Express Cable Television Ltd. v. MNR, 82 DTC 1431, [1982] CTC 2447 (TRB)

The Chairman:—Express Cable Television Ltd appealed from a reassessment with respect to its 1970 taxation year.

The appellant’s statement of allegations of fact reads as follows:

1. Statement of Allegations of Fact

1. By Notice of Re-Assessment No 161495 dated July 12, 1978 the Respondent assessed income tax in the total sum of $67,112.42 payable by the Appellant in respect of its 1970 taxation year.

2. On October 2, 1974 the Appellant filed a Notice of Objection to Notice of Re-Assessment No. 128418, dated October 2, 1974 in accordance with the provisions of the Income Tax Act, RSC 1952, c 148, as amended (the “Act”).

3. On July 12, 1978 the Respondent issued a Notification under the Act affirming the aforesaid Notice of Re-Assessment 128418 in respect of the Appellant’s 1970 taxation year on the grounds that the Appellant and Victoria Cablevision Ltd (“Victoria”) were associated corporations under the provisions of paragraph 39(4)(b) of the Act, and accordingly the reduced corporate tax rate provided for by paragraph 39(1 )(a) of the Act only applied in respect of $5400 of the Taxpayer’s taxable income for its 1970 taxation year.

4. On October 6, 1978 the Appellant filed a Notice of Objection to the aforesaid Notice of Re-Assessment No 161495, dated July 12, 1978. This Notice of Appeal is being filed in the event that the Respondent takes the position that he is not prepared to consider the Appellant’s Notice of Objection filed in respect of the aforesaid Notice of Re-Assessment No 161495, dated July 12, 1978 in view of the aforesaid Notification.

The respondent’s Statement of Facts reads as follows:

1. Admits the allegations of fact contained in paragraphs 1, 2, 3, 4 and 5 of the said Notice of Appeal.

2. Admits of the allegations of fact contained in the Reasons in support of the appeal only that Donald Paynter, the controlling shareholder of Quadra Sales Ltd directly or indirectly held shares in both the Appellant and “Victoria”, but otherwise does not admit what is alleged in the said Reasons.

Issue:

The sole issue is whether Express Cable Television Ltd (“Express”), the appellant, and Victoria Cable Television Ltd (“Victoria”) were in 1970 associated under paragraph 39(4)(b) of the Income Tax Act, RSC 1952, c 148, as amended which reads:

(4) Idem. For the purpose of this section one corporation is associated with another in a taxation year, if at any time in the year,

(b) both of the corporations were controlled by the same person or group of persons.

Submissions:

The appellant in support of the appeal contended:

6. In order for the Appellant and Victoria to be associated corporations under the provisions of paragraph 39(4)(b) of the Act, the same person or group of persons would have to control both the Appellant and Victoria. Columbia Broadcasting System Inc, Southlands Cablevision Ltd, Welsh Cablevision Ltd and Farwest Cablevision Ltd (the “CBS/Southlands’ Group”) could be alleged to be a group which controls Victoria by exercising voting control. However, the CBS/Southlands’ Group do not control the Appellant, because they collectively own only 848 of the 1700 issued and outstanding voting shares of the Appellant. For the purpose of paragraph 39(4)(b) of the Act, “controlled” means a majority of voting shares must be owned to exercise de jure control.

7. The only Employee/Shareholder of the Appellant who held shares in both the Appellant and Victoria, directly or indirectly, was Donald Paynter, the controlling shareholder of Quadra Sales Ltd. Because Paynter did not act with the CBS/Southlands’ Group in the management of Victoria, he is not part of the community of interest that could be alleged to be shared by the CBS/Southlands’ Group and is not part of the CBS/Southlands’ Group.

8. The group that could be alleged to control Victoria, the CBS/Southlands’ Group, does not need and does not use the votes of Paynter or anyone else to attain or to exercise control of Victoria; but the CBS/Southlands’ Group does not need three more votes from someone else to attain control of the Appellant. Paynter took no part in the management or decision making process of Victoria. He was never a director of Victoria and never shared in the community of interest and concern which CBS/Southlands’ Group alone could be alleged to have exercised in respect of Victoria. Accordingly, the group that could be alleged to control Victoria does not control the Appellant, and paragraph 39(4)(b) of the Act does not apply.

9. Because the same group did not control both the Appellant and Victoria, the Respondent has erred, in both fact and law, in determining that the Appellant and Victoria are associated corporations within the meaning of paragraph 39(4)(b) of the Act and that the Taxpayer is not entitled to the reduced rate of tax on the whole of its first $35,000 of taxable income in respect of its 1970 taxation year under the provisions of paragraph 39(1 )(a) of the Act.

