SHEPPARD, D.J.:—This appeal raises the issue of whether or not the appellant company (Consolidated Holding Co. Ltd.) and Martin & Robertson, Ltd. were associated companies in 1963 and 1964 within Section 39 of the Income Tax Act. That issue turns upon the question whether or not the two companies “were controlled by the same person or group of persons’’ within Section 39(4) (b).
The facts follow.
The appellant has two registered shareholders namely, Harold Duncan Gavin, 1,651 shares, and Robert Duncan Gavin, 1,651 shares. They are cousins and hence form a group. Martin & Robertson, Ltd. has outstanding 30,000 registered shares as follows :
| Harold D, Gavin | 1 share |
| Robert D. Gavin | 1 share |
| Duncan H. Gavin (as executor for Estate of A. S. | |
| Gavin) | 3,111 shares |
| Estate of Duncan Gavin, deceased | 13,777 shares |
| Consolidated Holding Co. Ltd. | 13,110 shares |
| 30,000 shares |
Both companies were incorporated under the Companies Act of British Columbia (R.S.B.C. 1960, ce. 67).
The will of Duncan Gavin, deceased (Exhibit A-3), contains Clause 15 as follows:
In carrying out the duties imposed upon my Trustees save as aforesaid, I direct that the views, discretion or direction of any two of my Trustees shall be binding upon the other of my Trustees.
The respondent has contended that Harold Duncan Gavin and Robert Duncan Gavin being the only members controlling the appellant, also by virtue of Clause 15 of the will, can enforce their wishes upon the third Trustee, Montreal Trust Company, and control Martin & Robertson, Ltd., therefore, as this same group controls both companies, the companies are associated (Section 39(4) (b)). The appellant contends that in determining control the will may not be considered but only the articles of Martin & Robertson, Ltd. and under those articles the Montreal Trust Company, one of the executors equally with the other two executors control the voting of the shares in the Estate of Duncan Gavin, deceased, hence, the two companies are not controlled by the same group and, therefore, are not associated.
As to the control of Martin & Robertson, Ltd., control is defined by Jackett, P. in Buckerfield’s Limited et al. v. M.N.R., [1965] Ex. C.R. 299 at 302; [1964] C.T.C. 504 at 507, whose reasons are quoted by Hall, J. (for the Court) in M.N.R. v. Dworkin Furs (Pembroke) Ltd. et al., [1967] C.T.C. 50 at 52, in part as follows:
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 Bucker field’s Limited at al. v. M.N.R., [1965] 1 Ex. C.R. 299 at 302-3; [1964] C.T.C. 504 at 507:
“. . . The word ‘control’ might conceivably refer to de facto control . . . 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 All 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.’
In determining the ‘‘right to a majority of the votes in the election of the Board of Directors’’ the said will may not be considered. In Z.R.C. v. J. Bibby and Sons, [1945] 1 All E.R. 67, the question was whether or not the directors had a. controlling interest in the company as they held some of their shares as trustees of their sister’s marriage settlement and the question was whether the trustees, not having a beneficial interest in such shares, should be deemed to have a controlling interest in the company. It was held that ‘‘controlling interest’’ did not refer to the directors’ beneficial interest in the company but to the power of controlling by votes the decisions binding on the company in the shape of resolutions passed at a general meeting. Lord Russell of Killowen at p. 669 stated:
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.
Lord Macmillan at page 670:
The control of the 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. . . .
at page 671 :
So far as the company is concerned the relation between such of its shareholders as happen to be trustees and their beneficiaries is res inter alios. It may be that a trustee shareholder may, as between himself and his cestuis que trust, be under a duty to exercise his vote in a particular manner, or a shareholder may be bound under contract to vote in a particular way (cf. Pud- dephau v. Leith (3) ). But with such restrictions the company has nothing to do. It must accept and act upon the shareholder’s vote notwithstanding that it may be given contrary to some duty which he owes to outsiders. The remedy for such breach lies elsewhere.
Lord Porter at page 672 :
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 the 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.
The Bibby case was quoted with approval by Cattanach, J. in Vineland Quarries and Crushed Stone Ltd. v. M.N.R., [1966] C.T.C. 69 at 80, as applicable to determining control under the Income Tax Act of Canada.
It follows from these judgments that the control is determined by the owners of the majority of voting power and in determining that voting power the existence of any trust under which the registered shareholders are liable is immaterial.
The irrelevancy of the trust in determining control as stated in the Bibby case, is confirmed by Section 86(2) of the Companies Act (R.S.B.C. 1960, c. 67) which provides ‘‘the company is not bound to see to the execution of any trust’’. While the fact of registered shareholders being executors may be stated by the company (Sections 86(1) and 95 of the Companies Act) and although the executorship is stated and a copy of the will is also placed on the files of the company, nevertheless that company is not bound to see to the performance of the trust in that it is not obliged to inquire into the extent of the duties of the shareholders as trustees (Simpson v. Molsons Bank (1895), 64 L.J. P.C. 51), although it may be otherwise where the company knowingly participates in a breach of trust. Hence the right to vote the shares at a general meeting of members including the election of directors is determined not by the trust of a shareholder but only by the articles of association.
