(b) The holders of the A Ordinary Shares and the holders of the B Ordinary Shares shall in each accounting year of the Company, in the absolute discretion of the Directors, be entitled to receive, pro rata in accordance with their shareholding, dividends as and when declared by the Directors either on the A Ordinary Shares or the B Ordinary Shares or both as the case may be, out of monies of the Company properly applicable to the payment of dividends, but limited to aggregate non-cumulative dividends of £4,000.00 in each fiscal period of the Company. LIEN 10.1 The Company shall have a lien on every share (not being a fully paid share) for all monies (whether presently payable or not) called or payable at a fixed time in respect of that share, and the Company shall also have a lien on all shares (other than fully paid shares) standing registered in the name of a single person for all monies presently payable by him or his estate to the Company; but the Directors may at any time declare any share to be wholly or in part exempt from the provisions of this regulation. 10.2 The Company may sell, in such manner as the Directors think fit, any shares on which the Company has a lien, but no sale shall be made unless some sum in respect of which the lien exists is presently payable, nor until the expiration of fourteen days after a notice in writing, stating and demanding payment of such part of the amount in respect of which the lien exists as is presently payable, has been given to the registered holder for the time being of the shares, or the person entitled thereto by reason of his death or bankruptcy. 10.3 For giving effect to any such sale the Directors may authorise some person to transfer the shares sold to the purchaser thereof. The purchaser shall be registered as the holder of the shares comprised in any such·transfer and he shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the sale. 10.4 The proceeds of the sale shall be received by the Company and applied in payment of such part of the amount in respect of which the lien exists as is presently payable, and the residue shall (subject to a like lien for sums not presently payable as existed upon the shares prior to the sale) be paid to the person entitled to the shares at the date of the sale. CALLS ON SHARES 11.1 The Directors may from time to time make calls upon the Shareholder in respect of monies unpaid on their shares provided that no call shall exceed one-fourth of the nominal amount of the share, or be payable at less than one month from the last call; and each Shareholder shall (subject to receiving at least fourteen days· notice specifying the time or times of payment), pay to the Company at the time or times so specified the amount called on his shares. 11.2 The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof. 11.3 If a sum in respect of a share is not paid before or on the day appointed for payment thereof, the person from whom the sum is due shall pay interest upon the sum at the rate of five percent per annum from the day appointed for the payment thereof to the time of the actual payment, but the Directors shall be at liberty to waive payment of that interest wholly or in part. 6 11.4 Any sum which by the terms of issue of a share becomes payable on allotment or at any fixed date, whether on account of the nominal value of the share or by way of premium, shall, for the purposes of these regulations, be deemed to be a call duly made and payable on the date on which, by the terms of issue, the same becomes payable, and in case of non-payment all the relevant provisions of these regulations as to payment of interest and expenses, forfeiture or otherwise, shall apply as if such sum had become payable by virtue of a call duly made and notified. 11.5 The Directors may make arrangements on the issue of shares for a difference between the holders in the amount of calls to be paid and times of payment. 11.6 The Directors may, if they think fit, receive from any Shareholder willing to advance the same all or any part of the monies uncalled and unpaid upon any shares held by them and upon all or any of the monies so advanced may (until the same would, but for such advance, become presently payable) pay interest at such rate (not exceeding six per cent) as may be agreed upon between the Controlling member paying the sum in advance and the Directors. TRANSFER AND TRANSMISSION OF SHARES 12.1 Any Shareholder may transfer all or any of his shares by instrument in writing in any usual or common form or any other form which the Directors may approve. 12.2 The instrument of transfer of any share shall be executed by or on behalf of the transferor, and the transferor shall be deemed to remain a holder of the share until the name of the transferee is entered in the Register of Members in respect thereof. 13. The legal personal representatives of a deceased sole holder of a share shall be the only person recognised by the Company as having any title to the share. In the case of a share registered in the names of two or more holders, the survivors or survivor, or the legal personal representatives of the deceased survivor, shall be the only persons recognised by the Company as having any title to the share. 14. Any person becoming entitled to a share in consequence of the death or bankruptcy of a Shareholder shall, upon such evidence being produced as may from time to time be properly required by the Directors. have the right, either to be registered as a Shareholder in respect of the share or, instead of being registered himself, to make such transfer of the share as the deceased or bankrupt person could have made; but the Directors shall. in either case, have the same right to decline or suspend registration as they would have had in the case of a transfer of the share by the deceased or bankrupt person before the death or bankruptcy. 15. A person becoming entitled to a share by reason of the death or bankruptcy of the holder shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share, except that he shall not, before being registered as a Shareholder in respect of the share, be entitled to any rights and privileges conferred by virtue of being a Shareholder in relation to meetings of the Company. 7 RESTRICTIONS ON TRANSFERS OF SHARES AND MEMBERSHIPS OF NON-SHAREHOLDER MEMBERS 16. Notwithstanding anything contained in these Articles, the Directors may in their absolute discretion decline to approve any transfer of shares or any transfer of membership of a Non-Shareholder Member and shall not be required to disclose their reasons therefor. 16.1 The instrument of transfer of a share or of non-shareholder membership may be in any usual form or in any other form which the directors may approve and shall be executed by or on behalf of the transferor and in the case of a share, unless the share is fully paid, by or on behalf of the transferee. 16.2 The instrument of transfer must be: (a) lodged at the office or at such other place as the directors may appoint and is accompanied by the certificate for the shares or membership to which it relates and such other evidence as the directors may reasonably require to show the right of the tran.sferor to make the transfer; (b) in respect of only one class of shares or non-shareholder membership; and (c) in favour of not more than four transferees. 16.3 If the directors refuse to register a transfer of a share or non-shareholder membership, they shaJJ within two months after the date on which the transfer was lodged with the company send to the transferee notice of the refusal. !6.4 The registration of transfers of shares or of transfers of any class of shares or of non-shareholder membership may be suspended at such times and for such periods (not exceeding thirty days in any year) as the directors may determine. 16.5 No fee shaJJ be charged for the registration of any instrument of transfer or other document relating to or affecting the title to any share or non-shareholder membership. 16.6 The company shall be entitled to retain any instrument of transfer which is registered but any instrument of transfer which the directors refuse to register shall be returned to the person lodging it when notice of the refusal is given. FORFEITURE OF SHARES 16.7 If a Shareholder fails to pay any call or instalment of a call on the day appointed for payment thereof, the Directors may at any time thereafter during such time as any part of such call or instalment. remains unpaid, serve a notice on him requiring payment of so much of the call or instalment as is unpaid, together with any interest which may have accrued. 16.8 The notice shall name a further day (not earlier than the expiration of fourteen days from the date of the notice) on or before which the payment required by the notice is to be made, and shall state that in the event of non-payment at or before the time appointed the shares in respect of which the call was made will be liable to be forfeited. 8 f __ , 16.9 If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the Directors to that effect. 17.1 A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Directors think fit, and at any time before a sale or disposition the forfeiture may be cancelled on such terms as the Directors think fit. 17.2 A person whose shares have been forfeited shall cease to be a Shareholder in respect of the forfeited shares, but shall, notwithstanding, remain liable to pay to the Company all monies which, at the date of forfeiture, were presently payable by him to the Company in respect of the shares, but his liability shall cease if and when the Company receives payment in full of the nominal amount of the shares. 18. A statutory declaration in writing that the declarer is a Director of the Company, and that a share in the Company has been duly forfeited on a date stated in the declaration, shall be conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share. The Company may receive the consideration, if any, given for the share on any sale or disposition and the purchaser thereof may be registered as the holder of the share, and shall not be bound to see to the application of the purchase money, if any, nor shall his title to the share be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale or disposal of the share. 19. The provisions of these regulations as to forfeiture shall apply in the case of non-payment of any sum which, by the terms of issue of a share, becomes payable at a fixed time, whether on account of the amount of the share, or by way of premium, as if the same had been payable by virtue of a call duly made and notified. ALTERATION OF CAPITAL 20. The Company may from time to time by unanimous resolution of the Members increase the authorised share capital by such sum to be divided into shares of such amount, as the resolution shall prescribe. 21. The new shares shall be subject to the saine provisions with reference to the payment of calls, lien, transfer, transmissions, forfeiture, and otherwise as the shares in the original share capital. 22. The Company may by Ordinary Resolution: a. consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; b. sub-divide its existing shares, or any of them into shares of smaller amount than is fixed by the memorandum of association subject, nevertheless, to the provisions of section 50( l)(d) of the Act; c. cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person. 