Estey,
J:—The
issue
in
this
case
is
whether
a
corporate
taxpayer,
with
the
avowed
purpose
of
reducing
its
taxes,
can
establish
an
arrangement
whereby
future
profits
are
routed
through
a
sister
subsidiary
in
order
to
avail
itself
of
the
latter
corporation’s
loss
carry-forward.
The
facts
are,
for
a
tax
proceeding,
quite
straightforward.
The
holding
company,
Finlayson
Enterprises
Limited,
referred
to
for
convenience
hereafter
as
the
“parent
company’’,
incorporated
the
appellant
in
1951.
In
1962,
the
appellant
purchased
the
assets
of
Stuart
Brothers
Company
Limited
which
carried
on
the
business
of
manufacturing
and
selling
food
flavourings
and
related
products
(sometimes
for
brevity
referred
to
as
“the
business’’).
The
appellant,
at
the
time
of
this
purchase,
changed
its
original
name
to
Stuart
Brothers
Limited
in
order
to
take
advantage
of
the
value
of
that
name
and
the
associated
goodwill
in
the
market.
In
1969,
the
appellant
again
changed
its
name
to
the
present
name,
Stubart
Investments
Limited.
The
parent
company,
amongst
its
other
subsidiaries,
owned
all
of
the
shares
of
Grover
Cast
Stone
Company
Limited
(hereinafter
referred
to
as
“Grover”)
which
carried
on
the
business
of
manufacturing
and
selling
precast
concrete
products.
By
1965,
Grover
had
incurred
substantial
losses
which
were
recognized
as
losses
under
the
Income
Tax
Act
SC
1970-71-72,
c
63,
as
amended,
for
the
purpose
of
the
carry-forward
provisions
under
the
Act.
In
1966,
the
tax
advisers
of
the
parent
company
established
a
plan
whereby
the
assets
of
the
appellant
would
be
sold
to
Grover
with
effect
January
1,
1966.
Concurrent
with
the
agreement
of
purchase
and
sale
of
these
assets,
Grover
would
appoint,
by
a
separate
agreement,
the
appellant
as
its
agent
to
carry
on
the
business
for
and
to
the
account
of
Grover.
The
contract
of
purchase
and
sale
of
the
assets
and
business
of
the
appellant
to
Grover
was
completed
by
the
registration,
pursuant
to
the
laws
of
the
province
of
Quebec,
of
a
transfer
of
the
real
estate
in
the
city
of
Montreal;
registration
of
trade
mark
assignments
in
the
Trade
Marks
Office
in
Ottawa;
registration
of
a
registered
user
agreement
in
Ottawa
whereby
Grover
appointed
the
appellant
as
the
registered
user
of
the
trade
marks
purchased
by
Grover
from
the
appellant;
registration
of
a
debenture
given
by
Grover
to
the
appellant
as
security
for
the
unpaid
purchase
price
for
the
assets
so
purchased
and
sold;
amendment
of
the
Letters
Patent
of
Grover
under
the
laws
of
the
province
of
Quebec
so
as
to
authorize
and
qualify
Grover
as
purchaser
of
these
assets
to
perform
the
contract
of
purchase;
registration
under
the
laws
of
the
province
of
Quebec
of
a
Trust
Deed
of
Hypothec,
Mortgage
and
Pledge
in
favour
of
Canada
Permanent
Trust
Company
whereunder
the
latter
company
issued
a
debenture
secured
against
Grover’s
Quebec
assets,
including
real
estate;
passage
of
a
resolution
by
the
Board
of
Directors
of
Grover
authorizing
the
guaranty
by
Gover
of
the
parent
company’s
indebtedness
to
the
Bank
of
Nova
Scotia
in
the
amount
of
one
million
dollars,
which
indebtedness
had
formerly
been
guaranteed
by
the
appellant
under
a
debenture
charging
the
assets
of
the
appellant;
the
issue
by
Grover
of
a
debenture
in
favour
of
the
Bank
of
Nova
Scotia
in
replacement
of
the
debenture
theretofore
issued
by
the
appellant
and
held
by
the
said
bank
(all
of
which
documents
were
registered
in
appropriate
public
registry
offices
in
the
province
of
Quebec);
and
by
establishing
in
the
appellant’s
records
a
separate
set
of
books
and
accounts
in
which
were
recorded
the
entries
relating
to
the
conduct
of
the
business
thereafter
carried
on
by
the
appellant
for
the
account
of
Grover.
After
this
agreement
of
purchase
and
sale
had
been
so
performed
and
closed,
the
appellant
proceeded
to
carry
on
the
business
on
behalf
of
Grover,
and
at
the
end
of
each
of
the
fiscal
years
1966,
1967
and
1968,
the
appellant
paid
over
to
Grover
the
net
income
realized
from
the
business.
Grover,
in
turn,
reported
this
income
under
the
Income
Tax
Act
in
its
corporate
income
tax
returns
for
these
three
years.
The
Department
of
National
Revenue
subsequently
reassessed
the
appellant,
setting
aside
the
entry
transferring
the
net
income
to
Grover,
and
charging
such
net
income
back
to
the
taxable
income
of
the
appellant.
It
is
from
these
assessments
that
this
appeal
was
taken.
The
Tax
Appeal
Board
rejected
the
appeal
on
the
ground
that
the
transaction
in
question
was
a
sham.
It
would
appear
that
the
Tax
Appeal
Board
(as
it
was
then
named)
reached
this
conclusion
largely
because
(in
the
words
of
then
Chairman,
His
Honour
Judge
KA
Flanigan):
.
.
.
In
the
Finlayson
group
of
companies
there
were
sufficient
common
directors
and
officers
in
Stuart
Brothers
Limited
and
in
Grover
to
reverse
those
overt
acts
at
any
time
that
it
suited
them.
The
Trial
Division
of
the
Federal
Court
dismissed
the
appeal
because
testimony
tendered
on
behalf
of
the
appellant
revealed
that:
When
the
tax
loss
on
Grover
has
been
fully
utilized
the
business
carried
on
by
Stuart
Brothers
will
be
sold
by
Grover
to
Stuart
Brothers.
Grant,
DJ
considered
this
to
be
‘‘an
obligation
on
the
part
of
Grover
to
reconvey
the
assets
to
Stubart
[the
appellant]
when
the
Grover
tax
loss
had
been
absorbed
.
.
.”.
The
Federal
Court
of
Appeal
dismissed
the
appeal
by
the
appellant
on
the
basis
that
the
sale
between
the
appellant
and
Grover
was
incomplete.
The
Court
found
it
unnecessary
to
determine
that
the
transaction
was
a
sham.
Indeed,
the
Court,
speaking
through
Urie,
J,
stated,
with
reference
to
the
avowed
purpose
of
the
transaction:
It
was
admitted
that
the
transactions
were
entered
into
for
the
purpose
of
utilizing
the
tax
losses
accumulated
by
Grover.
That
in
itself
is
not
a
reprehensible,
let
alone
an
illegal
act,
since
every
person
is
entitled
to
organize
his
affairs
in
such
a
manner
as
to
minimize
or
eliminate
taxes
so
long
as
he
does
so
within
the
limitations
imposed
by
the
aw.
In
the
view
of
the
Federal
Court
of
Appeal,
however,
the
transaction
was
incomplete
because
no
part
of
the
inter-company
purchase
price
was
referable
to
goodwill;
the
three
licences
required
to
carry
on
the
business
under
the
Excise
Tax
Act,
RSC
1952,
c
99,
remained
in
the
name
of
the
vendor,
the
appellant;
the
information
returns
filed
under
the
Corporations
Information
Act,
RSO
1960,
c
72,
as
amended,
by
Grover
described
its
business
as
“the
manufacture
and
sale
of
precast
concrete
products’’
without
mention
of
the
food
flavouring
business;
the
vendor-appellant
continued
to
show
its
name
on
the
business
premises
where
the
business
was
carried
on;
the
appellant
continued
to
pay
water
services
and
business
taxes
with
reference
to
those
premises;
the
appellant
filed
T-4
slips
with
the
Department
of
National
Revenue
for
the
employees
of
the
business;
and
no
notice
was
sent
out
to
trade
creditors,
lessors,
employees,
customers
and
suppliers
of
the
change
of
ownership
in
this
business.
In
relying
upon
one
of
its
earlier
decisions,
the
Court
considered
its
obligation:
.
.
.
to
ensure
that
everything
which
appears
to
have
been
done,
in
fact,
has
been
done
in
accordance
with
applicable
law
.
.
.
If
the
transaction
can
withstand
that
scrutiny,
then
it
will,
of
course,
be
supported.
If
it
cannot,
it
will
fall.
That
is
what
happened
here.
(Per
Urie,
J
in
Atinco
Paper
Products
Ltd
v
The
Queen,
[1978]
CTC
566
at
577-8.)
The
Court
then
concluded
that
the
appellant
had
failed
to
“show
that
the
transaction
was
in
all
respects
a
complete,
real
transaction”.
No
section
of
the
Act
was
isolated
by
the
Attorney
General
of
Canada
as
clearly
authorizing
the
assessments
which
gave
rise
to
these
proceedings.
Assuming
for
the
moment
there
is
no
sham,
the
respondent
asks
the
Court
to
find,
without
express
statutory
basis,
that
no
transaction
is
valid
in
the
income
tax
computation
process
that
has
not
been
entered
into
by
the
taxpayer
for
a
valid
business
purpose.
The
respondent
asserts
that
by
definition,
an
independent
business
purpose
does
not
include
tax
reduction
for
its
own
sake.
The
Attorney
General
of
Canada
submits
that,
in
any
case,
the
Federal
Court
of
Appeal
was
correct
in
holding
that
the
purported
transfer
was
incomplete
and
can
thus
be
disregarded
for
tax
purposes
as
an
ineffectual
transaction.
The
principal
authorities
upon
which
the
Department
relies
for
this
latter
proposition
are
Atinco,
supra,
and
Rose
v
MNR,
[1973]
FC
65;
[1973]
CTC
74;
73
DTC
5083.
In
1951,
the
Act
was
amended
to
prohibit
the
consolidation
of
separate
corporate
operations
in
reporting
income
under
the
Income
Tax
Act,
supra.
The
result
of
this
amendment
was
that
a
corporate
proprietor
carrying
on
business
through
more
than
one
corporate
vehicle
loses
the
right
an
individual
proprietor
enjoys
of
blending
profitable
and
unprofitable
operations
so
as
to
pay
income
tax
only
on
the
resultant
net
income.
After
1951
management
of
a
corporate
group
could
not
directly
merge,
blend
or
meld
the
operations
in
two
or
more
subsidiary
corporations
for
the
purpose
of
reducing
the
tax
payable
by
the
corporate
group
as
a
whole.
In
contrast,
an
individual
proprietor
with
an
equally
diverse
commercial
undertaking
can
do
so
because
only
one
taxable
entity
is
involved.
The
simple
question,
therefore,
is
whether
a
corporate
group
can
avail
itself
of
a
tax
loss
in
one
of
the
family
subsidiaries
by
rerouting
the
income
from
another
corporate
member
into
that
subsidiary.
Clearly,
the
corporation
can
do
so
by
buying
assets
from
any
business,
corporate
or
unincorporate,
and
putting
these
profit-generating
assets
into
a
company
with
an
accepted
loss
position.
The
purchase
of
the
shares
of
another
company
which
has
a
loss
carry-forward
might
prevent
its
utilization
by
the
purchaser.
With
that
we
are
not
here
concerned.
If
the
taxpayer
can
expand
an
existing
business
to
create
earnings
to
make
use
of
a
loss
carry-forward,
then
one
must
find
some
prohibition
in
the
Act
to
say
that
the
purchase
of
such
additional
assets
may
not
come
through
a
non-arm’s
length
transaction;
apart
from
section
137
which
has
not
been
relied
upon
by
the
respondent
here.
To
this
consideration
I
will
return.
The
main
issue
is
already
set
forth,
but
there
are
two
subsidiary
issues.
1.
A
sham
transaction:
This
expression
comes
to
us
from
decisions
in
the
United
Kingdom,
and
it
has
been
generally
taken
to
mean
(but
not
without
ambiguity)
a
transaction
conducted
with
an
element
of
deceit
so
as
to
create
an
illusion
calculated
to
lead
the
tax
collector
away
from
the
taxpayer
or
the
true
nature
of
the
transaction;
or,
simple
deception
whereby
the
taxpayer
creates
a
facade
of
reality
quite
different
from
the
disguised
reality.
The
Court
of
Appeal
here
found
it
unnecessary
to
determine
whether
or
not
the
transaction
was
a
sham.
The
Court
also
found
that
the
taxpayer
announced
its
purpose
from
the
outset,
entered
into
legally
binding
contracts
of
implementation,
registered
several
closing
documents
in
public
registries
in
the
provincial
registries
of
Ontario
and
Quebec,
and
in
federal
registries
in
Ottawa,
and
entered
into
an
enforceable
security
arrangement
between
Grover
and
the
Bank
of
Nova
Scotia.
It
was
further
determined
by
the
Court
of
Appeal
that
every
step
required
to
create
legally
binding
relationships
with
reference
to
transfer
of
the
corporate
assets
of
the
appellant,
including
its
trade
marks,
and
to
the
retirement
of
its
indebtedness
to
the
Bank
of
Nova
Scotia,
was
taken
by
the
appellant.
