Cullen, J.: —The trial of these matters was heard together and on common evidence.
The actions are by way of appeals from assessments made by the Minister of National Revenue directing that the plaintiff, pursuant to section 247 of the Income Tax Act, be deemed associated with:
(1) John Martens Co. Ltd. (Martensco), Falk Enterprises Ltd. (Falko), J.M. Enterprises Ltd. (Enterprises) and John Martens (Sask.) Ltd. (Sasko) in the 1974 and 1975 taxation years;
(2) John Martens Co. Ltd. and John Martens (Sask.) Ltd. in the 1977 taxation year;
(3) John Martens Co. Ltd. in the 1978 taxation year;
(4) John Martens Co. Ltd. and John Martens (Sask.) Ltd. in the 1979, 1980 and 1981 taxation years. Note: the association with John Martens
(Sask.) Ltd. was based on subsection 256(2) of the Act as John Martens Co. Ltd. was deemed associated with John Martens (Sask.) Ltd. and the plaintiff was reassessed accordingly.
The plaintiff appealed the 1974 and 1975 assessments to the Tax Review Board which appeal was dismissed by the Board.
There are really two issues:
(1) Whether the plaintiff, by reason of section 247 of the Act, was associated with one or all of the above-noted companies in the 1974, 1975, 1977, 1978, 1979, 1980, 1981 taxation years; and
(2) Whether the plaintiff was associated with one or all of the relevant companies by reason of subsection 256(2) of the Act.
The relevant legislation is: sections 3, 9, 125, 247, 251 and 256 of the Income Tax Act, R.S.C. 1952 c. 148 as amended.
In or about 1947, John Martens Sr. incorporated a company that was engaged in the wholesale sporting goods business. This corporation was called John Martens Co. Ltd. (old company). John Martens Sr., who supplied the capital and attended to the banking, was the majority shareholder. Other shareholders were John Martens Jr., Frieda Falk (daughter), Elsie Klausen (daughter) and Ed Falk (son-in-law). John Martens Jr. was the only active person — "I ran the company". With this number of people, and only one person really active, friction developed. John Martens Jr.'s assessment was that Ed Falk was not capable. This corporation, however, was John Martens Sr.'s commitment to provide for his children — in effect, estate planning. There is no need to elaborate on the efforts made by John Martens Jr. to help Ed Falk but try he did to no avail — "he was a failure”, and, says John Martens Jr., “ultimately, I put him in charge of the catalogue department". Incidentally, Falk had come in about 1957.
In 1962 the old company business was sold to John Martens (1962) Co. Ltd., later John Martens Co. Ltd. (new company) and at all material times its shares were held 80 per cent by Enterprises and 20 per cent by Falko. Enterprises was incorporated in 1963 and at all material times its shares were owned by John Martens Jr. Falko was also incorporated in 1963 and at all material times its shares were owned by: Erdman Falk — 170 common shares, Frieda Falk — 163 common shares, and Gordon Falk (son) — 167 common shares.
The Martens, Jr. and Sr., formed a partnership in Ontario — John Martens Ontario Co. (Ontario Company), each with a 50 per cent interest. This ownership continued until January 1964 when Enterprises acquired 80 per cent interest in Ontario Company and Falko acquired the remaining 20 per cent. Always present was Martens Sr.'s concern that he provide for his daughter Frieda Falk, because of Ed Falk's lack of business acumen. When asked why a partnership was formed rather than use the old company, John Martens Jr. in evidence states quite categorically, "because I felt we should exclude the Falks from the operation” (emphasis added).
The business of the old company was conducted at 84 Isobel "which Dad and I owned 50/50”, and it was built in 1956. When asked why the real estate was held by him and his father and not by the old company, John Martens Jr. again emphasized, "we wanted to exclude Ed Falk and both sisters who held shares and we wanted them not to share".
John Martens Jr. was asked to elaborate on the reasons and background for the sale from the old company to the new company. He emphasized that the old company was profitable but he was disappointed and concerned that Ed Falk and his two sisters were not active. He had earlier told us that he ran the show. John Martens Sr., as part of his estate planning, had gifted 60 shares to each of his children, i.e., John Jr., Frieda, and Elsie. In 1962, John Martens Jr. tells us, his thoughts turned to his own estate planning, and they retained a corporation lawyer for advice. John Martens Jr. stated they were so worried because of "Dad's age 71”, and estate taxes would create a cash flow shortage to the old company — so the decision was made and accepted by John Martens Sr. to freeze his holdings and pass to his children. By this, states John Martens Jr., they hoped to accomplish the following: "Dad's future growth would cease; growth would go to his children; we excluded Elsie, my sister (who had no financial worries); — Dad achieved his wish re. Frieda's future livelihood (the 20 per cent interest of Falko).
