S. Madill Ltd. (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Kerr J.—Vancouver, October 4,
1971; Ottawa, January 10, 1972.
Income tax—Associated companies (1968)—Income Tax
Act, s. 39(1)(a)—Manufacturing company and sales compa-
ny—Control of each by different persons—Whether together
constituting "group of persons".
Appellant company, a manufacturer of forest products,
was assessed income tax at the higher rate on its first
$35,000 of income for 1966, 1967 and 1968 on the ground
that it was controlled by the same group of persons as a
company which sold its products, and that it was therefore
"associated" with the other company within the meaning of
s. 39(4)(b) of the Income Tax Act. During those years two
brothers controlled a majority of the issued voting shares of
appellant company, and two other men controlled a majori
ty of the issued voting shares of the other company and
were directors of appellant company. Each of the men held
shares in both companies, whether directly or by other
companies which he controlled.
Held, affirming the assessment, on the evidence the four
men had a community of interest and concern in the opera
tion of both companies and were a "group of persons"
within the meaning of s. 39(4)(b) of the Income Tax Act
who controlled both companies, and such companies were
therefore associated companies.
Vina -Rug (Canada) Ltd. v. M.N.R. [1968] S.C.R. 193;
Aaron's (P.A.) Ltd. v. M.N.R. [1967] 1 Ex.C.R. 21,
referred to.
INCOME tax appeal.
H. P. Legg and P. N. Howard for appellant.
M. J. Bonner and W. G. Chappell for
respondent.
KERR J.—This is an appeal against assess
ments of income tax under the Income Tax Act
on Madill Sales Ltd. for its taxation years ended
June 30, 1966, 1967 and 1968. That company
subsequently amalgamated with S. Madill Ltd.
in June 1969 to form one company with the
name S. Madill Ltd.
In its income tax returns Madill Sales Ltd.
calculated its income tax payable by applying
the lower rate of tax under section 39(1)(a) of
the Income Tax Act to its first $35,000 of
taxable income in each of its 1966 and 1968
taxation years and to all of its taxable income
(which was less than $35,000) in its 1967 taxa
tion year.
The respondent applied the higher rate of tax
under section 39(1)(a) to all of the taxable
income of the company in those years, on the
basis that the company was associated in each
of the years with S. Madill Ltd. (as it then was),
within the meaning of section 39(4) of the Act.
In those years Madill Sales Ltd. was a sales
company and S. Madill Ltd. was a manufactur
ing company. The issue is whether in each of
the said years Madill Sales Ltd., hereinafter
referred to as "the old sales company", and S.
Madill Ltd., referred to as "the old manufactur
ing company", were controlled by the same
group of persons and by reason thereof were
associated within the meaning of section
39(4)(b), which reads as follows:
39. (4) For the purpose of this section, one corporation is
associated with another in a taxation year if, at any time in
the year,
(b) both of the corporations were controlled by the same
person or group of persons,
For the purposes of the appeal the parties
filed an agreed statement of facts, which
includes, inter alia, the following':
2. The old manufacturing company was incorporated
under the laws of the Province of British Columbia on the
21st day of May, 1942 as a private company called Newcas-
tle Ship Building Co. Ltd. The said company changed its
name to S. Madill Ltd. on the 18th day of November, 1948
and it became a public coma any under the laws of the
Province of British Columbia on the 8th day of July, 1965
and continued as a public company throughout its taxation
years 1966, 1967 and 1968.
3. The old sales company was incorporated as a private
company on the 25th day of April, 1962 under the laws of
the Province of British Columbia and continued as a private
company during its 1966, 1967 and 1968 taxation years.
6. On the 30th day of June, 1969 the old manufacturing
company and the old sales company were amalgamated
pursuant to Section 178 of the Companies Act of British
Columbia as one public company with the name S. Madill
Ltd. (the Appellant herein), ..
