Marceau, J:—On March 18, 1975, the Deputy Minister of National Revenue directed that, for the purpose of the Income Tax Act, two companies, Covertite Limited and Covertite (Ontario) Limited, were deemed to be associated with each other for the 1971 and 1972 taxation years. Covertite Limited (to which I will refer in these reasons as the “Quebec Company”) was a Quebec-based corporation which had carried on a roofing business from its head office in Montreal since 1958; it was a one-man corporation, 98 of its 100 issued common shares having been owned since the beginning by Mr Albert Warner. Covertite (Ontario) Limited (hereinafter referred to as the “Ontario Company”) had been incorporated, on February 4, 1970, to carry on a similar roofing business from a head office in Ottawa with Mrs Mary Warner, Albert Warner’s wife, owning 98 of its 100 issued common shares. The direction with respect to the year 1971 was made under subsection 138A(2) of the Act as it was then applicable and that with respect to the year 1972, under subsection 247(2) of the “new” Act. Both subsections are identical and provide as follows:
Where, in the case of two or more corporations, the Minister is satisfied
(a) that the separate existence of those corporations in a taxation year is not solely for the purpose of carrying out the business of those corporations in the most effective manner, and
(b) that one of the main reasons for such separate existence in the year is to reduce the amount of taxes that would otherwise be payable under this Act
the two or more corporations shall, if the Minister so directs, be deemed to be associated with each other in the year.
Pursuant to the Minister’s directions, notices of reassessment were issued against the Quebec company, the defendant herein, for each of the two years, since the tax payable by either of the two companies had to be calculated on the basis of the combined taxable incomes of both of them. The defendant objected to the assessments claiming that the directions which had given rise thereto were unjustified, and, when the assessments were confirmed, it launched an appeal before the Tax Review Board in accordance with the provisions of subsection 138A(3) of the old Act for the year 1971 and subsection 247(3) of the new Act for the year 1972. Again both subsections are identical; the relevant portions read as follows:
On an appeal from the assessment made pursuant to a direction under this section, the Tax Review Board or the Federal Court may
(a) confirm the direction;
(b) vacate the direction if
(ii) in the case of a direction under subsection (2), it determines that none of the main reasons for the separate existence of the two or more corporations is to reduce the amount of tax that would otherwise be payable under this Act; or
(c) vary the direction and refer the matter back to the Minister for reassessment.
The member of the Board called upon to hear the matter was forced to dismiss the appeal in respect of the assessment for the year 1971, the appellant having declared at the outset of the hearing that it was withdrawing its contentions in so far as that year was concerned (and I will explain the reason later), but he came to the conclusion that the direction relating to the year 1972 could not stand and, vacating it, he allowed the appeal in respect of the reassessment issued pursuant thereto. This is an appeal by Her Majesty the Queen against the decision of the Tax Review Board.
This Court has had to deal with cases similar to the one at bar on many occuasions in the past and the principles governing their disposition are well known. (See, for instance, Alpine Furniture Co Ltd v MNR,  CTC 532; 68 DTC 5338; Holt Metal of Manitoba Ltd et al v MNR,  CTC 144; 70 DTC 6108; Classic’s Little Books Inc v The Queen,  CTC 94; 73 DTC 5096; Pay-Less Meat Market Ltd et al v MNR,  CTC 102; 73 DTC 5102; Industrial Trailer Rentals Ltd v The Queen,  CTC 775; 74 DTC 6577; The Queen v Decker Contracting Ltd,  CTC 731; 76 DTC 6477;  CTC 838; 79 DTC 5001; Honeywood Limited et al v The Queen,  CTC 38; 81 DTC 5066.) This is a type of case that needs to be approached with a clear appreciation of both the real issue to be determined and the method of making that determination. A direction under subsection 247(2) necessarily implies that the Minister (or his Deputy) was satisfied that one of the main reasons for the separate existence of the two corporations in question, in the year referred to, was to reduce the amount of taxes that would have otherwise been payable under the Act. He must have come to that conclusion. Thus, in this case, the direction implies that the Minister has concluded that the Ontario company was caused to be formed, and thereafter was kept in existence as a separate entity from that of the Quebec company, for reasons among which one of the main ones was to reduce the taxes that would have been payable if the whole operation had been carried on by only one corporation. The taxpayer corporation, on its being reassessed pursuant to a direction under subsection 247(2), is given a right of appeal but to succeed it must sap the foundations on which the direction was based, it must refute the conclusion reached by the Minister. The appeal tribunal, the Board or the Court, is entitled to vacate the direction