23. The Company may by Special Resolution reduce its share capital, any capital redemption reserve fund or any share premium account in any manner and with, and subject to, any incident authorised, and consent required, by law. 9 NON-SHAREHOLDER MEMBERS 24.1 A Non-Shareholder Member may not he a Shareholder and any Non-Shareholder Member who acquires the beneficial ownership of any share in the Company, thereby becoming a Shareholder, shall he deemed to have resigned as a Non-Shareholder Member pursuant to Article 25.1 hereof. 24.2 A Non-Shareholder Member shall have the right to vote only at any General Meeting of the Company called or on any Resolution made to: a. change the authorised or issued Share Capital of the Company; b change Articles JO(b), 87 or 88; c change the number of Board of Directors members or the persons who are members of the Board of Directors of the Company; d. put the Company into liquidation and appoint one or more liquidators for the purpose of winding up the affairs and distributing the assets of the Company; e. appoint and remove any Eligible Person; 24.3 A Resolution with respect to any of the matters set out in Article 24.2 paragraphs a toe shall only he passed by the unanimous agreement of all of the Shareholders and Non-Shareholder Members of the Company. 25.1 A Non-Shareholder Member may resign as a Non-Shareholder Member of the Company by notice in writing signed by such Non-Shareholder Member served on the Company at its Registered Office, the date of resignation being the date of service of such notice upon the Company. On the service of such notice such Non-Shareholder Member shall he deemed to have ceased to be a Non-Shareholder Member of the Company and his name shall he deleted from the Register of Members. 25.2 A Non-Shareholder Member who is declared bankrupt or being a corporation has gone into liquidation or who in any way becomes by legal process incapable of exercising his full rights as a Non-Shareholder Member of the Company shall he deemed to have resigned as a Non-Shareholder Member with "effect from the time of such bankruptcy, liquidation or legal process, and Article 26 shall apply to such deemed resignation as if the Non-Shareholder Member resigned pursuant to Article 25.1 hereof. Such a person may. when he ceases to be bankrupt or otherwise incapable of exercising his full legal rights, he entitled to reapply for election as a Non-Shareholder Member at the discretion of the Directors. 26. Where a person or corporation ceases to he a Non-Shareholder Member pursuant to Article 25.1 hereof, neither the former Non-Shareholder Member nor his assigns or successors shall have any right to compensation or other payment of any kind related to cessation of Non-Shareholder Membership, nor to the return of any monies that such Non-Shareholder Member may have paid to the Company by way of fee monies or donations. 10 27.1. Non-Shareholder Membership in the Company is only transferable in accordance with the provisions of these Articles. 27.2. Upon the death of a Non-Shareholder Member, or incapacity as a result of becoming of unsound mind, or in respect of whom an order has been made by any court having jurisdiction in lunacy, the membership of such Non-Shareholder Member shall terminate, and all rights, privileges and benefits derived therefrom shall also terminate. The assigns or successors of the deceased Non-Shareholder Member or the committee or other legal representatives of the incompetent Non-Shareholder Member shall not have any right to any compensation or other payment of any kind related to the cessation of membership, nor to the return of any monies that such Non-Shareholder Member may have paid to the Company by way of fee monies or contributions. 27.3. At any time when there is no Non-Shareholder Member of the Company, a person may be nominated and elected as a Non-Shareholder Member of the Company by the Directors of the Company for the time being. 28. Except as provided in the Memorandum of Association no Non-Shareholder Member of the Company need pay or contribute any monies or funds to the capital of the Company as a necessary adjunct of membership or at all. 29. Every Non-Shareholder Member shall have issued to him a Certificate of Membership. REGISTER OF MEMBERS 30. The Directors of the Company shall keep a Register of Members (hereinafter called the "Register of Members") in which shall be set out the full name and address of each Member, and the category, that is Shareholder or Non-Shareholder Member, of such Member. In the case of Shareholders, the register shall record such details as are by Ia w required. In the case of Non-Shareholder Members, the register shall record the date of admission of the Non-Shareholder Member to membership, and the date of cessation of membership in the Company and whether such cessation is by virtue of resignation under Article 25.1 or otherwise. GENERAL MEETINGS 3 J. A General Meeting shall be held once in every calendar year at such time (not being more than fifteen months after the holding of the last preceding General Meeting) and place as may be prescribed by the Directors, or, in default, at such time in the third month following that in which the anniversary of the Company's incorporation occurs, and at such place as the Directors appoint. In default of a General Meeting being so held, a General Meeting shall be held in the month next following, and may be convened by any two Members in the same manner as nearly as possible as that in which Meetings are to be convened by Directors. 32. The above-mentioned General Meetings shall be called Annual General Meetings; all other general meetings shall be called Extraordinary General Meetings. 33. The Directors may, whenever they think fit, convene an Extraordinary General Meeting, and Extraordinary General Meetings shall also be convened on such requisition, or in default, may be convened by such requisitionists. as provided by section I 13 of the Act. If at any time there are not sufficient Directors capablr of acting to form a quorum, any Director or any two Members of the II Company may convene an Extraordinary General Meeting in the same manner as nearly as possible as that in which meetings may be convened by the Directors. NOTICE OF GENERAL MEETINGS 34. Subject to the provisions of Section 116(2) of the Act relating to special resolutions, twenty-one days' notice at the least (exclusive of the day on which the notice is served or deemed to be served, but inclusive of the day for which the notice is given) specifYing the place, the day and the time may be given in writing by first-class mail, or in such other manner, if any, as may be prescribed by the Company in General Meeting, to such persons as are, under the regulations of the Company, entitled to receive such notices from the Company; but with the consent of all the Members entitled to receive notice of some particular meeting, that meeting may be convened by such shorter notice and in such manner as those Members may think fit. 35. The accidental omission to give notice of a meeting to, or the non-receipt of notice of a meeting by any Member shall not invalidate the proceedings at any meeting. PROCEEDINGS AT GENERAL MEETINGS 36. All business shall be deemed special that is transacted at an Extraordinary General Meeting,· and all that is transacted at an Annual General Meeting with the exception of the consideration of the accounts, balance sheets, and the ordinary report of the Directors and auditors, the election of Directors and other officers and the fixing of the remuneration of the Auditors. 37. No business shall be transacted at any General Meeting unless a quorum of Members is present at the time when the meeting proceeds to business. Two Members entitled to vote at such meeting present in person or by proxy shall be a quorum. provided that for any Resolution with respect to matters set out in Article 24.2 a quorum shall include all Members. 38. If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of Members, shall be dissolved; in any other case it shall stand adjourned to the same day in the next week, at the same time and place, and if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting the Members present shall be a quorum. provided that for any Resolution with respect to matters set out in Article 24.2 a quorum shall include all Members. 39. The Chairman of the Board of Directors shall preside at every General Meeting, but if at any meeting he shall not be present within fifteen minutes after the time appointed for holding the same or shall be unwilling to act as chairman, the Members present shall choose some Director, or if no Director be present, or if all the Directors present decline to take the chair, they shall choose some Member present to be chairman of the meeting. 40. The Chairman may, with the consent of any meeting at which a quorum is present (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfmished at the meeting from which the adjournment took place. When a meeting is adjourned for ten days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. Save as aforesaid it shall not be necessary to give any notice of an adjournment or of the business transacted at an adjourned meeting. 12 4I At any General Meeting a resolution put to the vote of the meeting shall be decided on a show of hands, unless a poll is demanded (before or on the declaration of the result of the show of hands) by; a. the Chairman; or b. at least two Members present in person or by proxy and entitled to vote at the meeting. 42. I. Unless a poll be so demanded a declaration by the Chairman that a resolution has on a show of hands been carried, or carried unanimously, or by a particular majority, or lost, or not carried by a particular majority, and an entry to that effect in the minute book of the Company shall be conclusive evidence thereof without proof of the number or the proportion of the votes recorded in favour of or against such resolution. 42.2 The demand for a poll may be withdrawn. 43. I If a poll is duly demanded it shall be taken in such manner as the Chairman directs, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. 43.2 In the case of an equality of votes, whether on a show of hands or on a poll, the Chairman of the meeting at which the show of hands takes place or at which the poll is demanded, shall be entitled to a second or casting vote. 44. A poll demanded on the election of a Chairman or on a question of adjournment, shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the Chairman of the meeting directs. YOTES OF MEMBERS 45. On a show of hands every Member entitled to vote and being present in person shall have one vote. On a poll each Shareholder shall have one vote in respect of each share registered in his name as at the close of business seven days preceding the day of the Meeting. Each Non-Shareholder member shall have one vote irrespective of the amount (if any) of monies he may have paid or contributed to the Company. 46. In the case of joint Members the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint members; and for this purpose seniority shall be detennined by the order in which the names stand in the Register of Members. 