Grover,
it
was
found,
had
performed
all
essential
acts
to
place
absolute
beneficial
ownership
of
the
assets
in
Grover,
including
trade
marks,
and
Grover
did
everything
necessary
to
assume
the
indebtedness
of
the
appellant
to
the
Bank
of
Nova
Scotia.
The
Court
of
Appeal
found
no
element
of
deceit
present.
2.
The
application
of
section
137
of
the
Income
Tax
Act,
supra,
(section
245
in
the
new
Act):
This
is
an
anti-tax
avoidance
section
which
states
that
no
“disbursement”
which
“artificially”
reduces
the
income
of
a
taxpayer
shall
be
taken
into
account
in
determining
tax
liability.
The
section
provides
in
part
as
follows:
Artificial
transactions.
In
computing
income
for
the
purposes
of
this
Act,
no
deduction
may
be
made
in
respect
of
a
disbursement
or
expense
made
or
incurred
in
respect
of
a
transaction
or
operation
that,
if
allowed,
would
unduly
or
artificially
reduce
the
income.
While
it
is
at
least
arguable
that
this
section
covers
the
“disbursement”
by
the
appellant
of
the
profits
earned
for
the
account
of
Grover
in
the
operation
of
the
business,
the
Attorney
General
of
Canada
expressly,
in
response
to
a
question
from
the
Court
during
the
hearing
of
the
appeal,
said
that
the
Crown
was
not
relying
upon
section
137.
Clearly
the
cheque
transferring
the
profit
from
the
appellant
to
Grover
at
the
end
of
the
year
is
a
disbursement,
and
it
is
a
disbursement
the
deduction
of
which
leaves
no
taxable
income
in
the
appellant
from
the
business.
The
Crown
does
not
advance
this
argument
in
this
appeal
presumably
in
the
hope
that
the
tax
liability
of
the
appellant
will
be
founded
on
the
“genuine
business
purpose”
principle
or
the
“abuse
of
rights”
principle
which
are
said
to
form
part
of
the
taxation
principles
in
the
laws
of
the
United
Kingdom
and
the
United
States
and
elsewhere,
and
which
the
respondent
submits
are
equally
applicable
in
the
interpretation
of
the
Income
Tax
Act
of
Canada,
supra.
Returning
then
to
the
main
issues
in
this
appeal,
the
respondent
asserts
the
right
to
tax
here
on
two
bases:
A.
The
transfer
is,
in
any
event,
incomplete,
and
therefore
should
be
disregarded
and
the
transferor
and
transferee
taxed
according
to
their
respective
positions
as
though
this
transaction
had
not
taken
place;
B.
Canadian
cases
have
already
established
the
principle
recently
stated
in
the
United
Kingdom
in
Ramsay
v
Inland
Revenue
Commissioners,
infra,
in
Commissioners
of
Inland
Revenue
v
Burmah
Oil
Company,
infra,
and
in
Furniss
(Inspector
of
Taxes)
Appellant
v
Dawson,
et
al.,
infra,
namely,
that
a
transaction
without
a
valid
business
purpose
is
not
to
be
taken
into
account
in
the
computation
of
liability
for
tax
under
the
ITA.
A.
Incomplete
Transaction
It
is
acknowledged
that
the
transferor,
the
appellant,
and
the
transferee,
Grover,
completed
thirty
legal
steps
in
the
transfer
of
the
business
to
Grover.
These
included
the
contract
of
purchase
and
sale,
the
implementing
documentation
all
of
which
has
been
enumerated
above.
The
purchase
price
for
the
business
was
paid
by
the
assumption
by
Grover
of
the
secured
indebtedness
of
the
appellant
to
the
Bank
and
by
the
issuance
of
secured
notes.
The
respondent
did
not
question
the
appellant’s
assertion
that
the
Bank
of
Nova
Scotia,
on
the
default
of
Grover,
would
have
had
the
clear
right
in
law
to
recover
from
the
transferred
assets
the
unpaid
balance
of
the
debt
assumed
by
Grover
on
the
purchase
of
the
business
from
the
appellant.
Nevertheless,
the
Crown
says
that
the
following
matters
were
not
attended
to
in
relation
to
the
transfer
of
assets
between
the
parties
to
the
contract
and
that,
therefore,
the
contract
of
purchase
and
sale
was
not
completed:
(i)
In
filing
its
annual
return
for
the
years
1966
to
1968
under
the
Corporations
Information
Act,
supra,
that
is,
in
the
years
after
the
sale,
Grover
answered
the
question:
“Generally
the
undertaking
that
the
corporation
is
actually
carrying
on’’,
as
follows:
“manufacture
and
sales
of
precast
concrete
products”.
No
mention
is
there
made
of
the
business
of
the
appellant
which
had
been
acquired
by
Grover.
It
is,
of
course,
at
least
arguable
that
the
question
invited
the
answer
given
because,
by
a
contract
with
the
appellant
entered
into
at
the
time
of
the
purchase
of
the
assets
and
referred
to
by
all
parties
as
the
“nominee
agreement”,
Grover
had
appointed
the
appellant
as
its
agent
to
carry
on
the
business
in
trust
for
and
to
the
account
of
Grover.
The
appellant
stated
in
answer
to
the
same
question
that
its
business
was
the
“manufacture
and
sale
of
essential
flavourings
and
oils”.
In
filing
its
income
tax
return
for
the
same
years,
Grover
completed
the
tax
form
as
follows:
“Nature
of
business
—
manufacture
of
Pre-cast
Concrete
Products
and
Food
Flavours”.
Both
forms
appear
to
have
been
correctly
completed
by
both
companies,
and
nothing
misleading
or
incomplete
results
therefrom.
In
any
event,
this
step
has
nothing
to
do
with
the
implementation
of
the
agreement
of
purchase
and
sale,
and
not
by
the
remotest
argument
could
it
be
said
to
have
reversed
the
closing
of
the
transaction
of
purchase
and
sale
or
in
any
way
made
it
less
than
complete
from
a
legal
viewpoint.
(ii)
The
appellant,
in
the
conduct
of
the
business
prior
to
the
sale
in
1966,
held
licences
under
the
Excise
Act,
RSC
1952,
c
99,
section
10
of
which
provides:
No
person,
unless
thereunto
licenced,
shall
carry
on
any
business
or
trade
subject
to
excise
or
use
any
utensil,
machinery
or
apparatus
suitable
for
carrying
on
any
such
trade
or
business,
.
.
.
The
appellant
held
such
a
licence
at
the
time
of
the
transfer
of
its
business
to
Grover.
The
appellant
continued
to
hold
such
a
licence
for
the
asserted
reason
that
the
appellant,
as
the
nominee
of
Grover,
continued
to
carry
on
the
business
which
entailed
the
use
of
the
equipment
requiring
the
licence.
Arguably,
the
statute
might
require
that
a
licence
be
held
by
both
Grover
and
the
appellant.
The
fact
that
the
appellant
held
the
licence
or
the
fact
that
Grover
didn’t
take
out
a
duplicate
licence
would,
in
my
respectful
view
of
the
statute,
have
no
impact
whatever
on
whether
or
not
the
appellant
has
completed
the
transfer
of
its
assets
to
Grover.
There
is
no
relationship
in
law
advanced
by
the
respondent
to
explain
how
the
failure
to
have
two
licences,
or
the
holding
of
one
licence
by
the
nominee
appellant,
would
somehow
invalidate,
or
at
least
render
imperfect,
the
transfer
of
assets
and
assumption
of
liabilities
so
completely
documented
and
properly
registered
as
set
out
above.
(iii)
In
its
factum,
the
Crown
makes
reference
to
the
fact
that
T-4
slips
were
completed
by
the
appellant
under
the
Income
Tax
Act
of
Canada
for
the
employees
engaged
in
the
conduct
of
the
business.
In
this
Court,
no
oral
argument
was
advanced
on
this
ground.
In
the
Federal
Court
of
Appeal,
Urie,
J
remarked
upon
the
significance
of
this
fact
as
follows:
There
is
further
disclosed
in
the
evidence
a
number
of
instances
from
which
it
might
be
concluded
that
not
only
did
Stuart
carry
on
the
flavourings
business
in
fact
but
represented
that
it
was
so
doing.
Just
a
few
examples
of
many
support
this
view.
.
.
.
The
appellant
was
shown
as
the
employer
of
the
employees
in
the
flavourings
business
in
the
“Return
of
Remuneration
Paid’’
filed
with
the
Department
of
National
Revenue
and
in
the
T-4
slips
issued
to
employees.
The
workers
were
employed
by
the
appellant
in
the
course
of
carrying
on
the
business
“for
the
account
of
Grover’’.
The
Income
Tax
Act
requires
the
employer
to
deduct
from
wages
and
salaries
at
source
the
applicable
taxes
and
to
remit
the
moneys
so
withheld
to
the
Minister
of
National
Revenue.
The
Income
Tax
Act
also
requires
the
person
making
the
deductions
to
issue
evidence
of
such
deductions
to
the
employees
so
that
credit
may
be
claimed
for
taxes
withheld.
Vide
Income
Tax
Act,
RSC
1952,
c
148,
s
47,
as
amended
to
1968.
It
is
clear
from
an
examination
of
the
transfer
documents
and
the
documents
of
implementation
of
the
transfer
agreement,
and
particularly
the
nominee
agreement,
that
the
parties
to
these
agreements
intended
that
the
appellant
would
carry
on
the
business
for
the
account
of
Grover,
and
profit
derived
therefrom
would
accrue
to
Grover.
The
parties
so
performed
these
agreements.
The
appellant,
in
doing
so,
also
acted
in
compliance
with
the
tax
statute
in
withholding
taxes
from,
and
issuing
T-4
slips
to,
employees.
I
can
see
no
consequence
at
law
of
the
type
claimed
in
the
Crown’s
factum
which
would
in
any
way
indicate
that
the
contract
of
purchase
and
sale
of
this
business
was
somehow
rendered
incomplete
by
the
performance
by
the
appellant
of
its
statutory
obligation
under
the
tax
statute.
(iv)
Perhaps
related
to
the
submission
that
the
sale
in
question
was
incomplete
and
thus
is
to
be
disregarded
for
tax
purposes,
is
the
finding
in
at
least
two
of
the
courts
below
that,
by
reason
of
the
relationship
between
the
parties,
the
business
would
be
returned
to
the
appellant
when
Grover’s
tax
loss
was
fully
spent.
The
Federal
Court
Trial
Division
referred
to
the
sale
in
these
words:
.
.
.
such
an
obligation
on
the
part
of
Grover
to
reconvey
the
assets
to
Stuart
when
the
Grover
loss
has
been
absorbed
in
reducing
the
Stuart
income
tax,
when
coupled
with
the
facts
set
out
in
the
Judgment
appealed
from,
is
convincing
evidence
that
the
directors
of
both
companies
never
contemplated
the
transaction
as
a
transfer
of
the
Stuart
assets
nor
a
genuine
sale.
This
reference
is
apparently
to
the
memo
of
the
solicitor
for
the
appellant
company
to
which
reference
has
already
been
made,
and
which
stated
in
part
that
when
the
tax
loss
has
been
fully
utilized,
“the
business
carried
on
by
Stuart
Brothers
will
be
sold
by
Grover
to
Stuart
Brothers”.
There
is
nothing
in
the
record
which
amounts
to
an
enforceable
agreement
or
undertaking
to
reverse
the
sale,
or
even
a
commitment
by
an
officer
of
either
the
appellant
or
Grover
to
do
so.
In
the
event,
no
such
transfer
occurred
as
the
business
was
sold
by
Grover
to
an
independent
third
party.
In
1969,
Grover
sold
the
business
to
a
stranger.
The
sale
included
all
assets
and
goodwill.
The
appellant
was
not
a
party
vendor
to
the
contract,
nor
did
the
lengthy
agreement
stipulate
any
participation
by
the
appellant
in
the
closing
documents.
The
purchaser
paid
in
excess
of
$2
million
for
the
business
and
took
conveyances
and
assignments
only
from
Grover
as
the
vendor.
Both
the
parent,
Finlayson
Enterprises
Limited,
and
the
appellant
joined
in
the
agreement
as
third
parties
“‘in
order
to
induce
the
purchaser
to
enter
into
the
agreement”
and
“to
be
bound
by
all
of
the
indemnities,
warranties,
representations
and
agreements
made
herein”,
and
to
agree
to
change
the
corporate
name
of
Stuart
Brothers
Limited.
All
the
assignments
and
conveyances
delivered
on
closing
in
1968
were
executed
by
Grover
alone
in
favour
of
the
“purchaser”
whose
name
in
the
closing
documents,
unlike
the
contract,
was
Givaudan
Limited.
In
fact,
the
appellant,
as
already
stated,
did
change
its
name,
and
the
purchaser,
by
a
new
incorporation
or
a
change
of
name
of
an
existing
corporation,
adopted
the
corporate
name
Givaudan
Stuart
Brothers
Limited.
