The Queen v. Imperial General Properties Ltd., [1985] 2 S.C.R. 288

Her Majesty The Queen Appellant;

and

Imperial General Properties Limited (formerly Speedway Realty Corporation Limited) Respondent.

File No.: 17627.

1985: April 30; 1985: October 31.

Present: Beetz, Estey, McIntyre, Chouinard, Lamer, Wilson and La Forest JJ.

on appeal from the federal court of appeal

Income tax ‑‑ Corporations ‑‑ Control ‑‑ Corporate shareholder holding common shares ‑‑ Minority shareholder holding common shares and voting preference shares ‑‑ Corporate and minority shareholders having equal number of votes and able to elect equal numbers of directors ‑‑ Winding‑up possible on fifty per cent vote ‑‑ Whether or not respondent under control of corporate shareholder ‑‑ Income Tax Act, R.S.C. 1952, c. 148, s. 39(4) as amended by 1960 (Can.), c. 43, s. 11(1).

Determination of the respondent's applicable tax rate turned on whether or not respondent was controlled by another company within the meaning of s. 39(4) of the Income Tax Act. Of respondent's one hundred issued common shares, ninety were held by the Wingold family (and later by its company, Validor), and ten by Gasner, a business associate unrelated by blood or marriage. In a corporate re‑organization, voting, non‑participating, cumulative preference shares were created, and eighty were issued to Gasner and his wife. The Wingolds and the Gasners, accordingly, each held ninety votes. Mr. and Mrs. Gasner and two of the Wingolds filled the four directorships on re‑organization where previously the Wingolds held all four positions. A winding‑up could be effected by a fifty per cent vote. The assets of the company, in such event, would be distributed among the common shareholders after the par value of the issued preference shares and any accumulated but unpaid dividends had been paid.

Held (McIntyre, Lamer and Wilson JJ. dissenting): The appeal should be allowed.

Per Beetz, Estey, Chouinard and La Forest JJ.: The court, in determining the application of s. 39(4) of the Income Tax Act, is not limited to a highly technical and narrow interpretation of the legal rights attached to the shares of a corporation; nor is it constrained to an examination of those rights only in the context of their immediate application in a corporate meeting. Here, the lynchpin of the tax plan was the continued existence of the right to terminate the corporate existence should the presence of the minority common and preference stockholders become undesirable to the majority common shareholder. Control, in the real sense of the term, was not surrendered by the Wingolds or their successor on the issuance of the preference shares. They could still initiate a winding‑up, and if they did so, their obligations toward the minority common shareholder remained virtually the same as they were before the reorganization; namely a 10 per cent distribution of surplus assets, increased only by the nominal payments on return of capital on the preference shares and any accrued but unpaid dividends. Accordingly, the respondent remained in the control of Validor, the Wingold's successor, within the meaning of s. 39(4).

Per McIntyre, Lamer and Wilson JJ., dissenting: Although the scope of scrutiny under the de jure test for the purpose of determining who has voting control has been extended beyond a mere examination of the share register, the principle that voting control is the proper indicium of control was not deviated from until Oakfield. In Oakfield, the test of de facto control was applied based on an evaluation of the beneficial interests of the shareholders and, as that decision is anomalous, it should not be followed. For the courts suddenly to change direction in the face of well‑settled and long‑standing authority in tax jurisprudence is quite inappropriate as such a departure can have a serious retroactive impact on taxpayers who plan their personal and business affairs on the basis of the existing law. This is not an appropriate area for judicial creativity although it may be for the legislature.

Cases cited

By the majority

Minister of National Revenue v. Dworkin Furs (Pembroke) Ltd., 1967 112 (SCC), [1967] S.C.R. 223; Oakfield Developments (Toronto) Ltd. v. Minister of National Revenue, 1971 147 (SCC), [1971] S.C.R. 1032, considered; Buckerfield’s Ltd. v. Minister of National Revenue, 1964 1187 (CA EXC), [1965] 1 Ex. C.R. 299; British American Tobacco Co. v. Inland Revenue Commissioners, [1943] 1 All E.R. 13; Donald Applicators Ltd. v. Minister of National Revenue, [1971] S.C.R. v, 71 DTC 5202, affirming 1969 1546 (CA EXC), [1969] 2 Ex. C.R. 43, 69 DTC 5122; Himley Estates, Ltd. v. Commissioners of Inland Revenue (1932), 17 T.C. 367, referred to.

