A-492-81
The Queen (Appellant)
v.
Imperial General Properties Limited (formerly
Speedway Realty Corporation Limited)
(Respondent)
Court of Appeal, Heald, Le Damn JJ. and Kelly
D.J.—Toronto, September 29; Ottawa, December
24, 1982.
Income tax — Income calculation — Associated companies
— Appeal from Trial Division's reversal of Board decision
affirming reassessment — Whether S corporation "controlled"
by and thus "associated with" V Ltd. — Voting shares of S
held 50% by V with 90 common, 50% by spouses with 10
common and 80 preference — "Control" meaning de jure and
consisting in majority voting rights according to Buckerfield's
and Dworkin Furs — More comprehensive Oakfield approach
only an exception — Appeal dismissed — Income Tax Act,
R.S.C. 1952, c. 148, s. 39(4)(a) (as am. by S.C. 1960, c. 43, s.
11(1)).
Speedway had issued a total of 180 voting shares. Of these,
100 were common shares and 80 were preference shares. Vali-
dor Limited owned 90 of the common shares. The remaining 10
common shares were owned by Meyer Gasner, who also held 40
of the preference shares, and whose wife Goldie Gasner held
the other 40 preference shares. Thus Validor Limited and the
Gasner couple each held 50% of Speedway's voting shares.
The preference shares carried the right to a fixed, cumula
tive, preferential dividend, at the rate of. 10% per annum, on the
amount paid up on the preference shares. In the event of the
liquidation or winding-up of Speedway, capital was to be repaid
on the preference shares in priority to the common shares.
However, the holders of the preference shares had no other
right to participate in the profits or assets of the company. The
surrender of the company's charter could be authorized by a
majority of the votes cast at a general meeting, or by 50% (or
more) of all votes entitled to be cast at such a meeting.
The Minister reassessed Speedway on the basis that it and
Validor Limited were "associated" corporations within the
meaning of subsection 39(4) of the Act. More particularly, the
Minister took the view that Validor "controlled" Speedway, as
per paragraph (a) of the subsection.
An appeal to the Tax Review Board in respect of the
reassessment was dismissed. The Board's decision was reversed
by the Trial Division, whereupon the Minister, in turn,
appealed.
Held, the appeal should be dismissed.
One definition of "controlled" is that propounded by the
Exchequer Court in the Buckerfield's case, and subsequently
adopted by the Supreme Court of Canada in Dworkin Furs.
According to these authorities, the reference in paragraph
39(4)(a) is to de jure control, and not to de facto control. The
provision is concerned, specifically, with "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".
The Supreme Court took a somewhat different tack in the
Oakfield case, where a certain "inside group" of shareholders
was held to control a company even though that group and a
pair of individuals each possessed 50% of the voting power. It is
difficult, however, to identify with precision the principle which
this decision represents. There appear to be at least two possible
views as to what it implies for those cases in which each of two
persons (or groups) holds 50% of a corporation's voting shares.
On the one hand, the proper inferences might be: that the
Dworkin Furs approach—whereby the de jure control which
section 39 is understood to contemplate is itself identified
exclusively with voting rights—should be confined to cases in
which only one class of voting shares exists (or at least in which
all the shares have the same de jure rights); and that if the
voting shares constitute two classes with different de jure
rights, then for the purposes of section 39 control should be
deemed to reside with the person (or group) holding the greater
number of shares with the greater de jure rights. On the other
hand, it may be that the Oakfield version of de jure control,
which takes into account more than just voting rights, should
be regarded as nothing more than an exception to, or qualifica
tion of, the still dominant Dworkin Furs rule—that the Oak-
field approach should be followed only when one of the persons
(or groups) with 50% of the votes holds all of the common
shares (or shares having the greater de jure rights).
Given the uncertainty as to the import of Oakfield, together
with the nature of Oakfield's departure from the Dworkin Furs
definition and the emphasis which the Court in Oakfield placed
upon the inside group's ownership of all the shares with the
greater de jure rights, the second of these two constructions is
to be preferred.
In the instant case, Validor Limited did not hold all of
Speedway's common shares (or shares with the greater de jure
rights). The Oakfield approach is therefore not called into play,
and instead, the Dworkin Furs test applies. According to the
latter, Validor Limited did not control Speedway, and the two
corporations were not "associated" within the meaning of
subsection 39(4).
