Duha Printers (Western) Limited v. Her Majesty the Queen, [1995] 1 CTC 2481, 95 DTC 828

Rip J.T.C.C.:—This appeal from an income tax assessment for the 1985 taxation year of Duha Printers (Western) Ltd. ("Duha #3") turns on whether there was a change in control before February 9, 1984 of Duha #2, a corporation formed under the laws of Manitoba by articles of amalgamation granted to Duha #1 and 64457 Ltd., the certificate of which is dated February 7, 1984. [1] Duha #2 and Outdoor Leisureland of Manitoba Ltd. ("Outdoor") were amalgamated under the laws of Manitoba on February 10, 1984 to form the appellant. The issue to be decided is whether the Minister of National Revenue (the "Minister") was correct in disallowing a deduction to Duha #3, the appellant, of non-capital losses incurred by Outdoor: paragraph 111(1)(a) and subsection 87(2.1) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act").

The appeal proceeded by way of the following agreed statement of facts:

I. Duha Printers (Western) Ltd. ("Duha #1") was incorporated in the province of Manitoba on April 10, 1963. Duha #1 specializes in printing colour coating charts for paint suppliers. The voting shares of Duha #1 prior to and as at February 7, 1984 were held as follows:

Shareholder*Class & No. of Shares

Emdulis Ltd. 150,000 Class B preferred (non-voting) 300 common (voting)

Gwendolyn Duha50,000 Class B preferred (non-voting) 100 common (voting)

Advanced Typographical Services Ltd. 1,190 Class A preferred (voting)

2. At all material times, all of the shares of Advanced Typographical Services Ltd. were held by Emeric V. Duha.*

3. At all material times, the voting shares of Emdulis Ltd. were held as follows:

Shareholder*Class & No. of Shares

Gwendolyn Duha500 common

Emeric J. Duha 100 common

Duncan T. Duha 100 common

Phyllis Duha 100 common

4. Gwendolyn Duha is the spouse of Emeric V. Duha. Emeric J. Duha, Duncan T. Duha and Phyllis Duha are the children of Emeric V. Duha.

5. Outdoor Leisureland of Manitoba Ltd. ("Outdoor") was incorporated in the province of Manitoba on August 31, 1971. Outdoor was a retailer of recreational vehicles. The shares of Outdoor as at February 8, 1984 were held by Marr’s Leisure Holdings Inc. ("Marr’s"). At all material times, William Marr and his spouse, Noah Marr owned 62.16 per cent of the voting shares of Marr’s.

6. In filing its income tax returns, Outdoor reported losses for its 1979, 1980 and 1981 taxation years such that its aggregate non- capital losses as at August 31, 1981 were $542,928. Outdoor noted in its 1980 tax return that it ceased active operations on July 31, 1980. The business of retailing recreational vehicles was not carried on by Outdoor after July 31, 1980.

7. By letter dated April 8, 1983 Marr’s Leisure Products (1977) Ltd. ("Marr’s Leisure"), a wholly-owned subsidiary of Marr’s advised the director of the Manitoba corporations branch that Outdoor was no longer active.

8. By letter dated April 14, 1983 the director of the Manitoba corporations branch advised Marr’s Leisure that Outdoor was being placed on the list of corporations to be dissolved during the first week of March (sic) 1984.

9. On May 4, 1983, Outdoor filed its 1982 T2 return for the period September 1, 1981 to August 31, 1982 (the 1982 taxation year of Outdoor). Outdoor claimed inactive status and a non-capital loss balance as at August 31, 1982 of $541,044.

10. On November 24, 1983, 64099 Manitoba Ltd. was incorporated in the Province of Manitoba. No shares were issued at the time of incorporation.

11. On or about December 3, 1983, a directors’ meeting of Duha #1 was held in Minneapolis, Minnesota. At this meeting discussions took place as to whether or not Duha #1 should acquire the shares of Outdoor in order to utilize the tax losses available in Outdoor. The tax loss was estimated to be approximately $400,000 and it was decided that if this tax loss could be purchased advantageously and if the legal and audit costs would not exceed $10,000, the president of Duha #1, being Emeric V. Duha, was authorized to proceed at his discretion.

12. On or about December 28, 1983, 64457 Manitoba Ltd. was incorporated in the province of Manitoba. No shares were issued at the time of incorporation.

13. By letter dated January 23, 1984 to the Manitoba corporations branch, Outdoor advised that it wished to continue to carry on business in Manitoba and did not wish to have its charter cancelled.

14. On February 2, 1984 Duha #1 subscribed for one common shares of 64099 Manitoba Ltd. for a subscription price of $1, being the only issued and outstanding share of 64099 Manitoba Ltd. On February 3, 1984, Emeric

V. Duha was appointed the sole director and president and secretary of 64099 Manitoba Ltd.

15. On February 3, 1984 Duha #1 subscribed for one share of 64457 Ltd. for a subscription price of $1 and Emeric V. Duha was appointed the sole director and president and secretary of 64457 Ltd.

16. On February 7, 1984 Duha #1 and 64457 Ltd. amalgamated to form Duha Printer’s Western Ltd. (Duha #2). Pursuant to the amalgamation, the shares of 64457 Ltd. were cancelled and the shareholders of Duha #1 received the same shares as they previously owned in Duha #1 as described in paragraph 1 hereof. In all other respects Duha #2 was identical to Duha #1. The amalgamation of Duha #1 and 64457 Manitoba Ltd. was done to cause a year-end for tax purposes of Duha #1 which was deemed to occur immediately prior to such amalgamation. This was done to permit Duha #1 to claim the small business deduction on its taxable income for the period from January 1, 1984 to February 7, 1984.