47. No Shareholder shall be entitled to vote at any General Meeting unless all monies presently payable to the Company in respect of the shares owned by such Shareholder shall have been paid. 48. A resolution in writing, signed by every Member of the Company, for the time being entitled to receive notice of and to attend and vote at General Meetings (or being corporations by their duly appointed representatives), shall have the same effect and validity as a unanimous resolution of the Members passed at a General Meeting of the Company duly convened and held. Such resolution in writing may be contained in one document or in several documents in like form each signed by one or more Members. 13 PROXY 49.1 On a poll votes may be given either personally or by proxy. 49.2 The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney duly authorised in writing, or, if the appointor is a corporation, either under seal or under the hand of an officer or attorney duly authorised. A proxy need not be a Member of the Company. 50. The instrument appointing a proxy and the authority (if any) under which it is signed, or a certified copy of such authority, shall be deposited at the registered office, or at such other place as is specified for that purpose in the notice calling the meeting, or in any instrument of proxy sent out by the Company in relation to the meeting, not less than forty-eight hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote, and in default the instrument of proxy shall not be treated as valid, unless all those present at the meeting resolve that such instruments shall be treated as valid. 51. An instrument appointing a proxy may be in the following form, or any other form which the Directors shall approve: ......... LIMITED 1, .. ............................ being a ... of Shareholder/Non-Shareholder* Member of. hereby appoint . ............................. Limited ............. of .... .. as my proxy to vote for me and on my behalf at the Ordinary/Extraordinary* General Meeting of the Company to be held on the ......... day of (month) .................... (year) .............. and at any adjournment thereof: Signed this ................. Day of (month) ..................... (year) ............ . • delete as appropriate 52. The instrument appointing a proxy shall be deemed to confer authority to demand or join m demanding a poll. CORPORATIONS ACTING BY REPRESENTATIVES AT MEETINGS 53. Any corporation which is a Member of the Company may by resolution of its Directors or other governing body authorise such person as it thinks fit to act as its representative at any meeting of the Company or of any class of Members of the Company and the person so authorised shall be entitled to exercise the same powers on behalf of the corporation which he represents as that corporation could exercise if it were any individual Member of the Company. DJRECTORS 14 54. The first Directors of the Company shall be: 55. Unless and until otherwise determined by the Company in General Meeting, the number of Directors shall not be less than three and not more than five, and no Director need be a Member of the Company. 56. The remuneration of the Directors shall from time to time be determined by unanimous resolution of the Directors. 57. The Directors shall be entitled to be repaid all travelling, hotel and other expenses reasonably incurred by them respectively in or about the performance of their duties as Directors. 57. I The Directors shall not meet in Canada. POWERS AND DUTIES OF DIRECTORS 58. The business of the Company shall be managed by the Directors, who may pay all expenses incurred in setting up and registering the Company, and may exercise all such powers of the Company, as are not, by the Act, or by these Articles, required to be exercised by the Company in General Meeting, subject, nonetheless, to any regulation under these articles or under the provisions of the Act, (such regulations being not inconsistent with the aforesaid regulations and provisions), as may be prescribed by the Company in General Meeting; but no regulation made by the Company in General Meeting shall invalidate any prior act of the Directors which would have been valid if that regulation had not been made. 59. The Directors may from time to time appoint one or more of their body to the office of Managing Director or Manager for such term and at such remuneration as they may think tit. 60. The Company may exercise the powers conferred by Section 104 of the Act, and those powers shall accordingly be exerciseable by the Directors. 61.1 The Directors from time to time. and at any time, may provide through local Committees, Attorneys, or Agencies for the management of the affairs of the Company, and may appoint any persons to be members of such local Committees or as Attorneys or Agents, and may remove any persons so appointed and appoint others in their place, and may fix their remuneration. 61.2 The Directors from time to time, and at any time, may delegate to any such local Committee, Attorney or Agent, any of the powers. authorities and discretions for the time being vested in the Directors (and not exceeding those vested in or exerciseable by the Directors under these Articles), and any such delegation may be made on such terms and for such period and subject to such conditions as the Director may ihink fit, and may include a power to sub-delegate all or any of the powers, authorities and discretions vested in them, and any such powers of delegation may contain such provisions for the protection and convenience· of persons dealing with any such local Committee, Attorney or Agent as the Directors may think tit. The Directors may at any time annul or vary any such delegation, but no person dealing in good faith without notice to such annulment or variation shall be affected thereby. 15 62.1 The Directors may from time to time at their discretion raise or borrow any sum or sums of money for the purposes of the Company and may raise or secure the repayment of such money in such manner, and upon such terms and conditions as they may think fit. 62.2 The Directors may from time to time, by unanimous decision cause the Company to lend to one or more Eligible Persons any part or the whole of the Company's capital upon such terms as to repayment and interest or interest free with or without security as the Directors may in their absolute discretion think fit. 62.3 The Directors shall have the power, by unanimous decision, to cause the Company to allow one or more Eligible Persons to occupy any premises or property or use any property owned by the Company rent free or upon such payment of rent as they shall deem fit. 62.4 Where the Directors are empowered by the Articles of Association of any subsidiary of the Company to appoint new directors of such subsidiary, such powers shall only be exercised by the Directors acting unanimously. DISQUALIFICATION OF DIRECTORS 63. The office of a Director shall be vacated: a. If by notice in writing to the Company he resigns the office of Director. b. If he absents himself from the meetings of the Directors during a continuous period of six months without special leave of absence from the other Directors, and the Directors pass a Resolution that he has by reason of such absence vacated office. c. If he becomes bankrupt or insolvent or enters into any arrangement with his creditors. d. If he is prohibited from being a Director by an order made under any of the provisions of Section 208 or 259 of the Act. e. If he is found lunatic or becomes of unsound mind. 64. A Director may hold any other office or place of profit under the Company, except that of Auditor, upon such terms as to remuneration. tenure of office or otherwise as may be determined by the Board. 65. No Director shall be disqualified by his office from contracting with the Company, either as vendor, purchaser or otherwise, nor shall any such contract or any contract or arrangement entered into or on behalf of the Company in which any Directors shall be in any way interested be avoided, nor shall any Director so contracting, or being interested be liable to account to the company for any profit realised by any such contract or arrangement by reason of such Director holding office or the fiduciary relationship thereby established. but a director shall disclose the nature of his interest in any contract or arrangement in which he is interested in the manner required by Section 148 of the Act, and it is expressly declared that a Director may as a Director vote in respect of any contract which he may make with the Company or in which he may be so interested and if he does so vote shall be counted and he may be reckoned for the purpose of constituting a quorum of Directors. 16 66. The Company rna y, subject to the provisions of Article 24.2, from time to time in general meeting increase or reduce the number of Directors. 67. The Directors shall have power at any time, and from time to time, to appoint a person as a Director to fiJI any vacancy, which person shall retire from office at the next following ordinary General Meeting, but shall be eligible for election by the Company at that meeting as a Director. 68. The Members may remove any Director and may appoint another person in his stead in accordance with Article 24.2c. PROCEEDINGS OF DIRECTORS 69.1 The Directors may meet together for the dispatch of business, adjourn, and otherwise regulate their meetings as they think fit. Questions arising at any meeting shall be decided by a majority of votes except as otherwise provided by these Articles. In case of an equality of votes the Chairman shall have a second or casting vote. A Director may, and the Secretary on the requisition of a Director shall, at any time, summon a meeting of the Directors. 70. The quorum necessary for the transaction of business of the Directors may be fixed by the Company in general meeting, and unless so fixed shall be three. 71. If and whenever the number of Directors shall be reduced below the number prescribed by Article 55, it shall be the duty of the remaining Director or Directors to convene a general meeting to deal with the appointment of one or more Directors as may be necessary to comply with the said Article 55, and pending such appointment any other powers vested in the Directors by statute or otherwise shall be suspended. 72. The Directors may elect a Chairman of their meetings and determine the period for which he is to hold office; but if no such chairman is elected, or if at any meeting the Chairman is not present within five minutes after the time appointed for holding the same, the Directors present may choose one of their number to be Chairman of the meeting. 73. The Directors may delegate any of their powers to committees consisting of such member or members of their body as they think fit; any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on it by the Directors. 74. A committee may elect a Chairman of its meetings; if no such Chairman is elected or if at any meeting the Chairman is not present within five minutes after the time appointed for holding the same, the members present may choose one of their number to be Chairman of the meeting. 75. A committee may meet and adjourn as it thinks proper. Questions arising at any meeting shall be determined by a majority of votes of the members present, and in case of an equality of votes the Chairman shall have a second or casting vote. 76. All acts done by any meeting of the Directors or of a committee of Difectors, or by any person acting as a Director, shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such Director or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a Director. 