Like
the
appellant
in
1962
and
Grover
in
1966,
the
purchaser
in
1968
adopted
a
name
incorporating
“Stuart”,
obviously
in
order
to
facilitate
the
retention
of
the
goodwill
attaching
to
that
name
in
the
market.
Faced
with
this
commercial
reality,
it
is
difficult
to
see
how
the
transaction
between
Grover
and
the
appellant
was
incomplete.
At
the
time
of
the
1966
sale
to
Grover,
Grover
wished
to
continue
the
use
of
the
name
of
the
appellant
in
connection
with
the
business
for
a
second
reason.
There
were
serious
claims
outstanding
in
the
courts
against
Grover
in
an
action
brought
in
connection
with
its
cement
business,
and
the
testimony
in
the
record
reveals
that
it
was
desirable
“to
make
the
transfer
as
inconspicuous
as
possible”
in
order
not
to
encourage
Grover’s
adversaries
in
continuing
the
litigation,
“so
long
as
it
was
legally
binding”.
This
litigation
was
ultimately
settled.
In
my
view,
these
facts
and
circumstances
all
lead
inexorably
to
the
conclusion
that
the
transfer
and
sale
of
the
business
by
the
appellant
to
Grover
in
1966
was,
in
law,
fully
complete.
Grover
became
the
owner
of
the
business,
and
the
appellant
operated
the
business
on
behalf
of
and
for
the
account
of
Grover.
B.
Business
Purpose
Test
What
then
is
the
law
in
Canada
as
regards
the
right
of
a
taxpayer
to
order
his
affairs
so
as
to
reduce
his
tax
liability
without
breaching
any
express
term
in
the
statute?
Historically,
the
judicial
response
is
found
in
Bradford
Corporation
v
Pickles,
[1895]
AC
587
where
it
was
stated:
If
it
was
a
lawful
act,
however
ill
the
motive
might
be,
he
had
a
right
to
do
it.
If
it
was
an
unlawful
act,
however
good
his
motive
might
be,
he
would
have
no
right
to
do
it.
(per
Lord
Halsbury
LC
at
594)
No
use
of
property,
which
would
be
legal
if
due
to
a
proper
motive,
can
become
illegal
because
it
is
prompted
by
a
motive
which
is
improper
or
even
malicious,
(per
Lord
Watson
at
598)
In
the
field
of
taxation
itself
the
traditional
position
was
re-echoed
in
JRC
v
Duke
of
Westminster,
[1936]
AC
1
at
19
where
it
was
stated:
Every
man
is
entitled
if
he
can
to
order
his
affairs
so
as
that
the
tax
attaching
under
the
appropriate
Acts
is
less
than
it
otherwise
would
be.
If
he
succeeds
in
ordering
them
so
as
to
secure
this
result,
then,
however
unappreciative
the
Commissioners
of
Inland
Revenue
or
his
fellow
taxpayers
may
be
of
his
ingenuity,
he
cannot
be
compelled
to
pay
an
increased
tax.
In
the
courts
of
the
United
States
a
different
philosophy
was
developed
in
the
oft-cited
judgment
in
Gregory
v
Helvering,
Commissioner
of
Internal
Revenue
(1934),
293
US
465.
The
United
States
Supreme
Court
considered
the
Revenue
Act
of
1928,
which,
at
least
in
1934,
contained
no
clause
of
a
type
generally
referred
to
as
an
“anti-tax
avoidance
provision”.
The
Court,
in
setting
aside
a
plan
of
reorganization
carried
out
by
the
taxpayer,
did
so
by
asserting
that
the
proper
principles
applicable
in
construing
a
taxation
statute
required
such
a
result.
Justice
Sutherland,
in
giving
the
opinion
of
the
Court,
stated
at
469-70:
When
subdivision
(B)
speaks
of
a
transfer
of
assets
by
one
corporation
to
another,
it
means
a
transfer
made
“in
pursuance
of
a
plan
of
reorganization”
of
corporate
business;
and
not
a
transfer
of
assets
by
one
corporation
to
another
in
pursuance
of
a
plan
having
no
relation
to
the
business
of
either,
as
plainly
is
the
case
here.
Putting
aside,
then,
the
question
of
motive
in
respect
of
taxation
altogether,
and
fixing
the
character
of
the
proceeding
by
what
actually
occurred,
what
do
we
find?
Simply
an
operation
having
no
business
or
corporate
purpose
—
a
mere
device
which
put
on
the
form
of
a
corporate
reorganization
as
a
disguise
for
concealing
its
real
character,
and
the
sole
object
and
accomplishment
of
which
was
the
consummation
of
a
preconceived
plan,
not
to
reorganize
a
business
or
any
part
of
a
business,
but
to
transfer
a
parcel
of
corporate
shares
to
the
petitioner.
The
whole
undertaking
though
conducted
according
to
the
terms
of
subdivision
(B),
was
in
fact
an
elaborate
and
devious
form
of
conveyance
masquerading
as
a
corporate
reorganization,
and
nothing
else.
The
rule
which
excludes
from
consideration
the
motive
of
tax
avoidance
is
not
pertinent
to
the
situation,
because
the
transaction
upon
its
face
lies
outside
the
plain
intent
of
the
statute.
To
hold
otherwise
would
be
to
exalt
artifice
above
reality
and
to
deprive
the
statutory
provision
in
question
of
all
serious
purpose.
The
taxpayer
was
improperly
invoking
a
tax
allowance
authorized
by
the
legislature.
By
an
improper
application
of
the
legislative
measure,
the
taxpayer
gains
no
rights
to
the
claimed
benefit
which
would
otherwise
be
obtainable
under
the
statute.
The
element
of
sham
crept
into
the
language
of
the
court
and
it
is
not
clear
whether,
absent
this
element,
the
result
would
be
the
same.
This
is
not
the
case
with
which
we
are
faced.
The
Act
is
silent
on
the
subject;
and
there
are
general
provisions
in
the
Act
dealing
with
artificial
transactions.
The
same
taxation
philosophy
was
espoused
by
the
Supreme
Court
of
the
United
States
in
1960
in
Knetsch
v
United
States,
364
US
361
where
the
Court
concluded
that
the
transaction
was
a
sham
which
created
no
indebtedness
within
the
meaning
of
the
then
version
of
the
Internal
Revenue
Code.
Mr
Justice
Brennan,
for
the
majority,
concluded
that
the
taxpayer
could
not
rely
upon
formal
documents
“without
regard
to
whether
the
transactions
created
a
true
obligation
to
pay
interest.”
(at
367).
The
Court
was
there
construing
an
amendment
which
was
said
to
have
been
enacted
to
“close
a
loophole”
in
respect
of
interest
deductions.
The
word
“sham”
is
used
in
a
confusing
sense,
and
at
369
in
his
judgment,
Justice
Brennan
appears
to
extend
his
conclusion
to
cover
a
factual
situation
where
“actual
indebtedness”
arose
by
reason
of
the
transaction
in
question.
Justice
Douglas,
on
behalf
of
himself
and
two
other
justices,
dissented,
stating
that
the
facts
revealed
that
the
clear
and
simple
intention
of
the
taxpayer
was
to
qualify,
by
means
of
the
asserted
transaction,
for
a
deduction
for
interest
paid.
He
concluded:
“Yet
as
long
as
the
transaction
itself
is
not
hocus-pocus,
the
interest
charges
incident
to
completing
it
would
seem
to
be
deductible
.
.
.”
(at
370).
Of
interest
in
considering
the
issues
raised
in
this
appeal
are
the
later
observations
of
Justice
Douglas
at
371:
Tax
avoidance
is
a
dominating
motive
behind
scores
of
transactions.
It
is
plainly
present
here.
Will
the
Service
that
calls
this
transaction
a
“sham”
today
not
press
for
collection
of
taxes
arising
out
of
the
surrender
of
the
annuity
contract?
I
think
it
should,
for
I
do
not
believe
any
part
of
the
transaction
was
a
“sham”.
To
disallow
the
“interest”
deduction
because
the
annuity
device
was
devoid
of
commercial
substance
is
to
draw
a
line
which
will
affect
a
host
of
situations
not
now
before
us
and
which,
with
all
deference,
I
do
not
think
we
can
maintain
when
other
cases
reach
here.
The
remedy
is
legislative.
Evils
or
abuses
can
be
particularized
by
Congress.
Where
the
taxpayer
is
a
corporation
created
in
the
course
of
the
execution
of
a
tax
avoidance
plan,
a
different
result
may
flow.
There
is
considerable
literature
on
this
subject
in
the
United
States
which
is
fairly
represented
by
the
following
excerpt
from
“A
US
View
Through
the
Corporate
Veil”,
(Jan,
1978),
Tax
Management
International
Journal
3
at
7,
by
the
authors
Baker
and
Killingsworth:
Where
it
appears
that
the
principal
purpose
of
forming
a
corporation
—
or
multiple
corporations
—
is
to
circumvent
the
purpose
of
a
statute,
the
corporate
entity
will
usually
be
ignored.
Vide
Kocin
v
United
States
(1951),
187
F
2d
707;
Goldstein
v
Commissioner
of
Internal
Revenue
(1966),
364
F
2d
734;
Cardozo,
J
in
Berkey
v
Third
Avenue
Railway
Co
(1926),
244
NY
84
at
95;
and
Singer
v
Magnavox
Co,
380
A
2d
969
(1977).
Two
conditions
bear
upon
the
adoption
of
this
approach
to
the
interpretation
of
a
taxing
statute:
first,
the
taxpayer
is
either
a
creature
of,
or
comes
into
being
because
of,
a
tax
avoidance
program;
and
secondly,
the
absence
from
the
tax
statute
of
a
general
denial
of
recognition
of
artificial
transactions.
Thus,
when
examining
the
United
States
scene
it
is
well
to
remember
that
the
Internal
Revenue
Code
and
its
predecessor
statutes
did
not
include
an
anti-tax
avoidance
provision
in
the
nature
of
section
137
of
the
pre-1972
Canadian
Income
Tax
Act.
The
situation
in
Australia
sheds
further
light
on
the
problem
of
applying
the
proper
interpretative
approach
to
a
taxing
statute.
The
Australian
tax
statute
contains
a
more
rigorous
anti-tax
avoidance
provision
than
our
section
137,
and
which
at
the
time
of
the
Cridland
case,
infra,
provided
as
follows:
260.
Every
contract,
agreement,
or
arrangement
made
or
entered
into,
orally
or
in
writing,
whether
before
or
after
the
commencement
of
this
Act,
shall
so
far
as
it
has
or
purports
to
have
the
purpose
or
effect
of
in
any
way,
directly
or
indirectly
—
(a)
altering
the
incidence
of
any
income
tax;
(b)
relieving
any
person
from
liability
to
pay
any
income
tax
or
make
any
return;
(c)
defeating,
evading,
or
avoiding
any
duty
or
liability
imposed
on
any
person
by
this
Act;
or
(d)
preventing
the
operation
of
this
Act
in
any
respect,
be
absolutely
void,
as
against
the
Commissioner,
or
in
regard
to
any
proceedings
under
this
Act,
but
without
prejudice
to
such
validity
as
it
may
have
in
any
other
respect
or
for
any
other
purpose.
In
Cridland
v
Commissioner
of
Taxation
(Cth),
(1978),
52
AL
JR
96,
the
High
Court
of
Australia
considered
the
application
of
section
260
of
the
Income
Tax
Assessment
Act
1936
(Cth),
as
amended.
The
taxpayer,
a
university
student,
had
participated
in
a
tax
minimization
scheme
which
was
designed
to
make
available
to
the
participants
income
averaging
opportunities.
In
order
to
take
advantage
of
the
averaging
provision,
a
taxpayer
had
to
be
registered
as
an
income
beneficiary
of
trusts
which
authorized
the
trustee
to
carry
on
the
business
of
a
primary
producer.
An
elaborate
scheme
was
devised
by
the
trustee
in
this
case,
and
a
number
of
trusts
were
established
in
the
execution
of
this
plan.
Literally
thousands
of
participants
were
involved
in
the
scheme,
all
of
whom,
including
the
taxpayer
Cridland,
paid
a
nominal
sum
as
the
purchase
price
of
an
“income
unit”.
A
distribution
of
trust
income
was
effected.
However,
the
“income”
paid
out
to
the
beneficiaries
was
negligible
($1.00).
Two
factors
were
clear.
The
taxpayer,
as
a
party
to
the
trust
arrangement,
had
technically
come
within
the
statutory
language
entitling
him
to
the
income
averaging
provisions.
Secondly,
the
taxpayer
had
entered
into
the
transaction
deliberately
with
a
view
to
minimizing
his
tax
burden.
In
allowing
the
taxpayer’s
appeal
against
assessments
made
by
the
Commissioner
of
Taxation,
the
High
Court
of
Australia,
per
Masan,
J,
held
as
follows
(at
98-99):
[T]he
taxpayer
is
entitled
to
create
a
situation
by
entry
into
a
transaction
which
will
attract
tax
consequences
for
which
the
Act
makes
specific
provision
and
.
.
.
the
validity
of
the
transaction
is
not
affected
by
s
260
merely
because
the
tax
consequences
which
it
attracts
are
advantageous
to
the
taxpayer
and
he
enters
into
the
transaction
deliberately
with
a
view
to
gaining
that
advantage.
