Lusita Holdings Limited v. Her Majesty the Queen, [1982] CTC 351

Mahoney, J:—This action was tried on common evidence with an action by Ann-Gus Holdings Limited, Court no T-1114-80, and arises out of the determination by the Minister that the companies were associated with each other under paragraphs 251 (5)(b) and 256(1 )(d) of the Income Tax Act. The issues are whether a person who had a right to control voting rights of shares in a corporation under an indenture of settlement is a person within the contemplation of paragraph 251 (5)(b) and, if so, whether Gustav Schick- edanz had that right under certain trust deeds in respect of shares of the plaintiff.

The first issue may conveniently be dealt with before I set out the lengthy agreed statement of facts pertinent to the second. Paragraph 256(1 )(d) is in play only if Gustav Schickedanz is a person within the contemplation of paragraph 251 (5)(b), which provides:

251 (5) For the purposes of subsection (2) and section 256,

(b) a person who had a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to, or to acquire, shares in a corporation, or to control the voting rights of shares in a corporation shall, except where the contract provided that the right is not exercisable until the death of an individual designated therein, be deemed to have had the same position in relation to the control of the corporation as if he owned the shares; and

The indentures of trust here are clearly not contracts. It is trite law that a trust is not a contract. It is unnecessary to go beyond the textbooks, which enumerate the multitude of distinctions, for authority for that proposition.* [1]

The essential verbiage of paragraph 251 (5)(b) has been emphasized. Assuming that Gustav Schickedanz had a right to control the voting rights of shares in the plaintiff, he had that right under the indentures of settlement, not under a contract. Does paragraph 251 (5)(b) require that the right arise under a contract? What function is served by the phrase “in equity or otherwise”? Does it relate to the word “contract”, which it follows immediately, or does it relate back to “right”? In my view, on a fair reading of the entire paragraph, it relates back to “right” and the paragraph is to be interpreted as extending to a person who had a right under a contract, a person who had a right in equity or a person who had a right arising otherwise than under a contract or in equity to control the voting rights. In the first place, had Parliament intended that it be restricted to a person who had a right under a contract, the phrase “in equity or otherwise” is superfluous. In the second place, even if that phrase can somehow be meaningfully related to “contract”, the following phrases “either immediately or in the future” and “either absolutely or contingently” cannot. They make sense only if they modify the “right” and not if they modify the “contract”.

If, in fact, Gustav Schickedanz had a right under the trust indentures to control the voting rights of shares in the plaintiff, he was a person within the contemplation of paragraph 251 (5)(b).

I was advised by counsel, before the trial began, that this precise point was subject of a revised judgment by another judge of this court. I indicated then that I felt, however the issue was determined here, the right of appeal of the unsuccessful party should be preserved until the time for appeal from the reserved judgment has expired. I assume counsel will arrange to be apprised promptly of the other judgment.

The full text of the agreed statement of factst [2] follows:

1 At all material times during the 1975, 1976 and 1977 taxation years, there were twelve issued and outstanding shares of Lusita Holdings Limited which were held as follows:

Edward Smith in trust for The Susie Schickedanz Trust, The Lisa Schickedanz Trust, The Tina Schickedanz Trust and The Heidi

Schickedanz Trust	4
Edward Smith in trust for The Susie Schickedanz Trust	2
Bruno Schickedanz in trust for The Lisa Schickedanz Trust	2
Rex Knight in trust for The Tina Schickedanz Trust	2
Arnold Brenner in trust for The Heidi Schickedanz Trust	2

2 At all material times during its 1975, 1976 and 1977 taxation years the shareholders of Ann-Gus Holdings Limited were:

Gustav Schickedanz	33.3%
Ann Schickedanz (Spouse of Gustav)	33.3%
Lusita Holdings Limited	33.3%
‘Underhill’s Law relating to Trusts and Trustees, 13th Ed, (1979) p 4.
Law of Trusts in Canada, D W M Waters, (1974) p 46.

3 The Susie Schickedanz Trust was created by Indenture of Settlement dated April 14, 1969 naming Gustav Schickedanz and Edward Smith as trustees.

4 The Lisa Schickedanz Trust was created by Indenture of Settlement dated the 14th day of April, 1969, naming Gustav Schickedanz and Bruno Schickedanz as trustees.

5 The Tina Schickedanz Trust was created by Indenture of Settlement dated the 14th day of April, 1969, naming Gustav Schickedanz and Rex Knight as trustees.

6 The Heidi Schickedanz Trust was created by Indenture of Settlement dated the 14th day of April, 1969, naming Gustav Schickedanz and Arnold Brenner as trustees.

7 At all relevant times the Trustees of each of the trusts referred to in paragraphs 3, 4, 5 and 6 were the trustees originally named and the trustee other than Gustav Schickedanz in each case was an individual who was not related to Gustav Schnickendanz under the rules of subsections 2 and 6 of section 251 of the Income Tax Act.

