor were not so related. On the facts as agreed, at that time all of the outstanding voting shares of Outdoor were owned by Marr’s Leisure Holdings Inc. (“Marr’s”) which also held all of the outstanding Class “C” shares of Duha Printers #2, representing 55.71 per cent of the voting shares of that company. It is not disputed that Marr’s controlled Outdoor. What is disputed is that Marr’s “controlled” Duha Printers #2 despite its ownership of a majority of the voting shares of that corporation.

Before the Tax Court, the appellant also relied on the anti-avoidance provisions of section 245 of the Act as it then stood. An argument based on those provisions was not advanced in this Court.

The learned Tax Court Judge allowed the appeal from the assessment. He concluded that Marr’s held de jure control of both Duha Printers #2 and Outdoor at the relevant time with the result that both corporations was “related” to each other for the purposes of subparagraph 256(7)(a)(i). In the course of his reasons, at page 16, the Tax Court Judge stated:

I agree with respondent’s counsel that sole purpose of the transaction was to enable the appellant to make use of the losses incurred by Outdoor. There was no other reason. The issuance of the 2000 Class “C” voting preferred shares to Marr’s did not transfer de facto or real control to Marr’s. All three Duha corporations reported net income for the fiscal period January 1, 1983 to December 31, 1983 of $182,223.00 and of $96,695.00 for the 41 days ending February 10, 1984. The respective companies had retained earnings of $296,486.00 and $393,181.00 as at December 31, 1983 and February 10, 1984. Surely a person controlling such a corporation would not surrender control to a stranger for the consideration of $2,000.00. And in reality the Duha family shareholders did not relinquish control and Marr’s never intended to control the company. The majority of persons elected to the Board of Duha #2 by Marr’s were members of the Duha family. There is no evidence Mr. Marr was ever involved in the business carried on by Duha #2 or was even interested in the affairs of the company. Marr’s could not transfer its shares nor allow them to be encumbered in any way; obviously one may infer the Duhas did not want a person other than Marr’s to own the shares. The Class “C” preferred shares were redeemed on January 4, 1985, eleven months after Marr’s “invested” in Duha #2. With such facts before an assessor it is not too difficult to appreciate the reason for the assessment and perhaps these facts may be considered again in another forum.

The Supreme Court’s decision in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, commenced a new era for interpreting tax legislation. Subsequent to that case, the Supreme Court has dealt with interpretation of the Act in the series of cases culminating with its decisions in Symes v. R. (sub nom. Symes v. Canada), [1993] 4 S.C.R. 695, [1994] 1 C.T.C. 40, 94 D.T.C. 6001, Canada v. Antosko, [1994] 2 S.C.R. 312, Québec (Communauté Urbaine) v. Corporation Notre-Dame De Bon-Secours, [1994] 3 S.C.R. 3, Friesen v. R. (sub nom. Friesen v. Canada), [1995] 3 S.C.R. 103, [1995 2 C.T.C. 369, 95 D.T.C. 5551, Pigott Project Management Ltd. v. Land-Rock Resources Ltd., [1996] 1 C.T.C. 395, [1996] 5 W.W.R. 153, 38 Alta. L.R. (3d) 1. In Stubart, at page 580 (C.T.C. 317), Estey J. stated:

...where the substance of the Act, when the clause in question is contextually construed, is clear and unambiguous and there is no prohibition in the Act which embraces the taxpayer, the taxpayer shall be free to avail himself of the beneficial provision in question.

That principle of the interpretation was applied in Antosko where, speaking for the Court, Iacobucci J. added at page 326-27 (C.T.C. 31):

While it is true that the courts must view discrete sections of the Income Tax Act in light of the provisions of the Act and of the purpose of the legislation, and that they must analyze a given transaction in the context of economic and commercial reality, such techniques cannot alter the result where the words of the statute are clear and plain and where the legal and practical effect of the transaction is undisputed: Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175, at page 194; see also Symes v. Canada, [1993] 4 S.C.R. 695.

A majority of the Supreme Court in Friesen adopted the approach taken in Antosko. The respondent relies heavily on the principles enunciated in these various decisions on the basis that it is entitled to an advantage made available under clear and unambiguous provisions of the Act which contains no prohibition.