The
transactions
into
which
the
appellant
entered
in
the
present
case
by
acquiring
income
units
in
the
trust
funds
in
question
were
not,
I
should
have
thought,
transactions
ordinarily
entered
into
by
university
students.
Nor
could
they
be
accounted
as
ordinary
family
or
business
dealings.
They
were
explicable
only
by
reference
to
a
desire
to
attract
the
averaging
provisions
of
the
statute
and
the
taxation
advantage
which
they
conferred.
But
these
considerations
cannot,
in
light
of
the
recent
authorities,
prevail
over
the
circumstance
that
the
appellant
has
entered
into
transactions
to
which
the
specific
provisions
of
the
Act
apply,
thereby
producing
the
legal
consequences
which
they
express.
Accordingly,
it
is
my
view
that
s
260
has
no
application
to
this
case.
The
presence
of
a
provision
of
general
application
to
control
avoidance
schemes
looms
large
in
the
judicial
approach
to
the
taxpayer’s
right
to
adjust
his
sails
to
the
winds
of
taxation
unless
he
thereby
navigates
into
legislatively
forbidden
waters.
The
legislature
has
provided
the
standards
of
unacceptable
avoidance
procedures,
and
there
being
no
other
limit
imposed
by
the
Act,
the
Court
found
itself
under
no
duty,
nor
indeed
possessed
of
any
authority,
to
legislate
new
limits.
Where,
as
in
this
appeal,
the
Act
expressly
permits
the
application
of
accumulated
losses
to
reduce
taxes
on
current
and
future
earnings,
the
tax
collector
must
demonstrate
a
statutory
bar
to
succeed.
In
the
United
Kingdom
there
is
some
evidence
that
the
courts
are
moving
from
the
principles
enunciated
in
the
older
cases
mentioned
above
to
something
approaching
the
United
States
bona
fide
business
purpose
rule.
In
WT
T
Ramsay
Ltd
v
IRC,
[1981]
2
WLR
449,
the
House
of
Lords
considered
whether
losses
created
under
two
separate
tax
avoidance
schemes
were
artificial
and
should
consequently
be
treated
as
fiscal
nullities
for
tax
purposes.
Their
Lordships
were
urged
to
accept
this
conclusion
despite
the
fact
that
the
individual
transactions
which
gave
rise
to
the
losses
were
genuinely
carried
through
and
were
exactly
what
they
purported
to
be.
Although
the
details
of
each
scheme
were
dissimilar,
the
net
results
and
overall
concepts
were
identical.
In
each
case,
an
allowable
capital
loss
and
an
equivalent
non-taxable
gain
were
created.
The
taxpayers
intended
to
use
the
synthesized
capital
loss
to
offset
a
previously
realized
taxable
gain.
When
the
individual
transactions
were
viewed
as
a
whole,
it
was
clear
that
the
gain
and
loss
produced
by
this
plan
were
meant
to
be
self
cancelling.
In
reviewing
the
facts,
Lord
Wilberforce
concluded
that
the
schemes
were
pure
tax
avoidance
mechanisms
and
that
the
transactions
had
no
independent
commercial
purpose.
The
House
of
Lords
dismissed
both
appeals
and
held
that
the
taxpayers
were
to
be
assessed
without
regard
to
the
loss
described
above.
Lord
Wilberforce,
at
459,
offered
the
following
reasons:
The
capital
gains
tax
was
created
to
operate
in
the
real
world,
not
that
of
make-
believe.
As
I
said
in
Aberdeen
Construction
Group
Ltd
v
Inland
Revenue
Commissioners,
[1978]
AC
885,
it
is
a
tax
on
gains
(or
I
might
have
added
gains
less
losses),
it
is
not
a
tax
on
arithmetical
differences.
To
say
that
a
loss
(or
gain)
which
appears
to
arise
at
one
stage
in
an
indivisible
process,
and
which
is
intended
to
be
and
is
cancelled
out
by
a
later
stage,
so
that
at
the
end
of
what
was
bought
as,
and
planned
as,
a
single
continuous
operation,
is
not
such
a
loss
(or
gain)
as
the
legislation
is
dealing
with,
is
in
my
opinion
well
and
indeed
essentially
within
the
judicial
function.
That
is,
the
momentary,
theoretical
existence
of
an
accounting
quantity
which
does
not
survive
the
whole
transaction
has
no
existence
in
the
taxing
process.
It
may
be
that
a
fleeting
existence
is
reality
in
the
discipline
of
particle
physics
but
not
in
the
law
of
taxation
unless
it
is
specifically
so
enacted.
Lord
Fraser
of
Tullybelton,
at
469,
wrote
to
the
same
effect:
Each
of
the
appellants
purchased
a
complete
prearranged
scheme,
designed
to
produce
a
loss
which
would
match
the
gain
previously
made
and
which
would
be
allowable
as
a
deduction
for
corporation
tax
(capital
gains
tax)
purposes.
In
these
circumstances
the
court
is
entitled
and
bound
to
consider
the
scheme
as
a
whole:
see
Inland
Revenue
Commissioners
v
Plummer,
[1980]
AC
896,
908
and
Chinn
v
Hochstrasser,
[1981]
2
WLR
14.
The
essential
feature
of
both
schemes
was
that,
when
they
were
completely
carried
out,
they
did
not
result
in
any
actual
loss
to
the
taxpayer.
The
apparently
magic
result
of
creating
a
tax
loss
that
would
not
be
a
real
loss
was
to
be
brought
about
by
arranging
that
the
scheme
included
a
loss
which
was
allowable
for
tax
purposes
and
a
matching
gain
which
was
not
chargeable.
The
House
of
Lords
was
faced
with
another
complex
tax
avoidance
plan
in
CIR
v
Burmah
Oil
Co
Ltd,
[1981]
42
TR
535,
where,
as
a
result
of
an
intricate
series
of
intra-corporate
loans
and
reorganizations,
a
substantial
loss
was
realized
by
the
parent
company,
Burmah
Oil.
Based
on
Ramsay,
supra,
the
appellant
in
Burmah
Oil
argued
for
the
first
time
in
the
United
Kingdom
that
the
transaction
should
be
disregarded
as
artificial.
The
appeal
was
allowed
on
the
ground
that,
like
the
transaction
in
Ramsay,
when
this
scheme
was
carried
through
to
completion,
there
was
neither
a
real
loss,
nor
a
loss
in
the
sense
contemplated
by
the
legislation
(per
Lord
Fraser
of
Tullybelton
at
541).
In
the
reasons
for
judgment
rendered
by
Lord
Diplock,
the
significance
of
the
Ramsay
case
was
discussed
(at
536):
It
would
be
disingenuous
to
suggest,
and
dangerous
on
the
part
of
those
who
advise
on
elaborate
tax-avoidance
schemes
to
assume,
that
Ramsay’s
case
did
not
mark
a
significant
change
in
the
approach
adopted
by
this
House
in
its
judicial
role
to
a
preordained
series
of
transactions
(whether
or
not
they
include
the
achievement
of
a
legitimate
commercial
end)
into
which
there
are
inserted
steps
that
have
no
commercial
purpose
apart
from
the
avoidance
of
a
liability
to
tax
which
in
the
absence
of
those
particular
steps
would
have
been
payable.
The
difference
is
in
approach.
It
does
not
necessitate
the
over-ruling
of
any
earlier
decisions
of
this
House;
but
it
does
involve
recognising
that
Lord
Tomlin’s
oft-quoted
dictum
in
Commissioners
of
Inland
Revenue
v
Duke
of
Westminster,
“Every
man
is
entitled
if
he
can
to
order
his
affairs
so
as
that
the
tax
attaching
under
the
appropriate
Acts
is
less
than
it
otherwise
would
be”,
tells
us
little
or
nothing
as
to
what
methods
of
ordering
one’s
affairs
will
be
recognised
by
the
courts
as
effective
to
lessen
the
tax
that
would
attach
to
them
if
business
transactions
were
conducted
in
a
straight-forward
way.
The
Duke
of
Westminster’s
case
was
about
a
simple
transaction
entered
into
between
two
real
persons
each
with
a
mind
of
his
own,
the
Duke
and
his
gardener
—
even
though
in
the
nineteen-thirties
and
at
a
time
of
high
unemployment
there
might
be
reason
to
expect
that
the
mind
of
the
gardener
would
manifest
some
degree
of
subservience
to
that
of
the
Duke.
The
kinds
of
tax-avoidance
schemes
that
have
occupied
the
attention
of
the
courts
in
recent
years,
however,
involve
inter-connected
transactions
between
artificial
persons,
limited
companies,
without
minds
of
their
own
but
directed
by
a
singe
master-mind.
In
Ramsay
the
master-mind
was
the
deviser
and
vendor
of
the
tax-avoidance
scheme;
in
the
instant
case
it
was
Burmah,
the
parent
company
of
the
wholly-owned
subsidiary
companies
between
which
the
pre-ordained
series
of
transactions
took
place.
There
are
features
about
that
case
and
its
disposition
that
must
be
noted
when
considering
its
application
in
our
law.
The
transaction
created
an
accounting
result
which
was
then
applied
to
reduce
taxes
otherwise
exigible.
The
taxpayer
did
more
than
rearrange
its
affairs
to
avail
itself
of
a
statutory
tax
allowance.
It
was
not,
in
my
view,
the
non-arm’s
length
ideas
radiating
out
from
a
central
control
of
the
corporate
group
that
was
fatal.
It
was
the
synthetic
nature
of
the
gain
and
the
loss
which
rendered
it
unrecognizable
in
the
eyes
of
the
taxation
program
adopted
by
the
legislature.
Secondly,
and
more
importantly,
the
doctrines
developing
in
Ramsay
and
Burmah,
supra,
reflect
the
role
of
the
court
in
a
regime
where
the
legislature
has
enunciated
taxing
edicts
in
a
detailed
manner
but
has
not
superimposed
thereon
a
general
guideline
for
the
elimination
of
mechanisms
designed
and
established
only
to
deflect
the
plain
purpose
of
the
taxing
provision.
The
role
that
the
judiciary
must
play
in
such
a
regime
to
control
tax
avoidance
was
recognised
by
Lord
Reid,
who,
in
Greenberg
v
IRC
(1971),
47
TC
240,
at
272,
stated:
We
seem
to
have
travelled
a
long
way
from
the
general
and
salutary
rule
that
the
subject
is
not
to
be
taxed
except
by
plain
words.
But
I
must
recognize
that
plain
words
are
seldom
adequate
to
anticipate
and
forestall
the
multiplicity
of
ingenious
schemes
which
are
constantly
being
devised
to
evade
taxation.
Parliament
is
very
properly
deter-
mined
to
prevent
this
kind
of
tax
evasion,
and
if
the
Courts
find
it
impossible
to
give
very
wide
meanings
to
general
phrases
the
only
alternative
may
be
for
Parliament
to
do
as
some
other
countries
have
done
and
introduce
legislation
of
a
more
sweeping
character,
which
will
put
the
ordinary
well-intentioned
person
at
much
greater
risk
than
is
created
by
a
wide
interpretation
of
such
provisions
as
those
which
we
are
now
considering.
Here
the
appellant
has
bound
itself
contractually
to
pay
over
the
net
profits
of
the
business
to
Grover.
Grover
was
already
entitled
to
set
off
future
earnings
against
a
loss
position
recognized
as
valid
by
the
administrators
of
the
Income
Tax
Act.
The
earnings
of
Grover,
under
these
valid
arrangements,
were
gains
realized
in
the
market-place
and
were
recognized
as
such
by
the
terms
of
the
Act.
The
application
of
the
accumulated
losses
of
Grover
to
reduce
tax
attributable
to
these
gains
is
not
denied
by
any
provision
in
the
Act.
The
tax
administrators
do
not
invoke
section
137.
Parliament
has
nowhere
else
in
the
Act
expressed
an
interest
in
the
appellant’s
accounting
and
corporate
practices
in
question.
At
issue
is
the
role
and
function
of
a
court
in
these
circumstances.
The
examination
of
tax
avoidance
schemes
continued
in
the
House
of
Lords
in
Furniss
(Inspector
of
Taxes)
Appellant
v
Dawson,
et
al
(as
yet
unreported,
delivered
by
the
House
of
Lords
on
February
9,
1984),
forwarded
to
the
Court
by
the
respondent
after
the
hearing
of
this
appeal.
The
appellant
takes
the
view
that
this
case
has
no
relevance
to
this
appeal.
The
Court
found
the
taxpayers
taxable
for
a
gain
technically
realized
in
a
company
interposed
between
the
taxpayers
and
a
third
party
purchaser
to
whom
the
taxpayers
had
agreed,
prior
to
the
creation
of
the
interposed
entity,
to
sell
certain
shares.
The
object
of
the
plan
was
to
defer
rather
than
to
avoid
the
imposition
of
capital
gains
tax
otherwise
payable
by
the
taxpayers
on
the
sale
of
their
shares
had
they
sold
these
shares
directly
to
the
third
party
purchaser.
The
Court
disregarded
the
existence
of
the
intermediate
company
which
had
been
brought
into
being
solely
for
the
purpose
of
selling
the
shares
to
the
third
party
purchaser.
