Re Galt Estate, [1955] CTC 222, 55 DTC 1163

Williams, C.J.Q.B.:—By ten separate originating notices of motion Montreal Trust Company, successor to The Northern Trusts Company, applies as trustee under The Trustee Act for the opinion and advice of the Court and for the determination of certain questions arising in the administration of ten separate trusts. The same questions arise in each case and the motions were heard together.

Several questions have been propounded but the primary question to be decided is : Did moneys coming into the hands of the trustee representing the proceeds of the redemption of redeemable preferred shares of stock of G. F. & J. Galt Ltd., a Manitoba corporation, constitute capital or income in the hands of the trustee for the purpose of administering the trusts involved ?

The state of the authorities, the differences in the procedure followed in the various cases to be considered, and the arguments presented by counsel in the cases before me raise points of considerable difficulty which have given me some concern.

What was done in the cases I have to consider was inspired by the decision of the Ontario Court of Appeal in Re Fleck, [1952] O.W.N. 260; [1952] 2 D.L.R. 657; [1952] C.T.C. 205, affirming the decision of Hogg, J.A., [1952] O.R. 113; [1952] D.L.R. 657; [1952] C.T.C. 196.

The headnote in D.L.R. reads:

“The trustees under a will held the trust property, including shares in a limited company, on trust for certain life interests, upon the termination of which the corpus was to be divided among the ultimate beneficiaries. The company, pursuant to an election under s. 95A(1) (enacted 1950, ce. 40, s. 32) of the Income Tax Act, 1948 (Can.), ce. 52, issued redeemable preferred shares as a means of dealing with its undistributed income, and at once redeemed the same. The trustees received from the company a sum of money representing the proceeds of such redemption and sought the advice and direction of the Court whether such money constituted capital or income in their hands.

Held, looking at all the circumstances, including the substance and nature of the transaction, and applying the conclusive test whether or not the company had increased its capital, it was obviously contemplated and was certain that none of the money would remain in the hands of the company as paid-up capital. The real substance of the arrangement was to distribute the surplus profits of the company in the form of money and the issue of redeemable shares was a means to convey the surplus profits accumulated by the company to the shareholders as cash. Such money is income in the hands of the trustees for the benefit of those entitled to income under the will.’’

In Re Mills, [1953] 2 D.L.R. 80; [1958] O.R. 197; [1953] C.T.C. 115, Gale, J., followed Re Fleck, as he interpreted it.

Then the case of Re McIntyre, [1953] O.R. 910; [1954] 1 D.L.R. 192; [1953] C.T.C. 372, in which a similar question arose, but in which the circumstances and procedure were somewhat different, came on before McRuer, C.J.H.C. He held that Re Fleck and Re Mills were not binding on him and after an exhaustive review of the authorities held that the sums received by the trustees from the redemption of the redeemable preferred shares were received by them as capital and not as income.

The next Ontario decision was Re Waters, [1954] 4 D.L.R. 852; [1954] O.W.N. 649; [1955] C.T.C. 126, where McLennan, J., followed Re McIntyre and distinguished Re Fleck. On appeal from McLennan, J., the Court of Appeal affirmed his decision, [1955] O.R. 268; [1955] O.W.N. 233 ; [1955] C.T.C. 130. If I may respectfully say so the judgment of Pickup, C.J.O., speaking for the Court, clarifies the Ontario jurisprudence in a succinct and most helpful way.

The headnote reads (O.R.) :

“A company having surplus income on hand may withhold it from distribution and use it for capital purposes without taking it into its capital structure, or it may withhold it from its shareholders and take it into its capital structure by issuing paid-up stock in lieu of a cash dividend, or it may distribute it in the form of a stock dividend without in fact increasing its capital. The result of the cases (which are fully reviewed in Re McIntyre, [1953] O.R. 910) is that where a company, availing itself of the provisions of s. 95A of The Income Taz Act, distributes its accumulated surplus (after paying tax on it under that section) in the form of a stock dividend, the question whether the shares so issued, and the proceeds of their redemption, are capital or income in the hands of a shareholder-trustee must be answered in each case by deciding whether the company, by its corporate acts, has so dealt with its accumulated surplus income as to appropriate it irrevoc- ably to capital purposes of the company. ‘The conclusive test is whether or not the company has increased its capital in the distribution of the surplus profits.’ (Per Hogg, J.A., in Re Fleck, [1952] O.R. 113 at 118, affirmed [1952] O.W.N. 260.)

All that Re Fleck, supra, decides is that, in the circumstances of that case, the moneys received by the shareholders in redemption of shares issued as a stock dividend were income and not capital. It does not hold that in a case where the company in issuing shares as a stock dividend does not at the same time commit itself to immediate redemption its acts can be considered as anything else than capitalization of income.

Re Fleck cannot be soundly distinguished on the ground that it was concerned with a Dominion company rather than an Ontario company. The same corporate acts should mean the same thing in either company, except to the extent that if the interpretation of the corporate acts is doubful the Court should adopt an interpretation consistent with legality of action rather than one consistent with illegality.”

I refer to the Ontario jurisprudence because Coady, J., in Toronto General Trusts v. Bartram (1954), 11 W.W.R. (N.S.) 409; [1954] 2 D.L.R. 309 (sub nom. Re Bartram) preferred the reasoning of the English cases to which he referred and which had been discussed and applied by McRuer, C.J.H.C., in Re McIntyre to that of Re Fleck and Re Mills. He held that the money received by the trustees on the redemption of preferred shares was received as capital and not as income. The method adopted in Bartram’s case was different from and more complicated than the method used in Re Fleck and Re Mills and even in the other Ontario cases.

Re McAvity Trusts (1954), 34 M.P.R. 323 (N.B.), distinguished Re Fleck and Re Mills and applied Re McIntyre, Toronto General Trusts Corpn. v. Bartram and the English decisions.

When Bartram’s and McAvity’s cases were decided, Re Waters had not been decided by the Ontario Court of Appeal.

