The International Iron & Metal Co. Limited v. Minister of National Revenue, [1969] CTC 668, 69 DTC 5445

GIBSON, J.:—These appeals are from four assessments whereby income tax in the amounts hereinafter set out was levied in respect of income of the appellant for the taxation years 1961 to 1964 :

The issue in each appeal is whether or not the appellant was associated with a company by the name of Burland Realty & Equipment Company Limited within the meaning of Section 39(1)(b)* [1] of the Income Tax Act by reason of being controlled by the same group of shareholders.

The respondent pleads that in assessing the appellant for its 1961 to 1964 taxation years ‘‘the Minister acted on the assumption that at all material times the Appellant was associated with Burland Realty & Equipment Company Limited in that both of the said corporations were controlled directly or indirectly by the same group of persons to wit :

Marvin E. Goldblatt

Cecil Levy

Malcolm Goldblatt

Lawrence (Larry) Goldblatt

Morton Levy

Robert Levy

Labol Levy

Abby M. Goldblatt

Deborah Moses.”

The voting shares of Burland Realty & Equipment Company Limited were held by the above group of persons and by one Sorie Rosenblatt. (The fact that Sorie Rosenblatt is excluded from the above list of persons is immaterial to the decision in this case.)

The appellant, in answer to the above assumption, claims that it was controlled during its taxation years 1961 to 1964 inclusive by a group consisting of Frank P. Goldblatt, George Goldblatt, Morley B. Goldblatt and Reuben Levy; that Burland Realty & Equipment Company Limited was controlled by the group of persons above set out in the respondent’s assumption and by Sorie Rosenblatt; and that as a consequence the appellant and Burland Realty & Equipment Company Limited were not associated corporations within the meaning of Section 39(4)* [2] of the Income Tax Act for the said taxation years.

The common shareholders and. their respective share holdings of the appellant at all material times were as follows :

Franklatt Investments Limited is a holding company, all the shares of which are owned by the children of Frank Goldblatt and Morley B. Goldblatt (except as to the daughter of Frank Goldblatt, Sorie Rosenblatt; but again the exclusion of Sorie Rosenblatt. is not material to the decision in this appeal).

Georgelatt Investments Limited is a holding company, all the shares of which are owned by the two children and one son-in-law of George Goldblatt.

Molatt Investments Limited is a holding company, all the shares of which are owned by the children of Frank and Morley Goldblatt (except Sorie Rosenblatt).

Rulev Investments Limited is a holding company, all the shares of which are owned by the children of Reuben Levy.

In other words, the claim of the appellant is that the group consisting of the four fathers, Frank P. Goldblatt, George Goldblatt, Morley B. Goldblatt and Reuben Levy, although they held during the taxation years 1961 to 1964 only one share each in the appellant company, controlled the appellant company during its taxation years 1961 to 1964; and as a consequence, the said two corporations during the said taxation years were not associated within the meaning of Section 39(1)(b) of the Income Tax Act.

This claim is based on what the appellant alleges is the true interpretation of an agreement dated May 23, 1957, between Franklatt Investments Limited, Georgelatt Investments Limited, Molatt Investments Limited, Rulev Investments Limited and the said four fathers. (See Exhibit A-2.)

The appellant admits that if there was not this agreement dated May 23, 1957 the appellant and Burland Realty & Equipment Company Limited were controlled by the same group of persons during these said taxation years and that the group that controlled both of these corporations were at least some of the persons referred to above in the assumption made by the respondent in making the said assessments ; or putting it another way, the appellant admits that both these corporations were controlled by some of the children of the said four fathers if there was not the said agreement dated May 23, 1957.

The said agreement of May 23, 1957 recites at paragraphs 3 to 11 inclusive as follows:

3. The Board of Directors of each of the Corporations shall be composed of four (4) Directors, respectively, and so long as this Agreement or any of its extensions or renewals shall be in full force and effect, Franklatt, Georgelatt, Molatt and Rulev shall each have the respective right to designate one (1) Director only to the Board of Directors of each of the said Corporations; provided however that no person shall be so designated as a Director of any of the said Corporations unless he has been an employee or officer for at least three (3) years of any of the Corporations.

4. It is hereby understood and agreed that so long as the Parties of fifth, sixth, seventh and eighth parts live they will, at their individual and respective options, be designated and elected as Directors of the said Corporations or such one or more of them as they shall respectively desire.

o. The written consent, or affirmative vote of a majority of the Directors elected as aforeprovided shall, so long as this Agreement or any of its extensions or renewals be in full force and effect, be necessary for effecting or validating any act of the said Corporations, or any of them.

6. The Parties hereto agree to execute and deliver any papers, documents and instruments, causing such meetings to be held, resolutions to be passed and by-laws enacted, exercise their votes and influence, and do and perform and cause to be done and perform such further and other acts and things as may be necessary, practicable or desirable in order to give full effect to this Agreement and every part thereof.