9. With respect to the old manufacturing company, the
shareholdings of the issued voting shares and the number of
total issued voting shares were as follows:
Name of Beneficial
and Registered As at June As at June As at June
Shareholder 19, 1966 19, 1967 25, 1968
Mogul Holdings Ltd. 50,000 50,000 50,000
Mammoth Holdings
Ltd. 148,050 148,550 149,050
Carfield Investments
Ltd. 1,600 1,600 2,200
Charles D. Madill 50 50 370
John S. Wilfert 100 100 1,320
Norman W. Madill 50 50 50
Madill Sales Ltd 41,500 41,900 47,340
Total Issued Voting
Shares 334,990 338,920 340,200
10. The percentage ownership of issued voting shares of
the old manufacturing company from July 1st, 1965 to June
30th, 1968 was as follows:
Mogul Holdings Ltd. —At no time owned less
than 14%
Mammoth Holdings Ltd. —At no time owned less
than 43.6%
Carfield Investments Ltd. —At no time owned less
than .46%
Charles D. Madill —At no time owned less
than .01%
Norman W. Madill —At no time owned less
than .01%
John Wilfert —At no time owned less
than .029%
11. From October 26, 1965 to June 30, 1968, Mogul
Holdings Ltd. was a company in which Norman Madill was
the registered and beneficial owner of more than 50% of
the issued voting shares.
12. From October 26, 1965 to June 30, 1968, Mammoth
Holdings Ltd. was a company in which Charles Madill was
the registered and beneficial owner of more than 50% of
the issued voting shares.
13. From October 26, 1965 to June 30, 1968, Carfield
Investments Ltd. was a company in which Claire C. Smith
was the registered and beneficial owner of more than 50%
of the issued voting shares.
14. At all times relevant to this appeal, the issued voting
shares of the old sales company totalled 1,000 and were
beneficially owned and registered as follows:
John Wilfert — 450
C. C. Smith Co. Ltd. — 100*
S. Madill Ltd. — 450"*
* From the 30th day of January, 1968 to the 30th day
of June, 1969, R. Kinnimont was the registered holder of
one of these shares which he held in trust for C. C. Smith
Co. Ltd. From the 5th day of May, 1962 to the 30th day
of June, 1969, Claire C. Smith was the registered holder
of one of these shares and held such share in trust for C.
C. Smith Co. Ltd.
** From the 5th day of May, 1962 to the 30th day of
June, 1969, Charles D. Madill was the registered holder of
one of these shares and held such share in trust for the
old manufacturing company.
15. At all times relevant to this appeal, C. C. Smith Co.
Ltd. was a company in which Claire C. Smith was the
registered and beneficial owner of more than 50% of the
issued voting shares.
Persons who, in the respondent's submission,
controlled each of those companies in the taxa
tion years concerned were Charles Madill and
his brother Norman Madill, John S. Wilfert and
Clair C. Smith.
The old manufacturing company manufac
tures products for use in the forest industry. Its
plant, which has a capital investment of from
one to two million dollars, is located at
Nanaimo.
Charles Madill, who is president and manag
ing director of the present S. Madill Ltd., was
associated, along with his brother Norman and
their father, with the old manufacturing compa
ny as far back as 1948. The father died and the
two brothers inherited the shares of the compa-
ny in an equal division. Norman managed the
operations end of the business and Charles
managed the sales end. Norman continued to be
active in the business until 1958, in which year
he went to Europe and has not since returned to
live in Canada. In the interim Charles was presi
dent and managing director.
John S. Wilfert was purchasing agent and
logging manager of Powell River Company,
which was one of the old manufacturing compa-
ny's largest customers, in years prior to 1962
and in that capacity had frequent contacts with
the latter company and Charles and Norman
Madill.
Clair C. Smith was employed by Powell River
Company during the years 1950 to 1961 and for
part of that time was general manager of its
logging division, in which capacity he, too, had
business dealings with the old manufacturing
company and knew Charles and Norman
Madill. He left the company in 1961 and
formed C. C. Smith Company Ltd. and thereby
carried on an investment business on his own
account in Vancouver.