In Re Hardy’s Trusts, [1955] O.W.N. 273; [1955] C.T.C. 138, Ferguson, J., followed Re Fleck and in his reasons for judgment he referred to an unreported judgment of Schroeder, J., in which that learned judge also followed Re Fleck.

Reference should also be made to the decision of Stewart, J., in Re Yates, [1955] O.W.N. 481. In that case a family settlement had been made by which, as a compromise and to avoid litigation, it was agreed that 65 per cent of the shares should be regarded as being capital and 35 per cent as being income. The Official Guardian expressed his approval of such a division before application was made to the Court to approve the settlement. Before that approval was asked for Re Waters was decided and the Official Guardian refused to approve the settlement when it was brought before the Court. It was held that he had the right to refuse and that as the circumstances of the two cases were almost identical Re Waters governed.

With respect for the contrary views expressed in some of the decisions just mentioned and in the earlier decisions therein referred to, I prefer the reasoning of the Ontario Court of Appeal as set out in Re Waters. The procedure followed in Re Fleck was there explained and approved. The procedure followed in Re Waters, which differed from that in Re Fleck, compelled the Court to a contrary conclusion on the facts of that case.

For that reason and because of some of the arguments addressed to me it is necessary to set out the somewhat peculiar circumstances of the instant case and to consider the effect of the procedure followed.

C. F. & J. Galt Ltd., was incorporated on January 31, 1919, by letters patent under the then Manitoba Companies Act, with a capital stock of $2,000,000 divided into 20,000 shares of $100 each, all of which were issued. This capital structure remained unchanged until June 22, 1953. The stock was owned in its entirety, or practically so, by the late George F. Galt and his cousin the late John Galt. While these two persons were alive the physical assets of the company were sold to another company and G. I’. and J. Galt from then on operated as a holding company with very large assets.

Beginning in 1919, G. F. Galt and John Galt created a number of trusts which for convenience I shall designate by letters. The Northern Trusts Company was named as trustee in each trust, and has been succeeded by Montreal Trust Company.

TRUST A

Settlor, G. F. Galt: date, February 5, 1919 : subject matter, 2,000 shares of of G. F. & J. Galt Ltd.: income payable to Muriel Galt (wife) for life: corpus subject to disposition by her will.

TRUST B

Settlor, G. F. Galt: date, February 5, 1919: subject matter, 200 shares of G. F. & J. Galt Ltd.: income payable to Edythe

F. de Sieyes (daughter) for life: corpus subject to disposition by her will, and in default of such disposition to the persons entitled to share in her estate on an intestacy.

TRUST C

Settlor, G. F. Galt: date, February 5, 1919: subject matter, 500 shares of G. F. & J. Galt Ltd.: income payable to Marjorie Aldous (daughter) for life: corpus subject to disposition by her will, and in default of such disposition to the persons entitled to share in her estate on an intestacy.

TRUST D

Settlor, G. F. Galt: date, February 5, 1919 : subject matter, 500 shares of G. F. & J. Galt Ltd.: income payable to Alice M. Weiss (daughter) for life: corpus subject to disposition by her will, and in default of such disposition to the persons entitled to share in her estate on an intestacy.

TRUST E

Settlor, G. F. Galt: date, February 5, 1919 : subject matter, 500 shares of G. F. & J. Galt Ltd.: income payable to Louise E. Grant (daughter) for life: corpus subject to disposition by her will, and in default of such disposition to the persons entitled to share in her estate on an intestacy.

TRUST F

Settlor, John Galt: date, February 5, 1919: subject matter, 1,000 shares of G. F. & J. Galt Ltd.: income payable to Isabella

G. Piper (daughter) for life: corpus to her children in equal shares.

TRUST G

Settlor, George F. Galt : date, May 15, 1927 : subject matter, 250 shares of G. F. & J. Galt Ltd.: income payable to Thomas M. Galt (son) for life, corpus to his children.

TRUST H

Settlor, George F. Galt : date, May 15, 1927 : subject matter, 250 shares of G. F. & J. Galt Ltd.: income payable to Patricia

M. Galt, now Kortright (daughter) for life; corpus to her children.

TRUST I

Testator, G. F. Galt. Will dated April 15, 1928 : testator died April 15, 1928. At the time of his death the testator owned 9,000 shares of the stock of G. F. & J. Galt Ltd. and other assets. He had already settled 4,500 shares by Trusts A to E, G and H. The will directs the trustees to hold /3 of the entire capital of his estate and to pay to his wife Muriel the net income during her life time. He gave her a power of appointment and in default of appointment the capital is to go to their two children, Thomas

and Patricia as in the will provided. The trustee is to hold the other /3 of the capital and to pay the net income to his 6 children in equal shares during the lifetime of each. The capital goes to the various grandchildren on the death of the various life tenants. Paragraphs 8 and 9 of the will read:

‘8. I Direct my Trustees to pay income to the respective beneficiaries half-yearly or more frequently as my Trustees may from time to time decide the first payment to be made within six months of my death. Throughout this Will the term ‘net income’ shall mean the sum which in the absolute discretion of my Trustees from time to time is available from interest, rents, revenues, earnings and profits for distribution without impairment of capital after providing for all taxes and expenses and other outgoings which in the opinion of my Trustees should be chargeable against income, but probate expense and succession duties shall be chargeable against capital.

9. I Direct that my Trustees shall invest and keep invested all moneys belonging to my estate in such investments only as are allowed to trustees by statutes of the Province of Manitoba or Ontario and shall have power from time to time at discretion to vary such investments but being limited (save as to existing investments retained under the power of postponement hereinbefore given) to investments authorized by statute as aforesaid Provided (1) that my Trustees are expressly authorized to invest in shares of G. F. & J. Galt Limited at whatever price they may be able to acquire such shares, and

(2) that my Trustees may take up at their discretion the proportionate part of any new issue or substitution of shares that may be offered to existing shareholders by any Company in which my Trustees may hold stock.’’