By the minority

Oakfield Developments (Toronto) Ltd. v. Minister of National Revenue, 1971 147 (SCC), [1971] S.C.R. 1032; Minister of National Revenue v. Dworkin Furs (Pembroke) Ltd., 1967 112 (SCC), [1967] S.C.R. 223; Vancouver Towing Co. v. Minister of National Revenue, 1946 295 (CA EXC), [1946] Ex. C.R. 623; British American Tobacco Co. v. Inland Revenue Commissioners, [1943] 1 All E.R. 13; Inland Revenue Commissioners v. J. Bibby and Sons, Ltd., [1945] 1 All E.R. 667; Vineland Quarries and Crushed Stone Ltd. v. Minister of National Revenue, 1966 909 (CA EXC), 66 DTC 5092 (Ex. Ct.); Minister of National Revenue v. Consolidated Holding Co., 1971 191 (SCC), [1974] S.C.R. 419, 72 DTC 6007; Vina‑Rug (Canada) Ltd. v. Minister of National Revenue, 1968 66 (SCC), [1968] S.C.R. 193; Donald Applicators Ltd. v. Minister of National Revenue, [1971] S.C.R. v, 71 DTC 5202, affirming 1969 1546 (CA EXC), [1969] 2 Ex. C.R. 43, 69 DTC 5122; Buckerfield’s Ltd. v. Minister of National Revenue, 1964 1187 (CA EXC), [1965] 1 Ex. C.R. 299.

Statutes and Regulations Cited

Income and Corporation Taxes Act 1970, 1970 (U.K.), c. 10, s. 302(2)(a), (b), (c).

Income Tax Act, R.S.C. 1952, c. 148, s. 39(4)(a), (b) as amended by 1960 (Can.), c. 43, s. 11(1).

APPEAL from a judgment of the Federal Court of Appeal, 1982 5295 (FCA), [1984] 1 F.C. 402, [1983] CTC 27, 83 DTC 5055, dismissing an appeal from a judgment of the Federal Court Trial Division allowing an appeal from a decision of the Tax Review Board allowing in part appeals of the Minister's assessments. Appeal allowed, McIntyre, Lamer and Wilson JJ. dissenting.

Ian MacGregor and Harry Erlichman, for the appellant.

Wolfe D. Goodman, Q.C., and Joanne E. Swystun, for the respondent.

The judgment of Beetz, Estey, Chouinard and La Forest JJ. was delivered by

1. Estey J.‑‑Once again the meaning of "control" in determining the tax status of a corporation under the Income Tax Act raises its head in this Court. Section 39(4)(a) of the Income Tax Act, R.S.C. 1952, c. 148, as amended by 1960 (Can.), c. 43, s. 11(1), provides:

2. ...

(4) . . . one corporation is associated with another . . . if . . .

(a) one of the corporations controlled the other,

The issue is simply, what is the applicable rate of taxation of the respondent? This in turn calls for a determination as to whether the respondent is associated with another company (Validor Limited) during any of the taxation years in question.

2. Immediately prior to the December 1960 reorganization discussed below, the respondent had in its charter but one class of shares and these shares were issued and outstanding as follows:

The Wingold family group: 90 shares

Meyer Gasner: 10 shares

Gasner was unrelated by blood or marriage to the Wingold family. He was a friend and business associate of one member of that family. The 100 shares then outstanding were issued from treasury for the consideration of $1,000 in total.

3. In December 1960, the respondent received by way of supplementary letters patent an increase in authorized capital by the creation of 10,000 voting, non‑participating, cumulative preference shares with a par value of $1 each. Eighty (80) of the newly authorized preference shares of the respondent were issued from treasury to Gasner and his wife for a total consideration of $80. Also in December 1960 the Wingold shares (then being 90 common shares of the respondent) were transferred to Validor Limited, a corporation owned and controlled by the Wingold family. As a result of these transfers and issuances, the shareholdings of the respondent at the end of 1960 were as follows:

Validor (the Wingold family): 90 common

(one vote per share) shares

Meyer Gasner: 10 common

(one vote per share) shares

Mr. and Mrs. Gasner: 80 preference

(one vote per share) shares

In the result, the Wingold group held common shares according them 90 votes, and the Gasners held 10 common shares and 80 preference shares according them, in all, 90 votes.