Evidence given by Charles Madill, Wilfert
and Smith was to the effect that in 1961 Wilfert
was working out of his company's Vancouver
office but its system was calling for a resident
logging manager at Nanaimo. He did not want
to move to Nanaimo and decided to start work
ing in a business on his own account. In that
respect he had discussions with Smith, under
whose supervision he had worked when with
Powell River Company. He also had discussions
with Charles Madill, who was aware of his
intentions to go into business on his own
account, and Madill suggested that he come to
work for the old manufacturing company in the
sales end of its business. The idea appealed to
Wilfert, but he did not want to work as an
employee. They then took up the idea of form
ing a new sales company that would make use
of the old manufacturing company's name and
in which that company would have a half inter
est. The new company would sell the old manu
facturing company's products on a commission
basis. Wilfert and Madill came to general agree
ment to form a new company on that basis, but
they did not conclude any details respecting
commission and other contract terms at that
time. Following that general agreement Wilfert
sought Smith's advice on the plan. Smith point
ed out hazards involved in a 50/50 ownership
and suggested that some third party be brought
into the company who could arbitrate in the
event of problems and disagreements arising
between the two owners. As a result, Madill,
Wilfert and Smith had a meeting at which it was
agreed that Smith would come into the compa
ny as a third shareholder, and accordingly the
old sales company, Madill Sales Ltd., was
incorporated in April, 1962, with a starting capi
tal of $10,000 contributed by the old manufac
turing company and Wilfert each taking and
paying for 450 shares and Smith taking and
paying for 100 shares, in the name of C. C.
Smith Co. Ltd., each share at $10.
The old manufacturing company and the old
sales company then entered into a sales agree
ment, dated June 1, 1963 (Exhibit 8), which
provided, inter alia, that the sales company
would be sales agent of the manufacturing com
pany for the promotion, sale and distribution of
the manufacturing company's products and
would be paid a commission calculated on gross
sales, as follows:
(a) For the months of June to November, inclusive, in
1962, five (5%) per cent of the gross sales as aforesaid.
(b) For each month during the continuance of this Agree
ment after November 1962 four (4%) per cent of the
gross sales as aforesaid.
and that either company could determine the
agreement upon giving one year's written notice
to the other.
In March, 1965, a letter from the old manu
facturing company over the signature of
Charles Madill (Exhibit 9) gave notice of intent
to amend the agreement by reducing, effective
June 1, 1965, the commission rate to 3% from
the existing 4%. The lower rate was paid there
after. Madill attributed the reduction to the
increasing volume of sales. He said that he
discussed the change with Madill and agreed to
it. Madill was less definite that they had dis
cussed the matter or that Wilfert had agreed to
the change. In any event the reduced rate
became effective. Wilfert also said that the
reduction in the rate of commission would not
necessarily result in a reduction in the gross
amount of commissions earned, for the amount
would be affected by the volume of sales. In
that connection the income tax return of the old
sales company for 1967 shows commissions
earned in the amount of $112,139, as compared
with $169,232 in 1966.
The register of the old manufacturing compa
ny (Exhibit 13) shows the following directors
and the dates of their appointment and
retirement:
Date of Date of
Name Appointment Retirement
Samuel Madill 30.9.1948 18.3.1953
Norman Madill 30.9.1948 18.6.1965
Charles Madill 30.9.1948
John S. Wilfert 27.5.1964
Robert Clayton Weir 8.7.1965
Louis Berryman Williams 8.7.1965
Clay H. Anderson 29.9.1967
Clair C. Smith 29.9.1967
Weir was a solicitor of the company and its
secretary.
Anderson was chief engineer of the company
and later was engaged as a consultant. He was
also a substantial shareholder. Williams was
connected with the underwriting of the compa
ny when it became a public company in July,
1965. Charles Madill was also managing
director.