The respondent submitted that he made the disputed assessment on the assumption that the concept of control of a corporation as used in the Income Tax Act contemplates and includes any relationship which brings about such control by virtue of majority voting power, no matter how that result is effected, that is, either directly or indirectly.

He also submitted that the assessment associating the appellant and Victoria for their 1970 taxation year for the purpose of paragraph 39(4)(b) of the Income Tax Act was properly and correctly made; and the onus is on the appellant to show the assessment wrong in fact and in law.

Summary of Evidence:

Mr William Garth Pither testified that in the late 1960’s, he was president of Fred Welsh Antenna Systems (Antenna Systems), a partnership made up of Southlands’ Cablevision Ltd, Farwest Cablevision Ltd and Welsh Cablevision Ltd. The partnership provided management services, engineering services and acted also as a supplier of equipment to cablevision operators in the province of British Columbia. (In 1970 it was providing managerial services to both the appellant and Victoria).

In 1964 Antenna Systems acquired shares in Victoria, which subsequently became part of Premier Communications in 1971. In 1966 Antenna Systems acquired shares in Express which were allegedly sold in 1970.

Express and Victoria provided cable television to North Vancouver and to Victoria and Saanich, BC respectively. The Board of Directors of each corporation was described as playing a passive role; the day-to-day management being carried out by Antenna Systems which, it is alleged, exerted a strong influence in the corporations’ long-term policies.

Mr Pither testified that he had been associated with Mr Donald Paynter, the principal shareholder of Quadra Sales Limited some five to six years prior to his acquisition of the Express and Victoria shares and stated that Mr Paynter was also one of the original shareholders of each of those corporations. The annual reports indicate that Mr Paynter was also a director of Express.

Quadra Sales Limited provided sales services to Express and Victoria through the intermediary of Antenna Systems which managed both corporations. Mr Paynter had no participation in the management and administration of either Express or Victoria.

The evidence is that there existed no voting trusts or shareholders’ agreement in either Express or Victoria and although Columbia Broadcasting System Inc was a significant shareholder in Express, its administrative role was also essentially passive.

There is no dispute as to the allocation of voting shares of Express and Victoria which, according to paragraph 5 of the notice of appeal, is as follows:

The group chosen by the Minister as controlling both Express and Victoria on the assumption of which the companies are considered to be associated with one another, within the meaning of paragraph 39(4)(b) of the Act, are:

The Columbia Broadcasting System Inc (CBS)

Fred Welsh Antenna Systems Partnership made up of:

Southlands’ Cablevision Ltd

Welsh Cablevision Ltd

Farwest Cablevision Ltd

Mr Paynter through Quadra Sales Limited.

Submissions:

It is common ground that the word “control” used in paragraph 39(4)(b) of the Act refers to legal or de jure control as opposed to de facto control and that the word “group” means any number of persons except one. The basis for both those propositions is the Exchequer Court decision in Buckerfield’s Limited et al v MNR, [1964] CTC 504; 64 DTC 5301, to which I will later refer. The dispute relates to the exercise of effective control in Express and Victoria.

The appellant submitted that case law has established that the exercise of effective control by a group, whether or not they have legal control, is a question of fact which must be considered in determining which group controlled the corporations for purposes of paragraph 39(4)(b) of the Act.

Counsel pointed out that the combined holdings of CBS and Welsh Antenna in Victoria (15 out of 24)* [1] formed a group which had de jure control of Victoria but did not have legal control of Express. He admitted that CBS, Welsh Antenna and Paynter, the group chosen by the Minister, had de jure control over Express and Victoria but claimed it did not have effective control of either. Counsel recalled that there existed no voting trust between the shareholders of Express and Victoria; no shareholders’ or directors’ meeting for either company was held; Mr Paynter, while director of Express, was not a director of Victoria and the effective control of the day-to-day management of both Express and Victoria was exercised by Antenna Systems exclusively. He suggested that the Minister erred in assuming that Express and Victoria were controlled by the same group and concluded that Express and Victoria were not associated under paragraph 39(4)(b) of the Act.

Case Law

Counsel for the appellant cited the decision of the Federal Court in The Queen v Mars Finance Inc et al, [1980] CTC 216; 80 DTC 6207, where the issue was control by a related group of shareholders under paragraph 39(4)(e) of the Act. Referring to Yardley Plastics of Canada Limited v MNR, [1966] CTC 215; 66 DTC 5183, Mr Justice Addy at 222 and 6211 respectively stated:

It appears clear in this latter case that the question is first and foremost one of fact and that it is indeed de facto control that must be considered.