The word “control” is not defined by the Act. On the other hand, it has been the subject of much judicial consideration. If control were to be determined on the basis of voting rights only, there could be no question that by its ownership of 2,000 Class “C” voting shares of Duha Printers #2 on February 8, 1984 representing some 55.71 per cent of all outstanding voting shares of that corporation, Marr’s did acquire de jure control of Duha Printers #2 in the sense that Marr’s alone had the right to a majority of votes in the election of the Board of Directors: Buckerfield's, International Iron & Metal Co. Ltd., Dworkin Furs (Pembroke) Ltd., Vineland and Vina-Rug, all supra.

In Imperial General Properties Ltd., supra, the Supreme Court was faced with determining where “control”, within the meaning paragraph 39(4)(a) of the Act, lay after a reorganization and the issuance of such number of newly created shares to the minority shareholder such that he held a number of voting shares equal to those held by the former majority shareholders. As Estey J. pointed out at pages 292-93 (C.T.C. 301), “of the greatest significance is the further provision in the corporate charter of the respondent that the company may be wound up on a resolution for that purpose supported by 50 per cent of all voting shares in the company”, with the result that the former majority shareholder would receive all of the residual assets. In assessing the legal rights attached to the shares of the corporation “over the long run”, Estey J. applied the Supreme Court’s decision in Oakfield Developments, supra, where the single class of voting shares, held equally, resulted in a deadlock. In that case, as was observed by Estey J. at page 296 (C.T.C. 303) of Imperial General Properties, supra, it was the fact that the former controlling shareholder retained the right to wind up the company that was the “bedrock upon which the Oakfield judgment was founded”. Although there were two classes of voting shares at play in Imperial General Properties, Estey J. concluded, at pages 296-97 (C.T.C. 303), that “the right to terminate the corporate existence should the presence of the minority common and preference shareholders become undesirable to the 90 per cent common stockholder ... [was] the linchpin of the tax plan introduced following the 1960 amendments to the tax statute”, so that control “in the real sense of the term, was not surrendered” by the former majority shareholder. In the course of his analysis at page 295 (C.T.C. 302), Estey J. observed that “the court is not limited to a highly technical and narrow interpretation of the legal rights attached to the shares of a corporation”. Such interpretation would, indeed, have resulted in neither of the 50 per cent shareholders controlling the corporation. At the same time, Estey J.was careful to clarify, at page 298 (C.T.C. 304), that his approach to “control” did “not involve any departure from prior judicial pronouncements” and that his conclusions “merely result from applying existing case law and existing legislation to the particular facts of the case at bar”.

In the case at bar, the appellant submits that the agreement of February 8, 1984, between the shareholders of Duha Printers #2 and the company immediately following the issuance of Class “C” shares, was a “unanimous shareholder agreement” which removed de jure control from Marr’s. The role of agreements in the determination of de jure control has already been the subject of judicial consideration.

In International Iron & Metal, supra, there existed an agreement between the shareholders of the taxpayer corporation to the effect that all of the directors of the corporation, each holding one voting share, would be designated and elected a director notwithstanding that their respective children controlled four corporations which together held all but 30,000 of the remaining 499,996 voting shares of the corporation. At the trial, Gibson J. held [[1969] C.T.C. 668, 69 D.T.C. 5445 (Ex.Ct.), at page 674 (D.T.C. 5448)] the agreement to be irrelevant to the issue of control because the corporation has nothing to do” with the requirement imposed on the majority shareholders to vote in favour of the persons designated by the minority shareholders. In his view, the majority shareholders continued to control the corporation because they held the majority voting power in the corporation. In upholding the judgment at trial, [1974] S.C.R. 898, [1972] C.T.C. 242, 72 D.T.C. 6205, Hall J., speaking for the Supreme Court, stated at page 901 (C.T.C. 244):

I agree with the trial judge. The meaning of “control” in paragraph 39(4)(b)...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: Dworkin Furs, and Vina-Rug, supra.

[Footnotes omitted].