7. If at any time during the term of this Agreement the Parties hereto shall deem it necessary to make any alterations, amendments, or change in this Agreement, or any clause thereof, for the more advantageous or satisfactory management of the business of the Corporations and it shall be lawful and proper for them to do so by the consent in writing of Franklatt, Georgelatt, Molatt and Rulev.

8. The Party of the fifth part hereby acknowledges that all shares held by him in the said Corporations are held by him on behalf of and for Franklatt, which owns the whole beneficial interest thereof.

9. The Party of the sixth part hereby acknowledges that all shares held by him in the said Corporations are held by him on behalf of and for Georgelatt which owns the whole beneficial interest thereof.

10. The Party of the seventh part hereby acknowledges that all shares held by him in the said Corporations are held by him on behalf of and for Molatt which owns the whole beneficial interest thereof.

11. The Party of the eighth part hereby acknowledges that all shares held by him in the said Corporations are held by him on behalf of and for Rulev which owns the whole beneficial interest thereof.

The question for decision in this case therefore, is whether or not this agreement of May 23, 1957 deprived the children of the said four fathers of de jure control of the appellant and vested such de jure control of the appellant in the said four fathers in the taxation years of the appellant, 1961 to 1964.

Counsel for the appellant argues that de jure control during the said taxation years was absolute in the said four fathers by reason of paragraphs 3 and 4 of the said agreement of May 23, 1957 and that paragraph 7 thereof, despite its wording that ‘‘any alterations, amendments or changes’’ in the agreement may be made or done “by the consent in writing of Franklatt, Georgelatt, Molatt and Rulev’’, does not derogate therefrom. Instead, counsel argues that on a correct interpretation of the whole of the agreement, its true meaning and the intention of the parties to it, was that all of the parties, that is including the four fathers, must agree and consent before ‘‘any alterations, amendments or changes’’ could be made in the said agreement.

Counsel for the respondent, on the contrary, argues that paragraph 7 of this agreement gives the holding companies, and through them the children of the said four fathers, the sole power to amend the said agreement and as a result the ultimate or long-run control of the appellant is and was during the said taxation years with the group of children referred to by the respondent in the said assumption made for the purpose of these assessments.

Counsel for the respondent also argues that paragraph 7 of By-law No. 1 of the appellant (see Exhibit A-1) which is the general by-law relating to the transaction of the business and affairs of the appellant, provides for the removal from office of a director or directors at any time by ‘‘resolution passed at a special and general meeting of shareholders called for that purpose”; and that such is in conflict with the said paragraph 4 of the agreement of May 23, 1957 and that such conflict is irreconcilable.

As to this, counsel for the appellant argues that said By-law No. 1 of the appellant was passed in 1951 and that the said agreement of May 23, 1957 being executed later, and by reason of paragraphs 4 and 6 thereof, is operative to override any action taken by shareholders under paragraph 7 of By-law No. 1.

Counsel for the respondent also argues that Sections 308 to 310 (see Schedule ‘‘A’’ to these Reasons) inclusive of The Corporations Act of Ontario as applied to the facts of this case effectively gave to the children of the said four fathers de jure control of the appellant.

In sum, for the appellant to succeed on these appeals, the meaning it submits of the said agreement of May 23, 1957 must be the true meaning.

In my view, on the true meaning of the provisions of the said agreement of May 23, 1957 the four fathers during the taxation years 1961 to 1964 did not have de jure control of the appellant.

The meaning of ‘‘controlled’’ in Section 39 of the Income Tax Act in reference to a corporation means the right of control that is vested in the owners of such a number of shares in a corporation so as to give them the majority of the voting power in a corporation.* [3]

The fact that a shareholder in such a corporation may be bound under contract to vote in a particular way regarding the election of directors (as in this case), is irrelevant to the said meaning of ‘‘controlled’’ because the corporation has nothing to do with such a restriction.

Instead, the only relevant fact is that the voting power in such a corporation remains in the owners of such a number of shares. In other words, they do not in any lesser way control the corporation because they themselves may be liable to certain external control created by such a contract.* [4]

As a consequence, in my view, this said agreement was not the kind of contract among shareholders discussed in the said decision in M.N.R. v. Dworkin Furs (Pembroke) Limited et al. (supra) which has the effect of accomplishing what was the intention of the parties herein, namely, to give to a certain group, the kind of de jure control contemplated by Section 39 of the Income Tax Act so as to avoid certain income tax consequences, because in that case, by virtue of the statute it became part of the constitution of the Company.

In the result, therefore, the appellant has not proven that the said assumption made by the respondent in making the said assessments was wrong.

The appeals are therefore dismissed with costs as of one appeal.