if, but only if, it can determine that none of the main reasons for the separate existence of the two corporations was that of reducing taxes. The onus on the taxpayer appellant is complete and the role of the Court is clear. All that may appear simple but it is so only in theory and not in practice. The difficulty stems from the very nature of the conclusion of the Minister that is put into question and must be verified. It is indeed a conclusion of fact as opposed to a conclusion of law, but one of a purely psychological content, since it refers to the state of mind and the intention of those responsible for the creation and the continued separate existence of the two entities. It is obviously a conclusion that cannot be the object of direct evidence, at least in the absence of a clear prior statement of the parties concerned or an admission made by them afterwards, it must necessarily be based on inferences drawn from a series of material facts directly ascertainable. The Minister has inferred from a certain number of facts that the saving of taxes, which was actually realized, was not a mere side effect but rather one of the main goals contemplated by the individuals acting behind the corporations. In verifying the conclusion, the Court cannot but adopt an approach similar to that followed by the Minister, the mere denial of the taxpayer, whether or not accompanied by a simple indication of the other causes that could have prevailed, can be given no weight. Being a mere assertion of a negative fact, and a fact which has to do with the state of mind of the witness, it can have no convincing probative force; it cannot constitute the proof required to annihilate the conclusion of the Minister. To succeed, the taxpayer must: (a) disprove the facts assumed by the Minister in reaching his conclusion; or (b) convince the Court that the inferences drawn by the Minister from the facts assumed were unreasonable and unwarranted; or (c) add further facts capable of changing the whole picture and leading to different inferences pointing to the conclusion that the other reasons alleged have actually been prevalent.
I will now turn to the facts of this case and will endeavour to review them in the order that a proper application of the principles involved requires. It will be seen that, in the view I take of those facts, the attack on the Minister’s direction here cannot succeed.
The first step to be taken is naturally to review the facts on the basis of which the direction was made. Those facts were alleged in several subparagraphs of paragraph 4 of the statement of claim. They were then, of course, stated as being assumed but they were undisputable and have been simply admitted in the pleadings. The recital of those subparagraphs, to which I will add some comments suggested by the evidence adduced with respect thereto, will provide a good view of the situation and at the same time bring into light the “reasonableness” of the conclusion drawn by the Minister.
First, the Deputy Minister knew the history and the background of the two companies (subparagraphs (a), (b), (c), (d), of paragraph 4 of the statement of claim):
(a) The Defendant was incorporated in 1958 Under the Québec Companies Act and has carried on a roofing business since that time from its head office situated in Montréal;
(b) Since incorporation, Mr Albert Warner has been the owner of 98 of the 100 issued common shares of the Defendant and Mrs Mary Warner, the wife of Mr Albert Warner, has been the owner of one share of the issued common shares from March 29, 1967 to January 29th, 1970;
(c) Covertite (Ontario) Limited was incorporated on February 4th, 1970, to carry on a roofing business and its head office is in Ottawa, Ontario;
(d) the owners of the issued common shares of Covertite (Ontario) Ltd were the following persons:
Mrs Mary Warner ............ 98 shares Mr J B Chadwick ............ 1 share Mr W J McKissock ........... 1 share
The statement made in paragraph (b) to the effect that Mrs Warner had been the owner of one share of the issued common shares of the Montreal Company until January 29, 1970, therefore prior to the incorporation of the Ontario company, turned out to be incorrect. Mrs Warner did not transfer her share in the Montreal Company until 1971 and she did so on the advice of one Mr Tretiak, the newly hired accountant of the Montreal Company, in order to avoid the technical association defined by subparagraph 39(4)(c) of the old Act.* In the books of the company, however, the transfer had been antedated. That is the reason why the Minister’s declarations were made covering both years 1971 and 1972, and also the reason why the appellant company before the Tax Review Board promptly withdrew its appeal with respect to the 1971 year.
second, the Deputy Minister had been able to verify the source of the investment required to establish the Ontario company (subparagraphs (e), (f), (g), of paragraph 4 of the statement of claim):
(e) Mrs. Mary Warner’s investment in Covertite (Ontario) Ltd consisted of $100 in share capital and a loan of $29,406;
(f) Mrs. Mary Warner secured the money loaned to Covertite (Ontario) Ltd from her husband, Mr. Albert Warner as follows:
(i) sale of property to her husband for $20,500; and,
(ii) loan from her husband of $9,006.
