Bowman
J.T.C.C.:
—
The
point
at
issue
in
these
appeals
is
whether
the
appellant
(“S.F.I.”)
was
associated
with
two
other
companies,
that
1s,
Dobersol
Inc.
(“Dobersol”)
and
Techn-Ecologie
Inc.
(“T.E.”),
within
the
meaning
of
paragraph
256(1
)(b)
of
the
Income
Tax
Act,
during
1990
and
1991.
If
it
was
not,
it
is
entitled
to
the
small
business
deduction
under
section
125
of
the
Act.
If
it
was
associated,
it
must
share
the
deduction
with
Dobersol
and
T.E.
The
problem
briefly
is
as
follows:
in
1990
and
1991,
Paul
Allain
was
the
holder
of
only
0.2
per
cent
of
S.F.I.’s
shares,
while
his
two
daughters,
Patricia
Allain
and
Carole
Allain,
each
held
49.9
per
cent.
During
those
years,
Mr.
Allain
controlled
Dobersol
and
T.E.
The
question
is
whether
he
also
had
de
facto
control
of
S.F.I.
The
two
relevant
provisions
of
the
Act
read
as
follows:
Subparagraph
256(1
)(b):
For
the
purposes
of
this
Act,
one
corporation
is
associated
with
another
in
a
taxation
year
if
at
any
time
in
the
year,
(b)
both
of
the
corporations
were
controlled,
directly
or
indirectly
in
any
manner
whatever,
by
the
same
person
or
group
of
persons;
Subsection
256(5.1):
For
the
purposes
of
this
Act,
where
the
expression
“controlled,
directly
or
indirectly
in
any
manner
whatever,”
is
used,
a
corporation
shall
be
considered
to
be
so
controlled
by
another
corporation,
person
or
group
of
persons
(in
this
subsection
referred
to
as
the
“controller”)
at
any
time
where,
at
that
time,
the
controller
has
any
direct
or
indirect
influence
that,
if
exercised,
would
result
in
control
in
fact
of
the
corporation,
except
that,
where
the
corporation
and
the
controller
are
dealing
with
each
other
at
arm’s
length
and
such
influence
is
derived
from
a
franchise,
licence,
lease,
distribution,
supply
or
management
agreement
or
other
similar
agreement
or
arrangement,
the
main
purpose
of
which
is
to
govern
the
relationship
between
the
corporation
and
the
controller
regarding
the
manner
in
which
a
business
carried
on
by
the
corporation
is
to
be
conducted,
the
corporation
shall
not
be
considered
to
be
controlled,
directly
or
indirectly
in
any
manner
whatever,
by
the
controller
by
reason
only
of
such
agreement
or
arrangement.
The
basic
facts
on
which
the
Minister
relied
in
making
the
assessments
are
as
follows:
(a)
the
appellant
was
associated
during
each
of
the
1990
and
1991
taxation
years
with
the
following
Canadian-controlled
private
corporations:
Dobersol
Inc.
and
Techn-Ecologie
Inc.;
(b)
the
appellant’s
shares
are
held
by:
Patricia
Allain:
49.9%
Carole
Allain:
49.9%
Paul
Allain:
0.2%
(c)
the
companies
Techn-Ecologie
Inc.
and
Dobersol
Inc.
are
controlled
by
Paul
Allain;
(d)
Paul
Allain
is
Patricia
and
Carole
Allain’s
father;
(e)
the
three
companies
have
the
same
address;
(f)
on
December
5,
1980,
Paul
Allain
sold
the
shares
which
he
held
in
S.F.I.