Conversely, in Imperial General Properties, supra, the Supreme Court in determining where control lay took account of the provisions contained in the charter of the taxpayer corporation. [40] Accordingly, if the agreement of February 8, 1984 was wholly external to the corporation, as was the agreement in International Iron & Metal, supra, it would be irrelevant to the issue of de jure control. If the agreement was, as the appellant contends, a “unanimous shareholder agreement” as defined in subsection 1(1) of The Corporations Act, R.S.M. 1987, c. C225 (the “Manitoba statute”), I would find that such an agreement is to be read alongside of the corporation’s charter and by-laws*! [41] in determining the issue of “control”.

It must be determined whether the agreement of February 8, 1984 was a “unanimous shareholder agreement” and, if it was, whether it removed “control” from Marr’s. To be a “unanimous shareholder agreement” under the Manitoba statute, an agreement must, for our purposes, be one that is described in subsection 140(2), which reads:

140(2) 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.

That subsection should be read with subsection 140(5). It reads:

140(5) A shareholder who is a party to a unanimous shareholder agreement has all the rights, powers and duties and incurs the liabilities of a director of the corporation to which the agreement relates to the extent that the agreement restricts the discretion or powers of the directors to manage the business and affairs of the corporation, and the directors are thereby relieved of their duties and liabilities to the same extent.

The concept of “unanimous shareholder agreement” is relatively new to Canadian corporate law. Its purposes are explained by B. Welling, Corporate Law in Canada: The Governing Principles, 2d ed. (Toronto: Butterworths, 1991), at page 481.

One of the most interesting reforms of the 1970s and 1980s was the statutory provision for unanimous shareholder agreements. The unanimous shareholder agreement fills a procedural loophole that has long existed in Canadian corporate law. Though the shareholders could elect the board of directors, and could dismiss the incumbent directors and replace them with others, they were not able to control the day-to-day business decisions made by directors and their appointed officers. This was because the real power lay with the board: the shareholders could name those individuals who would make up the board, but the board members, once elected, wielded virtually all the decision-making power. They could be dismissed if they acted contrary to the shareholders’ wishes, but what they chose to do could not be effectively prevented by the shareholders. Nor could it be easily undone.

The agreement of February 8, 1984 contained several articles. Article 2.1 of that agreement required the shareholders to “cause the affairs of the Corporation to be managed by a board of three (3) directors...”. By Article 2.2, the shareholders agreed to “always vote their shares in the Corporation in order to carry out the provisions of this Agreement including without limiting the generality of the foregoing the provisions of this Article 2 hereof respecting election of directors”. By Article 3.1 the shareholders confirmed that the agreement (referred to therein as “this unanimous shareholder agreement”) “is intended to supersede the provisions of Section 184(1) of The Corporations Act which deals with the right of dissent of a shareholder” and removed from a dissenting shareholder “the right to demand payment for his shares”. Article 4.1 of the agreement placed restrictions on the transfer of shares by requiring the consent of the majority of the directors to approve a transfer. By Article 4.3 each shareholder agreed not to “sell, assign, transfer, dispose of, donate, mortgage, pledge, charge, hypothecate or otherwise encumber, deal with or dispose of shares” except in accordance with the agreement. Article 4.4. prevented the corporation from issuing further shares “without the written consent of all of the Shareholders”. By Article 6.1 it was agreed to submit

various differences to binding arbitration in the following terms:

6.1 Arbitration: In the event of any dispute, difference or question arising amongst the shareholders or any of them touching the business or accounts or transactions of the Corporation, or the construction, meaning or effect of these presents or anything contained herein, or the rights or liabilities of the parties hereto under these presents or otherwise in relation hereto, or in the event of the inability of the Board of Directors to function by reason of the failure or inability to obtain a quorum for meetings of the Board, or by reason of the Board of Directors becoming deadlocked for any reason, and, if such dispute, difference or question cannot be settled or determined in accordance with the provisions of this Agreement, or the Corporation’s by-laws, then every such dispute, difference, question or deadlock shall be referred to a single arbitrator if all of the parties to the dispute can agree upon one, and, if no such agreement can be reached, such arbitrator shall be appointed by the Chief Justice of the Court of the Queen’s Bench of Manitoba. The award of the arbitrator shall be final and binding upon the parties hereto and there shall be no appeal therefrom. The arbitration shall be conducted in accordance with the provisions of The Arbitration Act of Manitoba and any statutory amendment thereof for the time being in force. [42]

Article 6.2 called for the unanimous agreement of the shareholders to alter, change or amend the agreement, except as otherwise provided. By Article 6.4, all of the parties bound themselves and their heirs, executors, administrators, successors and assigns to the agreement.