17 77. The Directors shall cause minutes to be made in the books provided for the purpose of recording: a. all appointments of officers made by the Company. b. the names of the Directors present at each meeting of the Directors and of any committee of the Directors. c. all resolutions and proceedings at all meetings.of the Company and of the Directors and of committees of Directors. 78. A resolution in writing, signed by every member of the Board of Directors, shall have the same effect and validity as a resolution of the Directors duly passed at a meeting of the Directors duly convened and constituted. 79. Any Director or member of a committee of the Directors may participate in a meeting of the Directors or such committee by means of telephonic or similar communications whereby all persons participating in the meeting can hear each other and participation in a meeting in this manner shall be deemed to constitute presence in person at such meeting. The location of such a telephonic meeting shall he deemed to be the place at which the Chairman of the meeting was located at the time of that meeting. 80. The Board of Directors may, at the request of a Director, appoint any person nominated by such Director for such purpose to be an Alternate Director to represent such Director and such appointment shall have effect and such appointee, while he holds office as an Alternate Director, shall be entitled to notice of meetings of the Directors, and in the absence of the Director whom he represents, to attend and vote thereat accordingly, but he shall not require any qualification and he shall "ipso facto" vacate office if and when the Director whom he represents vacates office as a Director, or the Alternate Director is removed from office at the request of the Director whom he represents; and any appointment or removal under this Article shall be effected by the Board of Directors upon the request in writing to the Company under the hand of the Director whom the Alternate Director is to represent or represents. 81. Every person acting as an Alternate Director shall be an officer of the Company and shall not be deemed to be the agent of the Director whom he represents. The remuneration of any Alternate Director shall be payable out of the remuneration payable to the Director whom he represents and shall consist of such portion of the last-mentioned remuneration as shall be agreed between the Alternate Director and the Director whom he represents. INDEMNITY 82. Every Director or other officer of the Company shall be entitled to be indemnified out of the assets of the Company against all losses or liabilities (including any such liability as is mentioned in paragraph (c) of the proviso to Section !51 of the Act) which he may sustain or incur in or about the execution of the duties of his office or otherwise in relation thereto, and no Director or other officer shall be liable for any Joss, damage. or misfortune which may happen to or be incurred by the Company in the execution of the duties of his office or in relation thereto, but this Article shall only have effect in so far as its provisions are not avoided by the said Section. 18 83. The Directors may execute, in the name or on behalf of the Company, in favour of any Director or other person who may incur or be about to incur any personal liability for the benefit of Company such debenture or mortgage of the Company's property (present and future) as they think fit, and such mortgage may contain a power of sale and such other powers, covenants and provisions as shall be agreed upon. SECRETARY 84.1 The Secretary shall be appointed by unanimous resolution of the Directors for such tenn, at such remuneration and upon such conditions as they may think fit; and any Secretary so appointed may be removed by a majority of them 84.2 A person shall not be precluded from acting both as Director and as, or in place of, the Secretary. SEAL 85.1 Unless the directors resolve that the Company do have a Common Seal, the Company shall not have any Common Seal. 85.2 If the Company does adopt a Common Seal, the Seal of the Company shall be used only by the authority of the Directors and every instrument to which the Seal shall be affixed shall be signed in the presence of any two Directors, or of a Director and of the Secretary, or such other persons as the Directors may appoint for the purpose; and the Directors and the Secretary or other persons as aforesaid shall sign every instrument to which the Seal of the Company is so affixed in their presence. 86. The Company may exercise the powers conferred by Section 32 of the Companies Act, 1931 with regard to having an official Seal for use abroad and such powers shall be vested in the Directors. PAYMENTS OUT OF NET PROFIT AND CAPITAL 87. Save as prescribed by Article IO(b) the Company may not make any distribution of net profit, whether current or retained, or of capital to any Member of the Company, other than, upon the liquidation of the Company, the payment to each Shareholder of an amount not exceeding the par value of such Shareholder's holding of shares in the Company. 88. The Directors may, by unanimous decision, at their absolute discretion make gifts out of net profit, whether current or retained, or capital or contributed surplus to Eligible Persons or any one or more of them in such amounts and proportions as they shall determine, but they shall be under no obligation to make any such gifts at any time during the life of the Company, and no one or more Eligible Person shall be entitled to require the Directors to determine upon any gift nor to complain at the manner and decisions of the Directors relating to the amount, timing or recipients of any gift determined by the Directors. 89. The Directors may from time to time determine that any amount for the time being standing to the credit of the Company's Net Profit Account, or Revenue Reserves, may be capitalised and transferred to the Capital Reserves of the Company. 19 ACCOUNTS 90. The Directors shall cause proper books of account to be kept with respect to: a. All sums of money received and expended by the Company and the matters in respect of which the receipt and expenditure takes place; b. All sales and purchase of goods by the Company; and c. The assets and liabilities of the Company. 91. The books of account shall be kept at the Registered Office of the Company, or at such other place or places as the Directors think fit, and shall always be open to the inspection of the Directors. 92. The Directors shall from time to time determine whether and to what extent and at what times and under what conditions or regulations the accounts and books of the Company or any of them shall be open to the inspection of the Members not being Directors, and no Member (not being a Director) shall have any right of inspecting any account or book or document of the Company except as conferred by statute or authorised by the Directors or by the Company in General Meeting. 93. In accordance with the provisions of the Companies Act, 1982, section 2A, the Directors need not prepare or lay before the Company in General Meeting such Profit and Loss accounts, Balance Sheets and Reports as are referred to in that Act, unless required to do so under the provisions of section 2B of the Act. 94. A copy of every Balance Sheet (including every document required by law to be annexed thereto) which may be so required to be laid before the Company in General Meeting together with a copy of the auditors' report shall, not less than seven days before the date of the meeting, be sent to all persons entitled to receive notices of General Meetings of the Company. EXEMPTION FROM THE PRODUCTION OF AUDITED ACCOUNTS 95. Section II(!) of the Companies Act 1982 and all such other provisions of the Act as require the accounts of the company to be audited before being laid before the Members in General Meeting shall not apply to the Company so long as the Company shall be an exempt company for the purposes of the Income Tax (Exempt Companies) Act 1984 or a non-resident company for the purposes of the Non-Resident Company Duty Act 1986 or an audit exempt company for the purposes of the Companies (Exempt and Non-Resident Private Companies (Audit Exemption) (Amendment) Regulations 1994 and this Article shall hereby constitute an election in accordance with Regulation 3(1) of Companies (Exempt and Non-Resident Private Companies) (Audit Exemption) Regulations 1993 for the purposes of dispensing with the requirements for any such audit requirements. A Member may at any time by notice in writing deposited at the registered office of the Company require the rescission of this election. The Directors shall within 21 days from the date of the deposit of such notice as in sub-clause: (a) appoint an auditor in the slme manner as they may fill a casual vacancy in the office of the auditor; and (b) proceed duly to convene a general meeting of the Company to effect such amendments to these Articles as are necessary as a consequence of the notice. AUDIT 96. Auditors shall be appointed and their duties regulated in accordance with the Companies Act 1982, unless the Company shall, by Special Resolution resolve that Auditors need not be appointed. NOTICES 97. A notice may be given by the Company to joint Members by giving the notice to the joint Member named first in the Register of Members. 98. Notice of every General Meeting shall be given in some manner hereinbefore authorised to: a. every Member except those Members who have not supplied to the Company an address for the giving of notices to them, and also to: b. every Director of the Company; c. every person entitled to receive notice under any provision of the Act. WINDING UP 99. On the winding up of the Company the liquidator shall, with the sanction of a unanimous Resolution of the Members, and subject to the provision of Article 87, divide among those Shareholders and Eligible Persons in specie or in kind, any part of those assets of the Company available . after settlement of any outstanding liabilities and the costs of liquidation of the Company, and shall with the like sanction vest as a gift any part of the assets of the Company available for gifting in those Eligible Persons or trustees upon such trusts for the benefit of those Eligible Persons, or any of them In the event of the failure of the Members to agree by unanimous Resolution as to who amongst the Eligible Persons or trustees upon such trusts for the benefit of those Eligible Persons shall receive and in what amount any part of the assets available for gift, such disagreement shall be resolved by a single arbitrator, if one can be agreed upon by all of the Members, or by the appointee(s) of the President of the Isle of Man branch of the Institute of Chartered Accountants the decision of which arbitrator(s) shall be binding upon the Members and the Liquidator as if the decision of the arbitrator(s) constituted such a unanimous Resolution of the Members. 