TRUST J

Testator, John Galt: Will dated October 15, 1931: testator died April 9, 1933: at the time of his death the testator owned 5,400 shares of G. F. & J. Galt Ltd., and other assets. He had already settled 1,000 shares by Trust F. By his will his wife was to receive the income of his estate for life. On her death (which occurred March 3, 1944) the capital was to be divided into 3 equal shares: the income from 2 of the shares was to be paid to each of his 2 surviving daughters for life with gifts over to their children respectively. The income from the third share was to be paid to the children of a deceased daughter until the youngest attained 21, when the capital of the share was to be paid to them in equal shares.

The will contained, inter alia, the following clauses :

“I Devise and BEQUEATH all the residue of my real and personal estate unto my Trustees and their Successors Upon Trust to sell the said real estate and to call in, sell and convert into money the said personal estate; PROVIDED ALWAYS and I declare Firstly that my Trustees may postpone the sale, calling in and conversion of my said real and personal estate or any part or parts thereof for any period which my Trustees in their uncontrolled discretion may think proper and in particular may retain my stock in G. F. & J. Galt, Limited, until the liquidation of that Company has been completed without becoming liable for any loss thereby occasioned and SECONDLY that the net rents, profits and other income of my said real and personal estate shall from my death be treated and applied as income of my residuary estate. In addition to all powers invested in my Trustees by law I give my Trustees power to decide for the purposes of this Will and any codicils hereto what is income and what is capital and what charges and expenses are or shall be deductible from income before distribution. ’ ’

The trustee, on the death of G. F. Galt, became the holder of the 5,000 shares of the company which were part of his estate. On the death of John Galt it became the holder of 1,800 shares of the company which were part of his estate. It also held under Trusts A to H 5,500 shares, making in all 12,300 shares held under the various trusts. The trustee also held 938 shares as agent for Elizabeth EK. Barclay. The remainder of the 20,000 common shares were all held by members of one or other of the families, their trustees, agents, or nominees. The trustees, therefore, had control of the company and this was evidently the intention of the Messrs. Galt as shown by the procedure they followed in appointing the same trustee as trustee under the various trusts and under their respective wills.

If it had not been for the incidence of Income Tax the company would undoubtedly have declared dividends on its shares which would have resulted in the life tenants receiving the full income on the shares held in trust for them. But if the company had, prior to 1950, done so the life tenants would have had to pay tax on the dividends so received and in effect would be paying double taxation.

Therefore instead of declaring dividends commensurate with the profits the company retained some part of its income in each year and carried the amounts on its books as undistributed income. These amounts were not capitalized.

The result was that as of December 31, 1949, the company. according to its records, had on hand $311,752.90 of undistributed income.

Then, in 1950, Parliament decided to give some relief in such cases and enacted Section 95A of the Income Tax Act: see 14 Geo. VI (1950), c. 40, s. 32. G. F. & J. Galt Ltd. is a private company as defined in that section.

In Gilmour’s Income Tax Handbook (1951-52), the author, after pointing out that ‘‘one of the outstanding features of the Canadian income tax system is the fact that earnings of limited companies are subject to double taxation’’ discusses the problem so created and the various attempts to solve it (pp. 385-6). He then says:

“The third and most recent attempt was the introduction in 1950 of Section 95A of the Income Tax Act in which an attempt was made to provide for undistributed income accumulated up to the end of 1949, and at the same time to provide for earnings of 1950 and subsequent years. In brief, the present system provides that

(1) a company may pay a tax of 15% of undistributed income accumulated up to the end of the 1949 fiscal year, and thereafter

(2) in 1951 or a subsequent year may pay a 15% tax upon an amount equivalent to dividends declared and paid in 1950 and subsequent fiscal years which have been completed before the year of election.

Accordingly, to obtain full benefit of the provisions of the section, a corporation must first disburse 50% of its net earnings for 1950 and subsequent years as a taxable dividend, so that it may be enabled to pay 15% tax upon the remainder of the earnings. Only the passage of time will disclose whether corporations generally will find it possible or desirable to distribute 50% of their post-1949 earnings in the form of dividends.

The action of paying the 15% tax merely converts the remaining 85% of the pre-1950 earnings and the remaining portion of the post-1949 earnings into what is termed ‘tax-paid undistributed income’ which can be made available to shareholders in only a few ways, most of which are costly. Specifically this tax-paid undistributed income cannot be distributed in the form of a tax-free cash dividend to shareholders.” Then at p. 396 he says:

‘Where a company has elected to pay a 15% tax and has thereby created tax-paid undistributed income which it desires to make available to its shareholders without waiting until the liquidation of the company, the most simple method is to declare and pay a stock dividend in shares of redeemable preference stock, and then redeem these shares.

The procedure is as follows :

(1) Elect to pay 15% tax on the undistributed income on hand at the end of the 1949 fiscal year, and on such portion of subsequent earnings as desired.

(2) Obtain supplementary letters patent authorizing the issue of shares of redeemable preference stock of an amount at least equal to the tax-paid undistributed income created above, plus any extra amount desired to provide for future capitalizations.

(3) Declare a stock dividend of an amount not exceeding the tax-paid undistributed income, payable in shares of the redeemable preference stock.

(4) When funds are available, the shares of redeemable preference stock may be called for redemption. In this connection care should be taken to see that the redemption is made in strict accordance with the requirements of the Companies Act under which the company is incorporated.

By following the above procedure, the tax-paid undistributed income may be made available to the shareholders in a form which does not attract taxation in their hands, although the procedure is somewhat involved and rather expensive in fees and costs.”

In order to take advantage of the relief afforded by Section 95A, the procedure outlined in Gilmour was adopted in a number of instances with variations in some cases necessitated by the facts and the law applicable. I think it is a matter of much significance that counsel advising companies and shareholders desirous of taking advantage of a relief given for the first time were confronted with an entirely new problem and one involving questions of considerable difficulty.