4. The taxation years in question are 1962, 1963, 1966 and 1967. The shareholdings and voting rights in the respondent during those years were as set out above. During those years the Board of Directors of the respondent consisted of four directors. Prior to December 1960 all the directors were members of the Wingold family. From December 1960 to October 1968 two of the four directors were members of the Wingold family and the other two were Mr. and Mrs. Gasner. On October 31, 1968, after the fiscal years in question, all the Gasner shares, common and preference, were transferred to Validor, the preference shares being transferred for a total consideration of $88 made up of $80 par value and $8 dividends.

5. The holders of the preference shares were entitled to one vote per share and to a fixed cumulative preferential dividend at the rate of 10 per cent per annum. On the liquidation or winding up of the company, the holder of a preference share was entitled to recover the par value of the preference share and any accumulated but unpaid dividends in priority to the common shares. The preference shareholder, however, was not entitled to participate in the distribution of any surplus in the corporation. Perhaps of the greatest significance is the further provision in the corporate charter of the respondent that the company may be wound up on a resolution for that purpose supported by 50 per cent of all voting rights in the company. The effect of this provision is that either the Wingolds (and later, Validor) or the Gasners could bring about a winding up of the respondent without cause. Upon the happening of that event, the Gasner family would receive the par value of their preference shares and any accumulated but unpaid dividends, whereas the Wingolds, and Meyer Gasner to the extent of his 10 per cent holding in common shares, would receive all the remaining assets of the respondent. The significance of this right is emphasized by the fact that the business of the respondent company was carried on by the Wingold family along with some seventeen other companies, all of which were amalgamated into the respondent company in October 1968. Thus the pain normally associated with corporate liquidation would not be a very significant factor here because the undertaking carried on by the respondent corporation, less the 10 per cent interest to be paid out to Meyer Gasner, would remain substantially intact and within the orbit of the Wingold companies. The Gasners on the other hand, by a liquidation (apart from the aforementioned 10 per cent common share interest held by Meyer Gasner), would receive their $80 investment in the preference shares plus any accrued but unpaid dividends which, in fact, never exceeded $8. It is against this background of fact that we turn to the law.

6. The single issue arising on the facts in this appeal is whether, during the relevant period of time, Validor controlled the respondent for the purposes of s. 39(4).

7. It has been long decided that for the purposes of this section 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"; per Jackett P. in Buckerfield’s Ltd. v. Minister of National Revenue, 1964 1187 (CA EXC), [1965] 1 Ex. C.R. 299, at p. 303, which was adopted by this Court in Minister of National Revenue v. Dworkin Furs (Pembroke) Ltd., 1967 112 (SCC), [1967] S.C.R. 223, at p. 228, per Hall J. Hall J. at the same time adopted a somewhat broader concept of control from British American Tobacco Co. v. Inland Revenue Commissioners, [1943] 1 All E.R. 13, at p. 15, per Viscount Simon L.C.:

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.

8. It has been said that control for these purposes concerns itself with de jure and not de facto considerations (see Buckerfield’s Ltd., supra, at pp. 302‑03 and Dworkin, supra, at p. 227). Such a distinction, while convenient to express as a guide of sorts in assessing the legal consequences in factual circumstances, is not, as we shall see, an entirely accurate description of the processes of determination of the presence of control in one or more shareholders for the purpose of s. 39(4).

9. In Dworkin, supra, the Court was required to determine the applicable tax rate for several corporations, 50 per cent of whose voting shares were held by each of two groups. In each case neither group had the right to wind up the company or indeed to do anything else with reference to the affairs of the company or to its structure without the support of the voting power of the other group. In some instances there was indeed a casting vote in the president or chairman, but we are not concerned with that problem here for no person held such a right. The Court in effect found that, applying the Buckerfield test, none of these corporations was controlled for the purpose of s. 39(4) because the governing authority in the corporation was deadlocked as between the two groups. The Buckerfield test, it should be noted, was applied by Hall J. at the level of shareholders and not directors (Dworkin, supra, at p. 236).

