Duha Printers (Western) Ltd. v. Canada

Duha Printers (Western) Ltd. v. Canada
Collection
Supreme Court Judgments
Date
1998-05-28
Report
[1998] 1 SCR 795
Case number
25513
Judges
L'Heureux-Dubé, Claire; Gonthier, Charles Doherty; McLachlin, Beverley; Iacobucci, Frank; Major, John C.; Bastarache, Michel; Binnie, William Ian Corneil
On appeal from
Federal Court of Appeal
Subjects
Taxation
Notes
SCC Case Information: 25513
Decision Content
Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795
Duha Printers (Western) Ltd. Appellant
v.
Her Majesty The Queen Respondent
Indexed as: Duha Printers (Western) Ltd. v. Canada
File No.: 25513.
1998: March 17; 1998: May 28.
Present: L’Heureux‑Dubé, Gonthier, McLachlin, Iacobucci, Major, Bastarache and Binnie JJ.
on appeal from the federal court of appeal
Income tax -- Deductions from income -- Non-capital losses -- Amalgamation of corporations -- Predecessor corporation -- Meaning of “control” -- Corporation acquiring shares of inactive company in order to take advantage of its accumulated non-capital losses -- Corporation amalgamating with inactive company -- Whether change in control prevented corporation from deducting inactive company’s non-capital losses -- Whether unanimous shareholder agreement to be considered in assessing who has de jure control of corporation -- Income Tax Act, R.S.C. 1952, c. 148, ss. 87(2.1), 111(1), (5).
A predecessor of the appellant corporation decided to acquire the shares of an inactive company (“Outdoor”) in order to take advantage of the substantial non-capital losses it had accumulated. The company which owned the shares of Outdoor (“Marr’s”) subscribed for a sufficient number of shares in the appellant’s predecessor to give it a majority of the voting shares. An agreement was entered into among all the shareholders of the appellant’s predecessor pursuant to which its affairs were to be managed by a board of directors, elected by the shareholders from a list of nominees specified in the agreement. The agreement also restricted the transfer of shares so that no shares could be transferred without the consent of the majority of the directors. The appellant’s predecessor purchased all the outstanding shares of Outdoor from Marr’s for $1. It then amalgamated with Outdoor, thereby creating the appellant.
In its 1985 tax return the appellant deducted from its income non-capital losses which had been incurred by Outdoor in previous years, pursuant to s. 111(1) of the Income Tax Act (“ITA”). Section 87(2.1) of the ITA provides that where there has been an amalgamation of two or more corporations, the new corporation is deemed to be the same corporation as each predecessor corporation for the purposes of determining the non-capital losses of the new corporation. Under s. 111(5), however, where “control” of a corporation has been acquired by another person (the “purchaser”), that corporation’s non-capital losses from the carrying on of a business are only deductible by the purchaser in a subsequent taxation year if, throughout that year, the business in question was carried on by the purchaser with a reasonable expectation of profit -- that is, as a going concern. The Minister of National Revenue disallowed the deduction on the basis that Marr’s did not control the appellant’s predecessor prior to its amalgamation with Outdoor. The Tax Court of Canada allowed the appellant’s appeal, but that decision was overturned by the Federal Court of Appeal.
Held: The appeal should be allowed.
Under the ITA, “control” of a corporation normally refers to de jure, not de facto, control. The general test is whether the majority shareholder enjoys “effective control” over the affairs and fortunes of the corporation, as manifested in the ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the board of directors (the Buckerfield’s test). While the general approach to the determination of control has been to examine the share register of the corporation to ascertain which shareholder, if any, possesses the ability to elect a majority of the board of directors, it is entirely proper to look beyond the share register when the constating documents provide for something unusual which alters the control of the company. Although “ordinary” shareholder agreements and other external documents generally should not be considered in assessing de jure control, a unanimous shareholder agreement (“USA”) is a constating document and as such must be considered for the purposes of this analysis. The USA is a corporate law hybrid, part contractual and part constitutional in nature. It can result in a fundamental change in the management of the company, since under s. 140(5) of the Manitoba Corporations Act (the “Corporations Act”) the shareholders who are parties to the USA assume all the rights, powers, duties and liabilities of the directors which are removed by the agreement, and the directors are relieved of their duties and liabilities to the same extent. The fact that the USA has supplanted the long-standing principle of shareholder non-interference with the directors’ powers to manage the corporation, an otherwise exclusive right which is granted by the statute and the corporate constitution, clearly indicates that it is at least as important as the articles and by-laws in assessing de jure control.