CASES JUDICIALLY CONSIDERED
FOLLOWED:
Buckerfield's Limited, et al. v. The Minister of National
Revenue, [1965] 1 Ex.C.R. 299; The Minister of Nation
al Revenue v. Dworkin Furs (Pembroke) Limited, et al.,
[1967] S.C.R. 223.
DISTINGUISHED:
Oakfield Developments (Toronto) Limited v. The Minis
ter of National Revenue, [1971] S.C.R. 1032.
COUNSEL:
H. Erlichman for appellant.
J. E. Swystun for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Goodman & Carr, Toronto, for respondent.
The following are the reasons for judgment
rendered in English by
LE DAIN J.: This is an appeal from a judgment
of the Trial Division [[1981] CTC 331; 81 DTC
5191 ] allowing an appeal from a decision of the
Tax Review Board with respect to a reassessment
for the 1962, 1963, 1966 and 1967 taxation years.
The issue is whether the respondent company,
which for convenience will be referred to herein-
after as "Speedway", was "associated with" Vali-
dor Limited ("Validor") within the meaning of
paragraph 39(4)(a) of the Income Tax Act,
R.S.C. 1952, c. 148, as amended by S.C. 1960, c.
43, subsection 11(1), 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,
(a) one of the corporations controlled the other,
Speedway was incorporated on August 29, 1955.
A total of 86 of the 100 issued common shares of
the company were held by Morris and Louis Win-
gold and their respective wives. Ten common
shares were held by Meyer Gasner, who was a
personal friend and business associate of Morris
Wingold but was not related to the Wingolds or
their wives. The remaining four shares were held
by incorporating counsel. Supplementary letters
patent dated December 16, 1960 authorized the
issue of an additional 9,900 common shares with
out par value and 10,000 voting, non-participating
cumulative preference shares with a par value of
$1.00 each, carrying the right to a fixed cumula
tive preferential dividend at the rate of ten per
cent (10%) per annum on the amount paid up on
the preference shares, and the right in the event of
the liquidation or the winding-up of the company
to repayment of capital in priority to the common
shares, but without the right to participate in
profits or assets. The supplementary letters patent
also provided that the surrender of Speedway's
charter could be authorized by a majority of the
votes cast at a general meeting or by at least 50%
of votes of all the shareholders entitled to vote at
such meeting. On December 27, 1960 forty prefer
ence shares of Speedway were issued to Meyer
Gasner and forty preference shares were issued to
his wife Goldie Gasner. On December 21, 1960 the
incorporating counsel's four common shares were
transferred to the Wingolds, one to Morris Win-
gold and one to his wife, and two to Louis Win-
gold. On December 28, 1960 the Wingolds trans
ferred their 90 common shares in Speedway to
Validor, the common shares of which were held
entirely by the Wingolds. The Gasners were not
shareholders of Validor. Thus at the end of
December, 1960 the voting shares, common and
preference, in Speedway were held as follows:
Validor held 90 of the 100 issued common shares;
Meyer Gasner held the remaining 10 of the issued
common shares, and he and his wife held the 80
issued preference shares. In other words, Validor
held fifty per cent of the voting shares and the
Gasners held fifty per cent. The Gasners held their
shares in Speedway until October 31, 1968, when
they transferred them to Validor.
The issue on the appeal is whether by virtue of
this distribution of the common and preference
shares of Speedway, Validor "controlled" Speed
way within the meaning of paragraph 39(4)(a) of
the Act.
On October 31, 1968 Speedway and other com
panies in which Validor owned all the common
shares were amalgamated to form the respondent
Imperial General Properties Limited.
By notices of reassessment dated January 7,
1972, the Minister of National Revenue reassessed
Speedway as a division of Imperial General Prop
erties Limited on the basis that it was "associated
with" Validor during its 1962, 1963, 1966 and
1967 taxation years within the meaning of subsec
tion 39(4) of the Act. An appeal to the Tax
Review Board in respect of that reassessment was
dismissed. The Trial Division allowed the appeal
from the Board's decision. In its reasons for judg
ment the Court said [at page 332 CTC, and at
pages 5191-5192 DTC]:
The submission of the defendant is that even though 50%
voting control or votes which can be cast at a meeting of
shareholders were held equally by Validor and the Gasners,
nevertheless Validor held control of Speedway within the mean
ing of section 39(4) of the Act because the preferred shares
held by the Gasners did not have the same de jure rights as the
common shares; and for this proposition the defendant relied on
Oakfield Developments (Toronto) Limited v M.N.R. (SCC)
[1971] SCR 1032; [1971] CTC 283; 71 DTC 5175.