21 Names, Addresses & Descriptions of Subscribers Dated this _ _ day of _ _ _ _ _ 2000 Witness to the above signatures: Name: Address: Occupation: ), ' 22 Names, Addresses & Descriptions of Subscribers Dated this ___ day o f - - - - - - 2000 Witness to the above signatures: Name: Address: Occupation: 23 DELCARJATION OF GIFT I, (the "Donor"), of _ _ _ _ _~ _ _ _ [Province], own cash or other liquid assets in the amount of$ (the "Property"). I want to give the Property to ____ (the "Donee"), of _ _ _ _ _ _ for its own use absolutely and irrevocably. [name of Bank or other To carry out my purpose, I hereby direct holder of Property) to transfer the Property from my name to an account in the name of the Donee. I intend the transfer of the Property to be effective upon my execution of this Deed and henceforth I stand as bare trustee of the Property for the benefit of the Donee until such transfer is made. I intend to vest absolute ownership and title in the Property in the Donee from the date of this Deed. DATEDthe __ dayof _ _ _ _,,l999. Donor I accept the gift of the Property. DATEDthe __ dayof _ _ _ _ ,l999. Donee - .( 09199·0ffshore Company-Deed of Gift Example of "Letter of Wishes" [It is strongly recommended that the Donor's wishes be made a matter of record to guide the Members and Directors and an Arbitrator under Clause 99 of the Articles. However, it may be preferable that the Donor meet with the members of the board of directors at an organizational meeting and express his wishes, to be recorded in the minutes, rather than writing a "letter of wishes" which tends to be associated with a trust arrangement.] To the Members and Directors C/0 Singer & Friedlander Trust Company (Isle of Man) Limited Douglas Isle of Man _ _ _ _ ,2001 Gentlemen As one of the "founders" of _ _ _ _ _ _ _ ("the Company"), I acknowledge that the gift of approximately $ from myself to the Company was absolute, unconditional and irrevocable. Nevertheless, it would be my wish that the Members and Directors of the Company, would consult with me, from time to time, and penni! me to make suggestions (recognizing that such advice will not require or connnit the Members and Directors to any particular course of action and that they must wholly independently exercise their control and authority over the Company) with respect to the addition or deletion of Eligible Persons or the exercise of their discretion to make gifts to such Eligible Persons [or the choice of professional investment advisors] [or the purchase of other assets or investments not upon the advice of professional investment advisors). Furthermore, it would be my wish in the like spirit and on the same understandings that, in the event of my legal incapacity or death, the Members and Directors consult with and consider the suggestions of [my spouse or widower (as applicable, if any), or (if no spouse Page2 or widower) my children (natural or adopted, if any)] [or failing any of the foregoing _ _,],with respect to the disposition of the affairs and assets of the Company] [continue the Company so long as the Members determine that its continuance serves a substantive purpose] [in meeting the manifest needs of those Eligible Persons remaining alive, or in the case of incorporated entities or associations, continuing in existence] [and, subject to the unanimous agreement of the Members with respect to the addition as Eligible Persons of any such organizations, for the benefit of such other internationally recognized not-forprofit or charitable organizations or worthy individuals pursuing academic studies, scientific research or practical development activities in connection with understanding and mitigating the negative impacts of humankind on ecosystems and the environment in general, sustainable community development and organic agriculture, including the provision of scholarships or the funding of chairs at reputable academic institutions as the Director may in their sole discretion think worthy of support] [or in the event that the Members and/or Directors determine that the continuance of the Company would serve no substantive purpose and that the foregoing enumerated purposes would be better served by winding up the Company and distributing the assets to such Eligible Persons or such not-for-profit or charitable organizations agreed by the Members to be added as Eligible Persons, that the Company would be so wound-up]. Yours very truly INITIAL CLffiNT MEETING "SCRIPT" (The following is an outline of one possible approach to an initial meeting with a client.) • Introductions • Explain the pioprietary nature of strategy about to be discussed- KPMG's substantial investment, mutual interest of any clients that may choose to pursue the strategy to make sure that it does not get "on the street", • Explain that Confidentiality Agreement will be required before you can go into any detail with respect to the strategy; and a signed Engagement Letter and retainer will be required before any documentation is made available. • Explain that the strategy is most appropriate for high net worth individuals seeking asset protection/estate planning/philanthropic planning and that tax benefits should ideally not be the primary motive for pursuing the strategy. Mention that there are risks associated with the strategy, the primary tax risk being GAAR. Discuss GAAR, particularly potential application if the primary purpose of the planning is to obtain the tax benefits, although there may be substantive defenses (see Fraser Milner opinion). Mention that we reserve the right not to accept engagement where we judge the circumstances unsuitable. • Explain that fees are value based, but fees and disbursements will be at least $100,000. • If the prospective client wishes to proceed with the discussio~ at this time, obtain signature on Confidentiality Agreement. • Gather facts of clients' situation, particularly with respect to family and financial circumstances and objectives. • Judge apprf?priateness of proceeding to explain the strategy in some detail. • Describe the 5 primary aspects of the arrangement: • • • • • • exempt corporation in the Isle of Man (IOM) shareholders- 2 arm's length IOM corporations, each in turn controlled by KPMG partners and Simcocks' IOM partners (other arrangements may be appropriate 'in certain circumstances), who are entitled to a limited annual dividend; elect one member each to the board of directors · non-shareholder member- trusted non-Canadian resident person - nominates one board member and under Offshore Company's Articles votes on ·certain critical matters necessary to maintain the framework structure members' agreement between the shareholders and the non-shareholder member- setting out agreement of members, particularly on "eligible persons" "eligible persons"- defined in Articles as persons unanimously agreed upon by the membersffiay, at the discretion of the directors (or members upon winding up) receive ''gifts" from Offshore Company during its liquidation and upon wind-up Describe the primary benefits of the structure: • asset protection: corporation owns assets in its own right - eligible persons have absolutely no legal rights viz a viz Offshore Company: therefore nothing creditor/ex-spouse etc. can claim;· nothing to be deemed disposed of on departure from Canada. • • • • estate planning: inter-vivos arrangement that should avoid challenges to will, forced heir-ship rules, probate fees, succession duties or death taxes. philanthropic: avoid regulations and disbursement quotas applicable to registered private foundations. tax: IOM tax exempt should be no taxation of income of Offshore Company in Canada, including gifts to Canadian residents; no reporting. Describe the primary risks of the arrangement: • must rely upon the framework structure to protect the assets_and achieve objectives of the "founder": the members and directors owe no fiducial)' obligation to the founder or the eligible persons and cannot be under the direction and control of the founder or eligible persons • means really giving up control of assets to the board of directors of Offshore Company · • agency • corporate residence - mind and management ._ GAAR ,~ • Determine prospective client's interest in proceeding to engagement. Date To August 18, 1999 Offshore Company Tax Product File From cc Barry Philp subject Canadian Tax Treatment of Eligible Persons in the Offshore Company Tax Product This memorandum documents our analysis of the Canadian income tax treatment of the "rights" of Eligible Persons vis a vis Offshore Company under the proposed Offshore Company tax product. All statutory references herein, unless otherwise indicated are to the Income Tax Act (the ..Act") and the Income Tax Regulations (the "Regulations"). FACTS & ASSUMPTIONS Our analysis is based on the following facts and assumptions and on authorities which are subject to change. · 1. Offshore Company is a company limited by guarantee and shares under the Companies Acts of the Isle ofMan(l931- 1993). 2. Offshore Company's Articles contemplate relationships among the company and three types of person: Shareholders, Non-Shareholder Members and Eligible Persons. 3. Shareholders are persons who hold at least one share in the capital stock of Offshore Company and have the right to vote one vote for each share held at all General Meetings of Offshore Company. Shareholders are also parties to the Members Agreement. Shares are transferable only in accordance with the Articles and the Members Agreement. 4. Non-Shareholder Members are persons who are admitted by the Directors of Offshore Company and registered as such by Offshore Company. Non-Shareholder Members have the right to vote one vote on various limited matters requiring unanimous consent of the Members at General Meetings of Offshore Company, as set out in Article 24.2. KPMG' Page 2 5. Eligible Persons are those persons identified and appointed by unanimous agreement among the Shareholders and Non-Shareholder Members as persons eligible to participate in the distribution of capital or income or accumulated retained earnings or assets of Offshore Company at the absolute discretion of Directors elected by the Shareholders and Non-Shareholder Members, as set out in Article 88. Eligible Persons may also receive distributions on the winding up of the Company at the direction of the liquidator as sanctioned by unanimous resolution of the Shareholder and Non-Shareholder Members. In absence of a unanimous resolution among the Shareholder and Non-Shareholder Members, each Eligible Person will receive pro rata distribution of the remaining property in Offshore Company upon the winding up and after distributions are made to the Shareholder Members. ISSUES The issues to be addressed in this memorandum are as follows I. Is an Eligible Person a "shareholder" for purposes of Subsection 15(1) of the Act; 2. Does the interest of an Eligible Person in Offshore Company constitute a "share" for purposes of Subsection 90(1) of the Act; 3. Does the interest of an Eligible Person in Offshore Company constitute "property" for purposes of Subsection 9( I) of the Act; 4. Does the interest of an Eligible Person in Offshore Company constitute an "interest in property" for purposes of Section 94.1 of the Act. (Update- Nov 3/00: Section 94.1 has been substantiallv changed by the June 22. ?000 proposed legislation. For a discussion of the implications of proposed new section 94.1 to the Offshore Company plan, see Tab VJI.4.) CONCLUSIONS Subject to the review of legal counsel, our conclusions are: I. An Eligible Person should not be a "shareholder" for purposes of Subsection 15(1) since Eligible Persons are not entitled to receive a dividend from Offshore Company [S.248(1) definition of"shareholder"] nor are they shareholders otherwise in law; 2. The interest of an Eligible Person in Offshore Company should not be a "share" for purposes of Section 90 of the Act because Eligible Persons have no right to vote, have paid no consideration for their rights, have no right to transfer, are not entitled to receive a dividend, have no capital at risk and can be arbitrarily removed at any time; Page3 3. The interest of an Eligible Person in Offshore Company should not constitute "property" for purposes of Subsection 9(1) of the Act because Eligible Persons do not have any legal rights under the Memorandum, Articles or Shareholder's Agreement or on the basis of an implied or resulting trust to enforce their interests in Offshore Company. 