(g) Mr Albert Warner secured the amount of $9,006 lent to his wife by borrowing it from the Defendant;
The evidence provided further clarification. Actually all the moneys needed for the setting up of the Ontario operation were advanced by the Quebec company, except that they were entered in the books as loans to a director, the husband. On the other hand, the property sold to the husband was a cottage purchased in September 1968 for a price that had been fully paid by the husband, and the deed of sale is dated January 29, 1971, a year after the incorporation of the Ontario company. It should be pointed out also that in addition to the sources of financing alleged in the above quoted subparagraphs, Mr Warner personally endorsed an important bank credit secured by the new-formed company.
Third, the Deputy Minister had also been made aware of the role played by the Quebec company in the establishment of the Ontario operation and of the link between the two firms through the individuals involved in their operations (subparagraphs (h), (i), and (o) of paragraph 4 of the statement of claim):
“which reads as follows:
39. (4) For the purpose of this section, one corporation associated with another in a taxation year if, at any time in the year,
(a) each of the corporations was controlled by one person and the person who controlled one of the corporations was related to the person who controlled the other, and one of those persons owned directly or indirectly one or more
shares of the capital stock of each of the corporations,
(h) During its 1971 taxation year, the Defendant:
(i) sold equipment and machinery to Covertite (Ontario) Ltd for an amount of $11,509;
(ii) advanced $35,000 in cash to Covertite (Ontario) Ltd; and,
(iii) paid for material, supplies and rent on Covertite (Ontario) Ltd’s behalf in the amount of $6,500;
(i) Prior to the incorporation of Covertite (Ontario) Ltd, the Defendant executed contracts in Eastern Ontario and in the Fall of 1969 and in 1970 Mr. W. McKissock, an employee of the Defendant, supervised the activities of the Defendant in Eastern Ontario from his residence situated at 1149F Meadowlands Drive in Ottawa;
(o) Mr. McKissock became an employee of Covertite (Ontario) Ltd. in 1970 after having been on the payroll of the Defendant and Mr. McKissock continued to discuss the type of material used, material prices, and technical problems with Mr. Albert Warner for Defendant’s and Covertite (Ontario) Ltd’s contracts:
It should be pointed out that this Mr W McKissock was not a mere employee of the Defendant; he had been with the Quebec company for a number of years, and, as its chief estimator, he was actually running the operation on the same level as Mr Warner himself. He was the alter ego of Mr Warner, in the words of the latter, and a very good personal friend. Another point worth noting: in 1969, about 20% of the volume of work of the Quebec company was in Ontario, an unprecedented situation, and all of the contracts had been secured through the efforts of Mr McKissock.
Fourth and finally, the records of the two companies were providing some revealing figures (the last six subparagraphs of paragraph 4 of the statement of claim):
(m) The taxable income of the Defendant for each of the taxation years ending on the indicated dates was the following:
Jan. 31/67 $34,833.23
Jan. 31/68 $34,831.36
Jan. 31/69 $35,000.00
Jan. 31/70 $33,101.00
Jan. 31/71.................... 4,070.00
Dec. 30/71.................... $34,502.00
Dec. 30/72.................... $50,015.00
(n) Salaries and bonuses paid by the Defendant to Mr. Albert Warner have totalled the following in the taxation years ending on the indicated dates:
Jan. 31/67 $16,040
Jan. 31/68 $27,021
Jan. 31/69 $24,034
Jan. 31/70 $10,011
Jan. 31/71...................... nil
Dec. 30/71..................... $65,275
Dec. 30/72.................... $145,673
(p) Covertite (Ontario) Limited commenced its operations on February 23rd, 1970 and during its first taxation year ending on January 31, 1971 it reported sales of $471,352 and net income of $26,152;
(q) For its taxation year ending on January 31st, 1971, the Defendant reported sales of $564,068 and a net income of $28,892.
(r) Both corporations changed their taxation year to December 30 in 1971 and the sales and net income reported have been the following for each corpora-
|Defendant||Covertite (Ontario) Ltd|
(s) The combined taxable incomes of the Defendant and Covertite (Ontario) Ltd. were as follows for the taxation years ending on the indicated dates: Jan. 31/71....................... 62,315.09 Dec. 30/72.................... $70,907.00
From the figures given in (m) and (n), it is clear that the defendant company was consistently adjusting its salaries and bonuses so that the net profit remained just below the amount at which a higher tax rate would have been payable, which showed the importance of tax considerations in the defendant’s and Mr Warner’s activities. From the figures reported in (p), one can see that the Ontario operation was an instant success, and a most extraordinary one for a new operation of this type commencing business on its own. And from those in (s), the incidence of taxes coming into play can easily be measured.