The first of such cases to come before the Court was Re Fleck, supra. There the company was a private Dominion company. Its authorized capital was 30,000 common shares without par value and 15,000 redeemable preference shares of the value of $100 each. All the common shares were issued as fully paid up. The company, after paying the tax under Section 95A, issued 1,000 redeemable preference shares as a stock dividend and bound itself to redeem them, which it at once did. Hogg, J.A., pointed out that when redeemable preferred shares were issued pursuant to Section 59 of the Compames Act, 1934 (Can.), e. 33, Section 61 provided that the redemption of such shares was not to be deemed a reduction of the paid-up capital stock of the company if such redemption was made according to the conditions stipulated ([1952] 2 D.L.R., p. 663).

In Re McIntyre, supra, the case of an Ontario company, McRuer, C.J.H.C., referred to this point, to the provisions of the Ontario Companies Act, and to the fact that that Act did not contain a provision similar to Section 61 of the Dominion Act.

But Pickup, C.J.O., in Re Waters, supra, said that the Fleck case could not be distinguished on the ground that the company concerned was a Dominion company and not an Ontario company (see [1955] O.R. at p. 280).

When the decision in Re Fleck came to the attention of the officers of G. F. & J. Galt Ltd., the secretary of the company, who was also Treasurer of the trustee, prepared a very full and detailed memorandum discussing the advisability of electing under Section 95A and then issuing redeemable preferred shares and redeeming them as was done in Re Fleck.

This memorandum was placed before the directors of the company at a meeting of the Board held on June 2, 1952, and action was deferred to the meeting of the directors to be held on October 6, 1952. The secretary was directed to attempt to learn the effect of such a distribution on non-resident shareholders.

Some of the shareholders were resident in the United States. The opinion of counsel in New York was taken. It is dated August 22, 1952, and reads:

John G. Piper, Esq.,

40 Worth Street,

New York, New York.

Dear Mr. Piper:

Following our conference on August 12, we studied the file which you left with us and prepared a memorandum for our Washington office. In the memorandum we summarized the facts relating to the proposed payment by the company of the 15% Canadian Tax of $46,762.93 on the undistributed income of $311,752.90 on hand December 31, 1949, the capitalization of the balance of $264,989.97 by the issuance of redeemable preferred stock which would then be distributed pro rata to the shareholders as a stock dividend on the now outstanding common stock, the pertinent provisions of the Canadian Income Tax Act and the questions to be submitted to the Bureau of Internal Revenue for an informal expression of opinion.

I have recently received a letter from Mr. Dawson of our Washington office advising that he had discussed the matter with a representative of the Securities Section of the Bureau in Washington. Mr. Dawson reports that the Bureau has been issuing private rulings to the effect that the receipt by American shareholders of a preferred stock dividend in a Canadian corporation, which has elected to pay the 15% tax on undistributed income pursuant to Section 95A of the Canadian Income Tax Act, does not give rise to the receipt of a taxable dividend by the American shareholders notwithstanding the fact that the corporation redeems the dividend stock distributed to the Canadian shareholders. However, if the dividend stock so received by the American shareholders is redeemed within a period of two years after it is distributed to the shareholders, the Bureau takes the position that the distribution in redemption is essentially equivalent to the distribution of a taxable dividend within the purview of Section 115(g)(1) of the Internal Revenue Code in which case the proceeds of redemption will be subjected to Federal income tax at the regular normal and surtax rates.

Accordingly, if as a matter of Canadian corporation law it can be arranged to redeem the dividend stock distributed to the Company’s Canadian shareholders without redeeming the stock of the American shareholders, it would seem to us that the American shareholders will not be charged with the receipt of taxable income at the time the dividend stock is received so long as such stock is not redeemed within a period of at least two years following its receipt by the American shareholders.

I am returning herewith your file in this matter consisting of certain correspondence and a memorandum relating to Section 95A of the Canadian Income Tax Act.

If you have any questions with respect to this matter or if there is anything further that you would like us to do I shall be glad to hear from you.

Yours very truly,

(sgd) Howard O. Colgan, Jr. ”

Mr. Piper, to whom it was addressed, was one of the nonresident shareholders, is a son of Isabella Piper and grandson of John Galt and a director of G. F. & J. Galt Ltd. This opinion was communicated to the company.

The company was not at that time entitled to issue preferred stock. Furthermore the Manitoba Companies Act did not, and does not, permit or authorize a stock dividend unless such a right is given by letters patent or by supplementary letters patent.

At a directors’ meeting held on October 6, 1952, the following minute was made:

‘‘ After due consideration it was decided by the Board that it would be to the advantage of the Company and its shareholders to elect under Section 95A of the Income Tax Act to pay a 15% tax on the undistributed income as at December 31st, 1949, and to distribute the tax-free surplus so created to the shareholders, pro rata, in the form of redeemable preferred stock. The Secretary was directed to prepare a resolution to be circulated among the Directors and if approved, to be formally passed at a Meeting of the Board as soon as possible.”

At a directors’ meeting held January 23, 1953, a resolution and two by-laws (Nos. 46 and 47) were passed. They read:

“By-Law No. 46:

On the motion it was resolved :

That C. F. & J. Galt Limited hereby elects under subsection (1) of Section 95A of the Income Tax Act to be assessed and pay a tax on $311,483.73, being an amount equal to its undistributed income on hand at the end of the 1949 taxation year, minus its tax-paid undistributed income as of that time, and that the Secretary be and he is hereby authorized to execute the appropriate income tax form or forms for that purpose and to file the same and other documents and information required under the Income Tax Act with the Minister.

