Honeywood Ltd. v. The Queen, 81 DTC 5066, [1981] CTC 38 (FCTD)

Gibson, J:—The five plaintiff corporations other than Honeywood Limited appeal from assessments for income tax in respect to their respective taxation years 1968 and 1969 and Honeywood Limited appeals from an assessment for income tax for its taxation year 1969 only. There are nine appeals. All of them were heard together on common evidence.

What is the essence of these appeals may be stated in this way:

In the 1968 and 1969 taxation years, subsection 39(1) of the Income Tax Act provided that a corporation was taxable at the rate of 18% on the first $35,000 of the amount taxable and 47% on the balance of the amount taxable.

However, if two or more corporations were “associated” within the meaning of subsection 39(4) of the Income Tax Act they were required to share the $35,000 low taxable amount.

The plaintiffs were not associated within the meaning of subsection 39(4) of the Income Tax Act. However, pursuant to subsection 138A(2) of the Act, the Minister had the power to direct that two or more corporations were associated in a particular year. In order to do so he was required to find:

(a) that the separate existence of those corporations in the year was not solely for the purpose of carrying out the business of the corporations in the most effective manner, and

(b) that one of the main reasons for such separate existence in the year was to reduce the amount of taxes that would otherwise be payable under the Act.

In 1972 the Minister (through the Assistant Deputy Minister (Taxation)) exercised this power and directed that each of the plaintiffs was associated with each other pursuant to the provisions of subsection 138A(2) of the /n- come Tax Act. The plaintiffs were notified of that direction by letter dated November 22, 1972.

Subsection 138A(2) of the Income Tax Act reads:

(2) Where, in the case of two or more corporations, the Minister is satisfied

(a) that the separate existence of those corporations in a taxation year is not solely for the purpose of carrying out the business of those corporations in the most effective manner, and

(b) that one of the main reasons for such separate existence in the year is to reduce the amount of taxes that would otherwise be payable under this Act.

As a consequence, by assessment the tax payable pursuant to subsection 39(1) of the Income Tax Act (in force in 1968 and 1969) by each of these corporations was not computed at the rates prescribed in that subsection.

Subsection 39(1) reads:

(1) The tax payable by a corporation under this Part upon its taxable income or taxable income earned in Canada, as the case may be, (in this section referred to as the “amount taxable”) for a taxation year is, except where otherwise provided,

(a) 18% of the amount taxable, if the amount taxable does not exceed $35,000,

and

(b) $6,300 plus 47% of the amount by which the amount taxable exceeds $35,000, if the amount taxable exceeds $35,000.

The appeals are made pursuant to the provisions of subsection 172(1) of the Income Tax Act as amended by SC 1971-72-73 (the “New Act’’).

The plaintiffs seek in these appeals in effect, to be assessed for income pursuant to subsection 39(1) of the Act.

Pursuant to subsection 138A(3) of the Act or section 247(3) of the “New Act”, the court on these appeals may make certain alternative determinations.

Mr Andrea Ucci gave evidence on these appeals and described how his father before him, himself, and now his family and a number of other relatives were builders and developers in the greater Toronto area, especially since World War II. They were part of the Italian community who in large measure in fact physically built the buildings and infra-structures in the greater Toronto area since World War II. Mr Ucci said he wanted his children to take an interest in real estate and each to have assets separate from each other and from him. He said that reduction of income tax was not a main reason for the separate existence of these corporations which he caused to be incorporated.

The evidence was that each plaintiff corporation had only one beneficial shareholder throughout the 1968 and 1969 taxation years, namely:

Skybird Developments Limited, Miss Karen Ucci

Sunbird Developments Limited, Miss Andrea Ucci

Lynx Developments, Peter Ucci

Honeywood Limited, Mrs Phyllis Ucci

55-65 Broadway Avenue Limited Mr Andrea Ucci

Mr Andrea Ucci is the former husband of Phyllis Ucci and the father of Andrea Ucci, Karen Ucci and Peter Ucci.

The evidence further was that each of the plaintiff corporations was incorporated under the laws of the Province of Ontario and engaged in real estate activities.

55-65 Broadway Limited was incorporated on June 14, 1955.

Honeywood Limited was incorporated December 10, 1958.

Skybird Developments Limited, Sunbird Developments Limited and Lynx Developments Limited were each incorporated September 9, 1960. Although incorporated September 9, 1960, their shares were purchased on November 1, 1960.

Miss Andrea Ucci was born in April 17, 1956. Peter Ucci was born August 30, 1958. Karen Ucci was born November 12, 1959.

The evidence established that the taxable incomes from the date of incorporation of the respective plaintiff corporations to 1979 were as follows:

TAXABLE INCOMES

FROM DATE OF INCORPORATION

Authorities supporting the application of the relevant principles to particular facts of other cases cited by the plaintiffs for their submissions were: /RC v Brebner, [1967] 1 All ER 779; Doris Trucking Company Limited v MNR, [1968] 2 Ex CR 501 ; [1968] CTC 303; 68 DTC 5204; Holt Metal Sales of Manitoba Limited and Industrial Metals Processing Limited v MNR, [1970] Ex CR 612; [1970] CTC 144; 70 DTC 6108; CP Loewen Enterprises Ltd v MNR, [1972] FC 773; [1972] CTC 396; 72 DIC 6298; The Queen v Arthill Enterprises Limited, [1975] CTC 594; 75 DTC 5419; and MNR v Furnasman (Metal) Ltd, [1973] CTC 830; 73 DTC 5599.