By 1963, the transaction was completed. John Martens Jr.'s own estate planning, he tells us, also included the incorporation of Kencar Enterprises Ltd. (the plaintiff company) in 1963. John Martens Jr. is the father of Kenneth Martens and Carolynne Martens. The plaintiff's shares were held at all material times by Kenneth Martens or for Kenneth Martens in trust — 50 per cent, and by Carolynne Martens in trust — 50 per cent.
1963 also saw the transfer of 84 Isobel Street to the plaintiff. When asked why, John Martens Jr. pointed out that 50 per cent of the building growth was still going to Elsie and Frieda, and by this transfer "my growth was frozen", and incidentally there were other tenants. The 1964 transfer of the Ontario partnership also "froze the growth of Dad's interest", says John Martens Jr. and “making sure Frieda would get future livelihood”.
An interesting footnote or side bar, is that in 1965 the Department of National Revenue (DNR) forwarded a letter to the plaintiff (exhibit P7) in relation to the consideration regarding the association of the plaintiff with other companies. Consultations were held with the accountant and lawyer and Mr. Pollack's letter (exhibit P8) was sent explaining the situation which explanation was accepted by DNR.
It is clear that from 1963 and prior to a transaction in 1971, the assets of the plaintiff were 84 Isobel Street and a house at 88 Isobel Street, "purchased for future parking space".
In 1971, Enterprises' 80 per cent interest in Ontario Company was transferred to the plaintiff. Why? John Martens Jr. explains it this way, and I'm of course paraphrasing:
(1) the plaintiff had cash flow problems 1965-1970;
(2) in 1970, one mortgage expired and we made a little money; (3) could foresee Kencar would have no building of assets;
(4) the Manitoba Company was doing well (i.e. new company).
This was discussed with the accountant and it was recommended that Enterprises should sell Ontario Company to Kencar thereby increasing the net worth of Kencar for future use. "We were outgrowing warehouse, would lose parking and Kencar would have difficulty getting a mortgage", in fact John Martens Jr. suggested it just "wasn't likely”. The answer was to sell 80 per cent interest of Enterprises and "stop growth of my interest by passing on growth to my children”.
In 1962, John Martens Jr. created John Martens (Sask.) Ltd. (Sasko). When asked the reason for this he stated, "we were having warehousing space problems and this was a good opportunity for my wife. Whether branch or warehouse, by her holding the shares, it stopped John Martens Jr.'s growth and satisfied the warehouse problem".
Further, John Martens Jr. contended that further help was given to his children through having a catalogue published by the Manitoba company and used by Ontario Company and Sasko, because it was too expensive for Ontario Company to go it alone.
Prior to the sale and after, Mr. Allan James Mytruk (Mytruk) “did everything" for Ontario Company — purchasing, accounts receivable, banking, hiring and firing personnel. He "purchased directly from the suppliers" and he "determined the type of inventory". There is, however, no question that there was a very close liaison between Ontario Company and Manitoba Company. Services were provided by the Manitoba company such as the preparation of a catalogue, the accounting services re. personnel. They also purchased from each other inventory and also worked together so that larger orders gave them freight discounts and volume benefits. The "ultimate" decision on a customer credit position was made by the Manitoba company. Sasko company also received these benefits.
Again, practically all material of an advertising nature was done for all three companies and we saw brochures sent out with Manitoba described as "head office" and the other two companies referred to as branch offices.
In his final comments, during the examination-in-chief, John Martens Jr. stated once again that the purpose of establishing the plaintiff company was "to freeze my estate and pass future growth to my children.” He states categorically that even if the tax rate was 50 per cent he would go ahead with it anyway.