10. In Oakfield Developments (Toronto) Ltd. v. Minister of National Revenue, 1971 147 (SCC), [1971] S.C.R. 1032, the Court was faced with precisely the same issue as in Dworkin. In Oakfield there were two classes of shares, common and preferred, the voting rights in respect of which were equal. One group held all the common shares and the other group held all the preferred shares. The preferred shareholders, as is the case here, had a priority over common shareholders to the extent of recovery of the capital represented by the preferred shares on a winding up, together with accumulated dividends, and a 10 per cent premium. Similarly, either the common shareholders or the preferred shareholders could, acting by themselves as a class, bring about the surrender of the corporate charter. On the surrender, the residual assets, after the prior repayment of capital and premium and accrued dividends to the preferred shareholders, went to the common shareholders. There was no question but that the holders of the preferred shares were unrelated by blood or marriage to the holders of the common shares. As was the case here, the preferred shareholders received their shares some years after the corporation was established. Again, in Oakfield, supra, there was no casting vote in the hands of any officer or shareholder. After weighing the respective voting and other rights of the common and preferred shareholders, Judson J., speaking for a unanimous Court, stated at p. 1037:

Their [common shareholders] voting power was sufficient to authorize the surrender of the company's letters patent. In my opinion, these circumstances are sufficient to vest control in the group when the owners of non‑participating preferred shares hold the remaining 50 per cent of the voting power.

11. In determining the proper application of s. 39(4) to circumstances before a court, the court is not limited to a highly technical and narrow interpretation of the legal rights attached to the shares of a corporation. Neither is the court constrained to examine those rights in the context only of their immediate application in a corporate meeting. It has long been said that these rights must be assessed in their impact "over the long run". See Thurlow J. (as he then was) in Donald Applicators Ltd. v. Minister of National Revenue, 1969 1546 (CA EXC), [1969] 2 Ex. C.R. 43, at p. 51, affirmed by this Court at [1971] S.C.R. v, 71 DTC 5202.

12. Some comfort was sought by the respondent here in the judgment in Oakfield, supra, at p. 1037, where Judson J. stated, in distinguishing the Dworkin case, supra:

...the voting was split equally between two groups 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.

I do not think that the fulcrum upon which that case turned was the presence of two classes of shares in Oakfield as against only one class in Dworkin. The repeated reference by Judson J. to the significance of the final omnipotent right to wind up the company retained by the prior controlling stockholder was the bedrock upon which the Oakfield judgment was founded. When the Wingolds purported to terminate their control of the respondent causing the respondent to issue 80 preference shares for $80 to the 10 per cent minority shareholder Gasners, the Wingolds retained one central critical right, which they then passed on to Validor, namely the right, should their interest ever require, to wind up the respondent. The only penalty to be suffered by the Wingolds, and later Validor, upon such a wind‑up (in addition to the nominal payments on return of capital on the preference shares and any accrued but unpaid dividends) remained a 10 per cent distribution to Meyer Gasner which was precisely the same penalty as existed prior to the alleged termination of the Wingolds' control.

13. As in Oakfield, the continued existence, after the 1960 reorganization, of the right to terminate the corporate existence should the presence of the minority common and preference shareholders become undesirable to the 90 per cent common stockholder, Validor, is, in my view, the linchpin of the tax plan introduced following the 1960 amendments to the tax statute. Control, in the real sense of the term, was not surrendered by the Wingolds (and their successor, Validor) in 1960 upon the issuance to the Gasner group of $80 in preference shares. Accordingly, the respondent remains controlled by Validor within the meaning of the term as it is employed by Parliament in s. 39(4).

14. Counsel for the respondent argued that a finding on the facts herein that Validor controlled the respondent would amount to the judicial establishment of a new principle of law which would be substantially identical to legislation introduced by Parliament in the United Kingdom, and now found in s. 302(2) of the Income and Corporation Taxes Act 1970, 1970 (U.K.), c. 10, as amended. That subsection provides:

15. ...

