Montplaisir Ltée v. MNR, 92 DTC 2317, [1992] 2 CTC 2700 (TCC), aff'd 96 DTC 6557 (FCTD). aff'd 2001 DTC 5366 (FCA)

Lamarre Proulx, T.C.CJ.:—The appellant is appealing from reassessments by the respondent, the Minister of National Revenue (‘the Minister"), for its 1985 and 1986 taxation years.

The matter in dispute is whether the business of a corporation, control of which was acquired by a person, was carried on throughout 1985 and 1986 within the meaning of subparagraph 111(5)(a)(i) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The provisions of the Act which are more specifically applicable are subsections 111(5) and 87(2.1).

Garage Montplaisir Ltée ("Montplaisir No. 1”) and La Société Pinard and Pinard (1974) ("Pinard") were formerly two large garages in the city of Victo- riaville. It was admitted that control of Pinard was acquired by Montplaisir No. 1, in either December, 1983 or June, 1984. The appellant is a corporation resulting from the amalgamation on January 1, 1985 of Montplaisir No. 1 and Pinard.

In 1982, Pinard was obliged to give up its Ford dealership. During 1983 it cut back its staff and concentrated on the sale of used cars. An effort was made to collect accounts receivable and a search made for solutions to get the business activities going again. In late December, 1983, Mr. Georges Pinard sold all the issued shares of Pinard to the appellant.

In 1984 Pinard had disposed of all its tangible assets, including the building, and had no more employees.

In 1984 the person who had been Pinard's principal shareholder, Mr. Georges Pinard, agreed to work for the appellant as a car salesman on commission. His son Marcel apparently worked for the appellant also, but he did not testify. It does not seem that he has worked for the appellant during the years at issue. During the months of January and February, 1984, Mr. Pinard set about familiarizing himself with the new products he would be selling in the coming months. He also strove to put Pinard's papers and books in order. Additionally, he took this period of time to contact his customers in order to inform them of the changes that were taking place and of the place where he intended to continue working.

Since 1978 Pinard had accumulated losses amounting to $1,187,864.

For three months after the takeover in 1984, there was limited activity in selling used cars by Pinard. This activity by the appellant was entered in the books in Pinard’s name but it was not continued in the years at issue. It is the only activity carried on by the appellant with Pinard’s corporate structure.

Mr. Larocque, the appellant's secretary-treasurer and chief executive officer, explained that by taking control of Pinard he wished to eliminate a competitor and acquire Pinard's goodwill by acquiring the services of its key man, Mr. Georges Pinard. The latter is the appellant's second best salesman. Exhibit A-5 describes the number of sales made by him. There were 111 in 1984; 194 in 1985; 158 in 1986; 144 in 1987 and 143 in 1988.

Analysis

Counsel for the appellant referred to the following decisions:

Garage Henri Brassard Ltée v. M.N.R., [1960] C.T.C. 321, 60 D.T.C. 1205;

Carland (Niagara) Ltd. v. M.N.R. (1963-64), 34 Tax A.B.C. 386, 64 D.T.C. 139; Oakley Motors Ltd. v. M.N.R. (1966), 41 Tax A.B.C. 280, 66 D.T.C. 463;

Canadian Dredge and Dock Company Ltd. v. M.N.R., [1981] C.T.C. 2212, 81 D.T.C. 154.

Counsel for the respondent referred to the same decisions as those cited by counsel for the appellant and to Yarmouth Industrial Leasing Ltd. v. The Queen, [1985] 2 C.T.C. 67, 85 D.T.C. 5401.

The provisions of the Act which are applicable in the present case are subsections 87(2.1) and 111(5) of the Act. Subsection 87(2.1) reads as follows:

Where there has been an amalgamation of two or more corporations, for the purposes only of

(a) determining the new corporation's non-capital loss, net capital loss, restricted

farm loss or farm loss, as the case may be, for any taxation year, and

(b) determining the extent to which subsections 111(3) to (5.4) apply to restrict the deductibility by the new corporation of any non-capital loss, net capital loss, restricted farm loss or farm loss, as the case may be,

the new corporation shall be deemed to be the same corporation as, and a continuation of, each predecessor corporation, except that this subsection shall in no respect affect the determination of

(c) the fiscal period of the new corporation or any of its predecessors,

(d) the income of the new corporation or any of its predecessors, or

(e) the taxable income of, or the tax payable under this Act by, any predecessor corporation.