WHEREAS the capital of G. F. & J. Galt Limited consists of 20,000 shares of a par value of $100.00 each of which 20,000 shares are issued and are outstanding and are fully paid ; and

WHEREAS it is deemed necessary and expedient in the interest of the Company that Supplementary Letters Patent be issued confirming this by-law increasing the capital of the Company as herein provided :

Now, THEREFORE, BE It ENACTED AND It Is Heres Enacted as By-law No. 46 of G. F. & J. Galt Limited (herein called the ‘Company’) that:

1. Subject to confirmation by Supplementary Letters Patent the capital of the Company be increased by the creation of 300,000 preferred shares of the par value of $1.00 each and designating the existing shares of the capital of the Company as common shares.

2. The said preferred shares shall carry and be subject to the preferences, priorities, rights, privileges, limitations and conditions hereinafter set forth that is to say :

(1) The holders of the preferred shares shall in each year in the discretion of the directors, but always in preference and priority to any payment of dividends on the common shares for such year, be entitled out of any or all profits or surplus available for dividends to non- cumulative dividends, at the rate of four per cent (4%) per annum on the amount paid up on the preferred shares; if in any year, after providing for the full dividend on the preferred shares, there shall remain any profits or surplus available for dividends, such profits or surplus or any part thereof may, in the discretion of the directors, be applied on the common shares; the holders of the preferred shares shall not be entitled to any dividend other than or in excess of the non-cumulative dividends at the rate of four per cent (4%) per annum hereinbefore provided for, and if in any year the directors in their discretion shall not declare the said dividend or any part thereof on the preferred shares then the right of the preferred shareholders to such dividend or any greater dividend than the dividend actually declared for such year shall be forever extinguished.

(2) The preferred shares shall rank, both as regards dividends and return of capital, in priority to all other shares of the Company, but shall not confer any further right to participate in profits or assets.

(3) The Company may, upon giving notice as hereinafter provided, redeem the whole or any part of the preferred shares on payment for each share to be redeemed the amount paid up thereon, together with all dividends declared thereon and unpaid; in case a part only of the then outstanding preferred shares is at any time to be redeemed, the shares so to be redeemed shall be selected by lot in such manner as the directors in their discretion shall decide or, if the directors so determine, may be redeemed pro rata, disregarding fractions, or shall be selected in such manner as may be unanimously agreed to in writing by all the holders of the outstanding preferred shares; not less than ten (10) days’ notice in writing of such redemption shall be given by mailing such notice to the registered holders of the shares to be redeemed, specified the date and place of redemption; if notice of any such redemption be given by the Company in the manner aforesaid and an amount sufficient to redeem the shares be deposited with any trust company or chartered bank, as specified in the notice, on or before the date fixed for redemption, dividends on the preferred shares to be redeemed shall cease after the date so fixed for redemption, and the holders thereof shall thereafter have no rights against the Company in respect thereof except, upon the surrender of certificates for such shares, to receive payment therefor out of the moneys so deposited.

(4) The Company may at any time or times purchase for cancellation the whole or any part of the preferred shares outstanding from time to time at a price not to exceed the par value thereof, together with all dividends declared thereon and unpaid ; provided that before purchasing any preferred shares the Company shall mail to each person who at the date of mailing is a registered holder of such shares, notice of the amount available for such purchase of preferred shares and inviting such holder or holders to notify the Company how many preferred shares such holder or holders are prepared to sell to the Company at the price stated in said notice; such notice shall be mailed by ordinary prepaid post addressed to the last address of such holder or holders as it appears on the books of the Company at least fifteen (15) days before the date specified for such purchase. Such notice shall set out the proposed purchase price and the date on which the purchase is to take place. If in response to such notice, preferred shares are offered by the holder or holders thereof for purchase by the Company in excess of the number of preferred shares which the Company is prepared to purchase, then the preferred shares to be purchased by the Company shall be purchased as nearly as may be pro rata to the number of preferred shares offered by each shareholder who submits to the Company his acceptance of the offer. On and after the date so specified for purchase by the Company, the Company shall pay or cause to be paid the purchase price to the registered holders of the shares to be purchased on presentation or surrender of the certificates for the preferred shares so offered by the holder or holders for purchase by the Company and the certificates for such preferred shares shall thereupon be cancelled and shall not be re-issued. Should the holders of any preferred shares so offered for purchase as aforesaid fail to present their certificates representing such shares on the date specified for purchase, the Company shall have the right on or before the date specified for purchase in such notice to deposit with The Northern Trusts Company, at Winnipeg, Manitoba, to the credit of a special account or accounts, the purchase price of such shares to be purchased, to be paid without interest to or to the order of the respective holders of such shares upon surrender to such depositary of certificates representing the same. Upon such deposit such shares shall so far as any liability of the Company is concerned be regarded as having been redeemed and cancelled. After the Company has made a deposit as aforesaid the rights of the holders of such preferred shares offered by the holders thereof as aforesaid as against the Company shall be limited to receiving without interest their proportionate part of the amount so deposited.

(9) In the event of the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the preferred shares shall be entitled to receive, before any distribution of any part of the assets of the Company among the holders of any other shares, an amount equal to one hundred per cent (100%) of the amount paid thereon and any dividends declared thereon and unpaid, and no more.

(6) The holders of the preferred shares shall not as such have any voting rights for the election of directors or for any other purpose nor shall they be entitled to attend shareholders’ meetings unless and until the Company shall fail for a period of two (2) consecutive years to pay any dividend on the preferred shares, whereupon and whenever the same shall occur the holders of the preferred shares shall, until a dividend of four per cent (4%) per annum has been paid on the preferred shares, be entitled to attend all shareholders’ meetings and shall have one (1) vote thereat for each preferred share then held by them respectively.

3. The Company be and is hereby authorized to make application to the Provincial Secretary of Manitoba for Supplementary Letters Patent confirming this by-law.

4. The directors and officers be and are hereby authorized and directed to do, sign, and execute all things, deeds and documents necessary or desirable for the due carrying out of the foregoing.’’

By-law No. 47.