Article 6.6 was specifically aimed at binding Duha Printers #2 to the terms of the agreement. It reads as follows:

6.6 The Corporation, insofar as in its power lies, agrees to be bound by the terms of this Agreement and agrees to do and perform all such acts and things as it has power to do and perform to fully and effectually carry out the terms of this Agreement and, without limiting the generality of the foregoing, the Corporation hereby covenants and agrees to confirm, adopt and ratify the within Agreement insofar as same relates to the Corporation.

By resolution of the directors of February 8, 1984, the Duha Printers #2 was authorized to “enter into a certain unanimous shareholders’ agreement” and the President of the corporation was authorized to execute “the said unanimous shareholders’ agreement” under the corporate seal.

The Tax Court Judge concluded that the agreement of February 8, 1984, was not a “unanimous shareholder agreement” as defined in subsections 1(1) and 140(2) of the Manitoba statute because, as he found at page 5 of his reasons: “Nowhere in the agreement is there a provision that restricts, in whole or in part, the powers of the directors or Duha #2 to manage its business and affairs”, a conclusion which he repeated at page 6 of his reasons. With respect, I am unable to share this view. That the agreement did restrict the powers of the Board of Directors is evident from a careful examination thereof in the light of the relevant provisions of the Manitoba statute. Subsection 97(1) of that statute vested the Board of Directors of the corporation with the power of directing “the business and affairs of the corporation”. It is clear from subsection 1(1) of the same statute that the word “affairs” is not synonymous with the word “business”. There, the word “affairs” is defined as follows:

“affairs” means the relationships among a body corporate, its affiliates and the shareholders, directors and officers of those bodies corporate but does not include the business carried on by those bodies corporate;.

[Emphasis added.]

Nothing in the agreement of February 8, 1984 suggests that the word “affairs” was used therein other than in its statutory sense.

In my view, Article 2.1 of the agreement of February 8, 1984, did not leave with the Board of Directors the powers it otherwise would have possessed under subsection 97(1) of the Manitoba statute of directing the management “of the business and affairs of the corporation”, (emphasis added). Instead, by that article the shareholders agreed to “cause the affairs of the Corporation to be managed by a board of three (3) directors...”, (emphasis added). The effect of the article was to strip the Board of Directors of Duha Printers #2 of power to manage the business of that corporation and to leave with them only the power to manage its affairs. I am fortified in this view by Article 6.1 which provided for the settlement of disputes by binding arbitration. Among the disputes to be so settled were “any dispute, difference or question arising amongst the shareholders or any of them touching the business or accounts or transactions of the Corporation” (emphasis added). It is thus made clear that it would be the inability of the shareholders, rather than the directors, to agree among themselves with respect to the “business or accounts or transactions” of Duha Printers #2 that would cause a dispute to be referred to binding arbitration.

I therefore conclude that the agreement of February 8, 1984 was a “unanimous shareholder agreement” as defined in the Manitoba statute because it did restrict the powers of the Board of Directors of Duha Printers #2 to manage the business of the corporation as required by subsection 97(1) of that statute.