4. The interest of an Eligible Person in Offshore Company should not constitute an "interest in property" that is an interest in, or an interest in an interest in an offshore investment fund for purposes of Section 94.1 of the Act because in order to do so the interest of the Eligible Person in Offshore Company, or an interest in an interest, would have to rise to the level of being an interest in property which it does not do because Eligible Persons do not have any legal rights under the Memorandum, Articles or Shareholder's Agreement or on the basis of an implied or resulting trust to enforce their interests in Offshore Company. ANALYSIS Subsection 15(1) Section 15(1) of the Act requires a shareholder of a corporation to include in income the amount or value of certain benefits conferred on the shareholder by the corporAtion. The term "shareholder" is defmed in Section 248 to include a "member or other person entitled to receive a dividend. " 1 A "dividend" is defined in Section 248 to include a stock dividend. A dividend is generally considered in the cases to be a ratable distribution to shareholders in accordance with their interests other than a step reducdon in capital. Eligible Persons may become eligible, at the absolute discretion of the Directors, to receive a distribution from Offshore Company and may, upon unanimous resolution of the Shareholder and Non-Shareholder Members upon dissolution of Offshore Company, become eligible to receive a distribution from the assets of Offshore Company. In the 1 Section 3(1) of the Canada Business Corporations Act defines shareholder as: )/; '" - any subscriber for or holder of a share in the capital stock of the company and includes the personal representatives of a deceased shareholder and every person who agrees with the company to become a shareholder and every person who agrees with the company to become a shareholder:". In Allendale Mutua/Insurance Co. v. The Queen, 73 DTC 5382, Cattanach adopted an expansive definition of shareholder at p. 5388 as follows: Obviously the extended definition of shareholder was designed to include those persons who, while not holding a share of capital stock because there is no capital stock, by virtue of their participation in a corporation without share capital on a commercial venture to make a profit and by reason of the structural organization of the corporation. are entitled to share in any of profits of the corporation KPMG' Page 4 absence of a unanimous resolution of the Shareholder and Non-Shareholder Members to distribute to specific Eligible Persons upon winding up of Offshore Company, each Eligible Person will receive a pro rata share of the remaining assets. Although the potential eligibility of Eligible Persons to receive distributions from Offshore Company may appear at first glance to bear some resemblance to a shareholder's right to a discretionary dividend, Eligible Persons are not shareholders under the Act nor Isle of Man Jaw. Eligible Persons are not entitled to receive distributions from Offshore Company. Although Offshore Company is empowered to make distributions to Eligible Persons, it is not obliged to do so nor is Offshore Company obliged to treat Eligible Persons equally in respect of distributions. Entitlement connotes availability oflegal redress at least in the case of unequal treatment among members of the same class. 3 Any Eligible Person may be excluded from a distribution made to all other Eligible Persons and has no right to complain [Article 88]. Any distribution received by an Eligible Person should be considered to be a gift under Canadian law4 . The definition of "Shareholder" in subsection 248(1) is expansive. A shareholder includes persons eligible to receive dividends, and does not exclude other persons who are shareholders in law. Eligible Persons should also not be considered to be shareholders of Offshore Company by operation of law. The discussion provided below of statutory corporate schemes and common law treatment of the term "share" is equally relevant here. Subsection 90(1) Subsection 90(1) of the Act includes in a taxpayer's income dividends received by a taxpayer on shares owned by the taxpayer of the capital stock of a corporation not resident in Canada. The question of whether the interest of an Eligible Person in Offshore Company is a share is substantially similar to the question whether an Eligible Person is a shareholder as discussed above. A share is defined in Section 248 to mean a share or fraction of a share of the capital stock of a corporation. A dividend, as discussed above, is generally considered in the cases to be a ratable distribution to shareholders in accordance with their i)lterests other than a step reduction in capital. 2 This statement is equally true if the Board of Directors declares a distribution to an Eligible Person. In Cossitt v. MNR, [1966] CTC 785, Thurlow quoted Re Miller's Agreement. Uniacke v. Attorney General, [1947] 2 All E.R. as follows: 3 The word entitled, as used in this section, appears to me necessarily to carry the implication that, for a person to be entitled to property under this section, it must be capable of being postulated to her that she has a right 4 to sue for and recover such property. A gift is a voluntary transfer of personal property without consideration. Page 5 In absence of an exhaustive definition of a "share" in the Act we tum to Canadian statutory corporate schemes and common law for guidance. A share is generally taken to mean a fractional part of the capital of a corporation which confers upon the holder a certain right to a proportionate part of the assets of the corporation, whether by way of dividend or of distribution of assets on winding up. Shares are simply fractions of potential interests in the assets and the active life of the corporation into which the capital is divided. The issue of a share gives rise to a title to property of the nature of a chose in action. In Hunt v. The Queen, 66 DTC 5322 (affd 1928 SCR 323) the Exchequer Court defined a share as follows: A share as I understand it, is the bundle of rights that the statutory law, company charter and other instruments confer on the holder of the share. These are ordinarily (a) the right to vote at company meetings, {b) the right to receive dividends when declared, and (c) the right to participate in a winding up. Eligible Persons should not be characterized as owning a share in Offshore Company for the following reasons: 5 • Eligible Persons provide Offshore Company no consideration for their rights5 and have not contributed to the stated capital of Offshore Companl; • Eligible Persons do not hold a certificate specifying their interest in Offshore Company and have no title to property in Offshore Company; • Eligible Persons have no right to vote; • Eligible Persons' interests are not transferable or assignable; • Eligible Persons' interests do not survive the death of an Eligible Person; • Eligible Persons have no recourse if they do not receive a dividend; • Eligible Persons do not have equal rights within the class; • Eligible Persons have no liability whatsoever to outside parties (capital at risk); • Eligible Persons' interests are not measurable in a sum of money; A share may not be issued until consideration for it has been fully paid. CBCA s.25(3). A "subscriber" for shares is a person who contributes to the capital of a corporation in exchange for shares Re Richelieu Oil Co. (1950), 321 CBR 221 (Que. C.A.). 6 KPMl; 1 Page 6 • Eligible Persons may be arbitrarily removed without their consent. Subsection 9(1) Subsection 9(1) provides that the income of a taxpayer subject to Canadian income tax includes income that is profit from a business or property. "Property" is defined in Section 248 to mean property of any kind whatever, whether real or personal, corporeal or incorporeal, and includes a right of any kind whatever, a share or a chose in action. The wide import of the language in Section 248 defining "property" has been generously interpreted by the courts. In Vaillancourt v. The Queen, 9! DTC 5408, for example, Tremblay T.C.C.J. stated at p.5412 as follows: >· The word ''property'', in s. 248(1) of the Act, "means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes (a) a right of any kind whatever... " (my emphasis). This definition could hardly be more inclusive and seems quite broad enough to me to take in a portion or fraction of property: a person who acquires a portion or fraction of property most certainly acquires property. Although the word "property" is given a liberal interpretation by jurisprudence and the Act, it should not encompass the interests held by Eligible Persons since they have no rights to enforce or receive distributions or a pro rata sharing upon the wind up of Offshore Compan/. Such distributions will be strictly at the discretion of the Board of Directors and may be made to one Eligible Person to the exclusion of any others. In all cases in which a taxpayer is characterized as owning property the taxpayer has a right enforceable by the courts to the property involved 8 • Since Eligible Persons do not have a right to legal redress to enforce their interests in Offshore Company their interests in Offshore Company should not be considered to be property for purposes of the Act. Section 94.1 (Nov 3/00- See Tab Vll.4 (or discussion of proposed new Section 94.1) Section 94.1 applies where a taxpayer has an interest in an offshore investment fund and one of the main reasons for such investment was to reduce or defer the tax liability that would have applied to the income generated from the underlying assets of the fund if such income had been earned directly by the taxpayer9• In such a case the taxpayer is 7 We have obtained a legal opinion from counsel in the Isle of Man to confirm that Eligible Persons have no rights to enforce or receive distributions or a pro rata sharing upon the wind up of Offshore Company. 8 "The plain and ordinary meaning of the word "property" is legal title and not a contingent future equitable right to reacquire which one does not presently hold." Pigott Project Management v. Land Rock Resources Ltd., 96 DTC 6245. 