Jerome, ACJ:—These actions are by way of appeal from the assessments made by the Minister of National Revenue related to the taxation years 1972, 1973 and 1974, for the plaintiffs Alpha Forming Corporation Limited (hereinafter Alpha Forming) and Jenmari Properties Limited (hereafter Jenmari). The dispute arises from the Minister’s assessment that for these three years, the two plaintiffs were deemed to be associated companies pursuant to section 247:
247. (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) in the case of a direction under subsection (1), it determines that none of the purposes of the transaction or series of transactions referred to in subsection (1) was or is to effect a substantial reduction of, or disappearance of, the assets of a corporation in such a manner that the whole or any part of any tax that might otherwise have been or become payable under this Act in consequence of any distribution of income of a corporation has been or will be avoided, or
(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.
At the commencement of the trial, I ordered that the two actions be tried together and upon common evidence and this Judgment shall apply in both actions. Evidence on behalf of the plaintiffs was given by the companies’ solicitor, Harold Lipton, QC, Mr Ivor Matthews, his wife Jennifer and the companies’ accountant, Mr Robert Green.
Alpha Forming was engaged in the business of poured concrete foundations and basements and was incorporated in 1963 with Ivor Matthews as president and principal shareholder. Other shareholders included Ivor Matthews’ wife, Jennifer, his business associate, Peter Lombardi and Mr Lipton. In its first years of business, Alpha forming purchased a piece of real property which it quite properly considered to be an asset of potentially increasing value. Mr Matthews, his business associate and their wives wanted to find a way to insulate title to the realty from the financial hazards of the construction business and, in 1969, incorporated Jenmari Properties for that purpose. The shares of Jenmari were, and still are, held by the wives of Ivor Matthews and Peter Lombardi in the same 80-20 proportion in which the two men hold their interests in Alpha Forming. After the Jenmari incorporation, other properties were acquired and although very much at Mr Matthews’ suggestion and with Alpha Forming money or credit, some effort was made to disclose, in the initial acquisition, that the purchases were on behalf of Jenmari and in each case, title was ultimately transferred to Jenmari. Purchase money for the acquisitions was borrowed by Jenmari from Alpha at no interest. As would be expected, revenue from the properties was insignificant in the years following each acquisition. It was in fact only a few years ago, and certainly long after the taxation years under appeal, that Jenmari’s income from realty operations enabled it to discharge the last of several promissory notes which secured the loans from Alpha.
I find, therefore, that Jenmari was incorporated as a vehicle for placing ownership of real property in the hands of the wives of the two principal shareholders in Alpha. Since the purpose was not related to carrying out of the business of either corporation in the most effective manner, grounds obviously existed to satisfy the Minister as required in paragraph 247(2)(a). On the basis of realty ownership alone, however, I see no grounds which would satisfy the Minister as required by paragraph 247(2)(b). The usual experience with realty investment is that expenses are greater than income for some time following acquisition. From an accounting or taxation point of view, therefore, the greater tax reduction would be expected through ownership in the hands of Alpha where realty expenses or allowances in the early years might reduce the heavier tax burden. In the years under appeal, moreover, events conformed entirely to normal expectations. Jenmari’s ownership of realty produced no tax advantage nor could any have been anticipated, and certainly this aspect of the business alone did not provide the Minister with justification for a direction under section 274.
In July of 1969 however, Alpha acquired a crane, a piece of equipment which was coming into more frequent use, but which had previously been either supplied by the general contractor or rented by Alpha for specific projects. The decision to acquire the equipment was undoubtedly based on expectation of greater efficiency and convenience and was therefore an entirely normal business manoeuvre. Alpha did make frequent use of the machine and also put it on the market for rental to others under the name Alpha Crane Service. In October of 1969, Alpha transferred ownership of the crane to Jenmari. The purchase price for the transfer was once again paid with money borrowed by Jenmari from Alpha without interest. The crane could only be operated by a union member and, according to Ivor Matthews, the parties were anxious to have him employed by Jenmari so as to reduce the risk of unionization at Alpha. I have no reason to doubt that this was a consideration in the mind of Mr Matthews, but I cannot conclude that it was the sole or main reason which brought about the association between these two companies in the crane business. In August, 1971, Jenmari traded the first crane on a larger machine, but otherwise carried on the crane rental business as before. The name Alpha Crane Service was printed in large letters on the boom of the crane and after Jenmari took over the crane service, additional words were added in smaller print to indicate that it was operated by Jenmari Properties Limited. The telephone number of Alpha Crane Service was the same number as Alpha Forming. The witnesses indicated that the crane was occasionally rented to others, but I am satisfied that in the taxation years in question, Alpha Forming, if not virtually the only customer, was by far the major account. In 1972, Jenmari reported a gross income from crane rentals of $69,180, a net income of $34,346 and property rental income of $1,137. In 1973, Jenmari reported a gross income from crane rentals of $90,410, a net income of $60,054 and property rental income of $3,092. In 1974, Jenmari reported a gross income from crane rentals of $71,106, a net income of $41,231 and no income from property rental.
From a taxation point of view, therefore, the effect of the entry of Jenmari into the crane business was that Alpha, which continued to use the crane as it had previously, incurred rental charges from Jenmari as an operating expense, while Jenmari received rental revenue from Alpha as income which enjoyed small business preferential treatment. In my view, such an obvious tax advantage provided ample justification for the Minister to conclude that in these years, one of the main reasons for the separate existence of the two companies was to reduce tax otherwise payable by Alpha. I accept the submission of counsel for the plaintiffs that Jenmari was incorporated for reasons entirely unrelated to tax advantage. Indeed, it continues to exist today primarily for that original purpose. The language of section 247, however, does not confine the Minister to the purpose or the year of incorporation. The words in paragraph 274(2)(b) “one of the main reasons for such separate existence in the year” indicate that corporations which have otherwise existed separately may engage in activities in any taxation year which may provide grounds for the Minister to determine them to be associated only in that year, provided of course that they otherwise fall within paragraph 247(2)(a). I find this to be precisely the situation here. Jenmari was originally incorporated so that property which would otherwise have been owned by Alpha could be transferred to Jenmari. That was the purpose at incorpo- ration and continued to be one of the purposes during the years under appeal. Since it was not related to the carrying out of the business of either corporation in a more effective manner, it provided the Minister with the requisite grounds under paragraph 247(2)(a). No grounds existed under paragraph 247(2)(b), however, until Jenmari entered into the crane business in the manner and for the obvious tax advantages which I have outlined. When that occurred, and for as long as it continued, there was ample justification for the Minister to direct, as he did in 1972, 1973, 1974, that for the purposes of taxation, Alpha and Jenmari be deemed to be associated with each other.
Accordingly, the Minister’s direction is confirmed.