(2) For the purposes of this Chapter, a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, control, whether direct or indirect, over the company's affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire‑‑

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

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

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

15. This provision is much broader in reach than the principles enunciated with respect to control' in these reasons. Furthermore, the respondent submits that this legislation was enacted by the U.K. Parliament to replace the predecessor provision, in response to the decision in Himley Estates, Ltd. v. Commissioners of Inland Revenue (1932), 17 T.C. 367 (C.A.) This may have been the case, although the new provision first appeared more than thirty years after that judgment. In any event, no such situation exists in the Canadian context. The approach to control' here taken does not involve any departure from prior judicial pronouncements nor does it involve any alteration' of the existing statute. The conclusions reached above merely result from applying existing case law and existing legislation to the particular facts of the case at bar. The application of the control' concept, as earlier enunciated by the courts, to the circumstances now before the court is, in my view, the ordinary progression of the judicial process and in no way amounts to a transgression of the territory of the legislator.

16. We were also invited by counsel for the respondent to consider other combinations of share interests and to consider those combinations in the light of varying economic circumstances of a taxpayer. We are here concerned only with the corporate structure of the respondent in the tax years in question. The courts will deal with other combinations and circumstances if and when those circumstances do indeed come before the courts in future appeals.

17. I therefore would allow the appeal and would restore the order of the Tax Review Board dismissing the appeals of the respondent from income tax assessments in respect of the taxation years 1962, 1963, 1966 and 1967, with costs in this Court, in the Federal Court of Canada Trial Division and in the Federal Court of Appeal to the appellant.

The reasons of McIntyre, Lamer and Wilson JJ. were delivered by

18. Wilson J. (dissenting)‑‑This case raises the question whether, if voting control of a company is equally divided between two groups of shareholders, resort may be had to other indicia in order to determine which group controls a company within the meaning of s. 39(4) of the Income Tax Act, R.S.C. 1952, c. 148, as amended by 1960 (Can.), c. 43, s. 11(1). If such resort is permitted, what other indicia are relevant?

19. There is no doubt that up until the decision of this Court in Oakfield Developments (Toronto) Ltd. v. Minister of National Revenue, 1971 147 (SCC), [1971] S.C.R. 1032, voting control was the determining factor and, if such control were equally divided, no one group of shareholders controlled the company: see Buckerfield’s Ltd. v. Minister of National Revenue, 1964 1187 (CA EXC), [1965] 1 Ex. C.R. 299; Minister of National Revenue v. Dworkin Furs (Pembroke) Ltd., 1967 112 (SCC), [1967] S.C.R. 223. In my view Oakfield departed from that. The Court, in effect, found that, voting control being equally divided, control lay in the hands of the group having the greater de jure rights, in that case greater participation in the assets on a winding‑up. It seems to me that since either group in Oakfield could bring about a winding‑up of the company, that particular right could not per se be determinative. What was determinative was the Court's assumption that the group entitled to greater participation on the winding‑up would be more likely to bring it about. It could, in other words, dissolve the company, rid itself of the other group, and retrieve the substantial part of the assets. For these reasons it was likely to be the group which would in fact wind up the company if and when it considered it in its best interests to do so.

20. It seems to me that in Oakfield the Court moved from de jure to de facto control when de jure control did not provide an answer. The greater de jure rights on the winding‑up was the basis of the finding of de facto control.

21. In his reasons for judgment in the Federal Court of Appeal Le Dain J. tried to identify the precise rationale of Oakfield. He found that it represented a departure from prior authority and I agree with him. He sought therefore to confine its application strictly to situations where one group of shareholders holds all the shares having the greater de jure rights. It seems to me, however, that Judson J. distinguished Dworkin Furs on the basis that each group had the same de jure rights and neither could by itself wind up the company. It was, in other words, a complete deadlock and there was no basis at all on which one group could be distinguished from the other in terms of control, de jure or de facto. In my view, Oakfield stands for the proposition that, when voting control is evenly divided, the other rights attaching to the shares held by the two groups must be examined to see if they provide a basis for attributing de facto control to one group rather than the other, whatever the breakdown of share ownership by the two groups may be. Such control was inferred in Oakfield from the fact of greater participation by one group on a winding‑up but I see no logical reason why the principle, if adopted, would not apply in other circumstances.