9 The budget released in February 1999 indicates that the second "primary reason" test will be removed. IV'Mid' Page 7 required to include an amount in income determined by applying the prescribed rate of interest to the designated cost of his interest in the fund 10 • Section 94.1 applies where a taxpayer holds or has an interest in property that is a share of the capital stock, an interest in or a debt of a non resident entity, or an interest in or right or option to acquire such a share, interest or debt. At issue is whether the Eligible Person's relationship with Offshore Company can be considered an interest in property that is an interest in a non resident entity, or an interest, right or option to acquire such an interest, for purposes of the Act. The language in section 94.1 is clearly intended to expand the application of the section to every possible interest, or interest in an interest in property 11 • An interest in property is the most general term that can be employed to denote a right, claim, title, or legal share in something. It means a right to have the advantage accruing from anything; any right in 12 the nature of property, but less than title • As discussed above, Eligible Persons do not have legal redress available to them to enforce claims against in Offshore Company. Thus, they have no rights vis vis Offshore Company. Any distributions will be strictly at the discretion of the Board of Directors and may be made to one Eligible Person to the exclusion of any others and Eligible Persons may be removed at any time before the dissolution of Offshore Company. As such, Eligible Persons should not be considered to have an interest in property any more than they will be considered to have property in Offshore Company13 • a An interest in an interest in property can be described as a legally enforceable right to some of the benefit of ownership that an interest in property enjoys. Eligible Persons are not parties to the Memorandum of Association of Offshore Company nor to the Members' Agreement. No action lies against Offshore Company by an Eligible Person if 10 The budget proposes to tax on an accrual basis a taxpayer's share of the undistributed income of the offshore fund if there is information available to the taxpayer to determine his share; or require the taxpayer to "mark-to-market" his interest if such information is not available. E1igible Persons have no entitlement to a share of the income and no rights that have a market value. 11 In M.N.R. v. Fitzgerald; The King v. Walsh, 49 DTC 580 defined the term property as follows: In my opinion, while "property" is defined in Section 2(k) of the Statute [Dominion Succession Duty Act] as including every estate and interest in real and personal property capable of being devised or bequeathed by wiH or of passing on death, I see no reason for construing this statute, without more express language, as including an interest in an interest or more remote interests. 12 Black's Law Dictionary (61h ed.). "Re Miller's Agreement, Uniacke v. AG [1947] AllER 78 at 80: In my view, the word interest in the subsection means such an interest in property as would be protected by the courts. ....... ~ Page 8 a distribution is declared but not given. Eligible Persons should not therefore be considered to hold an interest in an interest in property. An interest in an interest in property may also be an interest in a property that is contingent upon the occurrence of an event, such as an option to buy shares. Upon the occurrence of the event, the interest matures and becomes actionable if not satisfied. Eligible Persons do not enjoy contingent rights vis a vis Offshore Company. If a distribution declaration is made by the Directors but not acted upon, Eligible Persons would be unable to force the distribution since they enjoy no privity of contract with Offshore Company or any of the Directors. Eligible Persons enjoy a potential expectation based on a contingency, wltich is not an interest under Canadian law. Any distribution received by an Eligible Person should be considered to be a gift under Canadian law 14 • 14 A gift is a voluntary transfer of personal property without consideration. C!ior.t NJ: _ _ _ _ _ _ _ __ Prepa.red by: - - - - - - - - To Private and Confidential :~.t'i T~r. - - - - - : - - - - - Date Offshore Company Tax Product FileRc·liewzr Pi -~t:e••c~::-;~) GTtv! StrstBg:J Summary PiSp2red Yss_N!A_ From GST Sp~cia\i;:t - - - - - Reviewer {i1 cc Barrie Philp cpp1ictlbi~) Tax Partner Approvai: - - - - - - - - - Subject Agency CC !G: - · - - - - - - - Issue: Are the shareholders of Offshore Company (i.e., Lochside Limited and Korderry Limited) agents for the individual transfening property to Offshore Company? Analysis: General Definition of Agency/Agent: Black's Law Dictionary, 5111 Edition, defines agency as: "Relation in which one person acts for or represents another by latter's authority, either in the relationship of principal and agent, master and servant, or employer or proprietor and independent contractor ... The relation created by express or implied contract or by law, whereby one party delegates the transaction of some lawful business with more or less discretionary power to another, who undertakes to manage the affair and render to him an accounting thereof... Or relationship where one party is authorized to do certain acts for, or in relation to the rights or property of the other. But means more than tacit permission, and involves request, instruction or command ... The consensual relation existing between two persons, by virtue of which one is subject to the other's control... Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act." It further defines "general agency" and "implied agency": General agency - "that which exists when there is delegation to do all acts connected with a particular trade, business or employment. lt implies authority on the part of the agent to act without restriction or qualification in all matters relating to the business of his principal." 09!99-0ffshore Company-Agency Page2 Implied agency- "one created by act of parties and deduced from proof of other facts. It is an actual agency, proved by deductions or inferences from other facts, and third party need have no knowledge of the principal's acts, nor have relied on them." "Agent" is defined as: "A person authorized by another to act for him, one intrusted with another's business ... One who represents and acts for another under the contract or relation of agency. A business representative, whose function is to bring about, modify, affect, accept performance of, or terminate contractual obligations between principal and third persons. One who undertakes to transact some business, or to manage some affair, for another, by the authority and on account of the latter, and to render an account of it. One who acts for or in place of another by authority from him; a substitute, a deputy, appointed by principal with power to do things which the principal may do. One who deals not only with things, as does a servant, but with persons, using his own discretion as to means, and frequently establishing contractual relations between his principal and third persons." Agency versus Trust: Agency is based on contractual principles, while a trust relationship is based primarily on equitable principles. Further, an agent acts on behalf, and under the control, of the principal, while a trustee generally has independence and discretion. Principle of Agency as defined in the Jurisprudence: The following points were considered in the jurisprudence regarding the subject of agent/agency: 1. Control of the Agent by the Principal • The "control" factor was emphasized in Fraser v. Minister of National Revenue (91 DTC 5123- FCTD). In this case, the taxpayer was one of a group of taxpayers who purchased units in an investment vehicle holding a pooled fund of mortgages that were managed by a professional brokerage firm. In characterizing the relationship between the taxpayers and the broker, the court found that all the classic elements of a trust relationship existed but that an agency relationship did not exist. The reason for this finding was that the taxpayer did not retain control over the actions of the trustee. The existing control was not in the nature of control that was exercisable by a principal over an agent. Specifically, the court stated that "while the relationship ... may have been created by contract, it was not an agency contract. The plaintiff retained no real control over the actions of the trustee." KR«G' Page 3 2. Control Of Property This point was considered to be salient in a number of cases. For example: • 1n Drummond Coal Co. v. Minister of National Revenue (72 DTC 1217- TRB), the court made the following comments: " ... Scotia Bond Company was acting much more in the nature of agent than principal because it was not at liberty to do whatever it pleased with these shares, as in The Palmolive Manufacturing Company (Ontario) Limited v His Majesty the King, [1933] S.C.R. 131, wherein the Ontario Company was not free to sell the Palmolive products to outsiders, and it was not regarded as principal but as an agent ... Scotia Bond Company was not acting beneficially in its own behalf, and consequently must be found to act as an agent for its principal ... " • 1n Saskatchewan Wheat Pool v. Queen (85 DTC 5034- FCA), the issue of control over property was also addressed. The court stated that "the Pool never acquires those attributes which are exclusively attached to ownership, ie the right to use as one pleases and for one's own personal advantage, the right to consume, to destroy or to dispose of, and conversely the "obligation" to assume the risk of loss due to any cause including, of course, force majeure." 3. Agency Relationship Must be Express • 1n Turner v. Minister of National Revenue (84 DTC 1828- TCC), the court considered it relevant that there was no express agreement between the parties indicating that one was the agent of the other. The court stated "the weakness of the appellant's case lies not in any failure to establish what the appellant's intention was but, rather, it lies in the failure to demonstrate that the company made him its agent and that the transaction was in fact carried out by him as agent." • 1n Richardson Terminals Ltd. v. Minister of National Revenue (72 DTC 6431}, the fact that the purported agency relationship was not disclosed to anyone was considered an important factor. Comments made by Revenue Canada: The following is a quote from the 1994 Conference Report (p. 42:112 GST and Agency (Murray,B.): ...) "A senior official of Revenue Canada recently indicated that the department would seek to apply the common law meaning of "agent" only in respect of those sections of the Act that specifically employ the word "agent". Page4 In the case of Offshore Company, the following factors would point to there not being an agency relationship between the shareholders and the individual transferring property to Offshore Company: ;;.;- • the shareholders own the shares completely for their own benefit and account - they do not hold them on any express or implied duty or obligation to hold them, transfer them or vote them on the direction of the transferor. The shareholders have the unfettered right to vote one vote for each share held at all general meetings of Offshore Company. The shareholders are also parties to the Members' Agreement which obligates them to vote so as to give effect to the provisions of the Members' Agreement, but does not in any way put them under the direction and control of the transferor. Although shares are transferable only in accordance with the Articles and the Members' Agreement, this is not an uncommon provision included in most shareholders' agreements. • the transfer of property to Offshore Company will be an unconditional gift to Offshore Company for its own use. The "donor" will have no control over the shareholders, directors, the company or the property so gifted. • there is no agency agreement, express or implied, in place between the shareholders and the transferor of the property to Offshore Company. Furthermore, the shareholders will in no way hold themselves out to be the agents of that individual. • there is an express intention, and the specific provisions of the Memorandum, Articles and Members' Agreement evidence this intent and conjoin the parties with respect thereto, that the shareholders will own and, through their elected director nominees, manage and control Offshore Company together with the Non-Shareholder Members for their own benefit, but more importantly, for the Eligible Persons' (whomever they may be, from time to time) benefit. However, it is also understood, agreed and evidenced by the documents that they do not do so under the direction or control of the transferor, but are only constrained by the contractual terms of the Memorandum, Articles and Members' Agreement. CI!