S Madill LTD (Formerly Named Madill Sales Ltd) v. Minister of National Revenue, [1972] CTC 47, 72 DTC 6027

Kerr, J:—This is an appeal against assessments 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 paragraph 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 taxation year.

The respondent applied the higher rate of tax under paragraph 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 subsection 39(4) of the Act.

In those years Madill Sales Ltd was a sales company and S Madill Ltd was a manufacturing 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 manufacturing company”, were controlled by the same group of persons and by reason thereof were associated within the meaning of paragraph 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:* [1]

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 Newcastle 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 company 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	As at June	As at June	As at June
Registered^ 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 Madili	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 manu- facturing company from July 1st, 1965 to June 30th, 1968 was as follows: Carfield Investments Ltd — At no time owned less than .46%

Mogul Holdings Ltd	— At no time owned less than 14%
Mammoth Holdings Ltd	— At no time owned less than 43.6%

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 Madiil 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 taxation years concerned were Charles Madill and his brother Norman Madill, John S Wilfert and Clair C Smith.

The old manufacturing company manufactures 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 managing director of the present S Madill Ltd, was associated, along with his brother Norman and their father, with the old manufacturing company as far back as 1948. The father died and the two brothers inherited the shares of the company 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 president and managing director.

John S Wilfert was purchasing agent and logging manager of Powell River Company, which was one of the old manufacturing company’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 working 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 forming a new sales company that would make use of the old manufacturing company’s name and in which that company would have a half interest. The new company would sell the old manufacturing company’s products on a commission basis. Wilfert and Madill came to general agreement 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. pointed 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 company as a third shareholder, and accordingly the old sales company, Madill Sales Ltd, was incorporated in April 1962 with a starting capital of $10,000 contributed by the old manufacturing 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 agreement, dated June 1, 1963 (Exhibit 8), which provided, inter alia, that the sales company would be sales agent of the manufacturing company 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 Agreement 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 manufacturing 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 thereafter. Madill [sic] 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 discussed 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 company (Exhibit 13) shows the following directors and the dates of their appointment and retirement:

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 company when it became a public company in July 1965. Charles Madill was also managing director.

The register of the old sales company (Exhibit R-1) shows the following directors and the dates of their appointment and retirement:

Wilfert was also president of the company and Smith was its secretary-treasurer.

Minutes of meetings of directors and shareholders 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 prepare the minutes and circulate them for signature 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 (Exhibit 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 shareholders’ 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 director, and he exercised proxies from the old sales company at shareholders’ meetings. Smith attended after he became a director in September 1967. The minutes of the directors’ meetings 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 purchase 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 managing director in that respect. He said that because of the sales contract Wilfert consulted with him in connection with the products available 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 necessary 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 manufacturing 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 Wilfert on the question of the sales company selling products of other companies, he wanted it to sell only the manufacturing company’s products, 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 manufacturing 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 company at Charles Madill’s request but prior thereto had played no part in the policies of the company or policy-making. Madill sought his opinion on occasions about the general business outlook but not in respect of the operation of the manufacturing company. He became aware that the manufacturing company was purchasing an aircraft 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 Wilfert 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 four or five 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 three salesmen, an accountant and a secretary. Its monthly financial 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 adjustment of the sales commission rate could have the effect of making an adjustment in the revenues. 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 manufacturing company were available he discussed the matter with Smith, who advised that the sales company purchase a number of shares commensurate with the money available. Madill asked him to become a director of the manufacturing company and he accepted, feeling that he had something worthwhile to contribute. He thought that it would be advantageous to capitalize 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 manufacturing 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 paragraph 39(4)(b) of the Income Tax Act.