In my view the principle in the Oakfield case is not appli
cable to the facts of this case. Instead the principle that should
be applied is exemplified in Buckerfield's Limited et al v
MNR, [1965] 1 Ex CR 299; [1964] CTC 504; 64 DTC 5301;
MNR v Dworkin Furs (Pembroke) Limited et al [1966] Ex CR
228; [1965] CTC 465; 65 DTC 5277; (SCC) [1967] SCR 223,
67 DTC 5035; and Himley Estates Ltd and Humble Invest
ments, Ltd v The Commissioners of Inland Revenue (1932), 17
TC 367 at 379.
On the argument in this Court it was agreed
that the issue, as reflected in the reasons of the
Trial Judge, was whether the definition of "con-
trol" that was applied in Buckerfield's Limited, et
al. v. The Minister of National Revenue, [1965] 1
Ex.C.R. 299 and The Minister of National Reve
nue v. Dworkin Furs (Pembroke) Limited, et al.,
[1967] S.C.R. 223 is the proper test in this case or
whether the approach that was adopted in Oak-
field Developments (Toronto) Limited v. The
Minister of National Revenue, [1971] S.C.R.
1032 should be applied.
In Buckerfield's the issue was whether certain
companies were "associated" within the meaning
of section 39 of the Income Tax Act by reason of
being "controlled" by a "group of persons" con
sisting, in two of the appeals, of two companies
each of which held 50% of the issued shares in the
two companies said to be associated, and consist
ing, in the other two appeals, of three companies,
each of which held one third of the issued shares in
the two companies said to be associated. In each
case there was only one class of shares. The Minis
ter had assessed the companies in question on the
basis that they were "associated" within the mean
ing of section 39, and the Exchequer Court dis
missed appeals from his assessments. Jackett P.
[as he then was] considered various possible mean
ings of "control", including [at page 303] "de
facto control by one or more shareholders whether
or not they hold a majority of shares", and con
cluded at page 303 that "controlled" in section 39
contemplated "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". He held that
the two sets of shareholding companies, which he
found to be "groups of persons" within the mean
ing of section 39, clearly controlled the companies
in which they held the shares.
In Dworkin Furs there were five companies
which the Minister had assessed as "associated"
companies within the meaning of section 39. In
each case there was only one class of shares
involved. In determining whether the companies
were "controlled" within the meaning of section 39
so as to make them associated companies, the
Supreme Court of Canada approved and applied
the definition of "control" adopted in Bucker-
field's. Hall J., who delivered the judgment of the
Court, said at pages 227-228:
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 apply
ing 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 manage
ment officials or the Board of Directors is, however, clearly
not intended by section 39 when it contemplates control of
one corporation by another as well as control of a corporation
by individuals (see subsection (6) of section 39). The word
"control" might conceivably refer to de facto control by one
or more shareholders whether or not they hold a majority of
shares. I am of the view, however, that, in section 39 of the
Income Tax Act, the word "controlled" contemplates the
right of control that rests in ownership of such a number of
shares as carries with it the right to a majority of the votes in
the election of the Board of Directors. See British American
Tobacco Co. v. I.R.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."
See also Minister of National Revenue v. Wrights'
Canadian Ropes Ld. (1947) A.C. 109 per Lord Greene M.R.
at page 118, where it was held that the mere fact that one
corporation had less than 50 per cent of the shares of another
was "conclusive" that the one corporation was not "con-
trolled" by the other within section 6 of the Income War Tax
Act.
This definition of controlled applies to all five appeals.
[Footnotes omitted.]