The
taxpayers,
in
the
simplest
analysis
of
this
plan,
had
merely
established
the
new
company
to
perform
as
agent
for
the
taxpayers
the
sale
agreement
already
reached
between
the
taxpayers
and
the
purchaser.
The
explanation
of
the
result
reached
in
the
judgment
of
Lord
Fraser
of
Tullybelton
was
based
on
the
decision
in
Ramsay,
supra:
The
true
principle
of
the
decision
in
Ramsay
was
that
the
fiscal
consequences
of
a
preordained
series
of
transactions,
intended
to
operate
as
such,
are
generally
to
be
ascertained
by
considering
the
result
of
the
series
as
a
whole,
and
not
by
dissecting
the
scheme
and
considering
each
individual
transaction
separately.
Lord
Brightman,
on
the
other
hand,
interpreted
Ramsay
and
Burmah,
supra,
as
producing
a
principle
of
law
comparable
to
that
pronounced
in
Helvering,
supra,
in
the
United
States
Supreme
Court.
The
transaction
is
to
be
set
aside
for
tax
purposes
if
the
“composite
transaction’’,
otherwise
acceptable,
has
inserted
into
it
steps
“which
have
no
commercial
(business)
purpose
apart
from
the
avoidance
of
a
liability
of
tax
—
not
‘no
business
effect’
’’.
Lord
Brightman
concluded
that
if
the
transaction
consists
of
a
series
of
transactions
or
a
composite
transaction
and
is
accompanied
by
or
includes
steps
which
have
no
business
purpose,
then
the
result
is
taxation.
In
that
circumstance,
the
Court
looks
to
the
end
result.
His
Lordship
acknowledged,
however,
that
“precisely
how
the
end
result
will
be
taxed
will
depend
on
the
terms
of
the
taxing
statute
sought
to
be
applied’’.
The
agreement
under
which
the
tax
liability
would
ordinarily
arise
had
already
been
reached
between
seller
and
buyer
before
the
intermediate
entity
was
created.
Its
injection
into
the
sale
added
nothing
to
the
legal
relationship
of
the
parties.
It
simply
became
the
agent
of
the
vendor-taxpayer.
Without
any
need
for
new
principles
of
taxation,
tax
liability
arose
in
the
vendor
upon
completion
of
the
sale.
It
is
significant
that
no
provision
of
the
British
tax
statute
is
referred
to
by
the
House
of
Lords.
In
the
view
of
some
Canadian
authorities,
Ramsay,
supra,
does
not
represent
a
repudiation
of
Duke
of
Westminster,
et
al.,
supra.
See
Ward
and
Cullity,
“Abuse
of
Rights
and
the
Business
Purpose
Test”
(1981),
29
Canadian
Tax
Journal
451
at
465-6.
Other
academic
commentators,
however,
view
the
recent
decisions
of
the
House
of
Lords
as
establishing
a
step
transaction
doctrine
which
“places
a
severe
limitation
on
the
Westminster
principle
.
.
.”.
See
Vern
Krishna:
“Step
Transactions:
An
Emerging
Doctrine
or
an
Extension
of
the
Business
Purpose
Test?”,
Vol
1,
no
4,
Canadian
Current
Tax,
c
15
(April
1984),
at
19.
This
approach
to
the
liability
of
a
taxpayer
in
the
circumstances
of
the
appeal
before
this
Court
takes
us
back
full
circle
to
the
terms
of
the
statute
itself.
The
policy
of
the
Act
is
to
allow
the
recipient
of
the
payment
in
question,
Grover,
to
offset
income
against
prior
losses.
The
taxpayer
in
Furniss,
supra,
was
accorded
no
right
by
the
Act
which
was
available
prior
to
the
implementation
or
arrangement
designed
and
adopted
to
offset
or
defer
any
taxes
which
might
arise.
It
must
be
borne
in
mind
that
the
United
Kingdom
tax
statute,
like
the
Internal
Revenue
Code
of
the
United
States
under
which
the
Helvering
case,
supra,
was
decided,
contains
no
clause
similar
to
our
section
137.
Each
of
the
English
and
American
statutes
had
specific
provisions
barring
dividend
stripping,
bond
washing,
land
transactions
and
the
like,
but
no
general
provision
barring
artificial
transactions
appears
in
the
statutes.
Vide
P
Whiteman
and
D
Milne,
White-
man
and
Wheatcroft
on
Income
Tax,
2nd
ed
(1976)
at
11
and
804;
Ward
and
Cullity,
“Abuse
of
Rights
and
the
Business
Purpose
Test”,
supra,
463.
The
United
States
Code
contains
such
specific
provisions
as
section
269
dealing
with
the
acquisition
of
a
deduction,
allowance
or
credit
designed
to
frustrate
a
clearly
isolated
particular
abuse.
See
Merten’s
Law
of
Federal
Income
Tax,
Vol
7,
Chap
38,
at
181-84
and
at
208
et
seq.
It
may
well
be
that
each
of
the
three
House
of
Lords
decisions,
supra,
can
be
simply
distinguished
on
the
basis
that
in
each
case,
a
plan
was
adopted
whereby
the
taxpayer
took
affirmative
action
to
create
the
“loss”
or
“gain”
by
a
procedure
not
otherwise
required
in
the
ordinary
course
of
business;
or
that
the
taxpayer
designed
an
accounting
holding
tank
to
delay
artificially
the
receipt
by
the
vendor
of
the
proceeds
of
sale
under
an
agreement
for
sale
reached
directly
between
the
true
parties
to
the
transaction
before
the
accounting
scheme
was
established.
Here
the
appellant
was
legally
bound
to
pay
a
defined
amount
to
another
company
which
held
a
valid
right
of
allowance
under
the
Income
Tax
Act
against
tax
liability
which
would
otherwise
arise
upon
the
receipt
of
bona
fide
future
earnings.
It
is
not
the
taxability
of
the
receipt
which
is
in
issue;
it
is
the
right
of
the
appellant
payor
to
deduct
the
amount
from
its
income
account
and
thereby
free
itself
from
taxation
on
the
amount
so
paid
out
to
Grover.
There
is
nothing
in
the
Income
Tax
Act
of
Canada
which
expressly
prevents
the
appellant
from
obligating
itself
to
pay
over
the
sum
in
question.
Section
137
might
arguably
apply
on
the
grounds
that
the
transaction
falls
within
the
reach
of
the
expression
“artificial
transaction”
but
the
taxing
authority
has
not
advanced
this
position
in
support
of
the
tax
claim
here
made.
However,
there
remains
the
larger
issue
as
to
whether
Canadian
law
recognizes,
as
a
principle
of
interpretation,
that
the
conduct
of
the
taxpayer,
not
dictated
by
a
genuine
commercial
or
business
purpose,
and
being
designed
wholly
for
the
avoidance
of
tax
otherwise
impacting
under
the
statute,
can
be
set
aside
on
the
basis
of
Furniss,
supra,
or
Helvering,
supra,
as
though
the
transaction
were,
in
fact
and
in
law,
a
“sham”.
The
scene
in
Canada
is
less
clear
and
has
not,
until
this
appeal,
reached
this
Court.
The
first
reference
to
‘‘a
business
purpose”
concept
appears
to
be
in
the
Exchequer
Court
in
Lagacé
v
MNR,
[1968]
2
Ex
CR
98;
[1968]
CTC
98;
68
DTC
5143
where
President
Jackett
(as
he
then
was)
referred
to
a
series
of
contrived
conveyances
as
not
representing
a
“bona
fide
business
transaction”.
Later,
at
[101],
he
noted
that
the
taxpayer
had
neglected
to
establish
that
each
party
was
bound
in
“an
actual
bona
fide
contract
that
was
in
fact
negotiated
.
.
.
at
the
time
of
the
negotiation
of
the
business
bargain”.
The
court
found
that
the
profit
resulted
from
the
taxpayer’s
“own
business
transactions”
and
was
taxable
in
respect
of
such
transactions.
The
court
proceeded
along
the
same
lines
as
the
House
of
Lords
did
in
Furniss,
supra,
namely
the
profits
arose
by
reason
of
transactions
made
by
the
taxpayer,
and
the
interposition
of
legal
entities
after
the
deal
had
been
made
did
not
separate
the
profits
from
the
taxpayer.
Lagacé
was
cited
by
the
same
court
in
Richardson
Terminals
Ltdv
MNR,
[1971]
CTC
42;
71
DTC
5028,
where,
after
a
series
of
factual
findings,
the
trial
court
found
that
the
taxpayer
had
simply
not
followed
a
plan
prescribed
by
its
advisers
for
the
transfer
of
a
business
to
a
loss
company,
and
had
simply
attempted
to
transfer
the
net
income
from
that
business.
The
transferee
company,
the
court
found,
neither
in
fact
nor
in
law
carried
on
the
business
in
question
in
its
own
right.
The
appeal
court,
in
oral
reasons,
reached
the
same
conclusion
([1972]
CTC
528;
72
DTC
6431).
While
Lagacé
was
also
quoted
in
Dominion
Bridge
Co
Ltd
v
The
Queen,
[1975]
CTC
263;
75
DTC
5150,
Décary,
J,
in
the
Federal
Court
Trial
Division,
found
that
the
transactions
between
the
parent
company
and
its
subsidiary,
designed
to
transfer
the
profits
of
the
parent
to
an
off-shore
subsidiary,
were
“a
sham”
(p
271
[5155])
“to
camouflage
and
hide”
(p
270
[5154])
the
parent
company’s
operations.
The
court
then
concluded
that
the
operations
in
question
‘‘were
those
of
the
appellant
taxpayer”
(p
270
[5154])
and
the
profits
were
properly
assessed
to
the
parent
company.
Again,
in
that
case,
the
court
found
that
the
fixing
of
prices
by
the
parent
for
purchases
by
it
from
the
subsidiary
was
a
device
to
transfer
income
from
the
taxpayer
to
its
agent,
the
subsidiary,
in
a
closed,
inter-company
sales
transaction
in
which
the
agent
subsidiary
in
fact
performed
no
function.
The
business
in
question
was
that
of
the
parent;
the
subsidiary
was
simply
its
purchasing
department;
and
by
this
device
the
parent
divested
itself
of
its
income
arising
from
the
transactions
in
question.
The
court,
at
275
[5158],
then
adopted
the
remarks
of
Lord
Morris
Borth
y
Gest
in
FA
&
AB
Ltd
v
Lupton
(Inspector
of
Taxes),
[1971]
3
All
ER
948
at
953:
These
are
paraded
by
their
admirers
as
possessing
the
guise
and
the
garb
of
trading
transactions.
Others
think
of
the
analogy
of
a
wolf
in
sheep’s
clothing
with
the
Revenue
as
the
prey.
The
Federal
Court
of
Appeal
in
[1977]
CTC
554;
77
DTC
5367
held
that
there
was
no
reason
to
interfere
with
the
findings
of
fact
made
by
the
trial
judge.
The
concept
of
“bona
fide
business
purpose”
played
no
part
in
the
final
outcome.
Rather,
this
case
falls
into
the
“sham”
category.
It
was
in
MNR
v
Leon,
[1976]
CTC
532;
76
DTC
6299
that
the
Federal
Court
of
Appeal
may
have
incorporated
the
bona
fide
business
purpose
test
into
Canadian
tax
law.
By
a
complex
of
management
companies
created
by
a
group
of
brothers,
each
of
whom
owned
all
the
shares
of
their
respective
management
companies,
the
profits
of
a
furniture
business
were
routed
through
several
corporate
screens
and
eventually
reached
the
original
owners
of
the
business
after
minimal
taxation.
In
carrying
out
this
plan,
the
brothers
disregarded
the
advice
of
their
accountants
in
which
the
true
nature
of
the
plan
was
discussed,
and
some
of
the
documents
were
found
to
have
been
back-dated.
The
trial
judge
concluded
that
none
of
the
companies
had
any
employees
(except
the
sole
shareholder
brother),
no
business
facilities
of
any
kind,
and
that
the
sole
purpose
of
the
interposition
of
the
management
companies
was
to
reduce
the
brothers’
taxes
in
the
future.
Heald,
J,
in
reviewing
the
evidence,
stated,
at
540
[6303]:
Thus,
the
interposition
of
the
management
companies
between
the
employer
and
the
employee
was
a
sham,
pure
and
simple,
the
sole
purpose
of
which
was
to
avoid
payment
of
tax.
In
the
course
of
reaching
this
conclusion,
the
Court
of
Appeal
propounded
the
following
rule
(at
539
[6302]):
It
is
the
agreement
or
transaction
in
question
to
which
the
Court
must
look.
If
the
agreement
or
transaction
lacks
a
bona
fide
business
purpose,
it
is
a
sham.
The
Federal
Court
of
Appeal
in
so
phrasing
the
rule
has
mixed
the
older
“sham”
doctrine
with
the
bona
fide
business
purpose
test,
and
has
brought
forth
a
hybrid
rule.
The
judgment
was
met
with
immediate
critical
response
from
the
taxation
authors.
TE
McDonnell,
Cdn
Tax
Fdn:
Twenty-ninth
Tax
Conference,
1977,
stated,
at
90,
that
the
court
“.
.
.
seemed
to
have
made
a
quantum
jump
in
statutory
interpretation
and
added
an
entirely
new
concept
to
the
tax
jurisprudence”.