17. The articles of Duha #2 were amended on February 8, 1984 to, inter alia, increase the authorized capital of Duha #2 by creating an unlimited number of Class "C" preferred shares. (A copy of the articles of amendment is attached hereto as Exhibit "A")**. The Class "C" preferred share (sic) entitle the holders thereof to non-cumulative, dividends equal to 9 per cent of the redemption price being the stated capital for each share, and the right to one vote per share which right ceases upon the transfer of such shares or on the death of the holder. The share rights also provided that the Class ”C" preferred shares were redeemable by the corporation with the consent of the holder of such shares. In the event that the Class "C" preferred shares were transferred then the share rights provided that the consent of the holder to the redemption of such shares was no longer required***.

18. On February 8, 1984 Marr’s subscribed for 2,000 Class "C" preferred voting shares of Duha #2 for a subscription price of $2,000 ****.

19. On February 8, 1984 a unanimous shareholders’ agreement (the "shareholders’ agreement"), a copy of which was kept in minute book of Duha Printers (Western) Ltd., was entered into among the shareholders of Duha #2. A copy of which is attached hereto as Exhibit "B")**. The shareholders’ agreement was in effect from February 8, 1984 to February 15, 1985. The shareholders’ agreement provided, inter alia'.

(i) that Duha #2 was to be managed by a board of directors comprised of any three of the following:

Emeric V. Duha

Gwendolyn Duha-Emeric V. Duha’s spouse

Paul S. Quinton

William A. Marr

(ii) restricting the transfer of shares so that no shares could be transferred without the consent of the majority of the directors;

(iii) prohibiting each of the shareholders from selling, assigning, transferring, donating, mortgaging, pledging, charging, hypothecating or otherwise encumbering it’s shares in any manner;

The shareholders’ agreement was not filed with the director of the Manitoba corporations branch.

20. Emeric V. Duha, Paul Quinton and William A. Marr were not “related to each other" within the meaning of section 251 of the Income Tax Act (Canada). Paul Quinton was an experienced businessman and long-time friend of Emeric V. Duha and William A. Marr.

21. On February 9, 1984 Duha #2 purchased all of the outstanding shares of Outdoor from Marr’s, being 1,000 common shares for a purchase price of $1.

22. On February 9, 1984, 64099 Manitoba Ltd., purchased from Marr’s Leisure a receivable owing by Outdoor to Marr’s Leisure in the amount of $441,253 for a purchase price of $34,559 (a copy of the purchase agreement is attached hereto as Exhibit "C")**. The purchase price was calculated as 7-1/2 per cent of $460,786 being the losses of Outdoor. The purchase price was to be paid as follows:

(i) $17,279.50 on June 1, 1984;

(ii) $17,279.50 on such day that the 2,000 Class "C" preferred shares held by Marr’s in Duha Printer’s Western Ltd. were redeemed.

23. On February 10, 1984 Duha #2 and Outdoor amalgamated to form Duha Printer’s (Western) Ltd. (Duha #3). The shares of Outdoor were cancelled and the shareholders of Duha #3 received the same shares as they previously owned in Duha #2 such that the shares of Duha #3 were held as follows:

Shareholder	Class & No. of Shares
Marr’s Leisure Holdings Inc.	2,000 Class C preferred (voting)
Emdulis Limited	150,000 Class B preferred (non-voting)
	300 common (voting)
Gwendolyn Duha	50,000 Class B preferred (non-voting)
	100 common (voting)
Advanced Typographical
Services Ltd.	1,190 Class A preference (voting)

In all other respects Duha #3 was identical to Duha #2.

24. On February 28, 1984, Outdoor filed its 1983 T2 return for the period ended August 31, 1983, claiming inactive status.

25. On February 28, 1984, Outdoor filed an amended T2 return for the 1979 taxation year resulting in the 1979 losses of Outdoor being reduced to $130,991, a decrease of $51,497. This reduction resulted from Outdoor reducing its claim for deductions that were at the discretion of Outdoor.

26. On February 28, 1984, Outdoor filed an amended T2 return for the 1980 taxation year resulting in the 1980 losses of Outdoor being increased to $424,889, an increase of $51,497. This increase resulted from Outdoor increasing its claim for deductions that were at the discretion of Outdoor.

27. By resolution dated March 12, 1984, the shareholders of Duha #3 elected Emeric V. Duha, Gwendolyn Duha and Paul S. Quinton as the three directors thereof. At all material times, Emeric V. Duha, Gwendolyn Duha and Paul Quinton were the only directors of Duha Printers (Western) Ltd.

28. By resolution of the directors of Duha #3, dated March 12, 1984, Emeric V. Duha was appointed president, Gwendolyn Duha was appointed secretary and Paul S. Quinton was appointed vice- president.

29. On June 29, 1984, Duha #1 filed its T2 corporate tax return for the period ended December 31, 1983, reporting taxable income of $242,608.

30. On August 7, 1984, Outdoor filed its T2 corporate tax return for period ended February 10, 1984 claiming inactive status.