And the authorities and statutory provisions cited by the defendant for such purpose were: Alpine Furniture Company Limited et al v MNR, [1968] CTC 532; 68 DTC 5338; Doris Trucking Company Limited v MNR (supra); Jordans Rugs Ltd et al v MNR, [1969] CTC 445; 69 DTC 5290; CP Loewen Enterprises Limited v MNR (supra); Holt Metal Sales of Manitoba Ltd et al v MNR (supra); The Queen v Decker Contracting Limited, [1976] CTC 731; 76 DTC 6477; Decker Contracting Limited v The Queen, [1978] CTC 5001; 79 DTC 838; Continental Stores (Les Magazins Continental Lteé) Ltd v The Queen, [1978] CTC 688, 79 DTC 5213; Lenco Fibre Canada Corp v The Queen, [1979] CTC 374; 79 DTC 5292; subsections 39(1) to (3) of the Income Tax Act; and subsection 138(2) of the Income Tax Act, RSC 1952, c 148 as amended.

On the evidence and within the meaning of paragraph 138A(2)(b) of the Income Tax Act, there is no question that the separate existence of the respective plaintiff corporations in the taxation years 1968 and 1969 was not solely for carrying out the business of these corporations in the most effective manner so that the only matter left for decision is whether or not, within the sense of paragraph 138A(2)(b) . . one of the main reasons for such separate existence in the (said taxation) year(s).. . (was) to reduce the amount of taxes that would otherwise be payable under this Act”.

By reason of the wording of paragraph 138A(2)(b) of the Act, the plaintiff corporations are required to prove a negative. (cf (a) Lefeunteum v Beaudoin,[1897] 28 SCR 89 per Taschereau, J at 93-4; J W Windsor Limited v Martime Fish Corporation Ltd, [1926] Ex CR 31 per Audette, J at 32; Vaillancourt v His Majesty the King, [1927] Ex CR 21 per Audette, J at 23; Browns- tein v Barnett and Others, [1939] 77 CS 23 per McDougall, J at 26; Beaudin v Choquetee, [1949] SCR 348 per Rinfret, J at 355-56; and (b) Joseph Constantine Steamship Line, Ltd v Imperial Smelting Corporation, Ltd, [1941] 2 All ER 165 (HL)). In their appeals, however, the plaintiffs do not have to overcome the rule of presumption viz, that in the estimation of the value of evidence of equal credibility, in ordinary cases, the testimony of a credible witness who swears positively to a fact should receive credit in preference to that of one who testifies to a negative, because in these appeals the defendant adduced no evidence.

Mr Justice Marceau in Continental Stores v The Queen (supra) in discussing the test that should be employed in determining cases such as this Said:

Counsel for the appellants raised a final argument. This multi-company system of growth was not only adopted by the group before any tax advantage resulted from it, but it continued to be used after this advantage had been rendered uncertain as a result of the Minister’s directions. He stated that it is established law that the most suitable test to determine the validity of a direction under s 139A is whether, without any tax benefit, the system of separate companies would have been adopted and maintained as such. In this regard, he cited the reasons of Dumoulin, J, in Doris Trucking Company Limited v MNR, 68 DTC 5204, and subsequently of Cattanach, Sheppard and Addy, JJ, in CP Loewen Enterprises Ltd v MNR, 72 DTC 6298, Jordans Rugs Ltd et al v MNR, 9 DTC 5290 and MNR v Furnasman Ltd and Furnasman (Metal) Ltd, 73 DTC 5599.

I made a careful study of these decisions on which the argument was based. In my opinion, the reasoning of the judges is much less clear cut than counsel for the plaintiffs suggests for the purposes of his argument, and the test which they formulate must be seen in the context from which it arose and in terms of the conclu- sion the merits of which were being examined. In any case I think it is clear that such a test, taken out of context as it was by counsel, cannot in itself be decisive. The Act requires that the tax advantage be only one of the main reasons; if this were to disappear, it does not necessarily follow that the others would not suffice as a basis for continuing the system. (See, further, Alpine Furniture Company Limited and Monte Carlos Company Limited v MNR, 68 DTC 5338; MNR v Howson and Howson Limited and Howson & Howson Company (Cargill) Limited, 70 DTC 6055; Doris Trucking Company Limited v MNR, 68 DTC 5024; Industrial Trailer Rentals Limited v Her Majesty the Queen, 74 DTC 6577; Classic's Littlebooks Inc, 73 DTC 5102.)

Mr Justice Marceau then on the facts of that case decided that one of the main reasons for the separate existence of the corporations was to reduce the amount of taxes that would otherwise be payable under the Income Tax Act.

With respect, it would appear to me that the test adopted by Mr Justice Marceau is the applicable one to apply in cases under this subsection of the Act. As a consequence, the plaintiffs here had the onus of proving that none of the main reasons for the separate existence of the corporations was to reduce income tax that would otherwise be payable under the Income Tax Act.

“Main” is the key word in this subsection of the Act. The Shorter Oxford Dictionary records as some of its meanings as follows: “of pre-eminent importance; principal, chief, leading”.

All the oral evidence adduced in these appeals was directed to prove that the reduction of income taxes was not one of the main reasons. The documentary evidence either supported this proposition or was neutral. There was no positive evidence adduced to prove as a fact that one of the main reasons was the reduction of income taxes that otherwise would be payable under the Income Tax Act.

After careful consideration of the evidence adduced, the conclusion is that the plaintiffs have discharged the onus of proof on them and have proven that none of the main reasons for the separate existence of the subject corporations was the reduction of income tax otherwise payable under the Income Tax Act.

Accordingly, these appeals are allowed, with costs, the direction of the Minister is set aside, and the matters are referred back for further reassessments not inconsistent with these Reasons.