For
like
comments,
see
Current
Cases,
24
Can
Tax
J
468
(1976)
and
O’Keefe,
“The
Business
Purpose
Test
—
Who
Needs
It?”,
25
Can
Tax
J
139
(1977).
The
statement
of
Heald,
J,
supra,
was
not
essential
to
the
conclusion
reached
by
the
court.
The
interposition
of
the
management
company
did
not,
in
law,
establish
anything
but
a
simple
agency
relationship
between
the
taxpayer
and
the
bare
incorporation
so
established.
The
company
itself
had
no
business,
and
indeed
no
business
facilities.
The
services
were
entirely
personal
and
were
at
all
times
destined
for
delivery
to
the
original,
ongoing
furniture
business,
owned
in
the
first
instance
by
the
sole
shareholders
of
the
management
companies.
Nothing
was
changed
by
reason
of
the
incorporation
of
the
nest
of
wholly-owned
management
companies.
The
Federal
Court,
in
enunciating
the
rule,
supra,
cut
across
the
United
States
bona
fide
business
principle
which
sharply
distinguishes
between
transactions
which
fail
because
they
are
shams
in
the
sense
of
a
deception,
and
those
which
fail
because
they
lack
an
independent
business
purpose.
The
Federal
Court
of
Appeal
shortly
thereafter
appears
to
have
drawn
back
from
the
Leon
proposition
when
Urie,
J
wrote:
I
am
not
at
all
sure
that
I
would
have
agreed
with
the
broad
principles
relating
to
a
finding
of
sham
as
enunciated
in
that
case
[Leon],
and,
I
think,
that
the
principle
so
stated
should
perhaps
be
confined
to
the
facts
of
that
case.
Massey-Ferguson
Ltd
v
The
Queen,
[1977]
CTC
6;
'll
DTC
5013
at
16
[5020].
This
was
another
case
of
an
interposed
corporation.
However,
the
parent
company
taxpayer,
wishing
to
make
an
inter-company
interest-free
loan
to
an
operating
second-tier
subsidiary,
did
so
by
loaning
the
money,
at
least
in
an
accounting
sense,
through
a
first-tier
subsidiary
which
was
engaged
in
the
business
of
financing
members
of
the
parent
company’s
corporate
group.
The
issue
was
whether
deemed
interest
would
be
attributed
to
the
parent
company
because
the
loan,
in
substance,
was
made
from
the
parent
to
the
second-tier
subsidiary.
By
the
terms
of
the
statute,
the
attribution
of
deemed
interest
would
be
required
where
the
loan
was
from
the
parent
to
the
second-tier
subsidiary,
whereas
a
loan
by
the
parent
to
the
first-tier
subsidiary
or
by
the
second-tier
subsidiary,
whereas
a
loan
by
the
parent
to
the
first-tier
subsidiary
or
by
the
second-tier
to
the
second-tier
subsidiary
did
not
attract
such
a
consequence.
The
Federal
Court
of
Appeal
found
the
legal
form
of
the
loan
to
be
of
controlling
importance.
In
so
doing,
the
Court
of
Appeal
returned
the
definition
of
sham
to
its
former
condition
but
did
not
necessarily
turn
its
back
on
the
“independent
business
purpose”
concept.
The
Court
of
Appeal
in
Massey-Ferguson,
supra,
concluded
that
the
underlying
decision,
that
is
to
lend
money
to
the
second-tier
subsidiary,
was
not
taken
solely
for
tax
purposes,
nor
was
the
use
of
the
first-tier
company
entirely
divorced
from
the
business
practices
of
the
parent
company.
Consequently,
it
could
not
be
said
that
the
interposition
by
the
parent
of
the
first
subsidiary
was
done
only
to
reduce
taxes.
Furthermore,
the
interposed
company
had
an
independent
reason
for
its
existence
in
contrast
to
the
management
companies
in
Leon,
supra,
which
were
created
solely
for
the
purpose
of
executing
the
plan
in
question.
The
position
of
the
Court
of
Appeal
is
made
unclear,
however,
by
its
reference,
after
concluding
that
neither
the
use
of
the
intermediate
company
nor
its
business
was
a
sham,
to
Inland
Rev.
Commissioners
v
Brebner,
[1967]
1
All
E.R.
779
where
Lord
Upjohn
enunciated
the
principle,
at
784:
.
..
when
the
question
of
carrying
out
a
genuine
commercial
transaction,
as
this
was,
is
considered,
the
fact
that
there
are
two
ways
of
carrying
it
out,
—
one
by
paying
the
maximum
amount
of
tax,
the
other
paying
no,
or
as
much
less,
tax
—
it
would
be
quite
wrong
as
a
necessary
consequence
to
draw
the
inference
that
in
adopting
the
latter
course
one
of
the
main
objects
is
for
the
purposes
of
the
section,
avoidance
of
tax.
No
commercial
man
in
his
senses
is
going
to
carry
out
commercial
transactions
except
on
the
footing
of
paying
the
smallest
amount
of
tax
involved.
The
effect
of
the
interworking
of
all
these
considerations
or
rules
may
be
that
a
court
must
apply
a
taxing
statute
so
as
to
bar
the
claim
of
entitlement
to
an
allowance,
deduction
or
other
advantage
or
benefit
where
the
taxpayer
created
entities
or
rights
and
obligations
in
order
to
revise
the
character,
under
the
statute,
of
the
income
or
earnings
already
achieved
by
the
taxpayer.
The
claim
would
not
necessarily
be
barred,
however,
where
the
new
alignment
of
the
taxpayer’s
affairs
is
adopted
only
to
reduce
or
avoid
taxation
of
earnings
or
income
thereafter
arising
independently
from
the
establishment
of
the
arrangements
in
question.
Before
returning
to
the
immediate
issue
in
this
appeal,
the
state
of
the
tax
law
under
section
137,
supra,
as
it
has
evolved
in
Canada
should
be
briefly
examined.
Although
this
section
is
not
invoked
by
the
respondent
in
this
appeal,
it
is
relevant
to
note
that
to
date
the
section
has
not
been
interpreted
so
as
to
incorporate
“the
bona
fide
business
purpose
test”.
Cattanach,
J.,
in
the
Federal
Court
Trial
Division,
after
finding
that
the
transaction
in
question
was
not
a
sham,
determined
that
a
tax
advantage
was
not
a
benefit
under
subsection
137(2):
What
the
defendant
has
done
has
been
to
order
its
affairs
as
to
attract
a
lesser
tax
at
a
subsequent
time
as
it
is
entitled
to
do
.
.
.
The
defendant
has
effected
a
tax
advantage
to
itself
as
is
its
right
and
accordingly
it
is
incongruous
that
that
advantage
should
be
construed
as
a
“benefit”
to
the
defendant
within
the
meaning
of
s.
137(2).
The
Queen
v
Esskay
Farms
Ltd,
[1976]
CTC
24;
76
DTC
6010
at
36-37
[6018].
Notwithstanding
that
the
taxpayer
there
deferred
and
reduced
taxes
otherwise
payable
on
the
sale
of
his
land
by
interposing
an
independent
trust
company
between
himself
and
the
purchaser,
and
by
contract
with
the
trust
company
delayed
his
receipt
of
the
proceeds
of
sale
over
a
period
of
years
commencing
several
years
after
the
sale,
the
proceeds
of
sale
were
not
found
to
be
taxable
income.
There
was
no
purpose
in
all
these
arrangements
other
than
the
lessening
of
the
impact
of
taxation
on
the
transaction.
No
“independent
business
purpose
test”
emerged,
and
section
137
was
found
to
be
inapplicable.
Vide
also
Pratte,
J
in
Produits
LDG
Products
Inc
v
The
Queen,
[1976]
CTC
591;
76
DTC
6344
at
598
[6349]:
There
is
nothing
reprehensible
in
seeking
to
take
advantage
of
a
benefit
allowed
by
the
law.
If
a
taxpayer
has
made
an
expenditure
which,
according
to
the
Act,
he
may
deduct
when
calculating
his
income,
I
do
not
see
how
the
reason
which
prompted
him
to
act
can
in
itself
make
this
expenditure
non-deductible.
I
therefore
believe
that
in
the
case
at
bar,
there
is
no
reason
to
apply
s.
137(1).
To
the
same
effect
is
The
Queen
v
Alberta
and
Southern
Gas
Co
Ltd,
[1977]
CTC
388;
77
DTC
5244
at
397
[5249]
where
Jackett,
CJ
stated:
.
.
.
a
transaction
which
clearly
falls
within
the
object
and
spirit
of
[a
given
section
of
the
Act]
cannot
be
said
to
unduly
or
artificially
reduce
income
merely
because
the
taxpayer
was
influenced
in
deciding
to
enter
into
it
by
tax
considerations.
The
courts,
in
applying
section
137,
and
in
applying
general
principles
of
statutory
interpretation,
seem,
thus
far
at
least,
to
have
fallen
short
of
adopting
the
“bona
fide
business
purpose
test”.
The
Richardson
case,
supra,
like
the
Atinco
and
Rose
cases,
supra,
falls
into
the
category
of
incomplete
or
legally
ineffective
transactions.
The
allowance
or
benefits
sought
by
the
taxpayer
in
those
cases
were
simply
not
available
by
the
procedures
adopted
by
the
taxpayer.
Leon,
supra,
at
its
highest,
is
a
modification
of
the
sham
test,
but
it
seems
to
have
been
isolated
on
its
factual
base
by
Massey-Ferguson,
supra.
In
light
of
this
general
background,
a
further
subsidiary
question
must
be
considered:
is
the
transaction
affected
as
to
tax
consequences
where
the
vendor
and
purchaser
are
not
at
arm’s
length?
There
are,
of
course,
many
pragmatic
and
philosophical
answers.
In
considering
this
issue,
one
must
take
cognizance
of
the
many
examples
in
the
Act
and
its
application
by
the
Department
which
belie
the
distinction.
For
example,
inter-spousal
loans,
which
effectively
allow
income
splitting
with
the
consequential
tax
reduction,
are
approved
under
the
present
Act.
See
Interpretation
Bulletin
No
IT-258R2,
Department
of
National
Revenue.
There
are
other
examples,
including
the
transfer
of
invested
surpluses
by
a
corporation
from
bonds
to
stocks
where
the
corporation
moves
from
deficit
to
profit
on
its
commercial
operations.
In
neither
of
these
examples
is
there
any
bona
fide
business
purpose
for
the
transfer
or
exchange
of
assets,
both
being
done
exclusively
or
avowedly
to
reduce
or
eliminate
taxation.
Other
sections
of
the
Income
Tax
Act
enable
a
corporation
or
its
shareholders
to
reduce
income
upon
the
distribution
of
accumulated
surplus,
as
for
example
under
section
85
of
the
old
Act.
By
conforming
with
the
terms
of
the
statute,
this
income,
which,
when
otherwise
withdrawn
by
the
shareholders
would
be
taxable
at
full
personal
rates,
can
be
transferred
to
the
shareholders
at
reduced
rates,
even
“artificially”
reduced
tax
rates
when
one
considers
the
artifice
prescribed
by
Parliament
in
these
sections.
There
are
many
other
examples
in
the
Act
of
tax
reduction
devices,
most
of
which,
by
axiom,
are
founded
upon
non-arm’s
length
relationships.
The
taxpayer
may
acquire
the
marital
deduction
in
toto
for
the
entire
calendar
year
by
marrying
on
December
31st
instead
of
January
1st
in
the
following
year.
If
the
choice
is
made
solely
for
tax
reasons,
surely
the
taxpayer’s
entitlement
is
not
thereby
placed
in
jeopardy.
The
same
applies
to
persons
who
deliberately
avail
themselves
of
registered
home
ownership
savings
plans
whether
or
not
the
taxpayer
does
so
because
of
the
tax
deduction
or
because
of
a
long-term,
bona
fide
intent
to
establish
a
fund
to
be
used
to
purchase
a
home;
and
to
businesses
combining
by
way
of
joint
venture
rather
than
by
minority
shareholding
in
a
project.
Motive
would
nowhere
appear
to
be
a
precondition
of
eligibility.
The
same
applies
to
the
decision
of
a
taxpayer
to
incorporate
or
to
carry
on
business
in
partnership
with
a
corporation.
Whether
or
not
these
choices
are
made
solely
on
the
basis
of
tax
advantage,
whenever
the
Income
Tax
Act
prescribes
different
tax
rates
for
different
forms
of
business,
the
taxpayer
must
surely
be
free
to
choose
whichever
mode
fits
his
plans.
As
earlier
indicated,
two
of
the
lower
courts
found
the
transaction
to
have
been
a
sham,
and
therefore
not
determinative
of
the
taxation
consequences
under
the
Income
Tax
Act,
supra.
The
Federal
Court
of
Appeal
found
it
unnecessary
to
determine
whether
or
not
the
term
“sham”,
in
the
circumstances
of
the
case,
is
properly
applicable
to
the
transaction,
but
in
reaching
this
conclusion
it
was
observed
that
“the
evidence
certainly
points
in
that
direction”.
The
element
of
sham
was
long
ago
defined
by
the
courts
and
was
restated
in
Snook
v
London
&
West
Riding
Investments
Ltd,
[1967]
1
All
ER
518
at
528.