8 Article VIII of the Indenture of Settlement referred to above in each case reads in part as follows:

(g) “In the event that GUSTAV SCHICKEDANZ presently residing at 37 Steele Valley Road, Thornhill, Ontario, deems it desirable that any of the Trustees be removed from the position of Trustee, the said GUSTAV SCHICKEDANZ may at any time request the Trustee or Trustees by written notice to resign his or their positions as Trustee or Trustees and upon receipt of such notice they shall forthwith resign. In the event that any one or more of the Trustees shall die before the Trust Estate has been fully distributed, or shall refuse or be unable to act or to continue to act as Trustee or shall have been given notice to resign as aforementioned, the said GUSTAV SCHICKEDANZ shall forthwith by Deed, Will, or Notice in Writing, appoint a successor Trustee to fill any such vacancy in the office of Trustee hereof which may occur by reason of such death, refusal, inability or written notice as aforesaid. PROVIDED THAT in the event that the said GUSTAV SCHICKEDANZ shall fail or neglect to appoint a Trustee to fill any such vacancy which may occur as aforesaid within thirty (30) days from the date of occurrence of such vacancy, then the remaining Trustee shall by Deed or Notice in writing appoint anyone other than himself to fill any such vacancy, it being the intention of the Settlor that there shall be, whenever possible, two (2) Trustees at all times to administer THE [NAME] SCHICKEDANZ TRUST PROVIDED THAT the said GUSTAV SCHICKEDANZ shall have the power by Deed, Will or Notice in Writing to appoint any person, or any succession of persons, to exercise the powers of removal, appointment or reappointment of Trustees hereinbefore conferred upon the said GUSTAV SCHICKEDANZ by this Paragraph (g) ARTICLE VIII.

PROVIDED FURTHER that in the event that the said GUSTAV SCHICKEDANZ shall die (or become incapacitated) without having made such appointment, then the following persons in the order named shall have the powers of removal and appointment of the Trustee hereinbefore conferred upon the said GUSTAV SCHICKEDANZ.

(a) ANN SCHICKEDANZ, wife of the said GUSTAV SCHICKEDANZ,

(b) GERHART SCHICKEDANZ, brother of the said GUSTAV SCHICKEDANZ,

(c) KURT SCHICKEDANZ, brother of the said GUSTAV SCHICKEDANZ,

and

(d) DANIEL SCHICKEDANZ, cousin of the said GUSTAV SCHICKEDANZ.

(k) The approval of both Trustees shall be required for any decision relating to THE [NAME] SCHICKEDANZ TRUST PROVIDED THAT in the event that the Trustees shall be unable to agree upon any question relating to the disposition of all or any portion of the Trust Estate, then such question shall be referred to arbitration pursuant to the provisions of the Arbitration Act of the Province of Ontario.”

9 The only relevant assumption of the Minister in assessing the two companies, Ann-Gus Holdings Limited and Lusita Holdings Limited was that as a result of Article Vlll(g) and (k) of the Trust Indentures, Gustav Schickedanz had a right under a contract to control the voting rights of the shares of Lusita and therefore as a result of section 251 (5)(b) is either deemed to control Lusita or is deemed to be the owner of the shares of Lusita.

The plaintiff did not, and in my view rightly, rely on the fact that the shares in the plaintiff were, in all cases, registered in the name of the co-trustee, not Gustav Schickedanz.

Among the powers of the trustees under the trust indentures, Article VI, paragraph (h), is the power “to vote in person or by proxy upon the securities held by them”. The decision as to how to vote on the securities, including the shares in the plaintiff is a decision requiring the approval of both Gustav Schickedanz and the other trustee, as provided by Article VIII, paragraph (k). Failing agreement by the two, that provision of the trust indenture then envisages a determination by arbitration. Up to this point, Gustav Schickedanz has neither de facto nor de jure control of the voting rights. However, under Article VIII, paragraph (g), he does have the power to require his co-trustee to resign and to replace him. I have no doubt that Gustav Schickedanz has de facto control of the voting rights of the trusts’ shares in theplaintiff.

The Trustee Act of Ontario RSO 1980, c 512, provides:

3 (1) Where a trustee . . . desires to be discharged from all or any of the trusts or powers reposed in or conferred on him, . . . the person nominated for the purpose of appointing new trustees by the instrument, if any, creating the trust may by writing appoint another person . . . to be a trustee in the place of the trustee . . . desiring to be discharged .. .

6 On the appointment of a new trustee for the whole or any part of trust property,

(c) it is not obligatory to appoint more than one new trustee where only one trustee was originally appointed or to fill up the original number of trustees where more than two trustees were originally appointed; but, except where only one trustee was originally appointed, a trustee shall not be discharged under section 3 from his trust unless there will be a trust company or at least two individuals as trustees to perform the trust.

I take the effect of paragraph 6(c) to be that, with respect to the trusts in issue, the resignation of a co-trustee demanded by Gustav Schickedanz could not, in law, become effective until his replacement was appointed. Thus, there must always be two trustees of each trust who must agree on how to vote the shares, all as provided by Article VIII, paragraph (k). De jure, Gustav Schickedanz has not, by reason of his power to require the resignation of his co-trustee in each trust, the right to control the voting rights of the trusts’ shares in the plaintiff.

The authoritative interpretation of the word “control”, as used in this context in the Income Tax Act, is that of Jackett, P, in Buckerfield’s Ltd v MNR, [1965] Ex CR 299; [1964] CTC 504; 64 DTC 501.

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 IRC, [1943] 1 AER 13, where Viscount Simon LC, 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.

That decision, that “control” means de jure control and not de facto control, has been expressly approved by the Supreme Court of Canada.* [3]

The plaintiff succeeds. The assessment in issue will be vacated and the plaintiff’s 1975, 1976 and 1977 income tax returns referred back to the Minister for reassessment on the basis that the plaintiff and Ann-Gus Holdings Limited were not associated corporations within the meaning of paragraph 256(1 )(d) of the Income Tax Act. The plaintiff is entitled to costs. The time for appeal is extended to expire with expiration of the time for appeal from the judgment to be rendered in Postal Sales Agency Ltd v Her Majesty the Queen, Court No T-2848-81. A copy of these reasons for judgment shall be filed in and form part of the record in Ann-Gus Holdings Limited v Her Majesty the Queen, Court no T-1114-80.

Appeal allowed.