This provision was amended in 1986 but not so as to affect the outcome of the instant case. In any event, the debate is not as to the interpretation of subsection 87(2.1) of the Act but relates to one of the conditions for applying subsection 111(5) of the Act, which reads as follows:

Where, at any time, control of a corporation has been acquired by a person or persons (each of whom is in this subsection referred to as the "purchaser"),

(a) such portion of the corporation's non-capital loss or farm loss, as the case may be, for a taxation year ending before that time as may be reasonably be regarded as its loss from carrying on a business is deductible by the corporation for a particular taxation year ending after that time

(i) only if that business was carried on by the corporation for profit or a reasonable expectation of profit

(A) throughout the part of the particular year that is after that time, where control of the corporation was acquired in the particular year, and

(B) throughout the particular year, in any other case, and

(ii) only to the extent of the aggregate of.

[Emphasis added.]

The parties agreed that the question in this instance is whether the Pinard business was carried on by the appellant for profit or for a reasonable expectation of profit throughout the years 1985 and 1986. The disagreement occurs when the appellant claims to have carried on the Pinard business for profit and when the respondent maintains that the Pinard business was not carried on at all during the years in question.

Counsel for the appellant argued that by hiring Mr. Georges Pinard as a commission salesman, the appellant operated the Pinard business. He pointed out that although the business's tangible assets were sold at the end of 1983, before the control of the company was taken over by Montplaisir No. 1, intangible assets remained: 60 years of experience and reputation in the market and the business’ leading mind, Mr. Georges Pinard. He said that what happened was an integration which allowed the appellant to significantly increase the volume of its business and to make greater profits.

He argued that a franchise was important but not essential for business purposes. The same would apply to inventory. The essential would be a good reputation, customers and the ability to serve them. When Mr. Pinard undertook to sell within the appellants corporate structure, he continued operating as he had always done. After 50 years of existence, the Pinard business continued as part of the other Montplaisir activities and indistinctly from them.

Counsel also said that at the time of the takeover the company's losses may have been an important factor, but it was only one factor among others. These factors were the elimination of a competitor and the acquisition the services of its key man and the integration of Pinard into Montplaisir had a stimulating effect as sales increased considerably.

As for counsel for the respondent, he argued that the question was whether Mr. Georges Pinard personally represented the continuation of the Pinard business when he worked for Montplaisir during 1985 and 1986, and that the obvious answer was no.

Counsel for the appellant reviewed the major tax case decisions on the matter and argued that the circumstances were either different or similar. In Brassard, supra, the case was about a corporation named Ranger Motor Sales that operated a garage in Lachine, near Montréal. It suffered losses in 1954. On December 18, 1954 there was a corporate resolution by the board of directors to sell all the business's assets and cease operations.

Fournier, J. of the Exchequer Court of Canada said at page 324 (D.T.C. 1210):

In short, at the end of the year 1955 the company had liquidated everything. It no longer had any inventory, plant, office equipment, stock, furniture, automobiles and it had vacated its garage and its business office. In other words, the company had put an end to its business enterprise.

In 1956 the shares of this company were bought by Mr. Brassard. The corporation's name was changed and the head office relocated.

Fournier, J. said the following at page 325 (D.T.C. 1211):

In short, the appellant, under a new name and with a new head office, acquired a business enterprise which it began to operate with new shareholders, directors and officers. It could not start up again the business it had before, as it had definitely discontinued business operations at Lachine and as it had disposed of all its assets. It was therefore another business which the appellant began to operate at St-Marc des Carrières.

The question at that time was the application of clause 27(1)(e)(iii)(A) of the Act which was in effect in 1956. That provision dealt with the carryover of losses only and not the carryover of the losses of a corporation whose control had changed. Losses could be carried over against revenue from business in which the loss was sustained. In Brassard, supra, the appeal was dismissed because the 1956 profits did not arise from the business in the course of which the losses had been sustained. It was not the same business.

Counsel for the appellant argued that the circumstances of that decision are different from those found here, as in Brassard, at the time of the change of control, the business no longer existed. The key people in that business were not transferred. There was no elimination of a local competitor or transfer of customers.

Counsel for the appellant also referred to Carland, supra. In his submission that case is particularly significant and particularly relevant because the Court for the first time dealt with the concept of the distinction between the corporation and the business. It was argued in that case that although the activity of the business was reduced, it continued to be a business. In that case the assistant chairman found at page 388 (D.T.C. 141) that:

I find, as a fact, that some measure of business, be it greater or lesser, never ceased to be conducted at any material time. Always, the premises were open to any customer who might call there.