Lord
Diplock,
at
528,
found
that
no
sham
was
there
present
because
no
acts
had
been
taken:
.
.
.
which
are
intended
by
them
to
give
to
third
parties
or
to
the
courts
the
appearance
of
creating
between
the
parties
legal
rights
and
obligations
different
from
the
actual
legal
rights
and
obligations
(if
any)
which
the
parties
intend
to
create.
This
definition
was
adopted
by
this
Court
in
MNR
v
Cameron,
[1974]
SCR
1062;
[1972]
CTC
380;
72
DTC
6325
at
p
1068
[384]
per
Martland,
J.
With
respect
to
the
courts
below,
it
seems
to
me
that
there
may
have
been
an
unwitting
confusion
between
the
incomplete
transaction
test
and
the
sham
test.
Earlier
I
have
enumerated
the
many
public
registrations
effected
by
the
parties
in
the
course
of
this
transaction.
The
documents
establishing
and
executing
the
arrangement
between
the
parties
were
all
in
the
records
of
the
parties
available
for
examination
by
the
authorities.
There
has
been
no
suggestion
of
backdating
or
buttressing
the
documentation
after
the
event.
The
transaction
and
the
form
in
which
it
was
cast
by
the
parties
and
their
legal
and
accounting
advisers
cannot
be
said
to
have
been
so
constructed
as
to
create
a
false
impression
in
the
eyes
of
a
third
party,
specifically
the
taxing
authority.
The
appearance
created
by
the
documentation
is
precisely
the
reality.
Obligations
created
in
the
documents
were
legal
obligations
in
the
sense
that
they
were
fully
enforceable
at
law.
The
courts
have
thus
far
not
extended
the
concept
of
sham
to
a
transaction
otherwise
valid
but
entered
into
between
parties
not
at
arm’s
length.
The
reversibility
of
the
transaction
by
reason
of
common
ownership
likewise
has
never
been
found,
in
any
case
drawn
to
the
Court’s
attention,
to
be
an
element
qualifying
or
disqualifying
the
transaction
as
a
sham.
If
the
factual
possibility
of
reversibility
were
a
test
as
to
the
legal
effect
of
a
transaction
under
the
“sham”
doctrine,
a
retail
store’s
sales
policy
of
guaranteed
return
of
goods
found
to
be
unsatisfactory
(“Goods
satisfactory
or
money
refunded”)
would
render
a
transaction
incomplete,
unenforceable
and
a
sham,
whether
or
not
the
goods
were
ever
returned
to
the
vendor.
In
fact,
of
course,
we
know
the
transaction
was
not
reversed
but
was
indeed
relied
upon
by
the
third
party
purchaser
of
the
assets
and
undertaking
of
Grover.
There
is,
in
short,
a
total
absence
of
the
element
of
deceit,
which
is
the
heart
in
these
circumstances
of
the
doctrine
of
sham
as
it
has
developed
in
the
case
law
of
this
country.
Returning
then
to
the
issue
of
interpretation
now
before
this
Court,
there
are
certain
broad
characteristics
of
tax
statute
construction
which
can
be
discerned
in
the
authorities
here
and
in
similar
jurisdictions
abroad.
The
most
obvious
is
the
fact
that
in
some
jurisdictions,
such
as
Canada
and
Australia,
the
legislature
has
responded
to
the
need
for
overall
regulation
to
forestall
blatant
practices
designed
to
defeat
the
Revenue.
These
anti-tax
avoidance
provisions
may
reflect
the
rising
importance
and
cost
of
government
in
the
community,
the
concomitant
higher
rates
of
taxation
in
modern
times,
and
hence
the
greater
stake
in
the
avoidance
contests
between
the
taxpayer
and
the
state.
The
arrival
of
these
provisions
in
the
statute
may
also
have
heralded
the
extension
of
the
Income
Tax
Act
from
a
mere
tool
for
the
carving
of
the
cost
of
government
out
of
the
community,
to
an
instrument
of
economic
and
fiscal
policy
for
the
regulation
of
commerce
and
industry
of
the
country
through
fiscal
intervention
by
government.
Whatever
the
source
or
explanation,
measures
such
as
section
137
are
instructions
from
Parliament
to
the
community
on
the
individual
member’s
liability
for
taxes,
expressed
in
general
terms.
This
instuction
is,
like
the
balance
of
the
Act,
introduced
as
well
for
the
guidance
of
the
courts
in
applying
the
scheme
of
the
Act
throughout
the
country.
The
courts
may,
of
course,
develop,
in
their
interpretation
of
section
137,
doctrines
such
as
the
bona
fide
business
purpose
test;
or
a
step-by-step
transaction
rule
for
the
classification
of
taxpayers’
activities
which
fall
within
the
ban
of
such
a
general
tax
avoidance
provision.
In
jurisdictions
such
as
the
United
States
and
the
United
Kingdom,
such
doctrines
have
developed
in
the
courts,
usually
in
the
guise
of
canons
of
construction
of
the
tax
statutes.
These
have
included
the
business
purpose
test,
step-by-
step
transactions
analysis,
substance
over
form,
and
expanded
sham
rules.
Whether
the
development
be
by
legislative
measure
or
judicial
action,
the
result
is
a
process
of
balancing
the
taxpayer’s
freedom
to
carry
on
his
commercial
and
social
affairs
however
he
may
choose,
and
the
state
interest
in
revenue,
equity
in
the
raising
of
the
revenue,
and
economic
planning.
In
Canada
the
sham
concept
is
at
least
a
judicial
measure
for
the
control
of
tax
abuse
without
specific
legislative
direction.
The
judicial
classification
of
an
ineffective
transaction
is
another.
In
the
United
States,
these
doctrines
have
expanded
to
include
the
business
purpose
test.
The
United
States
tax
code
is,
as
we
have
seen,
replete
with
benefits
in
the
form
of
special
relief
from
general
tax
measures,
but
the
problem
is
whether
the
bona
fide
business
purpose
test
will,
in
a
given
circumstance,
descend
upon
the
taxpayer
ex
post
facto.
See
Surrey
et
al,
“Federal
Income
Taxation’’,
Cases
and
Materials
(Foundation
Press
1973)
at
p
644.
In
sharp
contrast
is
the
approach
of
Noël,
J,
as
he
then
was,
in
Foreign
Power
Securities
Ltd
v
MNR,
[1966]
CTC
23;
66
DTC
5012
at
52
[5027],
where
he
stated:
There
is
indeed
no
provision
in
the
Income
Tax
Act
which
provides
that,
where
it
appears
that
the
main
purpose
or
one
of
the
purposes
for
which
any
transaction
or
transactions
was
or
were
effected
was
the
avoidance
or
reduction
of
liability
to
income
tax,
the
Court
may,
if
it
thinks
fit,
direct
that
such
adjustments
shall
be
made
as
respects
liability
to
income
tax
as
it
considers
appropriate
so
as
to
counteract
the
avoidance
or
reduction
of
liability
to
income
tax
which
would
otherwise
be
effected
by
the
transaction
or
transactions.
Perhaps
the
high
water
mark
in
the
opposition
to
the
introduction
of
a
business
purpose
test
is
found
in
the
reasoning
of
the
learned
authors,
Ward
and
Cullity,
supra,
who
stated,
at
473-75,
in
answer
to
the
question:
can
it
be
a
legitimate
business
purpose
of
a
transaction
to
minimize
or
postpone
taxes?:
If
taxes
are
minimized
or
postponed,
more
capital
will
be
available
to
run
the
business
and
more
profit
will
result.
Surely,
in
the
penultimate
decade
of
the
twentieth
century
it
would
be
naive
to
suggest
that
businessmen
can,
or
should,
conduct
and
manage
their
business
affairs
without
regard
to
the
incidence
of
taxation
or
that
they
are
not,
or
should
not,
be
attracted
to
transactions
or
investments
or
forms
of
doing
business
that
provide
reduced
burdens
of
taxation.
I
would
therefore
reject
the
proposition
that
a
transaction
may
be
disregarded
for
tax
purposes
solely
on
the
basis
that
it
was
entered
into
by
a
taxpayer
without
an
independent
or
bona
fide
business
purpose.
A
strict
business
purpose
test
in
certain
circumstances
would
run
counter
to
the
apparent
legislative
intent
which,
in
the
modern
taxing
statutes,
we
may
have
a
dual
aspect.
Income
tax
legislation,
such
as
the
federal
Act
in
our
country,
is
no
longer
a
simple
device
to
raise
revenue
to
meet
the
cost
of
governing
the
community.
Income
taxation
is
also
employed
by
government
to
attain
selected
economic
policy
objectives.
Thus,
the
statute
is
a
mix
of
fiscal
and
economic
policy.
The
economic
policy
element
of
the
Act
sometimes
takes
the
form
of
an
inducement
to
the
taxpayer
to
undertake
or
redirect
a
specific
activity.
Without
the
inducement
offered
by
the
statute,
the
activity
may
not
be
undertaken
by
the
taxpayer
for
whom
the
induced
action
would
otherwise
have
no
bona
fide
business
purpose.
Thus,
by
imposing
a
positive
requirement
that
there
be
such
a
bona
fide
business
purpose,
a
taxpayer
might
be
barred
from
undertaking
the
very
activity
Parliament
wishes
to
encourage.
At
minimum,
a
business
purpose
requirement
might
inhibit
the
taxpayer
from
undertaking
the
specified
activity
which
Parliament
has
invited
in
order
to
attain
economic
and
perhaps
social
policy
goals.
Examples
of
such
incentives
I
have
already
enumerated.
Indeed,
where
Parliament
is
successful
and
a
taxpayer
is
induced
to
act
in
a
certain
manner
by
virtue
of
incentives
prescribed
in
the
legislation,
it
is
at
least
arguable
that
the
taxpayer
was
attracted
to
these
incentives
for
the
valid
business
purpose
of
reducing
his
cash
outlay
for
taxes
to
conserve
his
resources
for
other
business
activities.
It
seems
more
appropriate
to
turn
to
an
interpretation
test
which
would
provide
a
means
of
applying
the
Act
so
as
to
affect
only
the
conduct
of
a
taxpayer
which
has
the
designed
effect
of
defeating
the
expressed
intention
of
Parliament.
In
short,
the
tax
statute,
by
this
interpretative
technique,
is
extended
to
reach
conduct
of
the
taxpayer
which
clearly
falls
within
“the
object
and
spirit”
of
the
taxing
provisions.
Such
an
approach
would
promote
rather
than
interfere
with
the
administration
of
the
Income
Tax
Act,
supra,
in
both
its
aspects
without
interference
with
the
granting
and
withdrawal,
according
to
the
economic
climate,
of
tax
incentives.
The
desired
objective
is
a
simple
rule
which
will
provide
uniformity
of
application
of
the
Act
across
the
community,
and
at
the
same
time,
reduce
the
attraction
of
elaborate
and
intricate
tax
avoidance
plans,
and
reduce
the
rewards
to
those
best
able
to
afford
the
services
of
the
tax
technicians.
In
all
this,
one
must
keep
in
mind
the
rules
of
statutory
interpretation,
for
many
years
called
a
strict
interpretation,
whereby
any
ambiguities
in
the
charging
provisions
of
a
tax
statute
were
to
be
resolved
in
favour
of
the
taxpayer;
the
taxing
statute
was
classified
as
a
penal
statute.
See
Grover
&
lacobucci,
Materials
on
Canadan
Income
Tax,
5th
ed,
(1981),
pp
62-65.
At
one
time,
the
House
of
Lords,
as
interpreted
by
Professor
John
Willis,
had
ruled
that
it
was
“not
only
legal
but
moral
to
dodge
the
Inland
Revenue”
(51
Canadian
Bar
Review
1
at
26),
referring
to
Inland
Revenue
Commissioners
v
Le-
vene,
[1928]
A.C.
217,
at
227.
This
was
the
high
water
mark
reached
in
the
application
of
Lord
Cairns’
pronouncement
in
Partington
v
Attorney-General
(1869)
LR,
3
HL
100
at
122:
I
am
not
at
all
sure
that,
in
a
case
of
this
kind
—
a
fiscal
case
—
form
is
not
amply
sufficient;
because,
as
I
understand
the
principle
of
all
fiscal
legislation,
it
is
this:
if
the
person
sought
to
be
taxed
comes
within
the
letter
of
the
law
he
must
be
taxed,
however
great
the
hardship
may
appear
to
the
judicial
mind
to
be.
On
the
other
hand,
if
the
Crown,
seeking
to
recover
the
tax,
cannot
bring
the
subject
within
the
letter
of
the
law,
the
subject
is
free,
however
apparently
within
the
spirit
of
the
law
the
case
might
otherwise
appear
to
be.
In
other
words,
if
there
be
admissible,
in
any
statute,
what
is
called
equitable
construction,
certainly
such
a
construction
is
not
admissible
in
a
taxing
statute
where
you
simply
adhere
to
the
words
of
the
statute.
Cited
with
approval
in
this
Court
in
The
King
v
Crabbs,
[1934]
SCR
523
at
525.
The
converse
was,
of
course,
also
true.