The register of the old sales company (Exhib-
it R-1) shows the following directors and the
dates of their appointment and retirement:
Date of Date of
Name Appointment Retirement
Robert C. Weir 25 Apr. 1962 5 May 1962
Eric W. Winch 25 Apr. 1962 5 May 1962
John S. Wilfert 5 May 1962
Clair Curtis Smith 5 May 1962
Charles D. Madill 5 May 1962 Jan. 1968
J. Russell Kinnimont 30 Jan, 196S
Wilfert was also president of the company
and Smith was its secretary-treasurer.
Minutes of meetings of directors and share
holders of the old sales company were put in
evidence (Exhibit R-2). They show Charles
Madill, Wilfert and Smith present at nearly all
directors' meetings in the period May 5, 1962,
to June 30, 1968. Madill resigned as director on
January 30, 1968. The minutes show them also
present at shareholders' meetings, plus S.
Madill Ltd. by its proxy Charles Madill and C.
C. Smith Co. Ltd. by its proxy C. C. Smith.
Signatures of Wilfert, Madill and Smith appear
on the minutes of the directors' meetings and on
resolutions of the company for declaration of
dividends and other things.
Charles Madill testified that he had never
attended any of the directors' meetings, that the
practice was for the company's solicitor to pre
pare the minutes and circulate them for signa
ture later. Wilfert confirmed this, said that there
were no formal meetings, that the minutes were
prepared on instructions of C. C. Smith in
accordance with agreed ground rules. Smith
also said that he did not think he attended any
meetings. Madill said that he did not personally
attend the shareholders' meetings. He gave a
proxy to Wilfert for the shareholders' meeting
held on October 2, 1968.
The minutes of directors' and shareholders'
meetings of the old manufacturing company as
from July 8, 1965, were put in evidence (Exhib-
it R-3). They show Charles Madill and Wilfert,
along with other directors at relevant dates,
present at the directors' meetings. Madill
attended and exercised . proxies at the share
holders' meetings from his brother Norman and
from Mammoth Holdings and Mogul Holdings.
Wilfert attended directors' meetings from the
time in May 1964, when he was made a direc
tor, and he exercised proxies from the old sales
company at shareholders' meetings. Smith
attended after he became a director in Septem-
ber 1967. The minutes of the directors' meet
ings bear their signatures in nearly all instances.
Resolutions for payment of dividends and for
other things also bear their signatures.
Madill said that he alone determined the
policy of the old manufacturing company in the
years in question: for example, he decided,
without consulting the other directors, to pur
chase an airplane at a cost of about $180,000
and a Toshiba boring mill at a cost of about
$650,000. He exercised his powers as a manag
ing director in that respect. He said that
because of the sales contract Wilfert consulted
with him in connection with the products avail
able for sale and as to their prices and other
matters in that respect, but that Wilfert and
Smith played no part in running the company,
except for such activities as they performed as
directors. It was in the best interests of both
companies to work together and it was neces
sary for the old sales company to have
familiarity with the manufacturing company's
products and for that purpose Wilfert and Smith
came to the manufacturing company's plant at
Nanaimo on more than one occasion.
As to the old sales company Madill said that
he found no reason to take any part in running
it. He was in touch with Wilfert in respect of
sales, but it was Wilfert who ran that company
and he did it well. Smith never acted to break a
deadlock. The sales company prepared monthly
financial statements and sent them to the manu
facturing company, but he, Madill, was more
concerned with the manufacturing company's
profits than with the sales company's profits
because the sales company's profits did not
constitute a large part of the manufacturing
company's profits, and he did not discuss the
sales company's profits with any directors of
that company. In 1969 he disagreed with Wil-
fert on the question of the sales company sell
ing products of other companies, he wanted it
to sell only the manufacturing company's prod
ucts, and as a result the sales agreement was
terminated.
