International Mercantile Factors Ltd. v. The Queen, 90 DTC 6390, [1990] 2 CTC 137 (FCTD), aff'd 94 DTC 6365 (FCA)

Teitelbaum, J.:—The plaintiff, International Mercantile Factors Ltd., is bringing forth four appeals from four decisions of the Minister of National Revenue (Minister). Each proceeding is brought for each of income tax returns reassessed and affected by a decision of the Minister. The plaintiff had claimed the small business deduction against its active business income in its 1979, 1980, 1981 and 1982 tax returns. On July 13, 1982, the Minister refused the small business deduction on the basis that the plaintiff was not a Cana- dian-controlled private corporation. The plaintiff objected to the assessments on October 5, 1982. The Minister confirmed the assessments on January 13, 1986.

At the commencement of the hearing, counsel for both parties jointly filed a book of documents titled International Mercantile Factors Ltd. 1979 to 1982 containing, according to the table of contents, fourteen documents. These are the income tax returns of plaintiff, the Minister's assessments, the notices of objection and the Minister's confirmations of the assessments. The book of documents was filed as Exhibit R-1. The parties have informed me that these documents have no direct relevancy to the issue that I am asked to decide. I take this to mean that whatever is contained in the documents is correct and what tax will have to be paid by plaintiff will be decided by my decision on the matter before me.

The parties filed a common evidence book containing eighteen documents. On consent of the parties, this book was filed as Exhibit R-2 and each document became Exhibits R-2(1) to R-2(18). Exhibits R-2(1) to R-2(18) are very much relevant to the present proceedings.

Plaintiff called two witnesses, a Mr. Eric Bissell who describes himself president and secretary of plaintiff company and Mr. Yoinie Goldstein, an attorney practising in the City and District of Montreal.

The defendant did not call any witnesses.

In describing the history of the plaintiff company, Mr. Bissell states he believes that in 1952 a company known as International Factors Corp, was formed. He believes a new company, plaintiff, was formed in 1967, the shares of this company were sold in 1972 to two companies, Charter Industries Ltd. (Charter) and to Hamilton Group Ltd. (Hamilton).

The company was formed for the purpose of doing business in the area of commercial financing and factoring of accounts receivable. Plaintiff did the same type of business during the relevant years in issue, 1979 to 1982 inclusively and is still doing so. Exhibits R-2(6), (7), (8) and (9) are the incorporating documents of plaintiff.

Exhibit R-2(6) indicates that plaintiff was issued its letters patent on September 20, 1967 as a private company pursuant to the Canada Corporations Act. The following is stated as the object of the company:

. . . to act as a factoring and acceptance company for manufacturers, merchants and others, including buying, selling, exchanging and dealing in accounts receivable, bills of lading, warehouse receipts, hire receipts, chattel mortgages, conditional sales agreements, lien notes, bills of exchange and other securities, and to take any of the said securities or other commercial paper in payment for the sale of any personal property.

(Exhibit R-2(6), page 2)

The authorized capital of the company on September 20, 1967 was $10,000 divided into 1000 common shares of the par value of $10 each. There is to be found the following, with regard to the shares, in the letters patent of plaintiff:

No share in the capital stock of the Company shall be transferred without the consent of the board of directors expressed by resolution.

And it is further ordained and declared that the shareholders of the Company may from time to time by a three-fifths (3/5) vote remove any director or directors before the expiration of his or their period of office and appoint any qualified person or persons in his or their stead for the balance of his or their term at a special general meeting of which notice specifying the intention to pass such resolution shall have been given.

