corporation’s affairs in Canada and that its Canadian directors implemented instructions from him regarding the handling of the corporation’s affairs in Canada.
11
Despite these findings, the Exchequer Court held that the control and management
of the corporation was exercised by its Canadian directors. As a consequence, the
Exchequer Court held that the corporation was subject to Canadian tax liability. In
this regard, Kerr J. held as follows at paragraphs 51 to 53:
51 . . .the residence of a company is not determined by or dependent upon the residence of
one or more of its shareholders; nor, despite the influence that shareholders may have over
the affairs of a company by virtue of their share ownership and power to remove directors
and put persons in their place who agree to their policy, do the powers of shareholders as
such invest them with the management and control of the company’s business, for the
directors are not the agents of the shareholders or bound to comply with directions given by
them and the responsibility of the directors and officers of the company is to the company
itself and their duties are controlled by the rules and constitution of the company.
52. However, the management and control of a company can be actually exercised otherwise
than by its directors and otherwise than under or according to the authority of its constitution,
as, for example, in Unit Construction Co. Ltd. v. Bullock (supra), where African companies
which, it was admitted, had residence in Africa and whose directors resided there, were held
by the House of Lords to be resident in England as well, because they were actually managed
and controlled from England by the directors of their parent company, and such management
and control was a fact affecting their residence even although it was exercised irregularly and
was not authorized by the constitution of the companies.
53. In Bedford’s case the management of the business of the company and the controlling
power and authority over its affairs were vested in its Canadian directors and they exercised
that power and authority in Canada, albeit in large measure to carry out Marchessini’s
instructions and policy decisions made elsewhere by him. In Canada they executed agreements and attended to business and legal affairs of the company which were required in
connection with and were essential to the company’s business venture of owning and
operating the vessels. In my view, the evidence that I have outlined and the facts that have
been admitted show that management and control of the company and attention to its
interests and affairs were exercised and given to a substantial degree, de jure and de facto,
within Canada, by its Canadian directors from the incorporation of the company up to and
including its 1964 taxation year. Consequently, in my view, Bedford was a person resident in
Canada during its 1964 taxation year within the meaning of Section 2(1) of the Income Tax
Act and was properly assessed for tax by virtue of Section 105A (1) of the Act.
Given that international shipping is an industry where most corporations pay little
or no tax whatsoever, it is perhaps not unsurprising that the Canadian government
and consultants reviewing Canada’s approach to international shipping matters in
the mid-1980s identified the “mind and management” test and the uncertainty it
engendered as a constraint on the development of international shipping business
and international shipping centres in Canada.
12 This conclusion sparked 3 years of
debate culminating in amendments to the Income Tax Act by way of Bill C-18, which
received royal assent on December 17, 1991.
11 Bedford Overseas, paras. 12 and 49.
12 Brooks and Hodgson (2005), pp. 147–149; J. Seymour & Associates (1989); Transport
Canada (1985).
460
F. M. Manolis and R. L. Bozzer
11
Despite these findings, the Exchequer Court held that the control and management
of the corporation was exercised by its Canadian directors. As a consequence, the
Exchequer Court held that the corporation was subject to Canadian tax liability. In
this regard, Kerr J. held as follows at paragraphs 51 to 53:
51 . . .the residence of a company is not determined by or dependent upon the residence of
one or more of its shareholders; nor, despite the influence that shareholders may have over
the affairs of a company by virtue of their share ownership and power to remove directors
and put persons in their place who agree to their policy, do the powers of shareholders as
such invest them with the management and control of the company’s business, for the
directors are not the agents of the shareholders or bound to comply with directions given by
them and the responsibility of the directors and officers of the company is to the company
itself and their duties are controlled by the rules and constitution of the company.
52. However, the management and control of a company can be actually exercised otherwise
than by its directors and otherwise than under or according to the authority of its constitution,
as, for example, in Unit Construction Co. Ltd. v. Bullock (supra), where African companies
which, it was admitted, had residence in Africa and whose directors resided there, were held
by the House of Lords to be resident in England as well, because they were actually managed
and controlled from England by the directors of their parent company, and such management
and control was a fact affecting their residence even although it was exercised irregularly and
was not authorized by the constitution of the companies.
53. In Bedford’s case the management of the business of the company and the controlling
power and authority over its affairs were vested in its Canadian directors and they exercised
that power and authority in Canada, albeit in large measure to carry out Marchessini’s
instructions and policy decisions made elsewhere by him. In Canada they executed agreements and attended to business and legal affairs of the company which were required in
connection with and were essential to the company’s business venture of owning and
operating the vessels. In my view, the evidence that I have outlined and the facts that have
been admitted show that management and control of the company and attention to its
interests and affairs were exercised and given to a substantial degree, de jure and de facto,
within Canada, by its Canadian directors from the incorporation of the company up to and
including its 1964 taxation year. Consequently, in my view, Bedford was a person resident in
Canada during its 1964 taxation year within the meaning of Section 2(1) of the Income Tax
Act and was properly assessed for tax by virtue of Section 105A (1) of the Act.
Given that international shipping is an industry where most corporations pay little
or no tax whatsoever, it is perhaps not unsurprising that the Canadian government
and consultants reviewing Canada’s approach to international shipping matters in
the mid-1980s identified the “mind and management” test and the uncertainty it
engendered as a constraint on the development of international shipping business
and international shipping centres in Canada.
12 This conclusion sparked 3 years of
debate culminating in amendments to the Income Tax Act by way of Bill C-18, which
received royal assent on December 17, 1991.
11 Bedford Overseas, paras. 12 and 49.
12 Brooks and Hodgson (2005), pp. 147–149; J. Seymour & Associates (1989); Transport
Canada (1985).
460
F. M. Manolis and R. L. Bozzer