Smith said that he was a silent partner in the
running of the old sales company, but he had
discussions with Wilfert in connection with the
investing of the company's money and he
advised that the company purchase shares of
the old manufacturing company, because they
were a good investment. He had become aware
through conversations with Charles Madill that
some of Norman Madill's shares in the manu
facturing company were available for purchase
and thereafter he bought some at various times
in the name of Carfield Investments Limited, a
company owned by him and his wife. He
became a director of the manufacturing compa
ny at Charles Madill's request but prior thereto
had played no part in the policies of the compa
ny or policy-making. Madill sought his opinion
on occasions about the general business outlook
but not in respect of the operation of the manu
facturing company. He became aware that the
manufacturing company was purchasing an air
craft when he was asked by a lawyer to sign the
contract, which had Madill's signature on it. He
phoned Madill who told him that it was alright
for him to sign, so he did so. He became aware
of the purchase of the Toshiba mill by the
company when the subject was brought up at a
directors' meeting. Arrangements had then been
made for the purchase. Until 1962 he had no
business association with either Charles or
Norman Madill or with Wilfert. In the years
1966-68 his acquaintance with Charles Madill
and Wilfert grew and he was in a position to
discuss their business affairs with them, but his
primary concern in that respect was his own
financial investment in the companies and their
long range prospects. He had confidence in
both men and could give advice if it were asked
for and he could function as an arbitrator in the
event of disagreement. He was aware that Wil-
fert was exploiting and developing the market
for the manufacturing company's products and
that he ran the sales company as a managing
director should. He accompanied Wilfert 4 or 5
times to the manufacturing company's premises
on Vancouver Island.
Wilfert testified that he managed the old sales
company without assistance from Madill or
Smith. He used a sales approach different from
that which the manufacturing company had
been using. The sales company operated from
Vancouver and had a staff of 3 salesmen, an
accountant and a secretary. Its monthly finan
cial statements were sent to the manufacturing
company and to Smith's company, because they
were shareholders. Madill did not interfere with
the management of the sales company. The
subject of division of revenues between the
companies was never discussed, but the adjust
ment of the sales commission rate could have
the effect of making an adjustment in the reve
nues. He discussed financial matters concerning
the sales company with Smith, but not anything
having to do with sales. Matters relating to
declaration of dividends were discussed with
Smith by telephone prior to giving instructions
to the solicitor to draw up minutes for the
directors to sign. There was no discussion in
that respect with Madill, but in the result Madill
concurred. When Madill advised him that
shares of Norman Madill in the old manufactur
ing company were available he discussed the
matter with Smith, who advised that the sales
company purchase a number of shares com
mensurate with the money available. Madill
asked him to become a director of the manufac
turing company and he accepted, feeling that he
had something worthwhile to contribute. He
thought that it would be advantageous to capi
talize on the Madill name in the sales company
and Madill was agreeable to that. It was also
beneficial to have the manufacturing company
as a shareholder in the sales company, because
that would give him a partner with resources
and a good name. He and Madill were good
friends. Madill made the decisions for the
manufacturing company and directed it and
never looked to him to seek the support of the
sales company's shareholding in the manufac
turing company's affairs. He engaged for the
sales company the auditor and solicitor whom
Madill recommended. Charles Madill, Wilfert
and Smith were not related to each other by
blood, marriage or adoption.