·:Oiif 0!0:--------- Prspaiecl by: - - - - - - - Revi2wed by: - - - - - - To Private and Confidential Offshore Company Tax Product File Date lr.t'l Tsx - · - - - - - - - - - - - " P.·~-·,!av:er ~if Ap~;;~~J.)l?) ;7.\.~ .Stratt:~;J\i From · ::;urr.mary ;'repared Yes_NiA_ GST Sp~ciattr-1-----­ r1~~tc-'rl::H {il a~·;Ji;ca;:,~~) cc Barrie Philp T~x Subject Attribution Issue: P.artner Ap;:\o~al:--------- CC to:---------- Can income and/or capital gains be attributed to the transferor of property to Offshore Company? Note: in the analysis given below, the attribution rules related to transfers to trusts have not been considered, as the characterization of Offshore Company as a trust defeats the tax planning strategy in any event. Analysis: All statutory references herein, unless otherwise indicated, are to the Income Tax Act (the "Act"). I. Corporate Attribution- Section 74.4 This section is intended to prevent an individual from splitting income with family members by lending or transferring property to a corporation where the individual's spouse or certain minors have at any time thereafter, directly or indirectly, an interest in the corporation. Where one of the main purposes of such a loan or transfer is to reduce the individual's income and to benefit "designated persons" in respect of the individual (i.e., the individual's spouse or certain minors). the individual may be deemed to have received interest income in respect of the property that was lent or transferred to the corporation. Section 74.4 will only apply during any period in a taxation year throughout which three further conditions are met: a) the corporation is not a small business corporation; b) the intended beneficiary is a "specified shareholder" of the corporation as described in paragraph 74.4(2)(a); and c) the individual is resident in Canada. 09199-0ftshore Company-Attribution Page2 Although Offshore Company is not a small business corporation (i.e., not a Canadiancontrolled private corporation, among other things) and the individual is resident in Canada, point b) above is not met. The intended beneficiaries are not "specified shareholders". In general terms, a specified shareholder is one who owns at least 10 percent of the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation. As no shares will be issued to either Eligible Persons or Nonshareholder Members, a spouse or child of the transferor will not satisfy the definition of "specified shareholder". Given the above, corporate attribution will not apply. 2. Other Attribution Rules Subsection 56(2) regarding indirect payments does not apply since it relates to indirect payments that would have been included in the taxpayer's income if the payment had been made directly to him. This would appear to require that the transferor have an interest in property vis a vis Offshore Company and have some capacity to direct or approve of a distribution to an Eligible Person. This is clearly not the case in the present circumstances. Subsection 56(4), which relates to the transfer of rights to income, is inapplicable where the property related to which the income is earned is also transferred. Therefore this provision also has no application. Although section 74.4 does not apply, it begs the question of whether any of the other attribution rules can override the corporate attribution rules in a situation where a transfer of property has been made to a corporation. More specifically, subsection 74.1 (I) states the following: "Where an individual has transferred or lent property ... either directly or indirectly, by_ means of a trust or by any other means whatever, to or for the benefit of a person who is the individual's spouse or who has since become the individual's spouse, any income or loss, as the case may be, of that person for a taxation year from the property or from property substituted therefore, that relates to the period in the year throughout which the individual is resident in Canada and that person is the individual's spouse, shall be deemed to be income or a Joss, as the case may be, of the individual for the year and not of that person" (emphasis added). Subsection 74.1 (2) contains a similar provision with respect to minor children. It is worth noting, in the first instance, that even if subsection 74.1 (I) and/or (2) were found to apply, we have elsewhere determined that, absent a GAAR assessment, it is our view that no provision of the Act would require an Eligible person who is a spouse or minor child to include a distribution from Offshore Company in income. Therefore, on the face of it, there. is no income to attribute. Page 3 Whether or not the rules given in subsections 74.1(1) and/or (2) apply depends on the interpretation of the phrase "either directly or indirectly, by means of a trust or by any other means whatever". The meaning of this phrase was considered in a recent Federal Court of Appeal case (Riverin v. Queen- May 28, 1999). In this case, the court stated: "Noting the care taken by Parliament to employ more than once the broadest possible terms in its introductory words, no doubt for the purpose of giving its rule a full extension - "either directly or indirectly, by means of a trust or by any other means whatever" - we have no difficulty in concluding that the provision applies once the tax debtor does the act that gives rise to the process by which his property will uitimately end up in the patrimony of any of these persons with whom he has a non-arm's length relationship ... " Given the liberal interpretation of the aforementioned phrase, it would appear that the net is cast wide enough to bring the present situation within the purview of the attribution rules. However, it has been well established in the jurisprudence that where statutory provisions overlap, the specific overrides the general, unless there is a contrary rule elsewhere. The Supreme Court of Canada case, Symes v Queen (94 DTC 6001 ), speaks to the issue of a specific provision overriding a general one. The court states that "if a specific provision exists which limits deductibility in respect of that purpose, then that should be the end of the matter. If, however, the purpose is not addressed in a specific provision, recourse may be had to more general rules governing deductibility." With respect to "the purpose" not being addressed in a specific provision, the court discusses another case in which a donation was made for a business purpose. In that case it was held that the purpose of the expenditure was other than charitable, in which case the general rules in section 9 could override the specific rules related to charitable donations. However, where the attribution rules are concerned, the "purpose" of the transfer of property is not relevant in determining which part of that legislation will apply. Given the existence of a specific attribution rule relating to the transfer of property to a corporation, the more general rule given in section 74.1 will not apply. 3. Conferral of Benefit Rules Subsection 246( I) states the following: .. ·~ "Where at any time a person confers a benefit, either directly or indirectly, by any means whatever, on a taxpayer, the amount of the benefit shall, to the extent that it is not otherwise included in the taxpayer's income or taxable income earned in Canada under Part I and would be included in the taxpayer's income if the amount of the benefit were a payment made directly by the person to the taxpayer and if the taxpayer were resident in Canada, be Page4 (a) included in computing the taxpayer's income or taxable income earned in Canada under Part I for the taxation year that includes that time; or (b) where the taxpayer is a non-resident person, deemed for the purposes of Part XID to be a payment made at that time to the taxpayer in respect of property, services or otherwise, depending on the nature of the benefit." (emphasis added) Since the legislation makes reference to a benefit being conferred "at any time", one must examine the potential times at which such a benefit may have been conferred. At the time of the transfer of property, no benefit has been conferred, as a person who is an Eligible Person at that time may never receive a distribution. As such, it would be difficult to argue that this person has received anything of value at that time. At the time of a distribution to an Eligible Person or persons, the question becomes whether that distribution would be included in the individual's income (as highlighted above). As discussed in the general technical memorandum regarding the Offshore Company structure, the distribution will only be taxable in Canada if Revenue Canada invokes GAAR (i.e., this type of receipt is not contemplated by the Act). The Federal Court of Appeal case, Kieboom v. Minister of National Revenue (92 DTC 6382), does not appear to be relevant since a transferor to Offshore Company will clearly have an actual disposition to the company. Furthermore, the case contemplates the conferral of benefit rules as they existed before the enactment of GAAR. At that time, paragraph 245(2) read as follows: "Where the result of one or more sales, exchanges, declarations of trust or other transactions of any kind whatever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and whether or not there was an intention to evade taxes under this Act, the payment shall, depending on the circumstances, be ... (c) deemed to be a disposition by way of gift." The recent Tax Court of Canada case, Shepp v. Queen (1999 CarswellNat 72), does not appear to shed any further light on the issues of attribution or conferral of benefit. In that case, the Minister attempted to assess the taxpayer for proceeds of disposition deemed to have been received on disposing of an economic interest to a trust which held shares of the taxpayer's operating company for the benefit of his son. The disposition of the economic interest was said to have occurred when the class A shares held by the trust were exchanged for class B shares. Page 5 As indicated above, a transferor will have an actual disposition (generally of cash, not appreciated property) which, while certainly subject to subsection 69(1) with respect to the amount thereof, does not fall with the type of transactions attacked in the Kieboom and Shepp cases.