22. That Oakfield represents a significant departure from earlier authority is, I think, clear from a review of the cases. In Vancouver Towing Co. v. Minister of National Revenue, 1946 295 (CA EXC), [1946] Ex. C.R. 623, the appellant argued that the parent company did not have a controlling interest in its subsidiary because of a management arrangement with one Jones who was appointed Managing Director under the Articles of Association and given "absolute and sole authority to exercise all the powers, authorities and discretions" of the directors. The appellant argued that Jones and not the parent company controlled the company. The Exchequer Court of Canada, relying on two leading English cases, British American Tobacco Co. v. Inland Revenue Commissioners, [1943] 1 All E.R. 13 (H.L.), and Inland Revenue Commissioners v. J. Bibby and Sons, Ltd., [1945] 1 All E.R. 667 (H.L.), rejected this submission on the ground that the expression "controlling interest" meant "having a shareholding in the company sufficient to out‑vote all other shareholders put together in a general meeting of the company".

23. Both the English cases relied on in Vancouver Towing dealt with the meaning of the expression "controlling interest" in the context of the Finance Act of the United Kingdom. However, it is clear from the judgments that the controlling interest was held to be the interest of the persons who "controlled" the company's affairs and that those persons were held in both cases to be the persons who, having the requisite voting power, could decide how the business of the company was to be carried on. Viscount Simon in British American Tobacco concluded at p. 15 that:

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.

Lord Russell of Killowen expressed the same view in Bibby at p. 669:

When the section speaks of directors having a controlling interest in a company, what it is immediately concerned with in using the words "controlling interest" is not the extent to which the individuals are beneficially interested in the profits of the company as a going concern or in the surplus assets in a winding up, but the extent to which they have vested in them the power of controlling by votes the decisions which will bind the company in the shape of resolutions passed by the shareholders in general meeting. In other words, the test which is to exclude a company's business from subsect. (9)(a) and include it in (9)(b), is the voting power of its directors, not their beneficial interest in the company.

For the purpose of such a test the fact that a vote‑carrying share is vested in a director as trustee seems immaterial. The power is there, and though it be exercised in breach of trust or even in breach of an injunction, the vote would be validly cast vis‑a‑vis the company, and the resolution until rescinded would be binding on it. The contention that upon the wording of sect. 13 the interest must be confined to beneficial interests appears to me to be but a repetition of the argument which was rejected by this House in the case of British American Tobacco Co. v. C.I.R....in relation to National Defence Contribution and the Finance Act, 1937.

Lord Macmillan agreed with Lord Russell of Killowen, stating at p. 670:

The control of a company resides in the voting power of its shareholders. In the respondent company the ordinary shares alone confer a right to vote at a general meeting. The directors are the registered proprietors of a majority of the ordinary shares. It would, therefore, appear to follow that the directors have a controlling interest in the company.

And so did Lord Simonds who said at pp. 672‑73:

What, my Lords, constitutes a controlling interest in a company? It is the power by the exercise of voting rights to carry a resolution at a general meeting of the company. Can the directors of the respondent company by the exercise of their voting rights carry such a resolution? Yes: for they are the registered holders of more than half the ordinary shares of the company. Therefore they have a controlling interest in the company.

From this result the Crown seeks an escape by the contention that shares held by a director as trustee should not be included for the purpose of computing the controlling interest. In the appellants' argument in this House and in their formal reasons this absolute veto is qualified by the suggestion that, if the director has not only the legal ownership of shares but also a predominating beneficial interest in them, they may be brought into the count.

My Lords, in my opinion the Crown's contention cannot be sustained. Those who by their votes can control the company do not the less control it because they may themselves be amenable to some external control. Theirs is the control, though in the exercise of it they may be guilty of some breach of obligation whether of conscience or of law. It is impossible (an impossibility long recognised in company law) to enter into an investigation whether the registered holder of a share is to any and what extent the beneficial owner. A clean cut there must be.

24. In Buckerfield’s Ltd. v. Minister of National Revenue, supra, Jackett P. dealt with a challenge to an assessment based on a finding that several corporations were "associated" under s. 39 of the Income Tax Act. Jackett P. considered s. 39(4)(b) and commented at pp. 302‑03:

Many approaches might conceivably be adopted in applying the word "control" in a statute such as the Income Tax Act to a corporation. It might, for example, refer to control by "management", where management and the Board of Directors are separate, or it might refer to control by the Board of Directors. The kind of control exercised by management officials or the Board of Directors is, however, clearly not intended by section 39 when it contemplates control of one corporation by another as well as control of a corporation by individuals (see subsection (6) of section 39). The word "control" might conceivably refer to de facto control by one or more shareholders whether or not they hold a majority of shares. I am of the view, however, that, in section 39 of the Income Tax Act, the word "controlled" contemplates the right of control that rests in ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the Board of Directors. See British American Tobacco Co. v. I. R. C.... where Viscount Simon L. C., at page 15, says:

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

See also Minister of National Revenue v. Wrights’ Canadian Ropes Ld....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 "controlled" by the other within section 6 of the Income War Tax Act.

