T-1112-80
Lusita Holdings Limited (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Mahoney J.—Toronto, September
21; Ottawa, September 27, 1982.
Income tax Income calculation — Associated companies
Indenture of settlement creating various trusts, each com
posed of shares of plaintiff company and each having Gustav
Schickedanz as one of two co-trustees — Powers of trustees
including right to vote shares held by trusts — Trust indenture
giving Schickedanz power to remove and replace co-trustees
— During same period Schickedanz, wife Ann, and plaintiff
owning all shares in Ann-Gus Holdings Ltd. — Whether
power to remove and replace co-trustees results in Schicke-
danz having right to control voting rights of shares in plaintiff
Whether right to control shares granted under settlement is
"right" within meaning of s. 251(5)(b) — Whether nature of
control exercised by Schickedanz over shares of plaintiff held
in trust, taken together with ownership of shares in Ann-Gus
results in plaintiff and Ann-Gus being associated companies
within meaning of s. 256(1)(d) — Action allowed and assess
ment vacated — Income Tax Act, S.C. 1970-71-72, c. 63, ss.
251(5)(b), 256(1)(d) — Trustee Act, R.S.O. 1980, c. 512, ss.
3(1), 6.
During the 1974 through 1977 tax years a number of trusts
composed of shares of the plaintiff company were each held by
Gustav Schickedanz and one other person as co-trustees. Under
the Indenture of Settlement the trustees enjoyed the right to
vote on the securities held by the trusts. Article VIII (g) of that
document gave Gustav Schickedanz the right to remove any
co-trustee and appoint a successor. The Minister concluded
that by vesting such power in Gustav Schickedanz, Article VIII
(g) created in him a contractual right to control the voting
rights over the shares of the plaintiff and, as a consequence, he
was, by virtue of paragraph 251(5)(b) of the Income Tax Act
either deemed to control the plaintiff or to be its owner. The
Minister further concluded that during the same tax years
Gustav Schickedanz, his wife Ann, and the plaintiff were the
shareholders of Ann-Gus Holdings Limited and that the plain
tiff and Ann-Gus were associated corporations within the
meaning of paragraphs 251(5)(b) and 256(1)(d) of the Act.
Held, the action is allowed. The phrase "in equity or other
wise" in paragraph 251(5)(b) of the Income Tax Act relates to
the word "right", not "contract". Thus the paragraph is to be
interpreted as extending to a person who has a right either
under a contract, in equity, or by other means, to control the
voting rights of shares. To interpret paragraph 251(5)(b) as if
Parliament intended that it apply only to a person who has a
right under contract would be to render the phrase superfluous.
Further, the phrases that follow the one in question, "either
immediately or in the future" and "either absolutely or contin-
gently", only make sense if they are related to "right". Thus
the fact that the rights of Gustav Schickedanz in respect of the
shares of the plaintiff arise by virtue of trust indenture does
not, in itself, bring him outside paragraph 251 (5)(b). However,
the word "control" as it is used in this context has been
interpreted in Buckerfield's Limited, et al. v. The Minister of
National Revenue, [1965] 1 Ex.C.R. 299, as meaning de jure
control, not de facto control. This interpretation has been
approved by the Supreme Court of Canada. Subsection 3(1)
and section 6 of the Trustee Act of Ontario provide that the
resignation of a co-trustee is not legally effective until his
replacement is appointed. There must, therefore, always be two
trustees for each trust. Given this and the fact that Article VIII
(k) of the Indenture of Settlement requires that both of these
trustees agree on how to vote, it is clear that while the power to
require the resignation of a co-trustee gives Gustav Schicke-
danz de facto control over the voting rights of the trust shares
in the plaintiff it does not give him the de jure control which is
necessary to bring him within paragraph 251(5)(b) of the Act.
As a result the plaintiff and Ann-Gus Holdings Limited are not
associated corporations within the meaning of paragraph
256(1)(d) of the Act.
CASES JUDICIALLY CONSIDERED
APPLIED:
Buckerfield's Limited, et al. v. The Minister of National
Revenue, [ 1965] 1 Ex.C.R. 299; The Minister of Nation
al Revenue v. Dworkin Furs (Pembroke) Limited, et al.,
[1967] S.C.R. 223; Vina -Rug (Canada) Limited v. The
Minister of National Revenue, [1968] S.C.R. 193.
COUNSEL:
John M. Roland, Q.C. and V. Dyer for
plaintiff.
