Robertson J.A.:—The respondent is a "Class 1” farmer who in 1987 transferred all his farmin assets to a company incorporated for the purpose of facilitating a "rollover" to his son on the former's death. Simply stated, the issue raised on this judicial review application is whether the respondent is entitled to deduct, from is income for the 1989 taxation year, farm losses incurred by the corporation. Invoking the informal appeal procedure, the respondent was able to persuade the Tax Court judge that the Minister erred in disallowing the claimed deduction. The relevant portion of the Tax Court judge's oral reasons reads as follows:
Counsel for the Minister was not aware of Moauro v. M.N.R., [1992] 1 C.T.C. 2129, 92 D.T.C. 1071 (T.C.C.), during the brief evidence given by the appellant. However, if the respondent believes that I have found facts herein that were not before me, they can have a trial de novo by the Federal Court-Trial Division on appeals for 1987 and 1988.
The appellant was born on March 8, 1923. He is not a robust man at 69 years of age and is in failing health. He did not understand the trial process and was at a loss as to how to present his appeals.
Briefly, he has been a Class 1 farmer (as defined by Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213) all his life. In 1987 he incorporated 363693 Alberta Limited ("363693") under the provisions of the Business Corporations Act of Ontario, R.S.O. 1990, c. B-16. He then transferred all his farming assets to 363693, which included land, cattle and equipment, his stated purpose being to facilitate a rollover to a Class 1 farmer’s son on his death.
The appellant is the sole common shareholder and he has sole control over the company. He has carried on farming since 1987 the same as in prior years. If it was not for his meagre investment income being poured into the company, it would have ceased. He is not an employee of 363693 and has never received any money therefrom and has only poured money into 363693.
The finding of facts made by Walsh, J. of the Federal Court-Trial Division, in R. v. Kuhl, [1973] C.T.C. 846, 74 D.T.C. 6024, as reproduced by Hamlyn, J.T.C.C. in Moauro at page 2132 (D.T.C. 1073), I find herein.
On the evidence herein I find that the appellant is an independent farm contractor. There is no dispute that he, prior to incorporation, was a Class 1 farmer, and thus is entitled in the years in question to unrestricted farm losses.
The appeals are allowed.
Ironically, it is not the Minister who seeks to pierce the so-called "corporate veil" but rather the taxpayer. The applicant maintains that the respondent and his corporation are separate legal entities and that "the normal rule of a corporation being a separate and distinct legal entity from its shareholders . . . [should apply in the case at bar]"; per lacobucci, C.J. (as he then was) in The Queen v. MerBan Capital Corp., [1989] 2 C.T.C. 246, 89 D.T.C. 5404 (F.C.A.), at page 255 (D.T.C. 5410). On this issue, the decision of the Supreme Court of Canada in Kosmopoulosv. Constitution Insurance Co., [1987] 1 S.C.R. 2, 34 D.L.R. (4th) 208, is instructive. Writing for the majority (McIntyre J. concurring), Wilson J. observed at pages 10-11 (S.C.R.):
The law on when a Court may disregard. . .[the principle of separate corporate entities] by “lifting the corporate veil" and regarding the company as a mere "agent" or "puppet" of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the “separate entities” principle is not enforced when it would yield a result "too flagrantly opposed to justice, convenience or the interests of the Revenue".. . .
There is a persuasive argument that ''those who have chosen the benefits of incorporation must bear the corresponding burdens, so that if the veil is to be lifted at all that should only be done in the interests of third parties who would otherwise suffer as a result of that choice". ... Mr. Kosmopoulos was advised by a competent solicitor to incorporate his business in order to protect his personal assets and there is nothing in the evidence to indicate that his decision to secure the benefits of incorporation was not a genuine one. Having chosen to receive the benefits of incorporation, he should not be allowed to escape its burden. He should not be permitted to "blow hot and cold" at the same time.
[Emphasis is mine.] Having regard to the meagre evidence adduced below and the limited arguments tendered by the respondent (who is unrepresented), we are all of the view that the Tax Court judge erred in law in permitting the losses of one legal entity to be used to offset the income of another. Only in the clearest of cases, and in compelling circumstances and after thorough legal analysis could the “normal rule” be displaced. In reaching this perfunctory conclusion, it is unnecessary to deal with a multitude of subsidiary issues. For example, how would a judgment allowing for corporate losses to be applied against the respondent's income be implemented given the fact that the taxation years of the respondent and his corporation do not coincide?
With respect to the legal authorities cited by the learned Tax Court judge, it is apparent that they do not address squarely the issue under consideration. They focus on whether a taxpayer, who has incorporated a company to carry on a business, is to be regarded as an employee of tnat corporation or as an independent contractor. A determination on this point is relevant only for the purpose of characterizing income that has been received by that taxpayer: see Moauro and Kuhl, supra, and Murray v. M.N.R., [1987] 2 C.T.C. 2284, 87 D.T.C. 559 (T.C.C.). The law reports do reveal, however, two cases which undermine the respondent's position: see K.J. Beamish Construction Co. v. M.N.R., [1990] 2 C.T.C. 2199, 90 D.T.C. 1584 (T.C.C.), at page 2215 (D.T.C. 1596); and Denison Mines Ltd. v. M.N.R., [1971] C.T.C. 640, 71 D.T.C. 5375 (F.C.T.D.) at page 662 (D.T.C. 5389). For these reasons, the application for judicial review will be allowed, the decision of the Tax Court of Canada dated December 14, 1989 set aside and the matter referred back to the Tax Court of Canada for redetermination on the basis that the respondent's appeal from the Minister’s reassessment for the 1989 taxation year be dismissed.
Application allowed.