4 Be It ENACTED and it is hereby enacted as By-law No. 47 of G. F. & J. Galt Limited that:

During the time one or more non-cumulative 4% redeemable preferred shares are issued and unredeemed and while the holders of the said preferred shares are entitled to vote at any meeting of shareholders, the said preferred shareholders shall be entitled to one vote in respect of each preferred share held by him, whether on a poll or show of hands, and every holder of one or more shares of common stock shall be entitled at all meetings of shareholders to 100 votes in respect of each common share held by him, whether on a poll or on a show of hands; but when the only class of shares issued and outstanding is the $100 par value class of shares, every holder of one or more shares of such common stock shall be entitled at all meetings of shareholders to one vote in respect of each common share held by him, whether on a poll or show of hands.’’

A special general meeting of shareholders was held February 9, 1953, at which all the shareholders seem to have been present in person or by proxy and the resolution and the two by-laws were unanimously confirmed.

On February 13, 1953, the company filed its formal election under Section 95A with the Income Tax authorities and as a result of certain adjustments required by the Department paid the tax of 15 per cent on $306,496.96 undistributed profits namely $45,974.54 leaving $260,522.42 of undistributed profits which might be paid free of tax. The assessment notice in respect thereof is dated April 24, 1953. This covered the undistributed profits as of December 31, 1949.

On May 25, 1953, the directors enacted By-law No. 48 and this by-law was unanimously confirmed at a special general meeting of shareholders : the same shareholders being present in person or by proxy as attended the meeting of February 9, 1953, above referred to.

By-law 48 reads:

44 The Secretary read Directors’ By-law No. 48 passed by a meeting of the Board of Directors, Monday, May 25th, 1953, and on the motion, duly seconded and unanimously carried, By-law No. 48, which appears below, was confirmed.

Be It ENACTED AND It Is Heres Enacted as By-law No. 48 of G. F. & J. Galt Limited (hereinafter called ‘the Company’) :

1. That for the amount of any dividend which the directors may lawfully declare payable in money they may issue therefor shares of the Company as fully paid.

2. THAT the Company be and it is hereby authorized to make application to the Provincial Secretary of Manitoba for Supplementary Letters Patent confirming this By-law and amending the Company’s Letters Patent of Incorporation by increasing the powers of the Company as set forth in the first paragraph of this By-law, and that the directors and officials of the Company be and they are hereby authorized and directed to do, sign and execute all things and documents necessary or desirable for the due carrying out of the foregoing.”

On June 22, 1953, Supplementary Letters Patent were granted to the company confirming By-laws Nos. 46 and 48.

On July 24, 1953, the directors enacted By-law No. 49. The minutes of that meeting read:

“By-law No. 49

The Secretary advised that Supplementary Letters Patent dated June 22nd, 1953, confirming By-law No. 46 increasing the capital of the Company by the creation of 300,000 4%, non-cumulative, redeemable preference shares of the par value of $1.00 each have been received from the Provincial Secretary and on the motion duly seconded and carried unanimously the said Supplementary Letters Patent were adopted.

The Secretary further reported that the sum of $260,522.42 now stood in the Company’s books under ‘Tax-Paid Undistributed Income’ and that it was in order for the Directors to capitalize $260,000.00 of the said sum and to appropriate the same among the common shareholders ratably in proportion to their holdings and to apply the said sum of $260,000.00 on paying upon their behalf the preference shares to be issued and distributed among the common shareholders ratably. It was moved by Mr. K. C. Weiss, seconded by Mr. A. L. Denison and unanimously carried that By-law No. 49 be passed and enacted.

Whereas G. F. & J. Galt Limited, duly elected under Section 95A of the Income Tax Act on the 18th day of February, 1953, to be assessed and to pay a tax of fifteen (15) per cent on $306,496.96 being the amount equal to its undistributed income on hand at the end of the 1949 taxation year;

AnD WHEREAS by Assessment Notice No. 20772G dated April 24th, 1953, the said fifteen (15) per cent tax was assessed at $45,974.54;

And WHEREAS the said fifteen (15) per cent tax of $45,974.54 has been paid and there is now standing in the books of the Company under the heading ‘Tax-Paid Undistributed Income’ the sum of $260,522.42;

And WHEREAS the Directors have determined to capitalize $260,000.00 of the said sum of $260,522.42 and to appropriate the said capitalized sum to and among the holders of the common shares ratably in proportion to the amounts paid up on the common shares held by them respectively and to apply the said sum in paying up on their behalf $260,000.00 4% non- cumulative, redeemable preference shares of the par value of $1.00 each in the capital stock of the Company to be issued and to distribute the said preference shares so paid up as aforesaid among the holders of the issued common shares ratably as aforesaid ;

Now THEREFORE, BE It ENAcTED and it is hereby enacted as a By-law of G. F. & J. Galt Limited :

1. That $260,000.00 four (4) per cent non-cumulative, redeemable preference shares of the par value of $1.00 each in the capital stock of the Company be and the same are hereby issued and allotted as a stock dividend to be dated August 1st, 1953, as fully paid to the holders of the issued common shares ratably in proportion to the amounts paid up on the common shares held by them respectively, that is to say : To

Thomas M. Galt	650 Preference Shares
W. Galt Martin	12,207 Preference Shares
John Martin	12,194 Preference Shares
Carew Martin and The Royal
Trust Company Executors of
the Estate of Mabel P. Galt	12,805 Preference Shares
Smiths Button Works Limited _	10,400 Preference Shares
Ann Galt Smith	26,000 Preference Shares
Alice M. Weiss	650 Preference Shares
Perkins & Co.	10,400 Preference Shares
Elizabeth P. Twelvetrees	2,600 Preference Shares
The Northern Trusts Company
Executor of the Estate of
George Frederick Galt	65,000 Preference Shares
The Northern Trusts Company
as Trustees for Thomas M.
Galt	3,290 Preference Shares
The Northern Trusts Company
as Trustees for Patricia M.
Kortright	3,290 Preference Shares
The Northern Trusts Company	100,594 Preference Shares
Total	260,000 Preference Shares