J. A. Van Iperen for defendant.
SOLICITORS:
Osier, Hoskin & Harcourt, Toronto, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
MAHONEY J.: This action was tried on common
evidence with an action by Ann-Gus Holdings
Limited, Court No. T-1114-80, and arises out of
the determination by the Minister that the compa-
nies were associated with each other under para
graphs 251(5)(b) and 256(1)(d) of the Income
Tax Act, R.S.C. 1952, c. 148, as am. by S.C.
1970-71-72, c. 63, s. 1. The issues are whether a
person who had a right to control voting rights of
shares in a corporation under an indenture of
settlement is a person within the contemplation of
paragraph 251(5)(b) and, if so, whether Gustav
Schickedanz had that right under certain trust
deeds in respect of shares of the plaintiff.
The first issue may conveniently be dealt with
before I set out the lengthy agreed statement of
facts pertinent to the second. Paragraph 256(1)(d)
is in play only if Gustav Schickedanz is a person
within the contemplation of paragraph 251(5)(b),
which provides:
251... .
(5) For the purposes of subsection (2) and section 256,
(b) a person who had a right under a contract, in equity or
otherwise, either immediately or in the future and either
absolutely or contingently, to, or to acquire, shares in a
corporation, or to control the voting rights of shares in a
corporation shall, except where the contract provided that
the right is not exercisable until the death of an individual
designated therein, be deemed to have had the same position
in relation to the control of the corporation as if he owned
the shares; and [Emphasis added.]
The indentures of trust here are clearly not con
tracts. It is trite law that a trust is not a contract.
It is unnecessary to go beyond the textbooks,
which enumerate the multitude of distinctions, for
authority for that proposition.'
The essential verbiage of paragraph 251(5)(b)
has been emphasized. Assuming that Gustav
Schickedanz had a right to control the voting
rights of shares in the plaintiff, he had that right
under the indentures of settlement, not under a
contract. Does paragraph 251(5)(b) require that
the right arise under a contract? What function is
served by the phrase "in equity or otherwise"?
Does it relate to the word "contract", which it
follows immediately, or does it relate back to
"right"? In my view, on a fair reading of the entire
paragraph, it relates back to "right" and the Para-
' Underhill, Law relating to Trusts and Trustees (13th ed.
1979) 4. Waters, Law of Trusts in Canada (1974) 46-47.
graph is to be interpreted as extending to a person
who had a right under a contract, a person who
had a right in equity or a person who had a right
arising otherwise than under a contract or in
equity to control the voting rights. In the first
place, had Parliament intended that it be restricted
to a person who had a right under a contract, the
phrase "in equity or otherwise" would be super
fluous. In the second place, even if that phrase can
somehow be meaningfully related to "contract",
the following phrases "either immediately or in the
future" and "either absolutely or contingently"
cannot. They make sense only if they modify the
"right" and not if they modify the "contract".
If, in fact, Gustav Schickedanz had a right
under the trust indentures to control the voting
rights of shares in the plaintiff, he was a person
within the contemplation of paragraph 251(5) (b).
I was advised by counsel, before the trial began,
that this precise point was subject of a reserved
judgment by another judge of this Court. I indicat
ed then that I felt, however the issue was deter
mined here, the right of appeal of the unsuccessful
party should be preserved until the time for appeal
from the reserved judgment has expired. I assume
counsel will arrange to be apprised promptly of the
other judgment.
The full text of the agreed statement of facts*
follows:
1. At all material times during 1975, 1976 and 1977 taxation
years, there were twelve issued and outstanding shares of
Lusita Holdings Limited which were held as follows:
Edward Smith in trust for The
Susie Schickedanz Trust, The
Lisa Schickedanz Trust, The
Tina Schickedanz Trust and The
Heidi Schickedanz Trust 4
Edward Smith in trust for The
Susie Schickedanz Trust 2
* No viva voce evidence was called. I have been advised,
after enquiry through the Registry, that the omission of "1974"
from paragraphs 1 and 2 of the agreed statement of facts in
action No. T-1114-80 was inadvertent and that written confir
mation of that will be forthcoming in due course.