(Exhibit R-2(6), pages 3 and 4)

On December 18,1972 by means of supplementary letters patent, plaintiff increased the capital of the company from $10,000 to the sum of $1,000,000 by the creation of 99,000 common shares of a par value of $10 each (Exhibit R-2(7)). On December 20, 1978, a certificate of continuance pursuant to the Canada Business Corporations Act was issued certifying that plaintiff was continued under section 181 of the Canada Business Corporations Act. In Annex “A” is found, in so far as the share structure of the company:

The following are the classes of shares and the attributes thereof:

Common Class "A"

(both without nominal or par value)

The said CLASS "A" shares shall be subject to the following rights, privileges, restrictions and conditions, namely:

1. The holders of the CLASS “A” shares will have the right to receive a non- cumulative dividend at the rate of eight per cent (8%) on the amount paid up thereon and no more, payable annually or semi-annually;

2. In the event of a distribution of the assets of the corporation as a result of its dissolution, its voluntary or forced liquidation, or otherwise, the holders of the CLASS "A" shares will have the right to payment, in priority to payment to the common shareholders, of the amount paid on said CLASS “A” shares with any dividend declared but not paid thereon, but save for the foregoing, the holders of the CLASS "A" shares will have no right to otherwise participate in the distribution of the assets of the corporation;

3. The holders of the CLASS "A" shares shall be entitled to one vote for each CLASS "A" share so held;

4. The corporation may redeem the whole or any part of the CLASS “A” shares upon giving thirty days notice to the holders of such CLASS "A" shares and upon payment for each share to be redeemed of the amount paid up thereon, together with all dividends declared thereon and unpaid and the corporation shall have the right, at any time and from time to time, upon the giving of a thirty day notice to the holders of such CLASS "A" shares, to purchase for cancellation the whole or any part of the CLASS “A” shares pursuant to tenders received;

5. The holders of the CLASS "A" shares may, at their option, upon the giving of a thirty day notice in writing to the corporation at its head office, cause the corporation to repurchase for cancellation or to redeem out of surplus, at such shareholders' option, the whole of the CLASS "A" shares so issued or such part thereof as may be specified in said notice, the whole at a price equal to the amount paid up on such shares, together with any dividends declared thereon and unpaid, and the corporation shall, upon the thirtieth day next following the posting of such notice by prepaid registered or certified mail, (or on the first business day next following such thirty day delay), issue its certified cheque for such amount upon presentation of the relevant share certificate or share certificates.

(Exhibit R-2(8))

Exhibit R-2(9) is simply a change of name of plaintiff by adding Société Financière Internationale Mercantile Ltée.

According to Mr. Bissell, he was asked to become a consultant to plaintiff in July 1977. At this time, the shareholders of plaintiff were Charter and Hamilton, each company owning 50 per cent of the issued stock of plaintiff. At that time, the authorized capital of the company was $1,000,000 by having a total of 100,000 common shares at a par value of $10 each (Exhibit R-2(7)). Both Charter and Hamilton were public corporations, Charter was listed on the Montreal Stock Exchange and Hamilton on the Toronto Stock Exchange. The plaintiff remained a private corporation.

At this time, July 1977, plaintiff was experiencing severe financial difficulties and, as a result of certain transactions not financially successful, the plaintiff lost its credibility to its banking creditors. As a result, Bissell was asked to help the then president, a Mr. Walling, to attempt to realize the best return on what was considered “financially unsound” transactions. Basically, Bissell was asked to minimize all potential losses and to advise on any new business the company may be able to attract.

Exhibit R-2(1) shows a loss before taxes for 1977 of $304,311 while the plaintiff showed a pre-tax profit of $209,890 in 1976. According to Mr. Bissell, and confirmed by Mr. Goldstein, it became apparent that if the then president, Mr. Walling, remained with the plaintiff, plaintiff would be unable to carry on business. One of the banks loaning money to plaintiff had lowered the line of credit extended to plaintiff. During this same period, July 1977 to end of December 1977, discussions took place between Bissell and a representative of plaintiff as to whether Bissell would be interested in becoming president of the plaintiff company and if so, under what circumstances. Bissell states he was then in a very strong bargaining position for without him plaintiff would have had to go out of business. The understanding arrived at was that Bissell would become president of plaintiff and in return he would be able to acquire a 25 per cent interest in shares of the company which would be dividend bearing. He would be authorized to acquire additional shares which, together with the common shares, would allow him to have a 50 per cent voting right. According to Bissell, and this was not contradicted, he states he made it clear that he would not consider himself as an employee or be considered as a minority shareholder. He states he "wanted to be master of his destiny and I would only do this if I had a 50 per cent vote".