The main points of argument at the trial on
behalf of the appellant were as follows:
(1) the companies were not controlled by the
same "group of persons" within the meaning of
section 39(4)(b) of the Income Tax Act;
(2) Norman Madill, Charles Madill, Wilfert
and Smith were not so connected as to consti
tute in fact a group of persons;
(3) if there was in fact any group, it was not a
group controlling a majority of the issued voting
shares of both companies;
(4) as to the parts played in the old sales
company by Wilfert and Smith and the old
manufacturing company, the situation was that:
(a) Wilfert insisted on and maintained his
independence, he refused to be employed by
the manufacturing company or to reside in
Nanaimo; he managed the sales company and
exercised day-to-day control; Smith's role
was only that of arbitrator and as an advisor
in general matters, such as the general busi
ness and financial outlook; the shareholders
of the sales company had unanimously agreed
to act independently, not as a group; and they
went to pains not to act as a group by arrang
ing for Smith to hold the balance of power,
and no group was in control of that company;
it was run independently of the manufactur
ing company, the former had its office and
staff at Vancouver, the latter at Nanaimo; the
sales company adopted an independent atti
tude, e.g., in selling products other than those
of the manufacturing company.
(b) if there was any control of the sales com
pany by the manufacturing company it was
through the sales contract, not through share-
holdings; each company had a right to termi
nate the contract by giving one year's notice
and that right was eventually exercised when
policy differences arose between Wilfert and
Charles Madill; the sales contract was nego
tiated at arm's length and it was consistent
with independence of each of the companies.
(5) as to the old manufacturing company, if
there was a group controlling the manufacturing
company in the years concerned it was Norman
and Charles Madill; Charles had proxies from
Norman and was managing director and as such
had all the powers of the board of directors; all
the shareholders were aware that absolute con
trol rested in the Madill brothers who held more
than 50% of the issued voting shares; Wilfert
and Smith were minor shareholders; Charles
Madill ran the company and made important
decisions without consulting Wilfert or Smith,
e.g., in purchasing an airplane and the Toshiba
mill; Smith's role was no more important than
that of the other directors Weir, Anderson and
Williams; Wilfert's and Smith's shareholdings
had no effect on the control exercised by
Charles Madill; no one except the Madill broth
ers functioned in exercising control of the com
pany; Smith's role was never more than that of
an investor in the company and he was never
called upon to exercise any real control;
(6) there was no common group controlling
both companies; the manufacturing company
bargained away power to control the sales com
pany by taking Smith in as arbitrator holding a
balance of power in the shareholding structure
in which neither Wilfert nor the manufacturing
company would have absolute control.
The argument on behalf of the respondent
was principally as follows:
(1) the number of voting shares owned by
Wilfert, Smith and Norman and Charles Madill,
directly or indirectly, as shown in the agreed
statement of facts, was sufficient to give them
control of both companies and they were a
group that controlled both companies;
(2) the control contemplated by section
39(4)(b) is a right to control by virtue of a
majority of voting shares; if two or more per
sons, no one of whom alone controls a particu
lar corporation, own a majority of the voting
shares of the corporation and the same group
own a majority of the voting shares of a second
corporation, this is sufficient to make the two
corporations associated, one with the other,
within the said section;
(3) de facto exercise of management and con
trol is not a governing factor in the determina
tion of the question whether both companies
were controlled by the same group of persons;
it is not essential that the members of a control
ling group have a common connection but in
fact in the present case there was a common
connection and community of business interest
and activities and an exercise of control of both
companies by the aforesaid 4 persons.
Dealing with the evidence counsel for the
respondent submitted that the Madill brothers
and Wilfert and Smith had a common interest
and connection and a community of business
interest; Charles Madill represented his broth
er's interest and had proxies from his brother;
Charles Madill wanted to hire Wilfert, Smith
was a business advisor to Wilfert; Smith was
brought into the sales company to avoid the
possibility of deadlock that would interfere with
the operation of the company, but the distribu
tion of shares was with an eye to control by
those persons and avoidance of a stalemate that
would interfere with the operation of the com
pany; an exclusive sales contract was envisaged
in which the sales company would promote
sales of the manufacturing company's products
for the mutual benefit of both companies;
Charles Madill, Wilfert and Smith were direc
tors of both companies; Madill represented the
manufacturing company's shareholdings in the
sales company and was satisfied with what was
being done, he signed the directors' meetings
and resolutions; the fortunes of the companies
were tied together by the sales contract, each of
the said persons performing his respective tasks
satisfactorily to the others; Wilfert and Smith
were made directors of the manufacturing com
pany by Charles Madill, all had known each
other for years in the forest industry and were
good friends; Madill was a managing director of
the manufacturing company and exercised his
powers in that capacity but he held the position
at the pleasure of the board of directors and
was a member of the said group; Smith was not
kept in the dark in respect of the affairs of the
companies and although he was a director of
the manufacturing company for only part of the
period he would have, prior thereto, advised
and brought things to the attention of Madill
and Wilfert in connection with the companies if
occasion to do so had arisen; one of the reasons
why the manufacturing company was a share
holder in the sales company was to give the
latter company financial strength and there was
a financial intimacy between them.