31. On August 7, 1984, Duha #1 filed its T2 corporate tax return for the period January 1, 1984 to February 7, 1984 reporting taxable income of $131,000.

32. On August 7, 1984, Duha #2 filed its T2 corporate tax return for the period from February 8, 1984 to February 10, 1984 reporting a loss of $3,034.

33. On January 4, 1985, Duha #3 redeemed the 2,000 Class "C" preferred shares owned by Marr’s for a redemption price of $1 per share and Marr’s consented to the redemption of such shares.

34. On February 15, 1985, the shareholder’s agreement dated February 8, 1984 was terminated.

35. On February 15, 1985, Paul Quinton resigned as a director and vice- president of Duha #3. Paul Quinton was a director of Duha Printer’s Western Ltd. from December 23, 1974 to February 15, 1985.

36. On June 28, 1985 Duha #3 filed its T2 corporate tax return for the period February 11, 1984 to January 2, 1985 (a copy of which is enclosed as Exhibit ”D”)*. Taxable income of $234,236 was reported after deducting non-capital losses of $463,820 of which $460,786 were losses incurred by Outdoor, one of the predecessor corporations continued as Duha #3 by virtue of the amalgamation.

37. On June 28, 1985 64099 Manitoba Ltd. filed its T2 return for the period January 1, 1984 to December 31,1984. Taxable income was reported as nil.

38. On December 12, 1991, Emeric V. Duha died in a traffic accident.

*1 refer to these shareholders as the "Duhas" or "Duha family shareholders".

**The Exhibits attached to the agreed statement are not included in these reasons.

***The amended articles also provided that on the death of any holder of the Class "C" preferred shares or on the transfer of any of the said Class "C" preferred shares the entire class of Class "C" preferred shares shall forthwith cease to have attached thereto any voting right.

****Respondent’s counsel referred in argument to the fair market value of the Class "C" preferred shares. As at December 31, 1983 and February 10, 1984 the shareholders’ equity of Duha #1 and Duha #2, respectively, was $498,076 and $596,771. The two amalgamated Duha corporations continued to carry on the business Duha #1 carried on before these transactions took place.

A taxpayer who has incurred non-capital losses in a taxation year may apply those losses in computing his taxable income for prior or subsequent taxation years subject to paragraph 111(1 )(a) of the Act. When a corporation is formed by way of amalgamation of two or more other corporations, the non-capital losses of the other corporations similarly may be applied in reducing the taxable income of the amalgamated corporation: subsection 87(2.1).

As stated earlier the issue is whether there was a change in control of Duha #2 when Marr’s acquired the 2,000 Class "C” preferred voting shares of Duha #2 on February 8, 1984. If Marr’s did acquire control of Duha #2 on February 8th, then there was no change of control of Outdoor when its shares were acquired the next day by Duha #2; both corporations would have been related to each other, each being controlled by Marr’s: subsection 251(2) and subparagraph 256(7)(a)(i). This is the appellant’s position. The respondent says that Marr’s did not acquire control of Duha #2 when it received the 2,000 Class "C" preferred shares and the non- capital losses incurred by Outdoor are not available to the appellant. The respondent declares that the "unanimous shareholder agreement" affected the right of the Class "C" preferred shareholder to freely vote its shares.

Counsel for the respondent also alleged that the transactions in the chain of events culminating in the appellant claiming the deductions of the non-capital losses of Outdoor, set out in the agreed statement of facts, constituted a transaction that, if allowed, would unduly or artificially reduce the income of the appellant for its 1985 taxation year. In the alternative, he says the chain of events had no valid business purpose and constituted a sham transaction. The soundness of these submissions is, of course, denied by the appellant; the appellant is of the view that each transaction had a purpose and did not unduly or artificially reduce its income, was legally effective and binding and, therefore, did not constitute a sham.

I wish to deal first with one preliminary matter. In the pleadings, the agreed statement of facts and in argument by both counsel references, are made to a "unanimous shareholder agreement"; the agreement was attached to the agreed statement of facts as Exhibit "B". Nowhere in the agreement is there a provision that restricts, in whole or in part, the powers of the directors of Duha #2 to manage its business and affairs. Subsection 140(2) of The Corporations Act, R.S.M. 1987, c. C.225 provides that:

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 their business and affairs of the corporation is valid.

Subsection 140(2) is headed "Unanimous shareholder agreement". the Corporations Act contains no other definition of "unanimous shareholder agreement”.

Subsection 43(1) of the Corporations Act provides that shareholders of a corporation are not, as shareholders, liable for any liability, act or default of the corporation except under subsections 36(4), 140(5) [2] and 219(5). Subsection 140(5) reads as follows:

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.

What both counsel called a "unanimous shareholder agreement" was an otherwise lawful agreement that is usually called a shareholders’ agreement. Shareholders agreements are contracts between shareholders of a corporation and sometimes the corporation itself in which, among other things, the shareholders agree to vote in a given way; these agreements are not illegal and the parties are obliged to act according to the terms of the agreement. See, for example, Ringuet et al. v. Bergeron (1960), S.C.R. 672, 24 D.L.R. (2d) 449. The agreement between the shareholders of Duha #2 and Duha #2 is not the unanimous shareholder agreement contemplated by the Corporations Act since it does not restrict one or more powers of the directors of Duha #2 in the management of its business and affairs. There are no provisions, for example, as there are in the agreement between the shareholders in Alteco, infra, in which the shareholders agreed to cause the corporation to do certain things that normally are within the powers of the directors to decide.