The consulting services offered by the witness Bissell was not offered by himself as an individual but was offered by a company controlled by Bissell, the company is Bissell & Bissell Enterprises Inc. (Bissell & Bissell). It was Bissell & Bissell that offered the consulting services from July 1977 to end of December 1977, without written agreement. On January 3, 1978 Bissell & Bissell entered into a written management agreement with plaintiff "to manage its affairs at the executive level" (Exhibit R-2(14)). It was understood that Bissell & Bissell would offer the services of Eric Bissell to manage the activities of the plaintiff. It is to be noted that pursuant to the management agreement and in particular, paragraphs 3 and 5, “policy, including expansion and projects out of the ordinary course of business of International shall be subject to prior discussion and approval of the board of directors of International” and that "International may, at its option, terminate the present agreement without notice provided that it shall pay to the Manager a sum equivalent to no less than one third (1/3) of the annual fee”.

I state that this fact should be noted, in that Bissell, during the giving of his evidence, attempted to make it very clear that unless he was a 50-50 "partner" in running the affairs of the company he would not have accepted to manage the business of plaintiff. As will be seen, the board of directors of plaintiff is made up of five individuals, four of whom represent and are the nominees of Charter and Hamilton and that only upon a majority vote can the board be changed. Thus, since neither Charter and Hamilton nor Bissell or his company had a majority of votes, the public corporations, Charter and Hamilton will always have the majority of the board of directors to represent the interests of Charter and Hamilton. It thus becomes difficult to accept Bissell’s submission that he is an “equal” partner in the management of the business. He can only do what the board of directors would allow.

On January 3, 1978, a meeting of the plaintiff's board of directors was held at the offices of the plaintiff company in Montreal (Exhibit R-2(13)). The directors attending the meeting were John J.A. Walling, who was then president of plaintiff company, Gordon Fox and Elliott Godel of Charter Industries and A.B. Young and W.H. Young of the Hamilton Group who were representatives of the shareholders of plaintiff company, the shareholders being Charter and Hamilton, the two public corporations.

At this meeting, John J.A. Walling resigned as a director and officer while Eric Bissell was named a director and president of plaintiff (Exhibit R-2(13), page 3).

According to Bissell, the shares purchased by his company to enable him “to have a 50 per cent vote" was pursuant to an agreement dated March 2,1978 (Exhibit R-2(15)). In this agreement, a company wholly owned by Eric Bissell, other than two qualifying shareholders Rieris Holdings Ltd. (Rieris) subscribes for 20,000 common snares at $10 each and 40,000 Class "A" voting shares at a value of 0.01 per share, the purchase having a total value of $200,400. According to Bissell, he paid $400 immediately for his 40,000 Class "A" shares, the $200,000 balance was payable and eventually paid, without interest, at the rate of $50,000 per year for four years, the first payment to be on December 31, 1978. The common shares, although owned by Rieris, were to remain “in escrow" with Mr. Yoinie Goldstein and released to Rieris as payments would be made. The Class "A" shares are voting non-participating and bear a fixed non-cumulative dividend of 8 per cent of their par value and are redeemable at their par value at the option of plaintiff.

It is to be noted that pursuant to paragraph 5 of Exhibit R-2(15), Charter and/ or Hamilton may request, in the event of default to pay for the common shares by Rieris, the escrow agent to deliver to plaintiff the share certificates for forfeiture notwithstanding the fact that the shares were purchased by Rieris from plaintiff and not Charter or Hamilton.