(2) Norman Madill, Charles Madill, Wilfert and Smith were not so connected as to constitute 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 adviser in general matters, such as the general business 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 arranging for Smith to hold the balance of power, and no group was in control of that company; it was run independently of the manufacturing company, the former had its office and staff at Vancouver, the latter at Nanaimo; the sales company adopted an independent attitude, eg, in selling products other than those of the manufacturing company;

(b) if there was any control of the sales company by the manufacturing company it was through the sales contract, not through shareholdings; each company had a right to terminate 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 negotiated 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 control 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, eg, 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 brothers functioned in exercising control of the company; 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 company 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 paragraph 39(4)(b) is a right to control by virtue of a majority of voting shares; if two or more persons, no one of whom alone controls a particular 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 control is not a governing factor in the determination of the question whether both companies were controlled by the same group of persons; it is not essential that the members of a controlling 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 four 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 brother’s interest and had proxies from his brother; Charles Madill wanted to hire Wilfert, Smith was a business adviser 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 distribution of shares was with an eye to control by those persons and avoidance of a stalemate that would interfere with the operation of the company; 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 directors 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 company 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 Smith in connection with the companies if occasion to do so had arisen; one of the reasons why the manufacturing company was a shareholder 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) Limited v MNR, [1968] SCR 193; [1968] CTC 1;

Buckerfield’s Limited et al v MNR, [1965] 1 Ex CR 299; [1964] CTC 504;

Yardley Plastics of Canada Limited v MNR, [1966] Ex CR 1027; [1966] CTC 215;

Floor & Wall Covering Distributors Limited and Vina-Rug (Canada) Limited v MNR, [1967] 1 Ex CR 390; [1966] CTC 566;

Vineland Quarries and Crushed Stone Limited v MNR, [1966] Ex CR 417; [1966] CTC 69;

Alpine Drywall & Decorating Ltd v MNR, [1966] CTC 359;

Bert Robbins Excavating Ltd v MNR, [1966] CTC 371.

The meaning of the word “control” as used in paragraph 39(4)(b) was considered by the Supreme Court of Canada in Vina-Rug (Canada) Limited v MNR (supra) in which Abbott, J, speaking for the Court, said (at page 3):

This Court considered the concept of “control” in MNR v Dworkin Furs Limited, [1967] SCR 223; [1967] CTC 50. Hall, J in delivering the judgment of the Court said at p 227 [p 52] :

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 MNR:

“Many approaches might conceivably be adopted in applying the word ‘control’ in a statute such as the Income Tax Act to a corporation. It might, for example, refer to control by ‘management’, where management and the Board of Directors are separate, or it might refer to control by the Board of Directors. The kind of control exercised by management officials or the Board of Directors is, however, clearly not intended by section 39 when it contemplates control of one corporation by another as well as control of a corporation by individuals (see subsection

(6) of section 39). The word ‘control’ might conceivably refer to de facto control by one or more shareholders whether or not they

hold a majority of shares. I am of the view, however, that in section 39 of the Income Tax Act, the word ‘controlled’ contemplates the right of control that rests in ownership of such a number of shares as Carries with it the right to a majority of the votes in the election of the Board of Directors. See British American Tobacco Co v IRC, [1943] 1 All ER 13 where Viscount Simon LC, 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 section 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 section 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 brothers and Wilfert and Smith came together initially 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 paragraph 39(4)(b). In Aaron’s (Prince Albert) Limited v MNR, [1967] 1 Ex CR 21; [1966] CTC 330, Thurlow, J said at page 25 [333]:

. . . 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 intentionally 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 paragraph 39(4)(b), that controlled both companies.

Counsel for the appellant referred to the definition 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 MNR (supra) Jackett, P said at page 304 [508]:

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 indirectly, 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 existence of a larger controlling combination or group comprised of them and the other shareholders 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 business 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 company 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 company 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 community 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 paragraph 39(4)(b) of the Income Tax Act; that by virtue of the ownership of voting shares they were in a position to exercise control over both companies; that they constituted a group of persons that controlled both companies at all material times, and that the companies were, therefore, associated with each other within the meaning of paragraph 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 paragraph 39(4)(b) by the same group of persons, namely, the four persons above named.

The appeal will therefore be dismissed, with costs.