Under s. 140(2) of the Corporations Act, to be valid a USA must restrict, in whole or in part, the powers of the directors to manage the business and affairs of the corporation. The agreement in this case constituted a USA within the meaning of s. 140(2). Article 4.4 of the agreement, which prevented the corporation from issuing further shares “without the written consent of all of the Shareholders”, imposed a clear restriction upon the directors’ statutory powers of management. However, the mere existence of a USA does not necessarily alter the de jure control of a corporation. Rather, it is possible to determine whether de jure control has been lost as a result of a USA by asking whether the USA leaves any way for the majority shareholder to exercise effective control over the affairs and fortunes of the corporation in a way analogous or equivalent to the power to elect the majority of the board of directors.
The provisions in the USA at issue in this case did not in fact result in the loss of de jure control by Marr’s. The inability to issue new shares without unanimous shareholder approval, while surely a restriction on the powers of the directors to manage the business and affairs of the appellant’s predecessor, was not so severe a restriction that Marr’s could be said to have lost the ability to exercise effective control over the affairs and fortunes of the company through its majority shareholdings. Marr’s, by virtue of its ability to elect the majority of the board of directors, enjoyed de jure control over the appellant’s predecessor immediately prior to its amalgamation with Outdoor. Nothing in the constating documents, including the USA, served to alter this state of affairs. Accordingly, there was no change in control occasioned by the amalgamation, which means that s. 111(5) of the ITA did not prevent the appellant from deducting from its 1985 taxable income the non-capital losses accumulated in previous years by Outdoor, regardless of whether or not the business of Outdoor was intended to be or was actually carried on by the appellant as a going concern.
Cases Cited
Distinguished: Oakfield Developments (Toronto) Ltd. v. Minister of National Revenue, [1971] S.C.R. 1032; Minister of National Revenue v. Consolidated Holding Co., [1974] S.C.R. 419; The Queen v. Lusita Holdings Ltd., 84 D.T.C. 6346; Alteco Inc. v. Canada, [1993] 2 C.T.C. 2087; referred to: Buckerfield’s Ltd. v. Minister of National Revenue, [1964] C.T.C. 504; Minister of National Revenue v. Dworkin Furs (Pembroke) Ltd., [1967] S.C.R. 223; Canada v. Antosko, [1994] 2 S.C.R. 312; International Iron & Metal Co. v. Minister of National Revenue, [1974] S.C.R. 898, aff’g [1969] C.T.C. 668; Vina-Rug (Canada) Ltd. v. Minister of National Revenue, [1968] S.C.R. 193; British American Tobacco Co. v. Inland Revenue Commissioners, [1943] 1 All E.R. 13; Donald Applicators Ltd. v. Minister of National Revenue, 69 D.T.C. 5122, aff’d 71 D.T.C. 5202; The Queen v. Imperial General Properties Ltd., [1985] 2 S.C.R. 288; Harvard International Resources Ltd. v. Provincial Treasurer of Alberta, 93 D.T.C. 5254; Motherwell v. Schoof, [1949] 4 D.L.R. 812; Atlas Development Co. v. Calof (1963), 41 W.W.R. 575; Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536.
Statutes and Regulations Cited
Canada Business Corporations Act, R.S.C., 1985, c. C-44 .
Corporations Act, R.S.M. 1987, c. C225, ss. 1(1) “affairs”, “business”, 6(3), (4), 20(1), 25(1), 97(1), 98(1), 116, 129(5), 140(2), (5), 207(1)(b), 240.
Income Tax Act, R.S.C. 1952, c. 148 [am. 1970-71-72, c. 63], ss. 87(2.1) [ad. 1977-78, c. 1, s. 42; am. 1984, c. 1, s. 38], 111(1) [rep. & sub. 1984, c. 1, s. 54], (5) [rep. & sub. 1980-81-82-83, c. 140, s. 70; rep. & sub. 1984, c. 1, s. 54], 251(2)(c), 256(5.1) [ad. 1988, c. 55, s. 192], (7)(a)(i) [ad. 1977-78, c. 1, s. 99; am. 1980-81-82-83, c. 48, s. 112, c. 140, s. 131].
Authors Cited
Concise Oxford Dictionary of Current English, 9th ed. Oxford: Clarendon Press, 1995, “affairs”.