In that Charter and Hamilton each owned 50 per cent of the issued shares of plaintiff and that pursuant to Exhibit R-2(15) Rieris was to acquire 20,000 common shares and 40,000 Class "A" shares of plaintiff company, Charter, Hamilton and Rieris entered into an agreement (a shareholder's agreement) on March 2, 1978 (Exhibit R-2(16)). Pursuant to this agreement, Charter and Hamilton reduced their common share holdings in plaintiff from 50 per cent to 37 1/2 per cent each in order to enable Rieris to have a 25 per cent holding of the common shares. No other capital stock of the plaintiff may be issued by plaintiff without the unanimous consent of Rieris, Charter and Hamilton in order to ensure that Rieris would retain a 25 per cent equity in plaintiff and retain 50 per cent voting rights. Pursuant to this shareholder's agreement, it shall be terminated upon the happening of the termination of the management agreement (Exhibit R-2(14)) which may be terminated by plaintiff at its option without notice provided that plaintiff pay a sum equivalent to no less than 1/3 of the annual management fee. Therefore, at the will of the members of the board of directors of plaintiff, four of the five members representing Charter and Hamilton, they can end the management agreement causing an end to the shareholder's agreement. In the event of such a termination, paragraph 8 of the shareholder's agreement, Exhibit R-2(16), states, in part:

That in the event of termination hereof by reason of termination of the management contract between the Company and Bissell & Bissell Enterprises Inc., Charter and Hamilton shall purchase in equal proportions from Bissell, and Bissell shall sell to Charter and Hamilton in equal proportions, all of the shareholdings of Bissell in the Company at the then book value of the said shares. For purposes hereof, the shares held by Bissell shall include all of the shares of the capital stock of the Company held by Bissell of whatever class.

It is of note that the shareholder's agreement makes no mention of election of directors of the plaintiff company. Nothing is said as to how many directors would represent Charter and Hamilton and how many Rieris. It should be recalled that on January 3rd, 1978, when Bissell became president of plaintiff and was elected to the five person board of directors, there were four representatives or nominees of Charter and Hamilton, two from Charter and two from Hamilton.

According to Eric Bissell there is no agreement as to how many persons would represent each shareholder on the board of directors. He states that the directors were reappointed each year by a unanimous vote.

Eric Bissell presently remains as president and a director with plaintiff although a new management agreement was signed on December 1, 1980 with Willing & Brunet Inc. replacing Bissell & Bissell (Exhibit R-2(17)). Willing & Brunet Inc. like Bissell & Bissell is wholly owned by Eric Bissell.

According to the evidence of Mr. Goldstein, a prominent attorney in the City of Montreal, I am told that during the years in issue, he was commercial counsel to plaintiff and corporate and commercial counsel to the Bissell group of companies and is very familiar with the circumstances under which Eric Bissell became the consultant to plaintiff and then shareholder, president and director of plaintiff. He states that in the early part of 1977 it became apparent that plaintiff could not and would not succeed as a viable business in that its then president, Mr. Walling, was either not able or willing to do the necessary work required in the commercial lending and factoring business. In mid-1977, Mr. Gordon Fox, one of the two representatives of Hamilton, concluded that the business of plaintiff should be discontinued unless serious changes were effected. As a result, Eric Bissell was introduced to Mr. Fox, was hired first as a consultant and after making the plaintiff company financially successful in a very short period of time, Bissell became president, shareholder, officer and director of plaintiff. It is Mr. Goldstein's opinion, having been at most if not at all preliminary meetings between Bissell and Fox, that Bissell would not have accepted the responsibility to operate the plaintiff company unless he became a 50 per cent voting shareholder as Bissell "refused to be answerable to anyone while Hamilton & Charter did not wish to be controlled". Mr. Goldstein states he struck "an approach where he believed neither side” would control the other, both would have equal say and votes and that all decisions would be arrived at by consensus. It was Mr. Goldstein who drafted all the agreements, Exhibits R-2(14), (15), (16) and(17) suggesting giving Bissell on one side and Charter and Hamilton on the other equality of votes but not equality in the equity. Goldstein thus suggested two classes of shares, the common shares and the Class "A" voting redeemable shares. This was not done because of income tax implications as, according to Mr. Goldstein, this thought did not occur to him, tax was never discussed and the agreements were definitely not prepared for purposes of tax, "what we did was entirely driven by business implications”. Mr. Goldstein informed me that from the moment Rieris subscribed for the common shares and Class "A" shares, they were owned by Rieris, voted by Rieris and dividends were paid to Rieris on the common shares notwithstanding the fact that the common shares had not been paid for and remained with him as escrow agent.