Those are therefore the facts from which the Minister drew the conclusion that the Ontario operation was in reality an extension of the Quebec operation and that among the reasons which had led to the setting up of a separate corporation was that of saving taxes. As I indicated the defendant never disputed those facts and in any event they are now established. On the other hand, I do not think that anyone can seriously maintain that the inferences the Minister drew from those facts to arrive at his conclusion were unreasonable. It follows, in view of the principles I outlined above, that the only means of attack against the Minister’s direction open to the defendant was to bring forth further facts capable of giving substance and credibility to its denial of the Minister’s conclusion. In my appreciation of the evidence adduced in support of the defence, the defendant clearly failed to do so.
The defendant relied wholly on the testimonies of Mr and Mrs Warner. Mr Tretiak, the private accountant of whom mention was made earlier, was also called as a witness, but prior to his becoming auditor of the Quebec company, in January 1971, this gentleman did not even know Mr and Mrs Warner, so that at trial he could only testify as to the entries appearing in the records of the company from that date on.
Of course, Mr and Mrs Warner both stated that the setting up of the Ontario company was the sole idea of Mrs Warner and had nothing to do with the Quebec operation. Those statements were of course to be expected; they were necessarily implied in the denial by the defendant. What must be looked at is what was alleged to corroborate the statements.
Mrs Warner explained that the idea of commencing a business in Ontario came to her, in 1969, as a result of three factors: first, her desire to leave her husband and her home in Rosemere, near Montreal, and move to Ontario, because of the social climate in Quebec; second, her intention to invest money in the province where she would thenceforth reside; and third, the decision of her husband’s chief estimator and trustworthy employee and friend to leave Montreal and take up residence in Ottawa. The explanation, in my view, does not add any substance to the statement: it is to me unconvincing. I find it hard to believe that a woman, happily married and with five young children between the ages of 4 and 12, would decide to leave her husband and move on her own to another province to flee the social climate that prevailed in Quebec twelve years ago. And the fact is that Mrs Warner did not leave Quebec until this year, 1981, when she moved to Ontario with her husband who is now retired, and in the interval between 1969 and this year, after the completion of the formalities required for the organization of the new company, she did not go to Ottawa more than twice a year and on each visit she was accompanied by her husband. I likewise find it hard to believe that a woman with no funds would seriously think of investing money in a new business of her own to be set up from nothing, when she had never directly worked in any capacity in a business of that kind, or of any kind for that matter, and was not even aware of the possibilities of the market where the operation was to be launched. As to the third factor, the alleged decision of Mr W McKissock to move to Ontario, apparently also because of the social climate in Quebec, suffice it to say that this gentleman, the alter ego of Mr Warner, was never called as a witness to attest to his intention in 1969; all we know for sure is that in the fall of that year, he was in Ottawa, on behalf of the Quebec company, supervising the performance of the important contracts the firm had secured in Ontario.
Mr Warner, for his part, corroborated his wife’s testimony by explaining that he did not want to interfere with her decision, and that he took pains not to get involved in any way and at any time with her new operation in Ontario, even though he advanced the moneys required for its setting up and thereafter remained in constant contact with the individual running it, his friend, Mr McKissock. Here again I find it extremely difficult to believe that such could have been the behaviour of a husband, the head of a closely knit family and also a shrewd businessman, who found himself in the situation Mr Warner said he was in.
To be fair to Mr and Mrs Warner, I acknowledge that their answers to the questions put to them may have been technically correct. The role of Mr McKissock behind the whole operation could perhaps provide some explanations. But their statements, standing alone, are not to me sufficiently convincing to be relied on and, in any event, without credible facts to substantiate them, they amount to no more than a mere denial of the Minister’s conclusion which, as I have said, is insufficient to allow the Court to vacate the direction made on the basis thereof.
And so, I have come to the conclusion that this appeal is well founded. I disagree with the decision of the Tax Review Board. In my view, the defendant company has not satisfied the onus of proving that the Ontario company was not formed, at this juncture in the expansion of its operation, as an attempt to reduce the amount of taxes that could become payable.
The action will therefore be allowed, the decision of the Tax Review Board will be set aside, and the direction of the Minister with the reassessments issued pursuant thereto will be restored.