Bruno Schickedanz in trust for
The Lisa Schickedanz Trust 2
Rex Knight in trust for The
Tina Schickedanz Trust 2
Arnold Brenner in trust for The
Heidi Schickedanz Trust 2
2. At all material times during its 1975, 1976 and 1977
taxation year the shareholders of Ann-Gus Holdings Limited
were:
Gustav Schickedanz 33.3%
Ann Schickedanz (Spouse of Gustav) 33.3%
Lusita Holdings Limited 33.3%
3. The Susie Schickedanz Trust was created by Indenture of
Settlement dated April 14, 1969 naming Gustav Schickedanz
and Edward Smith as trustees.
4. The Lisa Schickedanz Trust was created by Indenture of
Settlement dated the 14th day of April, 1969, naming Gustav
Schickedanz and Bruno Schickedanz as trustees.
5. The Tina Schickedanz Trust was created by Indenture of
Settlement dated the 14th day of April, 1969, naming Gustav
Schickedanz and Rex Knight as trustees.
6. The Heidi Schickedanz Trust was created by Indenture of
Settlement dated the 14th day of April, 1969 naming Gustav
Schickedanz and Arnold Brenner as trustees.
7. At all relevant times the Trustees of each of the trusts
referred to in paragraphs 3, 4, 5 and 6 were the trustees
originally named and the trustee other than Gustav Schicke-
danz in each case was an individual who was not related to
Gustav Schickedanz under the rules of Subsections 2 and 6 of
Section 251 of the Income Tax Act.
8. Article VIII of the Indenture of Settlement referred to
above in each case reads in part as follows:
(g) In the event that GUSTAV SCHICKEDANZ presently resid
ing at 37 Steele Valley Road, Thornhill, Ontario, deems it
desirable that any of the Trustees be removed from the
position of Trustee, the said GUSTAV SCHICKEDANZ may at
any time request the Trustee or Trustees by written notice to
resign his or their positions as Trustee or Trustees and upon
receipt of such notice they shall forthwith resign. In the event
that any one or more of the Trustees shall die before the
Trust Estate has been fully distributed, or shall refuse or be
unable to act or to continue to act as Trustee or shall have
been given notice to resign as aforementioned, the said
GUSTAV SCHICKEDANZ shall forthwith by Deed, Will, or
Notice in Writing, appoint a successor Trustee to fill any
such vacancy in the office of Trustee hereof which may occur
by reason of such death, refusal, inability or written notice as
aforesaid. PROVIDED THAT in the event that the said GUSTAV
SCHICKEDANZ shall fail or neglect to appoint a Trustee to
fill any such vacancy which may occur as aforesaid within
thirty (30) days from the date of occurrence of such vacancy,
then the remaining Trustee shall by Deed or Notice in
writing appoint anyone other than himself to fill any such
vacancy, it being the intention of the Settlor that there shall
be, whenever possible, two (2) Trustees at all times to
administer THE [NAME] SCHICKEDANZ TRUST PROVIDED
THAT the said GUSTAV SCHICKEDANZ shall have the power
by Deed, Will or Notice in Writing to appoint any person, or
any succession of persons, to exercise the powers of removal,
appointment or re-appointment of Trustees hereinbefore con
ferred upon the said GUSTAV SCHICKEDANZ by this Para
graph (g) ARTICLE VIII.
PROVIDED FURTHER that in the event that the said GUSTAV
SCHICKEDANZ shall die (or become incapacitated) without
having made such appointment, then the following persons in
the order named shall have the powers of removal and
appointment of the Trustee hereinbefore conferred upon the
said GUSTAV SCHICKEDANZ.
(a) ANN SCHICKEDANZ, wife of the said GUSTAV SCHICKE-
DANZ,
(b) GERHART SCHICKEDANZ, brother of the said GUSTAV
SCHICKEDANZ,
(e) KURT SCHICKEDANZ, brother of the said GUSTAV
SCHICKEDANZ, and
(d) DANIEL SCHICKEDANZ, cousin of the said GUSTAV
SCHICKEDANZ....
(k) The approval of both Trustees shall be required for any
decision relating to THE [NAME] SCHICKEDANZ TRUST PRO
VIDED THAT in the event that the Trustees shall be unable to
agree upon any question relating to the disposition of all or
any portion of the Trust Estate, then such question shall be
referred to arbitration pursuant to the provisions of the
Arbitration Act of the Province of Ontario.
9. The only relevant assumption of the Minister in assessing
the two companies, Ann-Gus Holdings Limited and Lusita
Holdings Limited was that as a result of Article VIII (g) and
(k) of the Trust Indentures, Gustav Schickedanz had a right
under a contract to control the voting rights of the shares of
Lusita and therefore as a result of Section 251(5)(b) is either
deemed to control Lusita or is deemed to be the owner of the
shares of Lusita.