As I have stated, the defendant did not make any viva voce evidence.

The single issue of law, in each of the four proceedings before me is: how was the term Canadian-controlled private corporation defined in each of the taxation years in question, 1979, 1980, 1981 and 1982. While the term was similarly defined in each of the years in question, amendments to the Income Tax Act (Act) in 1988 clarified or changed the definition for subsequent years.

If plaintiff is to be considered a Canadian-controlled private corporation, it would, pursuant to subsection 125(1.1) of the Act have a substantial deduction of its active income. It thus is important to see if plaintiff was in the years 1979 to 1982 inclusively a Canadian-controlled private corporation. Paragraph 125(6)(a) of the Act for the years in issue defines what is a Canadian-controlled private corporation.

(a) “Canadian-controlled private corporation"—"Canadian-controlled private corporation" means a private corporation that is a Canadian corporation other than a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation) or by any combination thereof;

In the present instance, the plaintiff is a Canadian corporation. It was incorporated by Canadian letters patent (Exhibit R-2(6)), its shares are not listed on any public stock exchange, is therefore, a private Canadian corporation but because 50 per cent of its shares are controlled by two public corporations, is plaintiff to be considered a Canadian-controlled private corporation in the sense spoken of in paragraph 125(6)(a) of the Act?

If I conclude that Charter and Hamilton, although they own only 50 per cent of the issued voting shares (75 per cent of the issued common shares) control the plaintiff, then I must dismiss the present claims of the plaintiff. If I conclude that neither Charter and Hamilton nor Rieris (Bissell) have control, because each "group" owns 50 per cent of the voting shares, then I must maintain the present claims of plaintiff as pursuant to paragraph 125(6)(a) the public corporation must "directly or indirectly in any manner" control the corporation not to be considered a Canadian-controlled private corporation.

In an attempt to determine the meaning of the word control I was referred to the case of Buckerfield's Ltd., Green Valley Fertilizer & Chemical Co. Ltd., Westland Elevators Ltd., and Burrard Terminals Ltd. v. M.N.R., [1965] 1 Ex. C.R. 299; [1964] C.T.C. 504; 64 D.T.C 5301. In this case, Mr. Justice Jackett, at pages 507-508 (D.T.C. 5303), states what he believes the word control means in the 1961 Act in subsections 39(2) and (4):

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. C.I.R., [1943] 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.

It is interesting to note that Mr. Justice Jackett speaks of control in relation to the board of directors, he states that control contemplates the right of control that rests in ownership of a majority of the votes in the election of a board of directors.

There is no doubt that in the case before me neither the public corporations alone or together have a sufficient number of votes to elect a new board of directors. Neither does Rieris (Bissell). It must be recalled that on January 3, 1978 when Bissell became a member of the plaintiffs board of directors and on March 2, 1978 when Bissell acquired 50 per cent of the issued voting shares, plaintiffs board of directors was composed of five persons, two each representing Charter and Hamilton and only Bissell representing Rieris and that no director can be removed and another appointed unless by A vote of shareholders at a special meeting for this purpose (article 3.04, Exhibit R-2(10)). Furthermore, according to articles 3.02 and 3.03 of By-Law No. 23 “A by-law relating generally to the transaction of the business and affairs of International Mercantile Factors Ltd." regarding the qualification of directors and their election and term we find:

3.02 Qualification.—No person shall be qualified as a director unless he, or any other corporation of which he is an officer or a director, shall at the time of his election and throughout his term of office be the holder of at least one share of the Company and not in arrears in respect of any call; provided that if a person not so qualified is elected a director he may so qualify by becoming a shareholder within ten days after the date of his election, subject to the provisions of the Act.

3.03 Election and term.—The whole board shall be elected at each annual meeting of shareholders to hold office until the next annual meeting, but if a new board is not elected thereat the directors then in office shall continue in office until their successors are duly elected. Retiring directors shall be eligible for reelection. The election may be by a show of hands or by resolution of the shareholders unless a ballot be demanded by any shareholder.