to
his
daughters
and
paid
tax
on
the
resulting
capital
gain;
at
that
time,
the
daughters
were
19
years
old;
(g)
on
the
same
day,
the
board
of
directors
(Patricia
Allain,
Carole
Allain,
Emile
Allain
and
Jacqueline
Canto
Allain)
adopted
a
resolution
appointing
Paul
Allain
“General
Manager”;
the
resolution
conferred
on
him
the
following
powers:
(i)
purchasing,
selling,
exchanging,
transferring
or
otherwise
alienating
any
movable
and
immovable
property
of
the
company
in
such
manner
and
for
such
sum
of
money
or
other
consideration
as
he
shall
see
fit;
(ii)
borrowing
any
sum
of
money
and,
to
this
end,
encumbering
or
mortgaging
all
the
movable
or
immovable
property
of
the
company,
as
the
case
may
be;
(iii)
coming
to
an
agreement
arrangement,
compromise
or
out-of-court
settlement
with
regard
to
any
claim
by
or
against
the
company,
and
in
particular,
giving
or
receiving
any
real
property
in
payment
of
any
passive
or
active
liability
of
the
company,
as
the
case
may
be;
(iv)
signing
any
partial
or
complete
discharge
for
any
amount
received
by
the
company
and
accruing
to
it
under
any
instrument
whatever;
(v)
signing
any
release
from
privileges,
from
mortgages
and
from
the
effects
of
any
resolutory
or
giving
in
payment
clause
created
in
the
company’s
favour,
with
or
without
consideration;
requesting
any
cancellation;
(vi)
signing
any
mortgage
and
servitude
priority,
with
or
without
payment,
as
he
shall
see
fit;
(vii)
signing
and
executing
all
documents
required
for
the
aforesaid
purposes
and
any
other
document
to
give
effect
to
this
resolution;
(h)
at
the
meeting
of
the
board
of
directors
(Patricia
and
Carole
Allain)
on
October
1,
1989,
the
following
additional
powers
were
conferred
on
Paul
Allain:
(i)
settling,
negotiating
and
entering
into
contracts
for
and
on
behalf
of
the
company
with
interested
bodies,
whether
government,
commercial
or
civil,
to
carry
out
the
purposes
for
which
the
company
is
in
operation,
and
in
particular,
without
limiting
the
generality
of
the
foregoing:
(ii)
purchasing,
leasing
or
otherwise
obtaining
equipment
required
to
carry
on
the
company’s
activities;
(iii)
obtaining
the
necessary
permits
or
any
other
legal
authorization
required
for
operating
the
company;
(iv)
acting
as
surety;
(v)
lending
any
sum
of
money
on
such
terms
and
conditions
and
at
such
rate
of
interest
as
he
shall
see
fit;
(i)
this
agreement
has
subsequently
been
renewed
each
year;
(j)
management
of
the
business
is
handled
by
Paul
Allain:
it
is
he
who
signs
cheques
and
contracts;
(k)
soon
after
Mr.
Allain
obtained
the
power
to
make
loans,
amounts
loaned
to
the
companies
controlled
by
him
increased
from
$71,000
in
1989
to
$588,300
in
1990
and
then
fell
to
$511,067
in
1991
;
(l)
Patricia
Allain
practises
as
a
notary;
her
involvement
in
the
company
is
limited
to
her
notarial
services
and
her
attendance
at
annual
directors’
meetings;
(m)
Carole
Allain
works
for
Communication
Bleu,
Blanc,
Rouge
Inc.;
her
involvement
in
S.F.I.
is
limited
to
her
attendance
at
annual
directors’
meetings;
(n)
during
the
years
under
review,
Dobersol
Inc.
was
the
only
customer
of
S.F.I.;
(o)
Paul
Allain
is
the
“controller”
mentioned
in
paragraph
256(5.1)
of
the
Act;
(p)
Paul
Allain
and
the
appellant
are
not
dealing
with
each
other
at
arm’s
length.
[Translation.]
These
facts,
which
are
set
out
in
the
Reply
to
the
Notice
of
Appeal,
are
not
disputed
except
that
Mr.
Allain
does
not
accept
the
conclusions
contained
in
subparagraphs
(a),
(o)
and
(p).
It
is
worth
recalling
the
classic
definition
of
the
word
“control”
of
a
corporation
in
cases
where
this
word
is
used
without
qualification
in
the
Act.
That
definition
was
stated
by
Jackett
P.
of
the
Exchequer
Court
in
Buckerfield's
Ltd.
v.
Minister
of
National
Revenue,
[1964]
C.T.C.
504,
64
D.T.C.
5301,
at
pages
507-08
(page
D.T.C.
5303),
as
follows:
Many
approaches
might
conceivably
be
adopted
in
applying
the
word
“control”
in
a
statute
such
as
the
Income
Tax
Act
to
a
corporation.