There is absolutely no question that in all transactions John Martens Jr. was the driving force. Statements, whether financial, Martens Entities, or "operating group”, always group the various corporations together. To borrow from the bank, the assets of all the corporations were taken into consideration by the bank. John Martens Jr. conceded in cross-examination that the new ownership of Ontario Company had no effect and operated pretty much the same. The catalogue (Exhibits Dé and D7) is addressed to the customers and it was conceded that the general policies applied to all companies. The cost of the catalogue was shared. We found that John Martens Jr. dealt personally on behalf of all the corporations "automatically", and the bank wanted the position of all together. Ontario Company assigned its accounts receivable to the bank. We also learned that Kencar did guarantee the Manitoba company bank loan and postponed liability to the Royal Bank re. the Manitoba company. Manitoba and Sasko companies also assigned accounts receivable to the bank.
Signing officers for Kencar were: John Martens Jr., Ken Martens, controller of the Manitoba company, R.B. Wall, the general manager of the Mani- toba company. Ken Martens was an employee of the Manitoba company performing many duties with expectations. "We were grooming him to be in charge eventually”.
All corporations were a most successful enterprise thanks to its driving force, John Martens Jr. It was successful as early as 1956, moving John Martens Jr. to ruminate that he was doing most of the work, was the only active shareholder and others were not contributing, and when one did contribute (Ed Falk) he was a failure. John Martens Sr. had also done well, was concerned about estate taxes and the estate tax drain on the cash flow if he died. He also wanted to provide for his children, but later only for his one daughter Frieda, because John Martens Jr. and Elsie Klausen were doing quite well. I listened very carefully to the evidence of John Martens Jr., both the examination-in-chief and the cross-examination. I do not believe his main reason for establishing the new company, the partnership in Ontario Company, or the creation of the plaintiff company, was motivated by his wish to do some estate planning, but rather by his desire to see to it that his two sisters and brother-in-law did not get an inappropriate amount for their passive efforts (i.e. simply holding shares) or the ineffective contribution of Ed Falk. Doing the things he did effectively eliminated their sharing in the profits. Only the insistence by John Martens Sr. gave the Falks any benefit at all. He conducted the business affairs in such a way that ultimately the interest of the estate of Ed Falk was sold, but not until the agreement of sale catalogued a series of complaints from the persons concerned.
In my view, the creation of the plaintiff company did create a vehicle for estate planning but it was very much controlled by John Martens Jr., not in the legal, technical sense of holding shares, but in his ability to: secure loans using all of his assets; provide catalogues; provide accounting services thereby saving expenses to the plaintiff; provide the ultimate credit rating for all customers of all the companies; and oversee purchases, arrange for cross purchases and bulk purchases to save on freight costs and to enable volume purchases. John Martens Jr. had de facto control, a much more effective control than simply owning some of the shares.
Again, even when the plaintiff had a serious cash flow problem, no action was taken until a mortgage was paid off and cash flow problems eased. John Martens Jr. had no personal or corporate financial problem and sought to freeze the growth of his assets, which admittedly enhanced the value of the shares held for or by the children Kenneth and Carolynne, but it was not the dominant reason for the transfer of the 80 per cent interest in Ontario Company.
Given the amount of money produced by this wholesale sporting goods business, it is difficult to conceive that a splendidly successful businessman who consults his accountant and lawyer would not discuss the tax ramifications. The accountant, in his evidence, declares they were trying to achieve a partial estate freeze, correcting an imbalance in the cash flow and training Kenneth Martens to rise in the organization. When asked, "were tax consequences discussed?” he says, subsequent to making a decision. All one can suggest is that this “discussion” took place more than 15 years ago and the accountant's memory may be suspect — after all, he did concede they were looking to "freeze the estate" to save estate taxes. Surely when one is concerned with cash flow or lack of it, the income tax has to be discussed before a decision is made.
The accountant conceded that he prepared the statement headed J.M. Entities "to assist with management of the companies and for the bank”. The accountant was also accountant for Kencar and Sasco companies. The statement was provided when a Mr. Goyette, employee of the Manitoba company, requested it and provided all the information and it was given to the accountant for a/l the companies. Exhibit D15, the John Martens Co. operating group "may have been internal but reviewed by us" but certainly it was to show the overall picture of the three companies.
The accountant acknowledged a freeze would avoid capital gains taxation in growth.