Therefore, unless a majority of shareholders agreed, there could not be an election of a new board of directors. In this event the board of directors then in office continued until successors were elected and this cannot be done unless a majority of votes was had. Thus Charter and Hamilton who had four of the five (or six) directors would always control the board of directors.

Counsel for plaintiff submits that the Supreme Court of Canada case of M.N.R. v. Dworkin Furs (Pembroke) Ltd. et al., [1967] S.C.R. 223; [1967] C.T.C. 50; 67 D.T.C. 5035 is a case analogous to the present one. Dworkin Furs is a case involving associated companies and the meaning of "control"—"control by casting vote". Mr. Justice Hall at pages 52-53 (D.T.C. 5036), in commenting where the voting shares are held equally between two groups, states:;

The word controlled as used in this subsection was held by Jackett P. to mean de jure control and not de facto control and with this I agree. He said in Bucker- field's Ltd. et al. v. M.N.R., [1965] 1 Ex. C.R. 299 at 302-3; [1964] C.T.C. 504 at 507:

In Dworkin Furs (Pembroke) Ltd. Dworkin Furs Ltd. owned 48 per cent of the issued shares in its own name and 2 per cent in the names of Roy Saipe and Helen Saipe as its nominees. The other 50 per cent were owned by one Sadie Harris. Roy Saipe was president of this respondent, but the by-laws of the company provided that in the event of an equality of votes, the chairman did not have a casting vote.

It is clear in the light of Buckerfield's that in these circumstances Dworkin Furs (Pembroke) Ltd. was not controlled by Dworkin Furs Ltd.

Counsel for plaintiff submits that it is de jure control and not de facto control that is of importance and that in the present case both "sides", have equal voting power therefore neither side controls. In both the Buckerfield case as in the Dworkin Furs case, there was only one class of shares.

Counsel for plaintiff also referred to the case of Oakfield Developments (Toronto) Ltd. v. M.N.R., [1971] S.C.R. 1032; [1971] C.T.C. 283; 71 D.T.C. 5175. He states that the facts in this case are "slightly different but that the issue is the same". Counsel submits that the decision in Oakfield turned on the facts, there was no division of shares as in the Dworkin Furs case, supra or as in the case before me. Counsel states that in the Dworkin Furs case there exists one class of shares, in the present case two classes of shares, common and Class "A" voting (Exhibit R-2(8), Annex "A" describes the rights and privileges of the Class "A" shares) while in the Oakfield case one existing shareholder had 100 per cent of the issued shares and in anticipation of tax reform issued shares of another class to another shareholder so as to divide control 50-50. The following is found on S.C.R. pages 1032-33 (D.T.C. 5176):

The appellant company was formed by amalgamation in 1964. One of its predecessor corporations was Polestar, of which there were 5,000 issued common shares. These shares, each carrying one vote per share, were held by a group of corporate shareholders, referred to as the “inside group". Supplementary letters patent for Polestar, which inter alia authorized the issue of 5,000 voting preference shares, were signed and sealed on February 15, 1961, but bore the date of December 20, 1960. On December 21, 1960, the Directors purported to allot and issue the preferred shares to two individuals, both strangers to the inside group.

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. These circumstances were sufficient to vest control in the group even if the owners of non-participating preferred shares held the remaining 50 per cent of the voting power. Accordingly, it was unnecessary to deal with the grounds relied on by the Court below in dismissing the appeal from the assessment.

Counsel for plaintiff tries to distinguish this case from the present one by saying that in Oakfield the "outside" group only had 50 per cent voting preference shares and could not participate in the surplus profits on a distribution by way of dividend, or on the winding up of Polestar and that they could not vote on the surrender of the company's letters patent while in the present case Bissell, to the extent of 25 per cent does participate in any declared dividends, can vote on the surrender of the company's letters patent and would participate in any winding up of the plaintiff's assets. Furthermore, counsel for plaintiff submits that pursuant to An Act Respecting Canadian Business corporations, R.S.C. 1985, c. C-44, s. 211(3):

211. (3) [Shareholder's resolution] A corporation may liquidate and dissolve by special resolution of the shareholders or, where the corporation has issued more than one class of shares, by special resolutions of the holders of each class whether or not they are otherwise entitled to vote.

and subsection 2(1)

["special resolution" “resolution spéciale"] “special resolution" means a resolution passed by a majority of not less than two-thirds of the votes cast by the shareholders who voted in respect of that resolution or signed by all the shareholders entitled to vote on that resolution.

both groups would have to vote to liquidate the company, once again indicating neither side had de jure control of the plaintiff company.