Counsel for the appellant also referred to the decision of Chairman L.J. Cardin in Canadian Dredge and Dock Company Ltd., supra. In that case, there was a change of control in 1971. The losses were sustained in 1968, 1969 and 1970. During those years the company carried on a marine construction business in the Maritimes. In 1971 and subsequent years, the years for which the taxpayer asked to carry over the losses, the company was in the marine construction but in the Great Lakes. Chairman Cardin made the following observations at page 2220 (D.T.C. 160):

The evidence is that, in the loss application years, only some of the assets in the appellant's Maritime operations were sold; the appellant continued to seek- out and to bid on tenders for its marine construction operations in the Maritimes; a marine construction contract was awarded and carried out by the appellant in Newfoundland in the loss application years; marine construction contracts on which bids were made could have been executed in the Maritimes, either with the appellant's marine equipment already located in Halifax or with equipment transported from the company's Great Lakes & St. Lawrence operations, or through the accepted practice of renting marine equipment from competitors. The skilled labour to carry out marine construction jobs was available on and around Halifax in the loss application years and could have been called by Mr. Larocque, who was still the company’s general manager of the marine operations in the Maritimes in 1971, 1972 and 1973.

There is evidence that the appellant substantially reduced its assets in the Maritimes, but there is no hard evidence that the appellant changed its Maritime operations from marine construction to a leasing business and that it operated two different businesses in the loss application years: one in the Maritimes and one in the Great Lakes area, as suggested by the respondent. Nor on the basis of the evidence can I conclude that the appellant's company at any time completely ceased, essentially changed or even suspended its marine construction operations in the Maritimes in the loss application years.

In these respects particularly, the facts of the instant appeal are distinguishable from those of the cases cited by the respondent in which the businesses carried on by the taxpayer had clearly ceased to be operated or had so been altered in the loss application years that they could not be considered as being the business carried on by the taxpayer during the loss years.

Counsel for the appellant indicated that in that decision the tribunal found that there was a business and that the business consisted of two operations which in that case were in two different provinces.

He argued that a company which sustains losses is a company which has difficulties, and therefore problems to be corrected. Such a business will have to take corrective measures. It may be that staff will have to be cut, overhead and inventory reduced and operating costs slimmed down. The size of the business will thus be reduced in general so as to stop losses and enable it to be profitable again. If the test imposed by the Minister is that there must be an identical business in subsequent years, that will ensure that the business goes on sustaining losses.

Counsel for the appellant properly suggested that the following principles emerge from the case law: it is the business which generated losses which must be continued, not necessarily the corporate entity; a reduction of activities, inventory and assets is not sufficient to show that the business was terminated; a minimum of activity may suffice to lead to the conclusion that there was continuity in the business; a business may have two separate operations and it is essentially a question of fact and of weighing the evidence, as to whether the business continued or not.

The appellants case was ably argued by counsel for the appellant, but it is impossible to logically arrive at the conclusion that the mere use by an automobile garage business of a key person from another automobile garage business is the continuation of that latter business.

If I consult the "dictionnaire" Le Petit Robert, 1989 edition, and the definition of the word "entreprise" (business), I find that in its economic and everyday sense, "entreprise" means an organization of a commercial nature producing goods or services. I do not see wherein the Pinard organization was continued with the appellant. If the structure of the business is not maintained, at least its production of goods or services should be. There was none of this. The group of mechanics, salesmen and clerical staff did not join the appellant's staff. Mr. Pinard was not a member of the appellant's board of directors. The Pinard name was not added to that of the appellant. While all these points are not necessary to establish the survival of a business, they are indications; but there was no indication in the instant case that the organization of production of services by Pinard's business survived. All I see here is that the disappearance of a competitor's business assisted that of the appellant. Mr. Larocque, the principal director, often repeated this phrase: "elimination of a competitor". Clearly what was involved was the elimination and not the acquisition of a competitor so as to carry on its existence or integrate it in the appellant's business. In my view, at the time control of Pinard was taken over, the Pinard business had ceased to exist and was not reactivated by employing its key person on commission.

The carryover of losses after a takeover is allowed, provided the business which sustained the losses is continued or reactivated. it is that business which must be reactivated. The purpose of the provision in the Act in question is not the carryover of losses as such but the strengthening or survival of a declining business. Accordingly, it must be shown that it was this declining business which was operated at a profit or with a reasonable expectation of profit, otherwise the losses may not be carried over. On the facts of the instant case, it is not possible to conclude that the appellant reactivated the Pinard business or that he integrated its activities into its own business.

The appeal is accordingly dismissed.

Appeal dismissed.