The following cases were cited in argument:
Vina -Rug (Canada) Ltd. v. M.N.R. [1968]
S.C.R. 193, 68 DTC 5021; Buckerfield's Ltd. v.
M.N.R. [1965] 1 Ex.C.R. 299, 64 DTC 5301;
Yardley Plastics of Canada Ltd. v. M.N.R.
[1966] Ex.C.R. 1027, 66 DTC 5183; Floor &
Wall Covering Distributors Ltd. v. M.N.R.
[1967] 1 Ex.C.R. 390, 66 DTC 5373; Vineland
Quarries and Crushed Stone Ltd. v. M.N.R.
[1966] Ex.C.R. 417, 66 DTC 5092; Alpine Dry
wall & Decorating Ltd. v. M.N.R. 66 DTC
5263; Bert Robbins Excavating Ltd. v. M.N.R.
66 DTC 5269.
The meaning of the word "control" as used in
section 39(4)(b) was considered by the Supreme
Court of Canada in Vina -Rug (Canada) Ltd. v.
M.N.R. (supra) in which Abbott J., speaking for
the Court, said at page 196:
This court considered the concept of "control" in Minis
ter of National Revenue v. Dworkin Furs Limited [1967]
S.C.R. 223 (67 DTC 5035). Hall J. in delivering the judg
ment of the Court said at p. 227:
The word controlled as used in this subsection was held
by Jackett P. to mean de jure control and not de facto
control and with this I agree. He said in Buckerfield's
Limited et al v. Minister of National Revenue:
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 sec
tion 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 "con-
trolled" 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. LR.C. (1943) 1 A.E.R. 13 where Viscount Simon
L.C., at p. 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.
Applying these principles, once it is established that a
group of shareholders owns a majority of the voting shares
of a company, and the same group a majority of the voting
shares of a second company, that fact is sufficient, in my
opinion, to constitute the two companies associated within
the provisions of s. 39 of the Income Tax Act. Moreover, in
determining de jure control more than one group of persons
can be aptly described as a "group of persons" within the
meaning of s. 39(4)(b). In my view, it is immaterial whether
or not other combinations of shareholders may own a
majority of voting shares in either company, provided each
combination is in a position to control at least a majority of
votes to be cast at a general meeting of shareholders.
There is no suggestion that the Madill broth
ers and Wilfert and Smith came together initial
ly or acted together thereafter in order to take
advantage of the lower tax rate or that the old
sales company was created with that objective
in mind as one of the motivating reasons for its
creation. Nevertheless, it may be that those
four persons constituted a "group of persons"
that controlled both companies, within the
meaning of section 39(4)(b). In Aaron's (Prince
Albert) Ltd. v. M.N.R. [1967] 1 Ex.C.R. 21,
Thurlow J. said at p. 25:
... The overall purpose of the provisions as to "associated"
companies, as I read them, is to prevent the owners of the
equity stock in corporations from gaining, whether inten
tionally or otherwise, such a tax advantage. But the method
adopted by the provisions is arbitrary and is made to
depend not on the right of shareholders to benefit from
profits but on various relationships between shareholders,
some of which are particularly defined and others not, and
by whom the companies concerned were "controlled".