Dickerson, Robert W. V., John L. Howard and Leon Getz. Proposals for a New Business Corporations Law for Canada, vol. 1. Ottawa: Information Canada, 1971.
Iacobucci, Frank. “Canadian Corporation Law: Some Recent Shareholder Developments”. In Nancy E. Eastham and Boris Krivy, eds., The Cambridge Lectures 1981: Selected Papers Based upon Lectures Delivered at the Conference of the Canadian Institute for Advanced Legal Studies, 1981, held at Cambridge University, England, and l’Université Catholique de Louvain, Louvain-la-Neuve, Belgium. Toronto: Butterworths, 1982, 88.
Iacobucci, Frank, and David L. Johnston. “The Private or Closely-held Corporation”. In Jacob S. Ziegel, ed., Studies in Canadian Company Law, vol. 2. Toronto: Butterworths, 1973, 68.
Welling, Bruce. Corporate Law in Canada: The Governing Principles, 2nd ed. Toronto: Butterworths, 1991.
APPEAL from a judgment of the Federal Court of Appeal, [1996] 3 F.C. 78, 198 N.R. 359, 27 B.L.R. (2d) 89, [1996] 3 C.T.C. 19, 96 D.T.C. 6323, [1996] F.C.J. No. 738 (QL), reversing a judgment of the Tax Court of Canada, [1995] 1 C.T.C. 2481, 95 D.T.C. 828, [1994] T.C.J. No. 1140 (QL), ordering a reassessment. Appeal allowed.
Joel Weinstein and Jonathan Kroft, for the appellant.
Robert Gosman, Sean D. Shore and Roger Taylor, for the respondent.
//Iacobucci J.//
The judgment of the Court was delivered by
1 Iacobucci J. -- In this appeal, this Court is required to examine the definition of “control” for the purposes of s. 111(5) of the Income Tax Act, R.S.C. 1952, c. 148, as amended, in order to determine whether the appellant corporation was entitled to deduct from its 1985 taxable income certain non-capital losses incurred by a predecessor corporation in an amalgamation. In this regard, it will be necessary to consider which of various factors may properly be considered in assessing the de jure control of a corporation, and in particular, whether a unanimous shareholder agreement, as contemplated by the Manitoba Corporations Act, R.S.M. 1987, c. C225 (the “Corporations Act”) (and by other statutes modelled after the Canada Business Corporations Act, R.S.C., 1985, c. C-44 (the “CBCA ”)), is to be considered a constating document for the purposes of the de jure control inquiry.
I. Facts
2 This case proceeded on an agreed statement of facts, and therefore the facts are not in dispute. Duha Printers (Western) Ltd. (“Duha No. 1”), incorporated in Manitoba in 1963, carried on business as a specialty printer. Prior to and as at February 7, 1984, all of the voting shares of Duha No. 1 were held either directly or indirectly by Emeric Duha, his wife, Gwendolyn Duha, and their three children.
3 Outdoor Leisureland of Manitoba Ltd. (“Outdoor”), incorporated in Manitoba in 1971, carried on business as a retailer of recreational vehicles. As at February 8, 1984, the shares of Outdoor were held by Marr’s Leisure Holdings Inc. (“Marr’s”), of which William Marr and his wife, Norah Marr, owned 62.16 percent of the voting shares. On that date, and as early as 1983, Outdoor was inactive and had accumulated non-capital losses in the amount of $541,044.
4 On December 3, 1983, the directors of Duha No. 1 authorized the president of the corporation, Emeric Duha, to proceed at his discretion to acquire the shares of Outdoor in order to attempt to take advantage of the substantial non-capital losses which the latter had accumulated, so long as the losses could be purchased advantageously and if the related costs did not exceed $10,000. This set into motion the chain of events which ultimately gave rise to this litigation.
5 On February 7, 1984, Duha No. 1 amalgamated with 64457 Manitoba Ltd., a wholly owned subsidiary of Duha No. 1, to form Duha Printers Western Ltd. (“Duha No. 2”). This caused a deemed year-end, permitting Duha No.1 to take advantage of a small business deduction, and the shareholders of Duha No. 2 received the same number of shares as they had previously owned in Duha No. 1. On February 8, 1984, the articles of Duha No. 2 were amended to increase the authorized capital of the company by creating an unlimited number of Class “C” preferred shares. These shares entitled their holders to non-cumulative dividends equal to 9 percent of the redemption price (the stated capital for each share). Each share also carried with it the right to one vote, which was to cease either upon the transfer of the share or upon the death of its holder. The Class “C” shares were redeemable by Duha No. 2 with the consent of the holder, or without the consent of the holder in the event that the shares were transferred.