25. In Vineland Quarries and Crushed Stone Ltd. v. Minister of National Revenue 1966 909 (CA EXC), 66 DTC 5092 (Ex. Ct.), Cattanach J. considered whether, when making a determination of de jure control under s. 39(4)(b), the Court could "look through" the corporate names on the register to find out who actually controlled voting power. In that case half the shares of the appellant company were owned by one Sauder and the other half by Bold Investments, all of the shares of which were owned by one Thornborrow. Half the shares of the Sauder and Thornborrow Company were owned by Thornborrow and the other half by the McMaster Company, all of the shares of which were owned by Sauder. The shares of the Verben Company were held half by Sauder and half by Thornborrow. The Minister assessed the appellant company, the Sauder and Thornborrow Company and Verben as associated corporations on the basis that all three companies were controlled by the same group of persons, namely Sauder and Thornborrow. The appellant's appeal was dismissed. Cattanach J. noted that in Bibby and British American Tobacco Ltd. the test of beneficial ownership had been rejected and concluded at p. 5098:

In my view the word "controlled" in section 39(4)(b) contemplates and includes such a relationship as, in fact, brings about a control by virtue of majority voting power, no matter how that result is effected, that is, either directly or indirectly.

It would seem pointless to me to call a halt on finding in the share register of the appellant company and the share register of Sauder and Thornborrow Limited that in each instance 50% of the shares are held respectively by Bold Investments (Hamilton) Limited and McMaster Investments Limited when an examination of the share register of Bold Investments (Hamilton) Limited and McMaster Investment Limited reveals that all (or nearly all) the shares in those companies are held by Vernon Thornborrow and Benjamin Sauder respectively.

On the authority of the British American Tobacco case, I do not think it is appropriate to end the inquiry after looking at the share registers of the appellant and Sauder and Thornborrow Limited. It is proper and necessary to look at the share registers of Bold Investments (Hamilton) Limited and Sauder and Thornborrow Limited to obtain an answer to the inquiry whether the appellant and the two other companies are controlled by the same "group of persons". Where the registered shareholder in the first instance is a body corporate, you must look beyond the share register.

26. The reasoning in Buckerfield’s was approved and applied by this Court in Dworkin Furs, supra. The issue in Dworkin Furs was whether five companies were "associated" under s. 39 of the Income Tax Act, 1952 in that all were "controlled" by a specified group or person under s. 39(4)(a), (b). Hall J. writing for this Court held at p. 227‑28:

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 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) 1946 345 (UK JCPC), 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 "controlled" by the other within section 6 of the Income War Tax Act.

This definition of controlled applies to all five appeals.

In Dworkin Furs (Pembroke) Limited, Dworkin Furs Ltd. owned 48 per cent of the issued shares in its own name and 2 per cent in the names of Roy Saipe and Helen Saipe and its nominees. The other 50 per cent were owned by one Sadie Harris. Roy Saipe was President of this respondent, but the By‑laws of the company provided that in the event of an equality of votes, the Chairman did not have a casting vote.

It is clear in the light of Buckerfield that in these circumstances Dworkin Furs (Pembroke) Limited was not controlled by Dworkin Furs Ltd.

Hall J. noted with respect to one of the corporations that an arrangement between two 50 per cent shareholders would give one of them de facto control. As to this he said at p. 229:

The arrangement or agreement between Wagenaar and Jager, while it might be said to give Wagenaar de facto control, did not give him de jure control, which is the true test....

27. Dworkin Furs with its emphasis on de jure control as the test under s. 39(4) was followed by this Court in Vina‑Rug (Canada) Ltd. v. Minister of National Revenue, 1968 66 (SCC), [1968] S.C.R. 193, (per Abbott J.)