SCHEDULE “A” TO REASONS FOR JUDGMENT

THE CORPORATIONS ACT

R.S.O. 1960, c. 71

308. (1) Shareholders of a company holding not less than one- tenth of the issued shares of the company that carry the right to vote at the meeting proposed to be held, or not less than one- tenth of the members of a corporation without share capital entitled to vote at the meeting proposed to be held, as the case may be, may request the directors to call a general meeting of the shareholders or members for any purpose connected with the affairs of the corporation that is not inconsistent with this Act.

(2) The requisition shall state the general nature of the business to be presented at the meeting and shall be signed by the requisitionists and deposited at the head office of the corporation and may consist of several documents in like form signed by one or more requisitionists.

(3) Upon deposit of the requisition, the directors shall call forthwith a general meeting of the shareholders or members for the transaction of the business stated in the requisition.

(4) If the directors do not within twenty-one days from the date of the deposit of the requisition call and hold such meeting. any of the requisitionists may call such meeting which shall be held within sixty days from the date of the deposit of the requisition.

(5) A meeting called under this section shall be called as nearly as possible in the same manner as meetings of shareholders or members are called under the by-laws, but if the by-laws provide for more than twenty-one days notice of meetings, twenty- one days notice is sufficient for the calling of such meeting.

(6) Any reasonable expenses incurred by the requisitionists by reason of the failure of the directors to call such meeting shall be repaid to the requisitionists by the corporation and any amount so repaid shall be retained by the corporation out of any moneys due or to become due from the corporation by way of fees or other remuneration in respect of their services to such of the directors as were in default, unless at such meeting the shareholders or members by a majority of the votes cast reject the repayment to the requisitionists.

309. (1) On the the requisition in writing of shareholders of a company holding not less than one-twentieth of the issued shares of the company that carry the right to vote at the meeting to which the requisition relates or not less than one-twentieth of the members of a corporation without share capital entitled to vote at the meeting to which the requisition relates, as the case may be, the directors shall,

(a) give to the shareholders or members entitled to notice of the next meeting of shareholders or members notice of any resolution that may properly be moved and is intended to be moved at that meeting; or

(b) circulate to the shareholders or members entitled to vote at the next meeting of shareholders or members a statement of not more than 1,000 words with respect to the matter referred to in any proposed resolution or with respect to the business to be dealt with at that meeting.

(2) The notice or statement or both, as the case may be, shall be given or circulated by sending a copy thereof to each shareholder or member entitled thereto in the same manner and at the same time as that prescribed by this Act for the sending of notice of meetings of shareholders or members.

(3) Where it is not practicable to send the notice or statement or both at the same time as the notice of the meeting is sent, the notice or statement or both shall be sent as soon as practicable thereafter.

(4) The directors are not bound under this section to give

notice of any resolution or to circulate any statement unless,

(a) the requisition, signed by the requisitionists, is deposited at the head office of the corporation,

(i) in the case of a requisition requiring notice of a resolution to be given, not less than ten days before the meeting,

(ii) in the case of a requisition requiring a statement to be circulated, not less than seven days before the meeting; and

(b) there is deposited with the requisition a sum reasonably sufficient to meet the corporation’s expenses in giving effect thereto.

(5) The directors are not bound under this section to circulate any statement if, on the application of the corporation or any other person who claims to be aggrieved, the court is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter, and on any such application the court may order the costs of the corporation to be paid in whole or in part by the requisitionists notwithstanding that they are not parties to the application.

(6) A corporation and a director, officer, employee or person acting on its behalf, except a requisitionist, is not liable in damages or otherwise by reason only of the circulation of a notice or statement or both in compliance with this section.

(7) Notwithstanding anything in the by-laws of the corporation, where the requisitionists have complied with this section, the resolution, if any, mentioned in the requisition shall be dealt with at the meeting to which the requisition relates.

(8) The sum deposited under clause (b) of subsection (4) shall be repaid to the requisitionists by the corporation unless at the meeting to which the requisition relates the shareholders or members by a majority of the votes cast reject the repayment to the requisitionists.

(9) A director of a corporation who authorizes, permits or acquiesces in any contravention of any requirement of this section is guilty of an offence and on summary conviction is liable to a fine of not more than $200.

310. If for any reason it is impracticable to call a meeting of shareholders or members of the corporation in any manner in which meetings of shareholders or members may be called or to conduct the meeting in the manner prescribed by this Act, the letters patent, supplementary letters patent or by-laws, the court may, on the application of a director or a shareholders or member who would be entitled to vote at the meeting, order a meeting to be called, held and conducted in such manner as the court thinks fit, and any meeting called, held and conducted in accordance with such an order shall for all purposes be deemed to be a meeting of shareholders or members of the corporation duly called, held and conducted.