2. That the said sum of $260,000.00 be and the same is hereby appropriated and applied on behalf of the said shareholders on paying up on their behalf the said $260,000.00 preference shares ratably as aforesaid and that the Directors distribute the said preference shares so allotted and paid up as aforesaid to the issued common shares ratably as aforesaid, that is to say :

To

Thomas M. Galt	650 Preference Shares
W. Galt Martin	12,207 Preference Shares
John Martin	12,194 Preference Shares
Carew Martin and The Royal
Trust Company Executors of
the Estate of Mabel P. Galt	12,805 Preference Shares
Smiths Button Works Limited	10,400 Preference Shares

Ann Galt Smith	26,000 Preference Shares
Alice M. Weiss	650 Preference Shares
Perkins & Co.	10,400 Preference Shares
Elizabeth P. Twelve trees	2,600 Preference Shares
The Northern Trusts Company
Executor of the Estate of
George Frederick Galt	69,000 Preference Shares
The Northern Trusts Company
as Trustee for Thomas M. Galt	3,200 Preference Shares
The Northern Trusts Company
as Trustee for Patricia M.
Kortright	3,290 Preference Shares
The Northern Trusts Company..	100,594 Preference Shares
Total	260,000 Preference Shares

Enacted this 24th day of July, 1953.

The Secretary was instructed to proceed with the preparation of preference shares certificates in accordance with the said By-law No. 49 and to deliver the said certificates to the preference shareholders.”

These shares were duly issued and the certificates were all retained by the company. The trustee under Trust I then addressed to the company under date of August 14, 1953, the following communication:

“The Secretary,

G. F, & J. Galt Limited,

333 Main Street,

Winnipeg, Manitoba.

Dear Sir:

As the registered holder of 65,000 four per cent (4%) non- cumulative, redeemable preference shares of G. F. & J. Galt Limited, we, The Northern Trusts Company, Executor of the Estate of George Frederick Galt, hereby offer to the Company 65,000 shares of the said preference stock at a price of One Dollar ($1.00) per share.

We understand and agree that the Company may accept the whole or any part of the preference shares offered by us and that acceptance by the Company of the whole or any part of the said preference shares so offered shall be binding upon us; excepting that if only part of the said preference shares so offered are accepted by the Company, then the acceptance of any and all offers so made must be pro rata among those shareholders so offering.

THE NORTHERN TRUSTS COMPANY

‘J. H. Riley’

President

‘Wm. Hilton’

Similar letters were sent to the company in respect of the various other trusts, dated August 20th and August 31st respectively.

The company thereupon paid to the trustee the face value of the redeemable preferred shares referred to in by-law 49, supra, and cancelled the share certificates. It did the same in respect of the shares of the other shareholders except in the case of Isabelle G. Piper who held 36,400 redeemable preferred shares. The company redeemed 3,000 of Mrs. Piper’s shares. 33,400 shares are still outstanding.

This is, I think, the only case which has come before the Courts since the passing of Section 95A in which a complicated situation is rendered more complicated by the fact that some of the life tenants are resident in the United States and their position in regard to double taxation is as already set out. It was for that reason, no doubt, that the trustees and company adopted a procedure different in some respects from that followed in Re Fleck and approved in Re Waters.

At all times material hereto three of the directors of the company were officers of The Northern Trusts Company, and trustee, and, voting the majority of the shares of the company, they controlled the company. The other directors were members of one or other of the two families by birth or marriage.

When the trustees received the redemption price of all the preferred shares so redeemed they paid the amounts so received to the life tenants respectively entitled thereto as income.

All of the life tenants named in Trusts A to H are alive, all married and all have children and some have grandchildren. Many of the remaindermen are of age but there are some still infants and there are quite likely to be further children born to some of the life tenants.

All of the remaindermen who are of age were represented by counsel and all supported the contention of the trustee that the amounts coming into the hands of the trustee on the redemption of the redeemable preference shares was received by it as income payable to the life tenants and not as capital.

The infant remaindermen were represented by Mr. E. B. Pit- blado, Q.C., appointed for that purpose and to represent the interests of unborn children. He took the contrary position, namely, that the amounts coming into the hands of the trustee on the redemption of the redeemable preference shares were received by it as capital and was not payable to the life tenants as income.

The assets of the company consist of bonds and preferred and common shares in numerous companies which have a market value of approximately $5,800,000. This, of course, does not include the amount of the undistributed profits. The company did not need, nor did it desire, to increase its capital. It did not need to borrow to carry out the intention which I find it at all times had of distributing the released undistributed profits to the life tenants by the method adopted.

Much has been written in the various decisions about the “intention” of a company in cases such as this. I am happy to adopt what Pickup, C.J.O., said in Re Waters, [1955] O.R. at p. 280; [1955] C.T.C. at p. 136:

‘‘The Fleck case has been considered and discussed by judges of the High Court in a number of other Ontario cases, but I do not think I need refer to such other cases except to say, with all respect to any contrary view expressed in any of such cases, that the Fleck case cannot, in my opinion, be distinguished on the ground that the company concerned was a Dominion company and not an Ontario company. The same corporate acts such as I am considering should mean the same thing in either company except to the extent that, if the interpretation of the corporate acts is doubtful, one should adopt an interpretation that is consistent with legality of action as against an interpretation that would indicate illegal action. I am not suggesting that in the Fleck case, or in any of the cases since that decision, the company was doing anything illegal. I am saying that what the company was doing in the Fleck case and in the instant case is clear. I am not consider- ing whether what was done could legally be done or not. That is not before this Court.

Counsel argues that in a case of this kind a Court can look only at form and must disregard substance and intention and that if in form the company even for a moment issued paid-up shares, it capitalized the distributable income applied in payment of the shares. It is also argued that intentions do not matter, and reference is made to the words of Lord Sumner in Commissioners of Inland Revenue v. Fisher’s Executors, [1926] A.C. 395 at 411, where he said: ‘The only intention, that the company has, is such as is expressed in or necessarily follows from its proceedings. It is hardly a paradox to say that the form of a company’s resolutions and instruments is their substance.’