6 Marr’s subscribed for 2,000 Class “C” shares at a price of one dollar each, for a total of $2,000, on February 8, 1984. Consequently, Marr’s then held a 55.71 percent majority of the voting shares in Duha No. 2. It is worth noting that, for the period ending December 31, 1983, Duha No.1 had net income of $182,223 and retained earnings of $296,486. For the period ending January 2, 1985, it had net income of $630,115 and retained earnings of $571,543.
7 Also on February 8, 1984, an agreement was entered into among all of the shareholders of the new corporation, Duha No. 2 (the “Agreement”). Aside from describing itself in Article 3.1 as a “unanimous shareholders agreement”, the Agreement stated that it dealt with the operation and management of the company’s business and affairs. According to Article 2 of the Agreement, the affairs of Duha No. 2 were to be managed by a board of directors elected by the shareholders and composed of any three of Emeric Duha, Gwendolyn Duha, William Marr and Paul Quinton. Although Mr. Quinton was a close friend of both Emeric Duha and William Marr, and had served as a director of Duha No. 1 since 1974, it is common ground that he, Emeric Duha, and William Marr were not “related to each other” within the meaning of s. 251 of the Income Tax Act.
8 The Agreement also restricted the transfer of shares so that no shares could be transferred without the consent of the majority of the directors (Article 4.1); prohibited any shareholder from selling, assigning, transferring, or otherwise encumbering its shares in any manner (Article 4.3); and provided that new shares could only be issued with the unanimous consent of the existing shareholders (Article 4.4). Further, in Article 6.1, the Agreement provided that shareholder disputes regarding the business, accounts, or transactions of Duha No. 2 were to be resolved by arbitration.
9 On February 9, 1984, Duha No. 2 purchased all of the outstanding shares of Outdoor from Marr’s for $1. On the same date, 64099 Manitoba Ltd., a wholly owned subsidiary of Duha No. 2, purchased from Marr’s Leisure Products (1977) Ltd. (“Marr’s Leisure”), a wholly owned subsidiary of Marr’s, a receivable in the amount of $441,253 owed by Outdoor to Marr’s Leisure. Half of the total purchase price of $34,559 was payable on June 1, 1984, and the balance was payable upon the redemption of the 2,000 Class “C” shares of Duha No. 2 held by Marr’s.
10 On February 10, 1984, Duha No. 2 and Outdoor effected a statutory amalgamation under the Corporations Act to form Duha Printers (Western) Limited (“Duha No. 3”). The shares of Outdoor were cancelled and the shareholders of Duha No. 3 received the same number and class of shares as they had previously owned in Duha No. 2. On March 12, 1984, the shareholders of Duha No. 3 elected Emeric Duha, Gwendolyn Duha and Paul Quinton as the three directors of Duha No. 3.
11 On January 4, 1985, Duha No. 3, with the consent of Marr’s, redeemed the 2,000 Class “C” shares owned by Marr’s for a redemption price of $2,000. On February 15, 1985, the Agreement was terminated and Paul Quinton resigned as a director of Duha No. 3.
12 In its corporate tax return filed on June 28, 1985, Duha No. 3 deducted from its income non-capital losses in the amount of $463,820, of which $460,786 had been incurred by Outdoor in previous years. The Minister of National Revenue disallowed the deduction on the basis that Marr’s did not control Duha No. 2 prior to its amalgamation with Outdoor, and that the transactions at issue were artificial and a sham. The Tax Court of Canada allowed Duha No. 3’s appeal, but this decision was overturned on appeal to the Federal Court of Appeal.
II. Relevant Statutory Provisions
13 Income Tax Act, R.S.C. 1952, c. 148, as amended
87. . . .
(2.1) Where there has been an amalgamation of two or more corporations, for the purposes only of
(a) determining the new corporation's non‑capital loss, net capital loss, restricted farm loss or farm loss, as the case may be, for any taxation year, and
(b) determining the extent to which subsections 111(3) to (5.4) apply to restrict the deductibility by the new corporation of any non‑capital loss, net capital loss, restricted farm loss or farm loss, as the case may be,
the new corporation shall be deemed to be the same corporation as, and a continuation of, each predecessor corporation, except that this subsection shall in no respect affect the determination of
(c) the fiscal period of the new corporation or any of its predecessors,
(d) the income of the new corporation or any of its predecessors, or
(e) the taxable income of, or the tax payable under this Act by, any predecessor corporation.