It is well settled law that "control" of a corporation for purposes of the Act means de jure control, that is, control of right or according to law, and not de facto control, that is, control in fact or in reality. In Buckerfield's Ltd. et al. v. M.N.R., [1964] C.T.C. 504, 64 D.T.C. 5301, at page 507 (D.T.C. 5303), Jackett P., as he then was, stated:

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.

In deciding Buckerfield's, Jackett P. relied on the English decision of British American Tobacco Co. v. I.R.C., [1943] 1 A.E.R. 13, and, on page 15 referred to the statement of Viscount Simon L.C.:

The owners of a majority of the voting power in a company are the persons who are in effective control of its affairs and fortunes.

The Supreme Court adopted Jackett P.’s definition of "control" in 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 at page 228 (C.T.C. 53, D.T.C. 5036), per Hall J. who also referred to Viscount Simon’s statement, and Vina-Rug (Canada) Ltd. v. M.N.R., [1968] C.T.C. 1, 68 D.T.C. 5021, at page 4 (D.T.C. 5023) per Abbott J.

However in Donald Applicators Ltd. et al. v. M.N.R., [1969] C.T.C. 98, 69 D.T.C. 5125, aff’d [1971] S.C.R. v, [1971] C.T.C. 402, 71 D.T.C. 5202, Thurlow J., as he then was, was of the view [at page 103 (D.T.C. 5125)] that the statement of Jackett P. should

...be read and understood as applying to a case where the directors when elected have the usual powers of direction to guide the destinies of the company.

In finding which shareholder has de jure control the courts may examine the incorporating or constating documents of a company: Aaron's Ladies Apparel Ltd. v. M.N.R. as described in Dworkin, supra,, at pages 234-36 (C.T.C. 59-61, D.T.C. 5040-41). Articles of association of a company are in effect an agreement between the shareholders and binding upon all the shareholders: Theatre Amusement Co. v. Stone, [1915] 50 S.C.R. 32, 16 D.L.R. 855, at page 36, cited in Dworkin, supra, at page 233 (C.T.C. 58, D.T.C. 5039).

In Revenue Canada’s view, although Marr’s owned a majority of the voting shares of Duha #2, the shareholders’ agreement "totally neutralized" the ability of Marr’s to manage Duha #2 since under the agreement Marr’s could not: (a) elect a majority of its choice to the board of directors; (b) dissent to a corporate transaction and apply to the Court for redemption of its shares; and (c) sell its shares or use its shares as security for a loan. Further, Duha #2 was a party to the shareholders’ agreement.

In Aaron ’s Ladies Apparel, supra, a provision in the articles of association of Aaron's Ladies Apparel Ltd., required the shareholders and directors of the corporation to pass all resolutions by unanimous consent. The Court held that 100 per cent of the votes of the shareholders was necessary to pass any resolutions and to elect the directors, a majority of votes was insufficient. Control of the corporation was in the hands of all of the shareholders. Appellant’s counsel submitted the courts generally will examine only incorporating or constating documents of a corporation in deciding which shareholder has control. She declared the terms of a shareholders’ agreement are not relevant to decide control of a company such as Duha #2.

In support of her client’s submission, appellant’s counsel referred to the reasons for judgment of the Exchequer Court of Canada in International Iron & Metal Co. v. M.N.R., [1969] C.T.C. 660, 69 D.T.C. 5445, confirmed by [1972] C.T.C. 242, 72 D.T.C. 6205 (S.C.C.). The Court held that the fact that a shareholder was bound by contract to vote in a particular way in the election of directors was irrelevant in deciding control of a corporation. Four families set up four holding companies; the shares of each company were owned by the children of each of the four families. The four companies in turn owned the shares of International Iron and Metal Co. The children of each of the four families also directly owned all the shares of Burland Realty and Equipment Ltd. The four holding companies owned by the children agreed with the fathers of the children that International Iron would have only four directors and that each of the four holding companies may elect one director. The agreement also provided that the fathers would each be elected as the four directors of International Iron at the option of the fathers. International Iron argued that it and Burland were not controlled by the same group of persons. By virtue of the agreement the children were limited to electing the fathers as directors and thus it was submitted the children did not control International Iron.

Gibson J. said, at pages 673-74:

The meaning of "controlled" in section 39 of the Income Tax Act in reference to a corporation 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 a corporation.*

The fact that a shareholder in such a corporation may be bound under contract to vote in a particular way regarding the election of directors (as in this case), is irrelevant to the said meaning of "controlled" because the corporation has nothing to do with such a restriction.

Instead, the only relevant fact is that the voting power in such a corporation remains in the owners of such a number of shares. In other words, they do not in any lesser way control the corporation because they themselves may be liable to certain external control created by such a contract.**

*See Hall J. (for the Court) in 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, at page 227 (C.T.C. 53, D.T.C. 5037); and Viscount Simon L.C. in British American Tobacco Co. v. Inland Revenue Commissioners, [1943] 1 All E.R. 13 at page 15.

**Cf. the words of Sheppard, J. in Consolidated Holding Co. v. M.N.R., [1969] C.T.C. 633, 69 D.T.C. 5429, at page 636 (D.T.C. 5431), viz.:...the control is determined by the owners of the majority of voting power and in determining that voting power the existence of any trust under which the registered shareholders are liable is immaterial. [Emphasis added.]