The plaintiff did not, and in my view rightly, rely
on the fact that the shares in the plaintiff were, in
all cases, registered in the name of the co-trustee,
not Gustav Schickedanz.
Among the powers of the trustees under the
trust indentures, Article VI, paragraph (h), is the
power "to vote in person or by proxy upon the
securities held by them". The decision as to how to
vote on the securities, including the shares in the
plaintiff is a decision requiring the approval of
both Gustav Schickedanz and the other trustee, as
provided by Article VIII, paragraph (k). Failing
agreement by the two, that provision of the trust
indenture then envisages a determination by arbi
tration. Up to this point, Gustav Schickedanz has
neither de facto nor de jure control of the voting
rights. However, under Article VIII, paragraph
(g), he does have the power to require his co-trus
tee to resign and to replace him. I have no doubt
that Gustav Schickedanz has de facto control of
the voting rights of the trusts' shares in the
plaintiff.
The Trustee Act 2 of Ontario, provides:
3.—(I) Where a trustee ... desires to be discharged from all
or any of the trusts or powers reposed in or conferred on him,
... the person nominated for the purpose of appointing new
trustees by the instrument, if any, creating the trust ... may by
writing appoint another person ... to be a trustee ... in the
place of the trustee ... desiring to be discharged ...
6. On the appointment of a new trustee for the whole or any
part of trust property,
(c) it is not obligatory to appoint more than one new trustee
where only one trustee was originally appointed or to fill up
the original number of trustees where more than two trustees
were originally appointed; but, except where only one trustee
was originally appointed, a trustee shall not be discharged
under section 3 from his trust unless there will be a trust
company or at least two individuals as trustees to perform
the trust; ...
I take the effect of paragraph 6(c) to be that,
with respect to the trusts in issue, the resignation
of a co-trustee demanded by Gustav Schickedanz
could not, in law, become effective until his
replacement was appointed. Thus, there must
always be two trustees of each trust who must
agree on how to vote the shares, all as provided by
Article VIII, paragraph (k). De jure, Gustav
Schickedanz has not, by reason of his power to
require the resignation of his co-trustee in each
trust, the right to control the voting rights of the
trusts' shares in the plaintiff.
The authoritative interpretation of the word
"control", as used in this context in the Income
Tax Act, is that of Jackett P., in Buckerfield's
Limited, et al. v. The Minister of National
Revenue 3 :
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 "man-
agement", where management and the Board of Directors are
2 R.S.O. 1980, c. 512.
3 [1965] 1 Ex.C.R. 299 at p. 302 ff.
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 subsec
tion (6) of section 39). The word "control" might conceivably
refer to de facto control by one or more shareholders whether
or not they hold a majority of shares. I am of the view,
however, that, in section 39 of the Income Tax Act, the word
"controlled" contemplates the right of control that rests in
ownership of such a number of shares as carries with it the
right to a majority of the votes in the election of the Board of
Directors. See British American Tobacco Co. v. I.R.C. ([1943]
1 A.E.R. 13), where Viscount Simon L.C., at page 15, says:
The owners of the majority of the voting power in a
company are the persons who are in effective control of its
affairs and fortunes.
That decision, that "control" means de jure con
trol and not de facto control, has been expressly
approved by the Supreme Court of Canada. 4
The plaintiff succeeds. The assessment in issue
will be vacated and the plaintiff's 1975, 1976 and
1977 income tax returns referred back to the
Minister for reassessment on the basis that the
plaintiff and Ann-Gus Holdings Limited were not
associated corporations within the meaning of
paragraph 256(1)(d) of the Income Tax Act. The
plaintiff is entitled to costs. The time for appeal is
extended to expire with expiration of the time for
appeal from the judgment to be rendered in Rostal
Sales Agency Ltd. v. The Queen, [1983] 1 F.C.
447 (T.D.). A copy of these reasons for judgment
shall be filed in and form part of the record in
Ann-Gus Holdings Limited v. The Queen, Court
No. T-1114-80.
4 The Minister of National Revenue v. Dworkin Furs (Pem-
broke) Limited, et al., [1967] S.C.R. 223. Vina -Rug (Canada)
Limited v. The Minister of National Revenue, [1968] S.C.R.
193.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.