I was also referred to the case of The Queen v. Imperial General Properties Ltd., [1985] 2 C.T.C. 299; 85 D.T.C. 5500, a decision of the Supreme Court. The issue in this case, as in the one before me, is where the voting shares are divided equally between two groups, which group controls. In the Imperial Properties case, one group, Validor, had 90 common shares and the other group, Gasner, had 10 commons shares and 80 preference shares.

Mr. Justice Estey, speaking for the majority (four to three) states at page 301 (D.T.C. 5502):

The holders of the preference shares were entitled to one vote per share and to a fixed cumulative preferential dividend at the rate of 10 per cent per annum. On the liquidation or winding up of the company, the holder of a preference share was entitled to recover the par value of the preference share and any accumulated but unpaid dividends in priority to the common shares. The preference shareholder, however, was not entitled to participate in the distribution of any surplus in the corporation. Perhaps 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 rights in the company ....

and concludes at page 303 (D.T.C. 5503-504):

As in Oakfield, the continued existence, after the 1960 reorganization, of 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, Validor, is, in my view, the linchpin of the tax plan introduced following the 1960 amendments to the tax statute. Control, in the real sense of the term, was not surrendered by the Wingolds (and their successor, Validor) in 1960 upon the issuance to the Gasner group of $80 in preference shares. Accordingly, the respondent remains controlled by Validor within the meaning of the term as it is employed by Parliament in subsection 39(4).

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 supplying 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.

Counsel for plaintiff submits that one must look only to the issue of de jure control and ignore de facto control. He therefore is saying ignore the fact that the public corporations could, at their option, end the management contract and thus obtain all of the shares of Rieris or have plaintiff redeem the Class "A" voting shares as this was not in fact done in the years 1979, 1980, 1981 and 1982. He therefore submits that since the public corporations did not have de jure control, plaintiff was in 1979, 1980, 1981 and 1982 a privately controlled Canadian corporation as contemplated in paragraph 125(6)(a) of the Act.

Counsel for defendant first submits that because Rieris was given the opportunity to buy 40,000 Class "A" voting shares in March 1978 for $400 and it is only as a result of this purchase that Rieris got 50 per cent voting rights in plaintiff company, it effectively means Charter and Rieris gave up their control of plaintiff company for $400. This counsel submits is illogical.

As I stated to counsel for defendant, I did not then and I still do not understand this submission. The evidence is that Rieris was issued 25 per cent, 20,000 of the issued common shares for $200,000 and 40,000 Class "A" voting shares for $400. Rieris purchased these shares for $200,400 and received shares giving it 50 per cent of the voting rights and 25 per cent equity. I do not consider that the two public corporations gave up control of plaintiff to Rieris by the sale by plaintiff to Rieris of the Class "A" shares. I am satisfied that Rieris by owning 50 per cent of the voting stock of plaintiff does not have and never obtained control of plaintiff. Therefore, defendant's submission that for $400 Rieris obtained control of plaintiff cannot be accepted.

Counsel for defendant submits that because Charter and Hamilton were always in a position to revert to their pre-1978 holdings, that is when Charter and Hamilton each had 50 per cent of the issued shares of plaintiff, they were always in control of plaintiff company.

There appears to be no doubt that in the years in issue, plaintiff, pursuant to Exhibit R-2(14), the management agreement, at its option could have the management agreement terminated which in turn would trigger paragraph 8 of Exhibit R-2(16) obliging Rieris to sell its shares to Charter and Hamilton. Does this mean that Charter and/or Hamilton have control of the plaintiff corporation as contemplated under the Act?