In four of the five companies in Dworkin Furs
no one person or group of persons held more than
50% of the issued shares. It was held that the fact
a shareholder who held 50% of the shares had, as
president of the company, a casting vote at meet
ings of shareholders and directors did not give him
control. In one of the four companies there was an
agreement that one of the shareholders holding
50% of the shares would attend to the running of
the day-to-day business of the company. Hall J.
held that while this agreement might be said to
give the shareholder de facto control, it did not
give him de jure control, "which is the true test"
[at page 229]. In the fifth company a group held
two thirds of the shares, but there was a provision
in the company's articles of association which
required that all motions at meetings of sharehold
ers or directors could only be passed by unanimous
consent. The Minister had taken the position that
this agreement was illegal, but the Court rejected
this contention.
In Oakfield the common shares in the company
("Polestar") assessed by the Minister as an
"associated" company within the meaning of sub
section 39(4) were held by an "inside group". An
equal number of voting preferred shares were
issued to two individuals who were strangers to the
inside group. Thus the voting power was distribut
ed on a fifty-fifty basis between the inside group
and the two individuals. The preferred shares car
ried the right to a fixed cumulative preferential
dividend of 10% per annum and the right to repay
ment of capital in priority to the common shares in
the winding-up of the company, but no rights to
further participation in profits or assets. A
member of the inside group personally guaranteed
the holders of the preferred shares a return upon
thirty days' notice of the money paid by them for
the shares and the payment of the 10% dividend.
The chairman at meetings of directors of share
holders did not have a casting vote. A surrender of
the company's charter could be authorized by 50%
of the votes of shareholders entitled to vote. The
Supreme Court of Canada held that the company
was controlled by the inside group, and was thus
associated with other companies controlled by
them. Judson J., delivering the unanimous judg
ment of the Court, said at page 1037:
The inside group controlled 50 per cent of the voting power
through their ownership of the common shares. They were
entitled to all the surplus profits on a distribution by way of
dividend after the payment of the fixed cumulative dividend to
the preferred shareholders. On a winding-up of Polestar, they
were entitled to all of the surplus after return of capital and the
payment of a 10 per cent premium to the preferred sharehold
ers. Their voting power was sufficient to authorize the surren
der of the company's letters patent. In my opinion, these
circumstances are sufficient to vest control in the group when
the owners of non-participating preferred shares hold the re
maining 50 per cent of the voting power.
The decision of this Court in Minister of National Revenue
v. Dworkin Furs (Pembroke) Ltd. et al. can be distinguished
from the present case. In the Dworkin Furs case, the voting was
split equally between two groùps also, but there was only one
class of shares. Each group had the same de jure rights, and
each shareholder was entitled to share rateably in the profits
and assets of the company by dividends or on winding up. In
addition, neither group could itself wind up the company.
[Footnote omitted.]
With great respect, I have difficulty perceiving
the precise rationale of the conclusion in Oakfield
and the principle or criterion that is implied by it.
There appear to be at least two possible views of
its implications for cases in which 50% of the
voting shares of a company are held by one person
or group of persons and 50% are held by another
person or group of persons: (a) that the definition
of de jure control approved and applied in Dwor-
kin Furs is to be confined to the case where there
is only one class of shares (or at least, where all
the shares have the same de jure rights), and that
where there are two classes of voting shares having
different de jure rights, control for purposes of
section 39 is to be deemed to rest with the person
or group of persons holding the greater number of
shares having the greater de jure rights; or (b)
that the concept of de jure control in Oakfield,
which extends beyond voting rights, is an excep
tion to or qualification of the traditional concept
approved and applied in Dworkin Furs which is to
be confined to the case where, as in Oakfield, all
the common shares (or shares having the greater
de jure rights) are held by one of the persons or
groups of persons holding 50% of the votes. (The
fact that either of the persons or groups of persons
holding 50% of the votes can authorize the wind-
ing-up of the company appears to me, with respect,
to be a neutral factor.) Given this uncertainty, the
nature of the departure in Oakfield from the
concept of de jure control approved and applied in
Dworkin Furs, and the emphasis in the reasons of
Judson J. that all of the shares having greater de
jure rights were held by the inside group, I am of
the respectful opinion that the second is the better
view. Accordingly, since all of the common shares
(or shares having the greater de jure rights) were
not held by Validor I am of the opinion, applying
the definition of "control" approved in Dworkin
Furs, that Speedway was not controlled by Vali-
dor. Speedway was therefore not an "associated"
company within the meaning of paragraph
39(4)(a) of the Act.
For these reasons I would dismiss the appeal
with costs.
HEALD J.: I concur.
KELLY D.J.: I concur.
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.