It
might,
for
example,
refer
to
control
by
“management”,
where
management
and
the
Board
of
Directors
are
separate,
or
it
might
refer
to
control
by
the
Board
of
Directors.
The
kind
of
control
exercised
by
management
officials
or
the
Board
of
Directors
is,
however,
clearly
not
intended
by
section
39
when
it
contemplates
control
of
one
corporation
by
another
as
well
as
control
of
a
corporation
by
individuals
(see
subsection
(6)
of
section
39).
The
word
“control”
might
conceivably
refer
to
de
facto
control
by
one
or
more
shareholders
whether
or
not
they
hold
a
majority
of
shares.
I
am
of
the
view,
however,
that,
in
section
39
of
the
Income
Tax
Act,
the
word
“controlled”
contemplates
the
right
of
control
that
rests
in
ownership
of
such
a
number
of
shares
as
carries
with
it
the
right
to
a
majority
of
the
votes
in
the
election
of
the
Board
of
Directors.
See
British
American
Tobacco
Co.
v.
I.R.C.,
[1943]
1
A.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.
See
also
Minister
of
National
Revenue
v.
Wrights’
Canadian
Ropes
Ltd.,
[1947]
A.C.
109,
2
D.T.C.
927,
per
Lord
Greene
M.R.,
at
page
118,
where
it
was
held
that
the
mere
fact
that
one
corporation
had
less
than
50
per
cent.
of
the
shares
of
another
was
“conclusive”
that
the
one
corporation
was
not
“controlled”
by
the
other
within
section
6
of
the
Income
War
Tax
Act.
That
definition
was
approved
by
the
Supreme
Court
of
Canada
in
Dworkin
Furs
(Pembroke)
Ltd.
v.
Minister
of
National
Revenue,
[1967]
S.C.R.
223,
[1967]
C.T.C.
50,
67
D.T.C.
5035.
Since
these
decisions,
other
words
have
been
added
for
the
clear
purpose
of
broadening
the
concept
of
control,
in
particular
the
words
“directly
or
indirectly
in
any
manner
whatever”.
So
far
as
I
know,
the
point
has
not
been
decided,
but
I
would
have
thought
that
it
could
reasonably
be
argued
that
these
words
necessarily
include
the
idea
of
de
facto
control
of
a
corporation
in
the
case
of
a
person
who
does
not
hold
more
than
50
per
cent
of
the
shares
but
has
a
controlling
influence,
whether
economic,
contractual
or
moral,
over
a
corporation’s
affairs.
It
is
hard
to
imagine
words
with
a
broader
meaning.
Apparently,
the
Parliament
of
Canada
feared
that
the
words
“directly
or
indirectly
in
any
manner
whatever”
did
not
go
far
enough.
It
therefore
tried
to
reinforce
their
effect
by
means
of
paragraph
256(5.1).
I
am
persuaded
that
the
resolutions
adopted
by
the
other
shareholders
had
the
effect
of
giving
Mr.
Allain
practically
absolute
control
over
the
affairs
of
S.F.I.
During
the
years
in
which
the
resolutions
were
in
effect,
he
had
complete
authority
to
manage
all
aspects
of
the
corporation’s
commercial
and
financial
dealings.
I
admit
that
the
other
shareholders
had
the
power
to
divest
him
of
this
authority,
but
as
long
as
he
was
permitted
to
exercise
it
he
was
in
a
position
of
unlimited
control.
The
exception
contained
in
the
second
part
of
paragraph
256(5.1)
demonstrates
the
breadth
of
this
provision.
That
exception
exists
when
the
control
is
derived
from
certain
commercial
agreements
where
the
“controller”
(Mr.
Allain)
and
the
corporation
are
dealing
with
each
other
at
arm’s
length.
There
was
no
arm’s
length
dealing
between
Mr.
Allain
and
the
corporation,
not
only
because
of
the
fact
that
he
had
very
close
ties
with
the
corporation
he
was
managing
but
also
because
of
the
fact
that
the
two
majority
shareholders
were
his
daughters.
The
appeals
are
accordingly
dismissed.
Appeals
dismissed.