The question remains, however, whether the agreement removed from Marr’s its de jure control of Duha Printers #2, held by virtue of the ownership of 55.71 per cent of the voting shares of the corporation. It seems to me that it did. Articles 2.1 and 2.2 of the agreement ensured that Marr’s would always be able to elect the directors of the corporation by virtue of its voting position. It was argued that Marr’s choice of directors was so limited, being confined to a list of four individuals two of whom were members of the Duha family and the third a long time friend of that family, that its choice was virtually meaningless from a legal standpoint. It is not necessary to express an opinion on the point. In my view, the ability to elect a board of directors which could manage only the “affairs” and not the “business” of Duha Printers #2 cannot be seen as an exercise of de jure “control” by Marr’s. As already indicated, the unanimous shareholder agreement contemplated management of the “business” by the shareholders. That agreement is not explicit as to the manner of decisionmaking with respect to management of the corporation’s business. On the other hand, it is implicit in Article 6.1 that unanimous agreement of all shareholders was required for business decisions rather than their being determined by the number of votes attached to the shares held. Otherwise, there would have been no need to provide for referring a dispute of that kind to binding arbitration because decisions of Marr’s would always prevail. Article 6.1 appears to contemplate a position of deadlock caused by lack of unanimity among the shareholders with respect to questions touching the business of Duha Printers #2. In that event, Marr’s could not by virtue of its voting power determine business management questions by itself. Based upon these terms and the fact that Duha Printers #2 was a party to it, I find that this particular unanimous shareholder agreement had a definite impact on the corporation and how its business would be managed. I am persuaded that the terms of the agreement effectively removed “control” of the corporation from Marr’s.

In view of the foregoing is not necessary to discuss in detail the additional points raised by the appellant based on the agreement bearing on the issue of control. These are that control by Marr’s was “neutralized” because it lost the right to dissent to a corporate transaction and to apply to a court for redeeming of its shares; that it could not sell or use its shares as a loan; and that it could not change the terms of the February 8, 1984 agreement by using its voting position. I wish only to say that the first two of these restrictions while affecting the rights of Marr’s qua shareholder would not have interfered with Marr’s ability to control Duha Printers #2 had Marr’s retained control of the corporation under the unanimous shareholder agreement. On the other hand, the third reinforces the conclusion that de jure control, relinquished under the agreement, could not be restored to Marr’s except with the full co-operation of the other shareholders and, indeed, of Duha Printers #2.

A final point raised by the appellant is that we are here faced with a “sham” transaction as that term is now understood and accordingly that the respondents ought not to reap any income tax benefits from that transaction. The contention is that the transaction has no economic purpose save to gain a tax advantage, and while legal in form in reality it constitutes what Dickson C.J. described in Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, at page 53 (C.T.C. 128) as “manipulating a sequence of events to achieve a patina of compliance”.

In Stubart, supra, Estey J. defined a sham transaction as follows, at pages 545-46 (C.T.C. 298):

1. A sham transaction: This expression comes to us from decisions in the United Kingdom, and it has been generally taken to mean (but not without ambiguity) a transaction conducted with an element of deceit so as to create an illusion calculated to lead the tax collector away from the taxpayer or the true nature of the transaction; or, simple deception whereby the taxpayer creates a facade of reality quite different from the disguised reality.

Thus the element of deceit is at the heart of a sham transaction. This was underlined by Estey J., in Stubart, at pages 572-73 (C.T.C. 313):

The element of sham was long ago defined by the courts and was restated in Snook v. London & West Riding Investments, Ltd., [1967] 1 All E.R. 518. Lord Diplock, at page 528, found that no sham was there present because no acts had been taken:

...which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.

This definition was adopted by this Court in Minister of National Revenue v. Cameron, [1974] S.C.R. 1062, at page 1068 per Martland J.

While it is true that the transaction here in question was designed so as to enable the respondent to make use of the unclaimed non-capital losses of Outdoor in accordance with the provisions of the Act, I do not find in the sequence of events deceitfulness in the sense described in Stubart.

I conclude that Duha Printers #2 was not “controlled” by Marr’s at the relevant time and, accordingly, that Outdoor and Duha Printers #2 were not “related” to each other within the meaning of subparagraphs 251(2)(c)(i) and 256(7)(a)(i) of the Act. I would dispose of the appeal in the manner proposed by Mr. Justice Linden.

Isaac C.J.: —

I have had the benefit of reading the draft reasons of Mr. Justice Stone and Mr. Justice Linden. For the reasons given by them, with which I agree, I too, would dispose of the appeal in the manner proposed by Mr. Justice Linden.

Appeal allowed.