If Wilfert and Smith were not included in a
"group" that controlled the old manufacturing
company in the taxation years concerned, the
appeal must succeed, for in that event the two
companies would not have been controlled by
the same group of persons. It is therefore
necessary to consider and determine whether
there existed a "group of persons", within the
meaning of section 39(4)(b), that controlled
both companies.
Counsel for the appellant referred to the defi
nition of "group" in Webster's International
Dictionary, the 3rd edition of which includes
the following:
A number of individuals bound together by a community
of interest, purpose or function.
In his decision in Buckerfield's Limited et al
v. M.N.R. [1965] 1 Ex.C.R. 299, Jackett P. said
at p. 304:
The applicable sense of the word "group" as defined by
the Shorter Oxford English Dictionary (1959) is
2. gen. An assemblage of objects standing near together,
and forming a collective unity; a knot (of people), a
cluster (of things). In early use there is often a notion of
confused aggregation.
The only other sense that might be applicable is
3. A number of persons or things in a certain relation, or
having a certain degree of similarity.
Counsel for the appellants referred to other dictionary
definitions but I do not find any conflict among them. Apart
from the argument on these appeals, the phrase "group of
persons" is apt to encompass the companies holding the
shares of Buckerfield's and Green Valley or the companies
holding the shares of Burrard and Westland, within my
understanding of the meaning of that phrase whether or not
I seek the aid of dictionaries.
By virtue of their ownership, directly or indi
rectly, of more than 50% of the issued voting
shares of the old manufacturing company the
brothers Norman and Charles Madill were in a
position to exercise control of that company.
But that does not necessarily preclude the exist
ence of a larger controlling combination or
group comprised of them and the other share
holders Wilfert and Smith. Charles Madill
represented his brother's interests in those
years. He was instrumental in obtaining Wilfert
and Smith as shareholders and directors of the
manufacturing company and they functioned in
that capacity by attending meetings, declaring
dividends and signing documents in the busi
ness of the company. The old sales company
was established following discussions between
Charles Madill, Wilfert and Smith and pursuant
to their plans, principally to promote and sell
the products of the manufacturing company.
The division of shares was agreed. Charles
Madill, Wilfert and Smith were directors of
both companies and the relationship between
the two companies demanded cooperation. The
sales company provided monthly financial
statements to Madill and Smith. Although no
formal meetings of its directors were held, the
directors signed minutes and resolutions as
necessary and in accordance with ground rules
to operate in that manner. Charles Madill was
managing director of the manufacturing compa
ny and ran its day-to-day operations and Wilfert
did likewise for the sales company. Each of
them was capable and competent and the others
were satisfied and felt no reason to interfere.
When disagreement eventually arose, the sales
agreement was terminated and the sales compa
ny was wound up.
I have summarized much of the evidence and
argument, particularly the parts that seem to me
to be the more important, and I have reached
the conclusion on my appreciation of all the
evidence and the cited authorities that at all
relevant times Norman Madill, Charles Madill,
John S. Wilfert and Clair C. Smith had a com
munity of interest and concern in the operation
of both the old manufacturing company and the
old sales company and that they can be aptly
described as a "group of persons" within the
meaning of section 39(4)(b) of the Income Tax
Act; that by virtue of the ownership of voting
shares they were in a position to exercise con
trol over both companies; that they constituted
a group of persons that controlled both compa
nies at all material times, and that the compa
nies were, therefore, associated with each other
within the meaning of section 39(4)(b) of the
Income Tax Act. I think that the respondent
was right in assuming, as he did when assessing
the old sales company, that both companies
were controlled within the meaning of section
39(4)(b) by the same group of persons, namely,
the 4 persons above named.
The appeal will therefore be dismissed, with
costs.
I have given the paragraphs the numbering they bear in
the Agreed Statement.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.