111. (1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such portion as he may claim of
(a) his non‑capital losses for the 7 taxation years immediately preceding and the 3 taxation years immediately following the year;
. . .
(5) Where, at any time, control of a corporation has been acquired by a person or persons (each of whom is in this subsection referred to as the “purchaser”)
(a) such portion of the corporation's non‑capital loss or farm loss, as the case may be, for a taxation year ending before that time as may reasonably be regarded as its loss from carrying on a business is deductible by the corporation for a particular taxation year ending after that time
(i) only if throughout the particular year and after that time that business was carried on by the corporation for profit or with a reasonable expectation of profit ...
251. . . .
(2) For the purposes of this Act “related persons”, or persons related to each other, are
. . .
(c) any two corporations
(i) if they are controlled by the same person or group of persons ...
256. . . .
(7) For the purposes of subsections 66(11) and (11.1), 87(2.1), 88(1.1) and (1.2) and section 111
(a) where shares of a particular corporation have been acquired by a person after March 31, 1977, that person shall be deemed not to have acquired control of the particular corporation by virtue of such share acquisition if that person
(i) was, immediately before such share acquisition, related (otherwise than by virtue of a right referred to in paragraph 251(5)(b)) to the particular corporation...
Corporations Act, R.S.M. 1987, c. C225
6(3) Subject to subsection (4), if the articles or a unanimous shareholder agreement require a greater number of votes of directors or shareholders than that required by this Act to effect any action, the provisions of the articles or of the unanimous shareholder agreement prevail.
6(4) The articles may not require a greater number of votes of shareholders to remove a director than the number required by section 104.
20(1) A corporation shall prepare and maintain, at its registered office and, subject to subsection (5), at any other place in Manitoba designated by the directors, records containing
(a) the articles and the by-laws and all amendments thereto, and a copy of any unanimous shareholder agreement;
. . .
97(1) Subject to any unanimous shareholder agreement, the directors of a corporation shall
(a) exercise the powers of the corporation directly or indirectly through the employees and agents of the corporation; and
(b) direct the management of the business and affairs of the corporation.
140(2) An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and a person who is not a shareholder, that restricts, in whole or in part, the powers of the directors to manage the business and affairs of the corporation is valid.
140(5) A shareholder who is a party to a unanimous shareholder agreement has all the rights, powers and duties and incurs the liabilities of a director of the corporation to which the agreement relates to the extent that the agreement restricts the discretion or powers of the directors to manage the business and affairs of the corporation, and the directors are thereby relieved of their duties and liabilities to the same extent.
240 If a corporation or any director, officer, employee, agent, auditor, trustee, receiver, receiver-manager or liquidator of a corporation does not comply with this Act, the regulations, articles, by-laws, or a unanimous shareholder agreement, a complainant or a creditor of the corporation may, in addition to any other right he has, apply to a court for an order directing any such person to comply with, or restraining any such person from acting in breach of, any provisions thereof, and upon such application the court may so order and make any further order it thinks fit.
14 A few explanatory words regarding this rather complex legislative scheme may be useful at this stage. Under s. 87(2.1) of the Income Tax Act, where there has been an amalgamation of two or more corporations, for the purposes of determining the non-capital loss of the new corporation for any taxation year, the new corporation is deemed to be the same corporation as, and a continuation of, each predecessor corporation. Therefore, for the purposes of s. 111(1), the new corporation is entitled to deduct from its taxable income for a year its non-capital losses for the seven years immediately preceding, and the three years immediately following, the year in question. However, this is subject to at least one important qualification: under s. 111(5), where “control” of a corporation has been acquired by another person (the “purchaser”), that corporation’s non-capital losses from the carrying on of a business are only deductible by the purchaser in a subsequent taxation year if, throughout that year and after that time, the business in question was carried on by the corporation with a reasonable expectation of profit -- that is, as a going concern. The foregoing provisions of the Corporations Act are relevant, potentially, as indicators of where “control” of a corporation lay at the material time or times.