I think not. Until such time as the management agreement is terminated and the shares owned by Rieris are purchased by Charter and Hamilton neither party has voting control as both "groups" have equal votes. The jurisprudence previously cited does not indicate to me that, for the years in issue, when one “side” has a right in an agreement to purchase the shares of the other in the event of a certain happening, it follows it has control of the other and thus give it control over the plaintiff.

It was specifically to cover this situation that the Act was later amended.

The defendant submits that the plaintiff was not a private corporation, in the sense of a "Canadian-controlled private corporation” defined under paragraph 125(6)(a) of the Act, because the public corporations, Charter and Hamilton retained, at all relevant times, de facto control over the plaintiff. The Minister made this finding on the basis that Rieris Holding Ltd. (Rieris) never owned more than 50 per cent of the plaintiff's voting shares, and half of these were redeemable Class "A" with only a par value of $0.01 per share. At all times Rieris's common and Class "A" shares were subject to the terms of a March 2, 1978 agreement between Rieris and the two public corporations which provided that if the management contract between plaintiff and Eric Bissell (for his company) was terminated, Rieris had to sell, in equal proportions all its shares to Charter and Hamilton. The Minister also submits that the directors of the plaintiff could terminate the management contract at any time, upon payment of /3 of the annual management fee; that the majority of the directors of plaintiff were at all times nominees of either the Hamilton Group or Charter; that all decisions of the board of directors were taken by majority vote but that directors could only be removed by a shareholder's resolution passed by at least A of the votes cast at a meeting called for that purpose.

Conclusion

From the wording of paragraph 125(6)(a) of the Act as it was in 1979 to 1982 inclusively and from the jurisprudence submitted and considered, I would have found that the public corporations did not have control over the plaintiff corporation either directly or indirectly in any manner whatsoever had the issued voting shares of the corporation been equally divided between the two groups, Rieris and Charter and Hamilton and both groups would have had equal voice in determining all matters relating to the plaintiff corporation. As I have stated, the fact that the plaintiff corporation could, if it so desired, terminate the management agreement causing Charter and Hamilton to purchase the shares of Rieris thus giving Charter and Hamilton control is immaterial, in that during the years in issue the management agreement was not terminated and Charter and Hamilton, only having 50 per cent of the voting shares did not have control of plaintiff. The same can be said about the submission that the Class "A" shares could, at any time, be redeemed by the plaintiff. The Class "A" shares were not redeemed.

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 corporations and that because a majority vote is required to change the board of directors the public corporations have legal and effective control of plaintiff Rieris cannot effectively do anything to cause a change in the board of directors. Charter and Hamilton do not have to do anything to cause a change as they now hold 4 of the 5 or 6 positions on the board of directors. I say 5 or 6 because Exhibit R-2(13) speaks of "we the undersigned, being all the Directors of the above-noted company . . .” and five persons are mentioned, Walling, Fox, Godel and the two Youngs while Bissell testified that there was a sixth director, a Mr. Reinhart, who resigned in 1978 and was never replaced.

The by-laws of plaintiff company clearly state that if a new board is not elected annually, and this can only be done by majority vote, then the then existing board remains as the board of directors. This gives Charter and Hamilton legal and effective control with regard to all major decisions of plaintiff.

This finding may not be "on all fours" with the findings in the cases of Buckerfield and Dworkin Furs, supra. As in the cases of Oakfield or Imperial Properties, supra the Supreme Court of Canada went further than the Buckerfield and Dworkin Furs cases by defining the issue of control not on the fact of equal voting rights, but by the fact that one 50 per cent shareholder could cause the liquidation of the Company giving it control. I also, following the principle in Oakfield and Imperial Properties, am satisfied that because Charter and Hamilton have retained, for as long as they wish, the majority of the board of directors, they have retained legal and effective control of the plaintiff corporation as control was defined in paragraph 125(6)(a) of the Income Tax Act.

For these reasons, plaintiff's actions are dismissed with costs. In that there was only one hearing for all four cases, defendant is allowed one hearing fee.

Appeal dismissed.