Counsel argued that the courts have only examined an outside agreement when there is an inequality in voting share ownership. She submitted that the shareholders’ agreement in the case at bar does not alter the voting control by Marr’s with respect to Duha #2. The shareholders’ agreement provides that the shareholders of Duha #2 were to elect three directors and that the three directors must be chosen from four named people. Marr’s was the majority shareholder of Duha #2 and it was Marr’s who decided the three individuals to be the directors. Since Marr’s had the ability to elect the directors of Duha #2, the appellant concluded Marr’s controlled Duha #2.

Counsel also argued that no other shareholder had the right to control Duha #2. The fact that the Class "C" preferred shares owned by Marr’s were redeemable by the directors of Duha #2 did not affect Marr’s ability to control that corporation since Marr’s had to consent to such redemption; therefore, the directors of Duha #2 could not force Marr’s to give up its shares. Also, Duha #2 may issue no new voting shares without the consent of all the shareholders; Marr’s shares could not be diluted. Marr’s consent would be required in the event the directors wished to alter the share structure of Duha #2 or winding up the corporation. Therefore, appellant’s counsel argued, Marr’s controlled Duha #2 "and no one else had the power to do so".

The registered or legal owner of the shares may or may not be the person who decides how the shares are to be voted: in Vineland Quarries and Crushed Stone Ltd. v. M.N.R., [1966] C.T.C. 69, 66 D.T.C. 5092; aff’d [1968] S.C.R. 193, [1968] C.T.C. 1, 68 D.T.C. 5021, Cattanach J. said, at pages 80-82 (D.T.C. 5097-98):

...it is permissible for certain purposes, to look beyond the register and seek the individuals who themselves control that body corporate.

See also Bert Robbins Excavating Ltd. v. M.N.R., [1966] C.T.C. 371, 66 D.T.C. 5269.

In M.N.R. v. Consolidated Holding Co., [1974] S.C.R. 419, [1972] C.T.C. 18, 72 D.T.C. 6007, the Supreme Court found it was necessary to look to a trust provision in the controlling will of a deceased shareholder to ascertain whether one or more executors had been put in a position where they could, at law, direct their co-executors as to the manner in which the voting rights attaching to the shares were to be exercised.

In The Queen v. Imperial General Properties Ltd., [1985] 2 S.C.R. 288, [1985] 2 C.T.C. 299, 85 D.T.C. 5500, Mr. Justice Estey stated, at page 294 (C.T.C. 302, D.T.C. 5502),

[I ] t has been said that control for these purposes concerns itself with de jure and not de facto consideration (see Buckerfield’s Ltd., supra, at page C.T.C. 507 (D.T.C. 5303), and Dworkin, supra, at page 227 (C.T.C. 52, D.T.C. 5036). 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 subsection 39(4). [3]

The facts in Imperial General were as follows: 90 of the 100 issued common shares of Imperial General Properties Ltd. were owned by another corporation. The remaining ten shares were owned by an individual. In addition, the individual and his wife held 80 voting but non-participating preference shares having a par value of $1 each. Both the common shares and the preference shares carried one vote each. The holders of the preference shares were entitled to a fixed cumulative preferential dividend of ten per cent per annum. On a liquidation or winding-up of the taxpayer, the holders of the preference shares were entitled to recover the par value of the shares plus any accumulated but unpaid dividends in priority to the common shares. The holders of the common shares were entitled to the remaining surplus. In summary, the corporate shareholder held 90 per cent of the common shares but only 50 per cent of the voting power. A 50 per cent vote in favour was sufficient to wind up the company. The Minister assessed the taxpayer on the basis that it was controlled by the corporate shareholder and thus associated with it.

The Supreme Court found that Imperial General Properties Ltd. was controlled by its corporate shareholder. In his reasons, Estey J. referred to Oakfield Developments (Toronto) Ltd. v. M.N.R., [1971] S.C.R. 1032, [1971] C.T.C. 283, 71 D.T.C. 5175. In Oakfield there were two classes of shares, common and preferred, and each class of shares was held by a different group. The voting rights were equal. In case of a winding-up of the company the preferred shareholders would recover their capital, accumulated dividends, and a ten per cent premium, before the common shareholders. Either the common shareholders or the preferred shareholders, acting by themselves as a class, could cause the surrender of the company’s charter. On the surrender of the charter the common shareholders would receive all the surplus profits on a distribution by way of dividend after the repayment of the capital and accrued dividends to the preferred shareholders. The holders of the common shares were strangers in the tax sense to the holders of the preferred shares. There was no casting vote in the hands of any officer or shareholder. All this was done in the belief that the inside group (the common shareholders) would no longer be in control of Oakfield since it would no longer have majority voting power. Oakfield did not wish to be associated with some 42 other companies. Judson J., speaking for a unanimous Supreme Court, wrote at page 1037 (C.T.C. 286, D.T.C. 5178):

Their [common shareholders] 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.

Thus control in Oakfield did not rest on the ownership of such number of shares as carried with it the right to a majority of the votes in the election of the board of directors but on the ownership of the common shares of Oakfield that were sufficient to authorize the surrender of the company’s charter. As in Oakfield, the corporate shareholder of Imperial General Properties Ltd. had a right to end the corporate existence of the appellant and therefore controlled the appellant.