III. Judicial History
A. Tax Court of Canada, [1995] 1 C.T.C. 2481
15 Rip J.T.C.C. observed first that, if Marr’s acquired control of Duha No. 2 on February 8, 1984, then ss. 251(2) and 256(7)(a)(i) of the Income Tax Act would deem there to have been no change of control when its shares were acquired the next day by Duha No. 2, given that the two companies would have been related to one another. As such, s. 111(5) would not prevent Duha No. 3 from deducting from its income the non-capital losses previously incurred by Outdoor, pursuant to s. 87(2.1), even though the business of Outdoor was not carried on by Duha No. 3 as a going concern.
16 As a preliminary matter, Rip J.T.C.C. noted that, although the parties had referred to the Agreement as a “unanimous shareholders’ agreement”, the Agreement did not by its terms restrict the powers of the directors of Duha No. 2 to manage the business and affairs of the company, as required by the definition of “unanimous shareholder agreement” in s. 140(2) of the Corporations Act. In his view, the Agreement, while admittedly unanimous, was simply an ordinary shareholders’ agreement, not the special type of “unanimous shareholder agreement” contemplated by that statute.
17 Turning to the substantive issues on the appeal, Rip J.T.C.C. began by stating that “control” of a corporation, for the purposes of the Income Tax Act, means de jure control, or the 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, and not de facto control: Buckerfield’s Ltd. v. Minister of National Revenue, [1964] C.T.C. 504 (Ex. Ct.) (a definition adopted by this Court in Minister of National Revenue v. Dworkin Furs (Pembroke) Ltd., [1967] S.C.R. 223, inter alia). Rip J. noted also that, in assessing de jure control, the courts may examine the incorporating or constating documents of the company, which are “in effect an agreement between the shareholders and binding upon all the shareholders” (p. 2490).
18 The Minister had argued that, although Marr’s owned a majority of the voting shares of Duha No. 2, the Agreement “totally neutralized” the ability of Marr’s to manage the company, since it effectively prevented Marr’s from: electing a majority of its choice to the board of directors, dissenting from corporate transactions and applying to the court for redemption of its shares, or selling its shares. However, after an extensive review of the case law, Rip J. was unable to find authority for the proposition that the Agreement should be taken to vitiate the apparent de jure control of Duha No. 2 by Marr’s. At the relevant time, Marr’s held more than 50 percent of the voting shares in Duha No. 2 and, in the view of Rip J.T.C.C., nothing in the constating documents prevented Marr’s from voting its shares in the normal course, nor was there any evidence that Marr’s was not the beneficial owner of the shares and thus unable to decide for itself how the shares were to be voted.
19 Even if Rip J.T.C.C. had accepted that documents other than the constating documents could be considered, he found that nothing in the Agreement obliged Marr’s to vote its shares in the manner in which it did, that is, to vote for a majority of directors who were representatives of the Duha family. Marr’s was in a position to alter the board of directors, and there was no evidence, in the view of Rip J.T.C.C., that Mr. Quinton was a nominee of the Duha family. Therefore, Marr’s was free, by electing to the board Mr. Quinton, either Mr. or Mrs. Duha, and Mr. Marr, to ensure that neither Marr’s nor the Duha family would have a majority on the board of directors. Rip J.T.C.C. thus concluded that Marr’s, by virtue of its ownership of the majority of the voting shares on February 8, 1984, controlled Duha No. 2 at that time.
20 Turning to whether the transaction was a sham, Rip J.T.C.C. acknowledged that the sole purpose of the chain of events was to enable Duha No. 3 to make use of the losses incurred by Outdoor, that de facto control of Duha No. 2 was never transferred to Marr’s, and that Marr’s never intended to control the company. However, he could not agree that the transaction was a sham, given that there was no attempt to disguise its true character. The various transactions were binding upon the parties and did precisely what they appeared to do. As for the argument that the transaction was contrary to the “object and spirit” of s. 111, Rip J.T.C.C. simply observed that the purpose of the section was to permit corporations to apply non-capital losses against income earned in subsequent years, that amalgamated corporations are entitled to deduct the losses of predecessor corporations in this manner if the amalgamated corporation is controlled by the same person or group as the predecessor, and that “control” in this sense refers to de jure and not de facto control. In his view, there was nothing in the transaction that violated the “object and spirit” of the provision.
21 Therefore, Rip J.T.C.C. concluded that Marr’s did control Duha No. 2 on and immediately prior to February 8, 1984, when Duha No. 2 and Outdoor were amalgamated, and that it controlled Duha No. 3 during the taxation year on appeal. Accordingly, the appeal was allowed.