The accountant also stated there was not just one discussion or meeting but several spread over several months, with legal counsel involved; he didn't know exactly how it started out. I found the accountant evasive in one particular area, namely, the fact that DNR had been concerned about an association in 1965 which the accountant knew about. In cross-examination, when asked whether he might not be concerned that DNR might possibly see an association, would it not be a concern that DNR might look at the ramifications after 1971 and "wouldn't that be considered before?”, the accountant's response was "your suggestion, not mine”. The accountant was firm in his view that the company was disassociated and so not really concerned at the time.
There is really no reason to deal with other evidence.
The concept of associated companies is defined in section 256 of the Income Tax Act.
Section 125 of the Act under the heading Small Business Deduction, contains the provisions for calculating the small business deduction (generally an amount up to the first $200,000 of a company's active business income). However, when two or more Canadian-controlled private corporations (CCPC's) are associated for tax purposes, the annual business limit of $200,000 and the total business limit of $100,000 must be allocated between the associated companies for the purpose of calculating the small business deduction for each company. "This limitation prevents any company in the associated group from obtaining the benefit of a lower rate of tax, after the group of companies has, in total, accumulated taxable income from business sources of $1,000,000” (Introduction to Federal Income Taxation in Canada, CCH Canadian Limited, 5th ed., at 362).
However, companies were able to restructure in such a way so as to avoid the provisions of section 256 and take advantage of the full small business deduction (dual rate). Therefore the predecessor of subsection 247(2) of the Act was enacted to provide the Minister of National Revenue with the discretion to direct companies to be considered "associated" for the purposes of section 125 of the Act where the company was established not solely for sound business reasons but also for one reason of reduction of taxes payable.
The provisions of subsections 247(2) and (3) — headed Deemed Association — are set out below:
(2) Where, in the case of two or more corporations, the Minister is satisfied
(a) that the separate existence of those corporations in a taxation year is not solely for the purpose of carrying out the business of those corporations in the most effective manner, and
(b) that one of the main reasons for such separate existence in the year is to reduce the amount of taxes that would otherwise be payable under this Act the two or more corporations shall, if the Minister so directs, be deemed to be associated with each other in the year.
(3) On an appeal from an 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
(i) . . .
(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; ...
The Federal Court of Appeal in Svend Krag-Hansen et al. v. The Queen,  2 C.T.C. 69 at 71; 86 D.T.C. 6122 at 6123, provided an interpretation of subsection 247(2):
. . . the minister must determine whether those who were responsible for the separate existence of the corporations had, as their sole purpose, the intention that the business of the corporations be carried in what they considered to be the most effect manner.
In our opinion, the two paragraphs of subsection 247(2) require the Minister to make what is in substance only one determination, namely that the existence of various corporations is not solely for the purpose of carrying out business in the most effective manner because one of the main reasons for the existence of separate corporations is to reduce the amount of tax payable under the Act.
The onus is on the taxpayer to show that the separate existence of the companies was dictated solely by business expediency. (Doris Trucking Co. Ltd. v. M.N.R.,  C.T.C. 303; 68 D.T.C. 5204); or the taxpayer has the onus of disproving the reasonableness of the Minister of National Revenue's inference that one of the main reasons for the separate existence of the company(ies) in question was the reduction of taxes. A mere denial by the taxpayer does not constitute the proof required to negate the conclusion of the Minister (The Queen v. Covertite Limited,  C.T.C. 464; 81 D.T.C. 5353). Marceau, J. in Covertite (supra), at page 467 (D.T.C. 5355) states:
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.
The only form of redress from the Minister's discretion under subsection 247(2) of the Act is the right of appeal to the Tax Court of Canada or the Federal Court of Canada contained in subsection 247(3).
The Minister's direction can only be vacated where it is determined that none of the main reasons for the separate existence of the companies in question is to reduce the amount of tax that would otherwise be payable.
The Minister must satisfy himself on two criteria, namely: 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 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. This is subject to challenge by the taxpayer who has but to establish that the main reason for such separate existence in the year was not to reduce the amount of taxes that would otherwise be payable under the Income Tax Act.
I have come to the conclusion that this appeal is not well founded. In my view the plaintiff company has not satisfied the onus of proving that Kencar Enterprises Ltd. was not formed in an attempt to reduce the amount of taxes that could become payable. Frankly, I am satisfied on the evidence that in utilizing the deeming provision of the Act, the defendant has satisfied the tests imposed upon it and cited earlier.
Accordingly, the appeal is dismissed with all taxable costs recoverable by the defendant.