The learned Justice’s statement was obviously not part of his ratio decidendi in the appeal before him but it does raise the point at issue in the case at bar.

There is no dispute that the group selected by the Minister (CBS, Welsh Antenna and Paynter) did hold the majority of the voting shares and had de jure control of both Express and Victoria. It is quite conceivable however, as in the instant appeal, that several combinations of persons or groups of persons other than the group chosen by the Minister can form a group holding the majority of voting shares.

The question of fact then becomes the determination of which one of several groups holding a majority of voting shares effectively controls two corporations within the meaning of paragraph 39(4)(b) of the Act.

The decision of the Exchequer Court of Canada in Yardley Plastics of Canada Limited (supra) was also cited by the appellant. In that case Mr Justice Noel statd at 233 and 5188 respectively:

The appellant’s second submission is that under section 39(4)(b) for the purposes of association, where corporations are controlled by the same group of persons, this group must have the right to effectively control the corporations and if it does not then it cannot be considered as the group contemplated in the section.

He then concludes that “controlled”, when control by a group is involved, is therefore something more than mere “control”, ie, a holding which might carry the majority of votes but must be the group that effectively controls and carries with it the power to determine the conduct of the corporation’s affairs over the long run.

The learned Justice clearly established that the Minister’s selection of the group having control within the meaning of paragraph 39(4)(b) is rebuttable; the appellant, however must prove that the group chose by the Minister was not the controlling group.

At 234 and 5189 respectively, Mr Justice Noel continued:

The appellant here attempted to challenge the assumptions of fact of the Minister by merely pointing out that several other combinations or groups could be held to have controlled the corporations during the year without, however, discharging the burden it had, and can exercise, by putting evidence before the Court to establish that the group assumed by the respondent to control the corporations was not the group that controlled the corporations as it had to do in order to succeed herein.

It then follows that because of the failure of the appellent to have successfully challenged the assumptions of fact on which the assessment is based and also because of the circumstances surrounding the origin of both corporations, their being under a common management, coupled with the group chosen by the Minister as the controlling group being common shareholders in both corporations, I must and do find the said group so chosen to be a group as contemplated by section 39(4)(b) of the Act.

I can agree with counsel for the appellant that Mr Justice Noel was referring here to effective control described in his earlier statement. The question is what is effective control? The learned Justice, in my opinion, was not speaking of the persons or group of persons who were assigned the day-to- day management of the corporations (who could be said to exercise effective or de facto control); he was referring to the group which held the majority of the voting shares of the corporations and had the legal right and power (whether or not it chose to exercise it) to determine ultimately the conduct of the corporations’ affairs. the right to control arising from the ownership of the majority of the voting shares is, in my opinion, a basic condition for effective control and is necessary for the proper identification of a controlling group for purposes of paragraph 39(4)(b) of the Act.

In the instant appeal, while Welsh Antenna may have been assigned the day-to-day management of both Express and Victoria, it did not by itself have the necessary voting power or the legal right to control the corporation within the meaning of paragraph 39(4)(b) of the Act.

Counsel for the respondent traced the development of the “control” issue back to the basic principle enunciated by Viscount Simon, LC in British American Tobacco Co Ltd v IRC, Jan 2, 1943, Vol 1 where at 15 he stated:

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.

The respondent referred to the Buckerfield’s Limited case (Supra) which was also cited and accepted by the appellant. At 507 and 5303 respectively, Mr Justice Jackett stated:

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 subsection 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.

Apart from the argument of these appeals, the phrase “group of persons” is apt to encompass the companies holding the shares of Buckerfield’s and Green Valley or the companies holding the shares of Burrard and Westland, within my understanding of the meaning of that phrase whether or not I seek the aid of dictionaries.

It is the respondent’s contention that any group having factual legal control comes within the provisions of paragraph 39(4)(b) of the Act, whether or not it chooses to exercise the control and whether or not a voting agreement or other common link exists between the shareholders forming the group.

For that proposition, counsel for the respondent cited a decision of the Tax Appeal Board in Dad’s Cookie Co (Ontario) Limited v MNR, [1965] CTC 73; 65 DTC 535.

In that case 17 shareholders owning all the shares in three companies in British Columbia, which in turn owned all the shares in Dad’s Cookie Co (Ontario) Limited (supra), were held to be a group controlling the appellant and therefore an associated company, even though the shareholders were a free association of shareholders with no common link and no voting agreement or trust existing between them.

At 82 and 540 respectively, the presiding Chairman of the Tax Appeal Board stated:

However, I find myself in agreement with the respondent’s argument that intention to control is not the deciding factor so long as factual legal control exists; and therefore, applying the rule established in the Buckerfield’s case, I must find that the three British Columbia companies were associated with each other in the taxation year 1961 within the meaning of subsection (4) of section 39 of the Income Tax Act.