Estey J. stated, at page 295 (C.T.C. 302, D.T.C. 5503) of Imperial General, that in determining control

the Court is not limited to a highly technical and narrow interpretation of the legal rights attached to the shares of a corporation. Neither is the Court constrained to examine those 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”. See Thurlow J. in Donald Applicators Ltd. et al. v. M.N.R., [1969] C.T.C. 98, 69 D.T.C. 5122, at page 51 (D.T.C. 5126), affirmed by this Court at [1971] S.C.R. v, [1971] C.T.C. 402, 71 D.T.C. 5202.

In Donald Applicators, Thurlow J. wrote at page 105 (D.T.C. 5126):

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 reverse decisions to his class of shareholders, dismiss directors from office and ultimately even secure the right to elect the 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 contemplated by section 39 of the Act.

Estey J. was of the view, at page 298 (C.T.C. 304, D.T.C. 5504) that:

[T]he 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.

Finally, he concluded at page 298 (C.T.C. 304, D.T.C. 5504):

We are here concerned only with the corporate structure of the respondent in the years in question.

In International Mercantile Factors Ltd. v. The Queen, [1990] 2 C.T.C. 137, 90 D.T.C. 6390, Teitelbaum J. examined whether the appellant taxpayer was a Canadian controlled private corporation ("CCPC") within the meaning of subsection 125(6) during its 1979 to 1982 taxation years. The shares of the taxpayer were held pursuant to the terms of a shareholders’ agreement between the shareholders; the taxpayer corporation was not party to the agreement. Under the terms of the shareholders’ agreement, two public corporations held 50 per cent of the voting shares and private corporation (not related to either of the public corporations) held the other 50 per cent of the voting shares. The shareholders’ agreement was to end upon the termination of a management agreement between the taxpayer and a second private corporation. The management agreement could be cancelled without notice by the taxpayer upon payment of a lump sum to the second private corporation. The shareholders’ agreement did not mention any election of directors of the appellant taxpayer. The bylaws of the appellant taxpayer stated that if a new board is not elected annually, and this can only be done by majority vote, then the existing board remains as the board of directors. The appellant would qualify as a CCPC if during the years in appeal it was not "controlled directly or indirectly in any manner whatsoever" by one or more of the public corporations. Neither the public corporations owning 50 per cent of the voting shares nor the private corporation owning 50 per cent of the voting shares had "control". Teitelbaum J. found that the deciding factor in finding control was that neither side could effectively change the composition of the taxpayer’s board of directors during the currency of the shareholders’ and management agreements. Throughout the taxation years in issue both agreements were in force and the taxpayer’s board comprised four nominees of the two public corporations, as opposed to one nominee of the private corporation. (A sixth director had resigned in 1978 and was never replaced.) A majority vote was required to change the board and therefore the two public corporations had legal and effective control of the taxpayer at all material times. The private corporation could do nothing to cause a change to the board.

Hutchinson J. of the Alberta Court of Queen’s Bench considered the Imperial General Properties case in Harvard International Resources Ltd. v. Provincial Treasurer (Alberta), [1993] 1 C.T.C. 329, 93 D.T.C. 5254.

He stated, at page 344 (D.T.C. 5265):

I believe that what Estey J. was seeking throughout his decision was to establish where de jure control of the respondent lay through the incorporating documents and bylaws of the respondent Imperial General Properties. He was not looking to any outside agreements entered into between shareholders to establish de facto control.

In Harvard International Resources, de jure control of the taxpayer rested with one shareholder’s ownership of 150 preferred shares. The respondent had argued that control was maintained through another shareholder’s unexercised right to force the owner of 150 preferred shares to cause its shares to be redeemed or repurchased by the particular corporation. Hutchinson J., held this to be an argument that de facto control existed, and not de jure control. He stated that the right was never exercised "presumably because [the corporation holding the rights] did not wish to exercise such rights in any event. It was a right that is not to be found within the confines of [the particular company’s] charter and bylaws where the real test of de jure control must be found".

My brother Judge Bell heard the appeal of Alteco Inc. v. The Queen, [1993] 2 C.T.C. 2087 (T.C.C.) under the informal procedure rules of the court and while I am not required to refer to Alteco, I may do so: Mourtzis v. The Queen, [1994] 1 C.T.C. 2801, 94 D.T.C. 1362 at page 2804 (D.T.C. 1364). The appellant owned 51 of the 100 issued shares of 581387 Saskatchewan Ltd. ("387") corporation and another corporation held 49 shares. The two shareholders entered into an agreement described as a "joint venture agreement" which provided for the incorporation of 387 and to cause 387 to execute a franchise agreement, a sublease, debenture and a registered user agreement in respect of a particular franchise. The shareholders agreed that funds of 387 would be deposited in an operating account at a specified branch of the Bank of Nova Scotia and all other funds and general operating accounts be maintained at another chartered bank. All these acts are normally performed by directors. Mutual buyout clauses were also included in the agreement. The agreement also provided for a five-person board of directors for 387, two directors being designated by the appellant and three by the other shareholder. The shareholders agreed there would be no change in the number of directors of 387 and a quorum for any meeting of directors would be a minimum of one director representing each shareholder. Any vacancy on the board would be replaced only by the unanimous resolution of the remaining directors. The shareholders agreed to irrevocably instruct their nominees or representatives on the board of directors always to vote and act in accordance with the terms of the agreement so as to give full force and effect thereto. 387 was not a party to the agreement. Bell J.T.C.C. found the agreement was a "unanimous shareholder agreement" within the meaning of the Business Corporations Act of Saskatchewan.