B. Federal Court of Appeal, [1996] 3 F.C. 78
(1) Reasons of Linden J.A. (Isaac C.J. concurring)
22 Like the trial judge, Linden J.A. was not persuaded that the transaction was a sham. The legal obligations between the parties were real and accomplished exactly what they purported to do. However, this was not sufficient to achieve the tax results ultimately desired by the parties. It remained to be seen whether the transactions came within the relevant sections of the Income Tax Act.
23 Linden J.A. refused to treat as a distinct issue the “object and spirit” of the provisions in question, stating that, instead, the interpretation of the sections should reflect their objects. The object and spirit of a section will only be practically relevant when the application of that section to factual circumstances admits of doubt, not where the meaning of the section is clear and free of ambiguity or uncertainty: Canada v. Antosko, [1994] 2 S.C.R. 312. In the view of Linden J.A., the purpose of the provisions at issue on this appeal was “to permit a deduction of a loss if control has not changed hands but to deny it if control has changed hands” (p. 109).
24 Linden J.A. acknowledged that control, for these purposes, means de jure and not de facto control, and that the single most important factor to consider is the voting rights attaching to shares. However, he was equally of the opinion that the scope of scrutiny under the de jure test has been extended “beyond a mere technical reference to the share register” (p. 109). After an exhaustive review of the case law, including cases which he interpreted as relying upon restrictions in the constating documents and “other agreements” as an indicator of de jure control -- and, in particular, Minister of National Revenue v. Consolidated Holding Co., [1974] S.C.R. 419 -- Linden J.A. concluded (at p. 118) that:
. . . it is important to look to the legal position of the parties as displayed in the wider circumstances of the parties’ affairs. . . . [T]rue de jure control is just what it is stated to be, control at law. Any binding instrument, therefore, must be reckoned in the analysis if it affects voting rights.
25 Linden J.A. held that, “[i]n determining issues of corporate control, the Court will look to the time in question, to legal documents pertaining to the issue, and to any actual or contingent legal obligations affecting the voting rights of shares” (p. 121). These factors, he held, “are simply facts with legal consequences, so that the distinction between de jure and de facto is not as stark as it once was”. In his view, then, “corporate control must be real, effective legal control over the company in question” (p. 121). Such an analysis, he continued, incorporates an appreciation for various considerations which might affect the way in which shares are or could be voted. He concluded that, “if majority ownership does not allow for real legal control over a company, the de jure test of control will not have been met” (p. 124).
26 Applying the law to the facts of the instant appeal, Linden J.A. held that Marr’s did not control Duha No. 2 because the Agreement determined that the majority of the Board of Directors would always be nominees of the Duha family. He found that Mr. Quinton was effectively a nominee of the Duha family because he had been a longtime friend of Mr. Duha, had been a director of Duha No. 1 for ten years, and had signed the resolution authorizing the subscription by Marr’s of the 2,000 Class “C” shares, the entering into the Agreement by the corporation, and the purchase of Outdoor’s shares. On this basis, Linden J.A. concluded that an election of any combination of the directors listed in the Agreement assured the Duha family of control over Duha No. 2. He also noted that Duha No. 2 was worth almost $600,000, and opined that no reasonable person would believe that a $2,000 share purchase would actually yield control of a company of such value. In his view, it was not coincidental that the three Duha family nominees were in fact elected as directors and that Marr’s did not elect its own majority shareholder to the board.
27 Linden J.A. was of the view that the Agreement likely qualified as a unanimous shareholder agreement (“USA”) under s. 140(2) of the Corporations Act, given that it operated to restrict the powers of the directors both directly and indirectly. However, he also held that the Agreement did not have to meet this statutory requirement before it could be considered in a de jure control analysis. The Agreement, signed by all the shareholders and by Duha No. 2, was legally binding and had significantly affected how the shareholders could vote their shares. These, in his view, were the minimum conditions to be met before the Agreement could be considered in a de jure control examination, given that “[c]ertain cases of the Supreme Court of Canada explicitly state” (p. 125) that external agreements are not to be considered irrelevant to the issue of de jure control. He distinguished the case of International Iron & Metal Co. v. Minister of National Revenue, [1974] S.C.R. 898, aff’g [1969] C.T.C. 668, on the basis that the agreement in that case was “contrived to multiply a tax benefit” (p. 126) and that the parties to whom control was supposedly transferred by the agreement were not parties to it, per se.