28. In Minister of National Revenue v. Consolidated Holding Co., 1971 191 (SCC), [1974] S.C.R. 419, 72 DTC 6007, Judson J. writing for the majority of this Court applied Vina‑Rug going beyond the share register to determine who had voting control. Spence J. dissenting would have confined the Court's scrutiny to the share register as "...the sole basis upon which the voting rights of shares can be determined and, therefore, the sole basis for deciding who controls a company..." (at pp. 434 and 6013 respectively).

29. In Donald Applicators Ltd. v. Minister of National Revenue, 1969 1546 (CA EXC), [1969] 2 Ex. C.R. 43, 69 DTC 5122 (affirmed [1971] S.C.R. v, 71 DTC 5202), the Exchequer Court, in interpreting the words "one of the corporations controlled the other", concluded that even although a shareholder might not have the immediate voting power to elect directors, if he has sufficient voting power to pass any ordinary resolution of shareholders, to take away powers of directors and reserve decisions to his class of shareholders, to dismiss directors from office and ultimately to secure the right to elect directors, then he has legal control of the corporation. Thurlow J. expressly rejected the use of a de facto control test at pp. 5124‑25:

I can deal with the alternative submission by saying that in my opinion de facto control is not to be taken into account, that de jure control is what is contemplated by the statute and that in determining association for the purposes of the statute control itself and not some mere element or fragment of it is required to support a conclusion that corporations are in fact associated. This submission, in my opinion, accordingly fails.

The statement of the President of this Court in Buckerfield’s case, (1965) 1964 1187 (CA EXC), 1 Ex. C.R. 299 at page 303 [64 DTC 5301 at page 5303], when he said "I am of the view, however, that in section 39 of the Income Tax Act, the word controlled contemplates the right 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" should, I think, be read and understood as applying to a case where the directors when elected have the usual powers of directors to guide the destinies of the company.

30. The concept of corporate persona and the fact that shareholders have no proprietary interest in the assets of corporations until a winding‑up of the enterprise has, I believe, led the courts to favour de jure rather than de facto control. The distinction between ownership and control of an operating corporate personality has been maintained. As pointed out by Cattanach J. in Vineland Quarries, supra, at p. 5096:

I am not here concerned with the proposition that a corporation is a distinct legal entity separate from its shareholders, nor with any question of corporate capacity or power. I readily accept the undisputed proposition that no shareholder, even though he holds all the shares in a corporation, has any property, legal or equitable, in the assets of the corporation and the proposition that a corporation is not, as such, the agent or trustee for its shareholders.

The question here is who "controlled" the appellant and Sauder and Thornborrow Limited. Is it Benjamin Sauder and Vernon Thornborrow, or is it Benjamin Sauder and Bold Investment (Hamilton) Limited and Vernon Thornborrow and McMaster Investments Limited.

31. Although the scope of scrutiny under the de jure test has been extended beyond a mere examination of the share register in order to determine who really has voting control, there has been no deviation from the principle that voting control is the proper indicium of control until Oakfield. I am of the view, therefore, that the decision in Oakfield is anomalous and should not be followed. For the courts suddenly to change direction in face of well‑settled and long‑standing authority in our tax jurisprudence is, in my view, quite inappropriate. If the legislature wishes to amend the legislation as was done in the United Kingdom to discourage the kind of tax planning which was done here, it is, of course, perfectly free to do so. But I do not think that this is a suitable area for judicial creativity. People plan their personal and business affairs on the basis of the existing law and they are entitled to do so. It is, I believe, important to recognize that any sudden departure by the courts from a well‑settled line of authority in an area such as tax law can have a serious retroactive impact on the taxpayer.

32. Quite apart from considerations of equity and fairness, I believe that the respondent makes a very valid point that a test of de facto control based on an evaluation of de jure rights in different corporate contexts and under different economic and business conditions is fraught with uncertainty. Indeed, it seems perfectly conceivable to me that, if such a test were adopted, de facto control could move from one group of shareholders to another depending upon the condition of the company from time to time.

33. I would dismiss the appeal with costs.

Appeal allowed, McIntyre, Lamer and Wilson JJ. dissenting.

Solicitor for the appellant: Roger Tassé, Ottawa.

Solicitors for the respondent: Goodman & Carr, Toronto.