Where
the
taxpayer
sought
to
rely
on
a
specific
exemption
or
deduction
provided
in
the
statute,
the
strict
rule
required
that
the
taxpayer’s
claim
fall
clearly
within
the
exempting
provision,
and
any
doubt
would
there
be
resolved
in
favour
of
the
Crown.
See
Lumbers
v
MNR,
[1944]
CTC
67;
[1943]
CTC
281;
2
DTC
631
(Ex
Ct),
affirmed
[1944]
SCR
167:
and
W
A
Sheaffer
Pen
Co
Ltd
v
MNR,
[1953]
Ex
CR
251;
[1953]
CTC
345;
53
DTC
1223.
Indeed,
the
introduction
of
exemptions
and
allowances
was
the
beginning
of
the
end
of
the
reign
of
the
strict
rule.
Professor
Willis,
in
his
article,
supra,
accurately
forecast
the
demise
of
the
strict
interpretation
rule
for
the
construction
of
taxing
statutes.
Gradually,
the
role
of
the
tax
statute
in
the
community
changed,
as
we
have
seen,
and
the
application
of
strict
construction
to
it
receded.
Courts
today
apply
to
this
statute
the
plain
meaning
rule,
but
in
a
substantive
sense
so
that
if
a
taxpayer
is
within
the
spirit
of
the
charge,
he
may
be
held
liable.
See
Whiteman
and
Wheatcroft,
supra,
at
37.
While
not
directing
his
observations
exclusively
to
taxing
statutes,
the
learned
author
of
Construction
of
Statutes,
2nd
ed,
(1983),
at
87,
E
A
Dreidger,
put
the
‘modern
rule
succinctly:
Today
there
is
only
one
principle
or
approach,
namely,
the
words
of
an
Act
are
to
be
read
in
their
entire
context
and
in
their
grammatical
and
ordinary
sense
harmoniously
with
the
scheme
of
the
Act,
the
object
of
the
Act,
and
the
intention
of
Parliament.
The
question
comes
back
to
a
determination
of
the
proper
role
of
the
court
in
construing
the
Income
Tax
Act
in
circumstances
such
as
these
where
the
Crown
relies
on
the
general
pattern
of
the
Act
and
not
upon
any
specific
taxing
provision.
The
Act
is
to
be
construed,
of
course,
as
a
whole,
including
section
137
but,
for
reasons
already
noted,
without
applying
that
section
specifically
to
these
assessments.
The
appellant
stands
to
save
taxes
if
its
program
is
successful.
The
Crown
loses
revenue
it
might
otherwise
receive.
At
least
in
theory,
the
burden
falls
on
other
taxpayers
to
make
up
the
lost
revenue.
Lord
Simon
of
Glaisdale
had
this
to
say
in
not
dissimilar
circumstances:
It
may
seem
hard
that
a
cunningly
advised
taxpayer
should
be
able
to
avoid
what
appears
to
be
his
equitable
share
of
the
general
fiscal
burden
and
cast
it
on
the
shoulders
of
his
fellow
citizens.
But
for
the
Courts
to
try
to
stretch
the
law
to
meet
hard
cases
(whether
the
hardship
appears
to
bear
on
the
individual
taxpayer
or
on
the
general
body
of
taxpayers
as
represented
by
the
Inland
Revenue)
is
not
merely
to
make
bad
law
but
to
run
the
risk
of
subverting
the
rule
of
law
itself.
Disagreeable
as
it
may
seem
that
some
taxpayers
should
escape
what
might
appear
to
be
their
fair
share
of
the
general
burden
of
national
expenditure,
it
would
be
far
more
disagreeable
to
substitute
the
rule
of
caprice
for
that
of
law.
Ransom
v
Higg,
50
TC
1
at
94
(1974).
All
this
may
reflect
the
tradition
of
annual
amendments
to
the
Income
Tax
Act
when
the
government
budget
for
the
ensuing
year
is
presented
to
Parliament
for
approval.
Perhaps
the
facility
of
amendment
to
the
Income
Tax
Act
is
one
of
the
sources
of
the
problem
since
the
practice
does
not
invite
the
courts
to
intervene
when
the
legislature
can
readily
do
so.
Nonetheless,
some
guidelines
can
be
discerned
for
the
guidance
of
a
court
faced
with
this
interpretative
issue.
1.
Where
the
facts
reveal
no
bona
fide
business
purpose
for
the
transaction,
section
137
may
be
found
to
be
applicable
depending
upon
all
the
circumstances
of
the
case.
It
has
no
application
here.
2.
In
those
circumstances
where
section
137
does
not
apply,
the
older
rule
of
strict
construction
of
a
taxation
statute,
as
modified
by
the
courts
in
recent
years,
(supra),
prevails
but
will
not
assist
the
taxpayer
where:
(a)
the
transaction
is
legally
ineffective
or
incomplete;
or
(b)
the
transaction
is
a
sham
within
the
classical
definition.
3.
Moreover,
the
formal
validity
of
the
transaction
may
also
be
insufficient
where:
(a)
the
setting
in
the
Act
of
the
allowance,
deduction
or
benefit
sought
to
be
gained
clearly
indicates
a
legislative
intent
to
restrict
such
benefits
to
rights
accrued
prior
to
the
establishment
of
the
arrangement
adopted
by
a
taxpayer
purely
for
tax
purposes;
(b)
the
provisions
of
the
Act
necessarily
relate
to
an
identified
business
function.
This
idea
has
been
expressed
in
articles
on
the
subject
in
the
United
States:
The
business
purpose
doctrine
is
an
appropriate
tool
for
testing
the
tax
effectiveness
of
a
transaction,
where
the
language,
nature
and
purposes
of
the
provision
of
the
tax
law
under
construction
indicate
a
function,
pattern
and
design
characteristic
solely
of
business
transactions.
Jerom
R
Hellerstein,
“Judicial
Approaches
to
Tax
Avoidance”,
1964
Conference
Report,
p
66.
(c)
“the
object
and
spirit”
of
the
allowance
or
benefit
provision
is
defeated
by
the
procedures
blatantly
adopted
by
the
taxpayer
to
synthesize
a
loss,
delay
or
other
tax
saving
device,
although
these
actions
may
not
attain
the
heights
of
“artificiality”
in
section
137.
This
may
be
illustrated
where
the
taxpayer,
in
order
to
qualify
for
an
“allowance”
or
a
“benefit”,
takes
steps
which
the
terms
of
the
allowance
provisions
of
the
Act
may,
when
taken
in
isolation
and
read
narrowly,
be
stretched
to
support.
However,
when
the
allowance
provision
is
read
in
the
context
of
the
whole
statute,
and
with
the
“object
and
spirit”
and
purpose
of
the
allowance
provision
in
mind,
the
accounting
result
produced
by
the
taxpayer’s
actions
would
not,
by
itself,
avail
him
of
the
benefit
of
the
allowance.
These
interpretative
guidelines,
modest
though
they
may
be
be,
and
which
fall
well
short
of
the
bona
fide
business
purpose
test
advanced
by
the
respondent,
are
in
my
view
appropriate
to
reduce
the
action
and
reaction
endlessly
produced
by
complex,
specific
tax
measures
aimed
at
sophisticated
business
practices,
and
the
inevitable,
professionally-guided
and
equally
specialized
taxpayer
reaction.
Otherwise,
where
the
substance
of
the
Act,
when
the
clause
in
question
is
contextually
construed,
is
clear
and
unambiguous
and
there
is
no
prohibition
in
the
Act
which
embraces
the
taxpayer,
the
taxpayer
shall
be
free
to
avail
himself
of
the
beneficial
provision
in
question.
In
this
appeal,
the
appellant
taxpayer
has
done
nothing
to
contrive
the
accumulated
and
recognized
loss
carry-forward
of
Grover.
Neither
has
the
parent
nor
the
affiliated
company
Grover
done
so.
The
immediate
payment
in
issue,
the
transfer
of
yearly
profits
from
the
business,
was
made
by
the
appellant
under
a
clear,
binding
legal
obligation
so
to
do.
Grover’s
right
to
apply
the
tax
loss
to
the
income
so
received
from
the
business
is
technically
not
here
in
issue.
If
it
were
in
issue,
it
is
difficult
to
see
why
Grover
could
not
have
acquired
production
assets
from
any
source,
including
non-arm’s
length
sources
as
here,
so
as
to
produce
earnings
in
futuro
in
order
to
take
advantage
of
its
deficit
accumulations
before
their
expiry
under
the
provisions
of
the
Income
Tax
Act.
Neither
the
loss
carry-forward
provisions,
nor
any
other
provision
of
the
Act,
have
been
shown
to
reveal
a
parliamentary
intent
to
bar
the
appellant
from
entering
into
such
a
binding
transaction
and
to
make
the
payments
here
in
question.
Once
the
tax
loss
concept
is
included
in
the
statute,
the
revenue
collector
is
exposed
to
the
chance,
if
not
the
inevitability,
of
the
reduction
of
future
tax
collections
to
the
extent
that
a
credit
is
granted
for
past
losses.
I
would
therefore
allow
the
appeal,
and
direct
that
the
notices
of
reassessment
in
question
be
vacated,
with
costs
here
and
in
the
courts
below
to
the
appellant.
Wilson,
J:—I
agree
with
my
colleague
Mr
Justice
Estey
that
the
transaction
involved
in
this
appeal
was
an
effectual
transaction
and
that
it
was
not
a
sham.
Indeed,
I
cannot
see
how
a
sham
can
be
said
to
result
where
parties
intend
to
create
certain
legal
relations
(in
this
case
the
purchase
and
sale
of
a
business
and
a
nominee
arrangement
to
operate
it)
and
are
successful
in
creating
those
legal
relations.
As
I
understand
it,
a
sham
transaction
as
applied
in
Canadian
tax
cases
is
one
that
does
not
have
the
legal
consequences
that
it
purports
on
its
face
to
have.
For
example,
in
Susan
Hosiery
Ltd
v
MNR,
[1969]
2
Ex
CR
408;
[1969]
CTC
533;
69
DTC
5346
Mr
Justice
Gibson
found
a
purported
employees’
pension
plan
to
be
a
mere
“simulate”
that
was
“masquerading”
as
a
pension
plan;
the
actions
of
the
taxpayers
in
question
“never
established
a
pension
plan,
nor
any
relationship
of
trustee,
cestui
que
trust,
nor
any
other
legal
or
equitable
rights
or
obligations
in
any
of
the
parties
and
none
of
the
parties
intended
at
any
material
time
that
there
should
be
any”
(at
420-21
[544]).
In
MNR
v
Shields,
[1963]
Ex
CR
91;
[1962]
CTC
548;
62
DTC
1343
Mr
Justice
Cameron
held
that
an
alleged
partnership
agreement
between
the
taxpayer
and
his
son
was
“not
a
reality,
but
a
mere
simulate
agreement”
(at
114
[570]);
the
parties
never
intended
that
it
should
give
rise
to
a
partnership
and
in
law
it
did
not
do
so.
And
in
MNR
v
Cameron,
(supra),
Mr
Justice
Martland
declined
to
find
a
contract
for
services
between
an
employer
and
a
company
incorporated
by
his
former
employees
to
be
a
sham
because
“the
legal
rights
and
obligations
which
it
created
were
exactly
those
which
the
parties
intended”
(at
1069
[384]).
I
am
also
of
the
view
that
the
business
purpose
test
and
the
sham
test
are
two
distinct
tests.
A
transaction
may
be
effectual
and
not
in
any
sense
a
sham
(as
in
this
case)
but
may
have
no
business
purpose
other
than
the
tax
purpose.
The
question
then
is
whether
the
Minister
is
entitled
to
ignore
it
on
that
ground
alone.
If
he
is,
then
a
massive
inroad
is
made
into
Lord
Tomlin’s
dictum
that
“Every
man
is
entitled
if
he
can
to
order
his
affairs
so
that
the
tax
attaching
under
the
appropriate
Acts
is
less
than
it
would
otherwise
be”:
IRC
v
Duke
of
Westminster,
(supra),
at
19.
Indeed,
it
seems
to
me
that
the
business
purpose
test
is
a
complete
rejection
of
Lord
Tomlin’s
principle.
The
appellant
would
clearly
be
liable
to
pay
tax
on
the
income
from
the
flavourings
business
if
the
business
purpose
test
is
part
of
our
law
since
it
is
freely
admitted
that
the
saving
of
tax
for
the
Finlayson
conglomerate
was
the
sole
motivation
for
the
transaction.
In
my
opinion,
the
Federal
Court
of
Appeal
in
Leon
v
MNR,
(supra),
characterized
a
transaction
which
had
no
business
purpose
other
than
the
tax
purpose
as
a
sham
and
was
in
error
in
so
doing.
I
do
not
view
that
case
as
introducing
the
business
purpose
test
as
a
test
distinct
from
that
of
sham
into
our
law
and,
indeed,
if
it
is
to
be
so
viewed,
I
do
not
think
it
should
be
followed.
I
think
Lord
Tomlin’s
principle
is
far
too
deeply
entrenched
in
our
tax
law
for
the
courts
to
reject
it
in
the
absence
of
clear
statutory
authority.
No
such
authority
has
been
put
to
us
in
this
case.
For
these
reasons
I
concur
in
my
colleague’s
disposition
of
the
appeal.