At 80 and 539 respectively, Mr Davis said:

Returning to the wording of the section as applicable to the 1961 taxation year, and to Mr Archibald’s contention that, from all the dictionary definitions put forward, there appears to be no common link strong enough to justify regarding the seventeen named shareholders of the three British Columbia companies as a “group of persons”, it may well be that if some common denominator is called for

— and I do not suggest that to be so — the fact that these persons are all shareholders of the same corporations might be sufficient.

In Floor & Wall Covering Distributors Ltd et al v MNR, [1966] CTC 566; 66 DTC 5373, and Vina-Rug (Canada) Limited v MNR, [1968] CTC 1; 68 DTC 5021, Mr Justice Gibson, then of the Exchequer Court, stated at 4 and 5374 respectively:

In my opinion also, without detailing the indicia which is clear from the evidence, each of these groups of persons are a “group of persons” within the meaning of s 39(4) para (d) of the Act, in that they had at all material times a sufficient common connection as to be in a position to exercise control of Stradwick’s Limited.

Vina-Rug (supra) appealed the decision to the Supreme Court of Canada. In Vina-Rug (supra) Mr Justice Abbott in referring to the principles in Buck- erfield’s Limited (supra) and British American Tobacco (supra), stated at 4 and 5023 respectively:

Applying these principles, once it is established that a group of shareholders owns a majority of the voting shares of a company, and the same group a majority of the voting shares of a second company, that fact is sufficient, in my opinion, to constitute the two companies associated within the provisions of section 39 of the Income Tax Act. Moreover, in determining de jure control more than one group of persons can be aptly described as a “group of persons” within the meaning of section 39(4)(b). In my view, it is immaterial whether or not other combinations of shareholders may own a majority of voting shares in either company, provided each combination is in a position to control at least a majority of votes to be cast at a general meeting of shareholders.

In reviewing the case law cited, there appears to have been some development in the jurisprudence with respect to the concept of “control”. However the basic tenet in British American Tobacco (supra) that “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” has not in the slightest been altered over the years. The exercise of de facto control certainly has not been substituted for de jure control in the interpretation by the Courts of paragraph 39(4)(b) of the Act; and effective control does not necessarily mean de facto control.

I agree with counsel for the appellant’s contention that the basis for finding two companies associated is more than a mathematical exercise to the extent that the determination of which of several “majority groups” exercises effective control must necessarily go beyond the mathematic computation of shares.

Taxpayers can be successful in rebutting the Minister’s selection of a controlling group by establishing that persons or groups of persons other than those chosen by the Minister are also groups which own a majority of voting shares and have factual legal control. That basic requirement having been met, the existence of voting trusts, community of interest and other common links between the shareholders then become pertinent in determining which of the majority groups does in fact control two corporations within the meaning of paragraph 39(4)(b) of the Act.

In S Madill Ltd v MNR, [1972] CTC 47; 72 DTC 6027, which was included in the appellant’s Book of Authorities, Mr Justice Kerr makes the point clearly at 59 and 6035 respectively when he states:

I have summarized much of the evidence and argument, particularly the parts that seem to me to be the more important, and I have reached the conclusion on my appreciation of all the evidence and the cited authorities that at all relevant times Norman Madill, Charles Madill, John S Wilfert and Clair C Smith had a community of interest and concern in the operation of both the old manufacturing company and the old sales company and that they can be aptly described as a “group of persons” within the meaning of section 39(4)(b) of the Income Tax Act: that by virtue of the ownership of voting shares they were in a position to exercise control over both companies; that they constituted a group of persons that controlled both companies at all material times, and that the companies were, therefore, associated with each other within the meaning of section 39(4)(b) of the Income Tax Act.

In the case at bar, while no voting agreement existed, there was community of interest between the shareholders of the majority group chosen by the Minister — all were involved in television productions as indeed were Express and Victoria. Welsh Antenna provided managerial and other services to Express and Victoria and Mr Paynter, who was a former employee of Welsh Antenna, provided sales services to both corporations.

On the basis of the evidence, CBS, Welsh Antenna and Paynter were a group which owned the majority of the shares of Express and Victoria; it had the legal right and power to the ultimate determination of the corporations’ affairs and it did in fact exercise effective control of both corporations.

The appellant was not successful in rebutting the Minister’s assumption that CBS, Welsh and Mr Paynter were a group controlling both Express and Victoria within the meaning of paragraph 39(4)(b) of the Act and the Minister did not err in associating the two corporations.

For these reasons, judgment will go dismissing the appeal.

Appeal dismissed.