The relevant articles of Martin & Robertson, Ltd. are as follows :
41. The executors or administrators of a deceased member (not being one of several joint holders) shall be the only persons recognized by the Company as having any title to the shares registered in the name of such member; and in the case of the death of any one or more of the joint holders of any registered shares, the survivors shall be the only persons recognized by the Company as having any title to or interest in such shares.
42. Any person who has become entitled to a share in consequences of the death or bankruptcy of any member upon producing such evidence that he sustains the character in respect of which he proposes to act under this clause, or of his title, as the Directors think sufficient, may with the consent of the Directors (which they shall not be under any obligation to give) be registered as a member in respect of such shares, or may, subject to the regulations as to transfers hereinbefore contained, transfer such shares: This clause is hereinafter referred to as the transmission clause.
73. On every question to be decided by poll, every member: shall. have one vote for every share held by him in the Company, except as hereinafter mentioned.
74. No member shall be entitled to vote at any general meeting other than the first unless all calls and interest due from him have been paid, and unless he has been registered as the holder of the shares in respect of which he proposes to vote for at least one calendar month.
75. Any person entitled under the transmission clause to transfer any shares, may vote at any General Meeting in respect thereof in the same manner as if he were the registered holder of such shares, provided that twenty-four hours at least before the time of holding the meeting at which he proposes to vote he shall satisfy the Directors of his right to transfer such shares, unless the Directors shall have previously admitted his right to vote at such meeting in respect thereof.
Under the articles words imputing the singular number include the plural (Art. 1). The three directors as executors may be included in one certificate but they would have only one vote for every share registered in their names (Art. 73).
Under thes articles the three directors being executors must be unanimous. In Lumbers v. Fretz, [1948] 4 D.L.R. 269; 62 O.L.R. 635, Wright, J. stated that,
In Mas ten and Fraser’s Company Law, 2nd ed., p. 528 it is stated that: “Joint holders must concur in voting, unless the by-laws provide otherwise”, and that statement or opinion appears to be the logical deduction from the decisions in Re Saunders & Co., [1908] 1 Ch. 415, and Barton v. L. & N.W.R. Co. (1889), 24 Q.B.D. 77; Burns v. Siemens Bros. Dynamo Wks. Ltd., [1919] 1 Ch. 225 . . . I accept as the law the statement that already cited from Masten and Fraser, and hold that the votes for the estate of J. Lumbers in respect of the 40 shares held jointly as trustees by Marie Lumbers and W. G. Lumbers were improperly cast. It may be mentioned here that there are four executors representing the estate of J. Lumbers; namely, the plaintiff L. L. Lumbers, Mrs. Marie Lumbers, W. G. Lumbers, and J. H. Lumbers. As the executors of this will hold the position of trustees of a private trust, the general law that all should concur in doing any act ought to be applied as to voting shares held by the estate, as to some extent it is a disposition of the assets of the estate, in which all should concur and not a mere majority. See Underhills Law of Trust and Trustees, 8th ed., pp. 318 et seq. (affirmed (1928), 63 O.L.R. 190).
It follows that Harold Duncan Gavin and Robert Duncan Gavin do not by virtue of the said will control the voting of the executors in respect of the shares in the estate of Duncan Gavin, deceased, but on the contrary under the articles which alone are considered, the voting of the executors must be unanimous in voting the shares in the estate and in determining that unanimity, Montreal Trust Company has equal voice with the coexecutors and may prevent the two co-executors exercising that control which is accorded by the said will. In consequence, Martin & Robertson, Ltd. is not controlled by Harold Dunean Gavin and Robert Duncan Gavin.
It is not contested that Harold Duncan Gavin and Robert Duncan Gavin being the only shareholders of the appellant company do control the appellant. While Article 77 of Martin & Robertson, Ltd. requires a proxy to be a shareholder, Harold Duncan Gavin and Robert Duncan Gavin are each registered as holder of one share and therefore either is capable of being appointed proxy for the appellant company. Moreover their control of the appellant company is determined by the principle of Vineland Quarries and Crushed Stone Ltd. v. M.N.R. (supra) by Cattanach, J. and of Vina Rug Canada Ltd. v. M.N.R., [1968] C.T.C. 1. However, this group does not control the shares registered in the executors of the estate of Duncan Gavin, deceased, therefore, the group does not control both companies and the companies are not associated.
In conclusion, the appellant company (Consolidated Holding Co. Ltd.) and Martin & Robertson, Ltd. are not associated companies within Section 39 of the Income Tax Act. The assessments in respect of the taxation years 1963 and 1964 are set aside and the assessments referred back to the Minister for re-assessment in accordance with these reasons.