Bell J.T.C.C. held that notwithstanding the appellant held 51 per cent of the voting shares of 387, the appellant was not in a position to alter the board of directors, the composition of which had been agreed to by it. Accordingly the appellant did not control 387 and was not related to it. The appellant was successful and was permitted to deduct an allowable business investment loss.

Judge Bell was not persuaded by Alteco’s counsel "that a unanimous shareholder agreement is on par with the articles of association". Bell J.T.C.C. noted "that 387 is not a party to the agreement and therefore has no contractual obligation to comply with what the shareholders thereunder want to do". As a result, although Bell J.T.C.C. allowed the appeal, he did not do so on the basis of the Aaron's Ladies Apparel decision.

In Oakfield, Imperial General and International Mercantile Factors no shareholder or group of shareholders held more than 50 per cent of the voting shares of the corporation. The courts had to find control in a shareholder. In the first two cases, the courts looked beyond whether shareholders could elect the board of directors to whether any shareholder owned a class of shares that permitted the shareholders to wind up the company and to participate in any surplus to the exclusion of the other shareholders, thus retaining control of the company. The rights to wind up the company and participate in the company’s surplus on winding-up were found in the corporation’s charter and bylaws. In International Mercantile Factors, the company’s bylaws governed the continued presence of a majority of the directors elected by one group of shareholders and did not give either group of opposing shareholders control to effect a change of directors.

In the appeal at bar the Class "C" preferred shareholder owned more than 50 per cent of the shares and thus had

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. Buckerfield’s, supra.

The articles of amalgamation 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 bylaws 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: Consolidated Holding, supra, and Vineland Quarries, supra.

The directors of Duha #2 could not force a redemption of the Class C" preferred shares without the consent of Marr’s while Marr’s owned this class of shares. The holders of the Class "C" preferred shares could not sell their shares or use them as security for loans; this may affect the value of the shares but does not affect the right of the shareholder to vote the shares. The Duha family shareholders could not vote their shares to change the composition of the board of directors or to cause Duha #2 to be wound up: Oakfield, supra, and Imperial General, supra.

Counsel for the respondent encouraged me to look at documents other than the corporation’s constating documents, in particular, the shareholders’ agreement, to find who controlled Duha #2. Even if I do refer to the shareholders’ agreement, there is nothing in that agreement obliging Marr’s to vote in the manner it did, that is, to vote for a majority of the directors who are representatives of the Duha family. Unlike Alteco, Marr’s was in a position to alter the board of directors. There is no evidence that Quinton was a nominee of either Marr’s or the Duha family; the agreed statement of facts reveals that although Quinton was a director of Duha #1 for ten years, he was a "long time friend" of both Mr. Duha and Mr. Marr. Under the agreement Marr’s conceivably could vote for Marr, Quinton and either Mr. or Mrs. Duha in which case neither Marr’s nor the Duhas would have a majority on the board of directors. In Alteco, the majority shareholder could elect only two directors and the minority shareholder, three directors. Among the four potential directors of Duha #2, Marr’s could elect two persons who are not nominees of the Duhas. While Marr’s owned the Class "C" preferred shares it could have changed the composition of the board of directors of Duha #2. In the present appeal Marr’s, by virtue of its majority control, had the right to elect all the directors, although it was limited as to its choice of directors. The Duhas cannot be said to control the company if a majority of persons listed as possible directors cannot reasonably be said to be nominees of Emeric Duha and Gwendolyn Duha. Marr’s by virtue of its ownership of the 2,000 Class "C" shares controlled Duha #2 on February 8, 1984.

In her pleadings the respondent alleged the deductions claimed by the appellant would artificially reduce the appellant’s income and in the alternative, the chain of events leading to the appellant claiming the deduction had no valid business purpose and was a sham transaction.

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 2,000 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 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 $2,000. 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, 11 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.

However, the general anti-avoidance rule and related provisions set out in sections 245 and 246 of the Act do not apply with respect to transactions that took place before May 24, 1985. Subsection 245(1) of the Act as it applied before May 24, 1985, does not assist the respondent’s case since the losses claimed by Duha #3 (or any of its predecessors) are not a “disbursement or expense". Respondent’s counsel made no specific submissions in argument concerning the issues of business purpose and artificial transaction and I shall not pursue the matter any more than I have.

In respondent’s view the transactions described in the agreed statement of facts were shams and not within the "object and spirit" of the Act. Counsel distinguished the facts in the appeal at bar from those in Stubart Investments Ltd, v. The Queen, [1984] S.C.R. 536, [1984] C.T.C. 294, [1984] D.T.C. 6305. In Stubart, supra, the loss company, Grover Ltd., unlike Outdoor, carried on a business before the amalgamation and the amalgamated corporation continued to carry on that business. Respondent’s counsel noted the following facts clothed the transactions with sham: (a) the pool of people eligible to sit on the board of directors of Duha was restricted to four individuals three of whom were arguably Duha nominees;

(b) immediately following the year-end after the losses of Outdoor were utilized by Duha, Marr’s redeemed its majority interest; (c) the $2,000 paid by Marr’s to Duha for the "controlling" interest in Duha was far less than fair market value for these shares; and (d) the "unanimous shareholder agreement" was not filed in the public registry as is required by subsection 140(6) of the Manitoba Corporations Act. Therefore respondent declares one is entitled to infer that there was an attempt to camouflage the fact that Marr’s had not in fact gained control of Duha.