In considering this appeal I have endeavoured to consider only the corporate acts of the company where I find both the form and substance as well as the intention of the company. I think, however, that one must look at the whole of the form and not just part of it. When one does so, it seems to me to be clear that in the Fleck case the company was not in fact capitalizing its accumulated surplus income but that in the instant case the company was.”

In Re Mills, supra, Gale, J., looked at the auditor’s statements of the company, a letter written to the shareholders, and the notices calling the meeting as well as the minutes of the company.

In the instant cases the initial memorandum placed before the directors and the shareholders, and which is much too long to set out here, clearly shows the intention of the company, and that intention governed all its proceedings which I have considered it necessary and advisable to set out at such length. The opinion given to the shareholders, resident in the United States, is something which must be considered, as is the fact that the trustee controlled the company.

Here I should refer to Re Hardy’s Trusts, supra, cited to me by Mr. Pitblado. There Ferguson, J., said ( [1955] O.W.N. 277; [1955] C.T.C. 142) :

“It was argued on behalf of the Official Guardian, whom I appointed to represent unborn children and unascertained persons, as he, in my view, sufficiently and adequately represented them, that the trustee in this case had committed a breach of trust in taking steps to come within Re Fleck. He argued that the trustee had taken sides, that it had ‘slanted’ things in favour of one beneficiary to the detriment of another, as it appears that the trustee has full control of the board of the company. I do not consider that problem to be before me. It seems to me that if the Official Guardian is serious in this contention, it must be disposed of in an action. The judgment on this motion will be without prejudice to the Official Guardian’s rights in this respect.”

I do not understand Mr. Pitblado to adopt the argument put forward by the Official Guardian in that case. As I read the judgment of Ferguson, J., he was not impressed by it. While the problem may not be directly before me I should, I think, say something about it, because it has at least an indirect bearing on the question I am deciding.

Each of the settlors quite obviously had a definite plan in mind in selecting the same trustee for each of the trusts knowing that the trustee would have absolute control of the company. Each of the settlors equally obviously had the intention that the various life tenants would obtain the full income which would arise from the respective capital funds.

Each of the settlors must be taken to have known the situation that would be created by the incidence of double taxation. G. F. Galt, who died in 1928, would not have anticipated the relief which would subsequently be given by Section 95A, supra. John Galt died in 1933. He would know of the first attempt to give relief by permitting undistributed income accumulated prior to 1930 to be distributed free of tax. This only applied in eases of reorganization or liquidation and would give no relief to the shareholders of the company: see Gilmour, ante, p. 386.

In the view I take of this matter it was the duty of the trustee to take advantage of Section 95A for the benefit of the life tenants who, if it had not been for the double taxation problem, would have received the full income long since.

The trustee was, in my opinion, quite justified in not declaring a full dividend on the shares in the company and in accumulating the undistributed profits and not capitalizing them.

The manifest intention of John Galt is given added weight by the fact that by his will, Trust J, he said: “I give my Trustee power for the purposes of this will and any codicils hereto what is income and what is capital.”

While in the instant case the company, to use the language of Pickup, C.J.O., in Re Waters ([1955] O.R. 279; [1955] C.T.C. 136), “did in form momentarily convert the surplus income into capital by issuing paid-up shares by way of stock dividend” it 4 did not withhold its accumulated surplus income from shareholders nor did it appropriate such income to any capital purpose”, and “what the company in reality did was to distribute its accumulated surplus income among its shareholders by channelling it through its capital account’’.

This brings me to the point which has given me most concern. Pickup, C.J.O., points out that in Re Fleck the company ‘‘at the same time as it declared the stock dividend it committed itself to immediate redemption of the shares’’ ([1955] O.R. p. 279; [1955] C.T.C. p. 136).

This it did by the resolution set out at [1952] 2 D.L.R. p. 600; [1952] C.T.C. p. 200, that the shares ‘‘be redeemed and the Secretary is directed to take such steps as may be requisite to effect the redemption and to execute such documents as may be necessary to effectively redeem the said preferred shares’’.

In the instant case no such resolution was passed, although the company was being guided by the judgment in Re Fleck. The actual procedure followed has already been set out in detail. The reason for the departure seems to have been that the company, as already mentioned, had a different set of circumstances to deal with in that the shareholders resident in the United States were still confronted with a double taxation problem.

However, the company did at once—the delay was very short —redeem all the issued redeemable preferred shares except the 33,400 retained by Isabelle Piper, and I understand it is still prepared to redeem them.

I have come to the conclusion that the company, by taking the various steps outlined above, did commit itself to immediate redemption of the shares.

Besides the cases referred to in these reasons and the numerous cases considered in those various decisions, I have read with care the many other cases referred to in the arguments of counsel, not once but several times. This and the pressure of other work has necessarily delayed the writing of this judgment. I can see no object in discussing the authorities in greater detail. These reasons are already long enough.

The instant cases present many peculiar problems, and differ from all the previous cases. After the most careful consideration I have reached the conclusion that the money received by the trustee from the redemption of the redeemable preferred shares was received by it as income and not as capital and was properly paid to the respective life tenants as income.

As Isabelle Piper has not yet accepted redemption of all of her shares I only answer the question asked in her case in respect of the 3,000 shares that were redeemed. I do not consider it necessary or advisable to answer the other questions.

I propose to fix the costs of the various parties and that may be spoken to.

The trustee in each trust was represented by W. P. Fillmore, Q.C. Mr. R. B. Maclnnes, Q.C., represented certain of the life tenants and of the adult remaindermen. Mr. C. D. Lear represented the others. Mr. E. B. Pitblado, Q.C., represented the Official Guardian appointed by the Court to represent unascertained and unborn persons who might be interested, and the infant remaindermen.