28 Moreover, there was other evidence that Marr’s did not control Duha No. 2. Linden J.A. noted that the amended articles of Duha No. 2 stated that the company could not issue new voting shares without unanimous shareholder consent and found that this meant that Marr’s could not change its restricted choice of directors by using its majority share position. He held that Marr’s ability to dissolve Duha No. 2 was not determinative and was little more than “a chimera” because, upon a dissolution, Marr’s would receive nothing beyond the stated value of its shares, would forfeit the receivable and would actually suffer a net loss.
29 Linden J.A. concluded that the intentions of the parties had been that Marr’s would not control Duha No. 2, that the legal obligations between the parties ensured that the Duha family would retain control over the company, and that this was the legal effect of the transactions. In his view (at p. 129), the appellant had “used the technicalities of revenue law and company law to conjure a legal remedy for restrictions to which it would otherwise be subject. They did not succeed.” He concluded, therefore, that Outdoor and Duha No. 2 were not related prior to the amalgamation, that Duha No. 2 never carried on the business of Outdoor as a going concern or with a reasonable expectation of profit, and that the appellant therefore could not make use of Outdoor’s non‑capital losses.
(2) Reasons of Stone J.A. (Isaac C.J. concurring)
30 Like Linden J.A., Stone J.A. would have allowed the appeal, but for different reasons. In his view, the Agreement was to be considered along with the constating documents of the corporation because it was a USA within the meaning of the Corporations Act. Stone J.A. noted that s. 97(1) of the Corporations Act gives directors the power to direct “the business and affairs of the corporation” and that s. 1(1) defines “affairs” as including “the relationships among a body corporate, its affiliates and the shareholders, directors and officers of those bodies corporate but . . . not . . . the business carried on by those bodies corporate”. He further held that, to be a USA for the purposes of s. 140(2) of the Corporations Act, the Agreement had to restrict the powers of the directors to manage the business and affairs of the corporation.
31 Stone J.A. noted that Article 2.1 of the Agreement required the shareholders to “cause the affairs of the Corporation to be managed by a board of three (3) directors” (emphasis added), and reasoned that this, by exclusion, did not leave the directors with the power to manage the business of Duha No. 2. Further, Article 6.1 of the Agreement provided for the resolution by arbitration of any dispute arising among the shareholders with respect to the “business or accounts or transactions” of the company. Ordinarily, in his view, no dispute as to the “business” of the company would arise between the shareholders, as the business of a corporation is, in the absence of a USA, to be directed by the board of directors. On this basis, he concluded that the Agreement restricted the powers of the directors and was thus a USA within the meaning of the Corporations Act. Thus, in his view, the Agreement had to be considered when examining de jure control.
32 In the circumstances of this case, Stone J.A. concluded that the Agreement prevented Marr’s from obtaining the de jure control that it otherwise might have held by virtue of owning 55.71 percent of the voting shares of Duha No. 2. Even though Marr’s could in theory determine the composition of the board of directors, its ability to elect a board that could manage only the “affairs” and not the “business” of Duha No. 2 was not de jure control. Stone J.A. also observed that the referral to arbitration of irreconcilable differences between shareholders implied that the unanimous agreement of all shareholders, not simply a majority of votes, was required for business decisions. In this respect, Marr’s clearly lacked de jure control over Duha No. 2. Stone J.A. concluded, therefore, that Outdoor and Duha No. 2 had not been related before they amalgamated and that Outdoor’s losses could not be utilized by Duha No. 3.
33 While it was not necessary to the manner in which he proposed to dispose of the case, Stone J.A. also held that the transaction was not a sham, as the Minister alleged, given that the requisite element of deceit as to the true nature of the transaction was not present in the circumstances.
IV. Issues
34 The ultimate issue on this appeal is whether Duha No. 3 should have been entitled to deduct from its 1985 business income non-capital losses incurred in previous years by Outdoor, pursuant to s. 111(5) of the Income Tax Act. To answer this question, it will be necessary to decide whether documents other than the constating documents of a corporation should be considered in determining de jure control of a company for the purposes of ss. 111(5) and 251(2)(c) of the Act, and whether USAs enjoy any special status in this regard. If either or both of these questions are resolved in the affirmative, it will then be necessary to establish whether or not the Agreement was a USA within the meaning of s. 140(2) of the Corporations Act and, if so, whether it in fact deprived Marr’s of de jure control over Duha No. 2. On appeal to this Court, the Min