The respondent’s argument the appeals be dismissed on the basis that "the object and spirit" of paragraph 11 l(l)(c) and subsection 87(2.1) were defeated by the procedures blatantly adopted by the appellant and its predecessors to synthesize a tax saving device is an argument that the Duha family retained de facto control and not de jure control. These provisions are clear and unambiguous. One must bear in mind the purpose of paragraph 111 ( 1 )(a) in the context of the whole statute: to allow a corporation that suffered losses from a business to apply those losses against income earned in another year if the business that incurred the losses is carried on in the year or if the corporation is controlled by the same persons who controlled it when it incurred the losses. If the corporation amalgamates with one or more other corporations, the amalgamated corporation generally retains the right of its predecessor corporations that had incurred losses to deduct the losses. One must keep in sight that the courts have repeatedly adopted the rule that control means de jure control and not de facto control and that Parliament has not seen fit to legislate change. The legislation of foreign jurisdictions have defined their concepts of control in their taxing statutes. The Parliament at Westminster defined control for the purpose of the ’’close company" provisions of the Income and Corporation Taxes Act 1988 in subsection 416(2):

...a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company’s affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire:

(a) the greater part of the share capital or issued share capital of the company or of the voting power in the company; or

(b) such part of the issued share capital of the company as would, if the whole of the income of the company were in fact distributed among the participators (without regard to any rights which he or any other person has as a loan creditor), entitled him to receive the greater part of the amount so distributed; or

(c) such rights as would, in the event of the winding-up of the company or in any other circumstances, entitle him to receive the greater part of the assets of the company which would then be available for distribution among the participators.

For the purposes of subsection (2), subsection (3) provides that when two or more persons together satisfy any of these conditions they are taken to have control of the company, and subsection (4) states a person shall be treated as entitled to acquire anything which he is entitled to acquire at a future date, or will at a future date be entitled to acquire. [4] In the United States, the Internal Revenue Code defines ’’control” for purposes of acquisitions made to evade or avoid tax as follows in paragraph 269(a):

Control means the ownership of stock possessing at least 50 per cent of the total combined voting power of all classes of stock entitled to vote or at least 50 per cent of the total value of shares of all classes of stock of the corporation.

The setting in the Act of the deduction (paragraph 11 l(l)(a) and subsection 87(2.1)) clearly does not suggest a legislative intent to restrict such a benefit to a right accrued before the establishment of the arrangement adopted by the taxpayer purely for tax purposes: Stubart, page 580 (C.T.C. 317, D.T.C. 6324).

I am unable to find any sham in the appeal at bar. Estey J. discussed the meaning of the word "sham" at pages 545-46 (C.T.C. 298, D.T.C. 6308) of Stubart:

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.

The purported "unanimous shareholder agreement" is not an "unanimous shareholder agreement" within the meaning of the Corporations Act and therefore the agreement need not have been filed with the director appointed under section 252 of the Corporations Act. Indeed, even if the agreement is an "unanimous shareholder agreement", the lack of filing is not fatal. Sanctions may be taken against the directors or the corporation: see, for example, subsection 242(2) and section 243 of the Corporations Act and Alteco, supra.

There is no element of deceit involved in the transactions. There is no evidence another or "side" agreement existed between the shareholders of Duha #2. The transactions were aimed at one goal, to avoid the restrictions contained in paragraph 111(1)(a). The shareholders’ agreement was legally enforceable by all of the parties to it. The parties intended the relationships and obligations between them set out in the contracts and arrangements in the various transactions and the shareholders’ agreement. There was no intent to disguise some other legal relationship. The parties intended for Marr’s to control Duha #2. This was not a secret. This was the purpose of the transactions.

In these appeals, the appellant and its predecessors have done nothing to contrive the accumulated and recognized loss carryforward of Outdoor. There is no question Outdoor incurred the losses and had the right to apply them to future income. The various agreements, including the shareholders’ agreement, between the appellant’s predecessors and others were binding on all parties and were bona fide transactions and contracts. As Estey J. stated in Stubart, at page 581 (C.T.C. 317-18, D.T.C. 6324):

Neither the loss carryforward provisions, nor any other provision of the Act, have been shown to reveal a parliamentary intent to bar the appellant from entering into such a binding transaction and to make the payments here in question. Once the tax loss concept is included in the statute, the revenue collector is exposed to the chance, if not the inevitability, of the reduction of future tax collections to the extent that a credit is granted for past losses.

From February 8, 1984 to February 10, 1984, when Duha #2 and Outdoor were amalgamated to form Duha #3, Marr’s controlled Duha #2. Marr’s controlled Duha #3 throughout its fiscal period February 11, 1984 to January 2, 1985, the taxation year in appeal. We are only concerned with the corporate structure of the appellant in its 1985 fiscal period: Imperial General, supra, page 297 (C.T.C. 303, D.T.C. 5504).

The appeal is allowed with costs.

Appeal allowed.