Rose v. MNR, 73 DTC 5083, [1973] CTC 74 (FCA)

The Chief Justice (orally, all concur):—This is an appeal from a decision of the Trial Division ‘dismissing an appeal from the appellant’s assessments under Part I of the Income Tax Act for the 1965 and 1966 taxation years, which assessments were based on the view that an Ontario company, Amrose Enterprises Limited (hereinafter referred to as “Amrose”), was a personal corporation within the meaning of subsection 68(1) of the Income Tax Act during those years.

The sole attack made on the assessments by the appellant, who was a beneficial owner of certain shares in Amrose, was an attack on the correctness of the view that that company was a personal corporation during the years in question. The importance of the issue so raised arises from subsection 67(1) of the Income Tax Act, which provides that “The income of a personal corporation whether actually distributed or not shall be deemed to have been distributed to, and received by, the shareholders as a dividend on the last day of each taxation year of the corporation”.

The meaning of the expression “personal corporation” for the purposes of the Income Tax Act is determined by subsection 68(1) of the Act, which reads as follows:

68. (1) In this Act, a “personal corporation” means a corporation that, during the whole of the taxation year in respect of which the expression is being applied,

(a) was controlled, whether through holding a majority of the shares of the corporation or in any other manner whatsoever, by an individual resident in Canada, by such an individual and one or more members of his family who were resident in Canada or by any other person on his or their behalf;

(b) derived at least one-quarter of its income from

(i) ownership of or trading or dealing in bonds, shares, debentures, mortgages, hypothecs, bills, notes or other similar property or an interest therein,

(ii) lending money with or without securities,

(iii) rents, hire of chattels, charterparty fees or remunerations, annuities, royalties, interest or dividends, or

(iv) estates or trusts; and

(c) did not carry on an active financial, commercial or industrial business.

It is common ground that the conditions in paragraphs (a) and (b) of subsection 68(1) were satisfied in so far as Amrose is concerned for the 1965 and 1966 taxation years. The only question to be determined on this appeal, in respect of each of the taxation years in question, is, therefore, whether Amrose, at any time in the taxation year, carried on an active financial, commercial or industrial business.* [1] If, in either year, Amrose carried on such a business for any part of the year, then Amrose was not a personal corporation for that year and the appeal succeeds for that year. In that event, no question as to quantum arises as the parties are agreed with reference thereto. If Amrose did not carry on such a business at any time in one of those years, Amrose was a personal corporation for that year and the appeal fails for that year.

In effect, therefore, the sole question in this appeal, in respect of each of the taxation years in question, is whether the: appellant has, in the Trial Division, discharged the onus of proving that Amrose, at some time in the taxation year, “carried on an active financial, commercial or industrial business”.

It will be sufficient, for the purpose of explaining how that issue arises, to summarize the state of affairs in terms that, while they may oversimplify matters, will, I hope, be sufficiently accurate for that purpose.

Amrose is one of a group of eight closely held companies generally referred to in the record as the Oelbaum companies. The shares of each of the eight companies belonged to one or more different descendants of a man by the name of Oelbaum or a spouse of such a descendant. In each of the matters that are involved in this appeal, where these companies were embarked on investments or undertakings together, the share of Amrose in relation to the interest of the whole group was 11.25 out of 50. In the matters that are involved in this appeal, the Oelbaum group were interested in conjunction with a company or companies the shares of which belonged to members of a family by the name of Reichman and the two families operated in such matters on a 50-50 basis.

Commencing in May or June of 1965, the two groups, through another company, owned all the voting shares in Central Park Estates Limited, which company owned property that included several large apartment blocks. Under an arrangement with the non-voting shareholders of Central Park Estates Limited, the companies belonging to the two families supplied all the directors for Central Park Estates Limited and, between them, controlled that company including the management of the apartment blocks. The directors so supplied consisted of three individuals from each of the families.

While, under the arrangement with the non-voting shareholders, the directors had no right to be paid for the services rendered by them in conducting the management of Central Park Estates Limited, it was contemplated at the time that Central Park Estates Limited acquired the properties in question, in May 1965, that a partnership (owned 50% directly or indirectly by each family) would be established to supply management services to Central Park Estates Limited for a consideration to be determined in accordance with the going rate; and, under the arrangement with the non-voting shareholders, this would have been unobjectionable. No such partnership was, however, established in May 1965; instead, commencing at that time, the directors, of whom only five were active, carried on the management of the apartment blocks, as part of the management of Central Park Estates Limited, with a staff consisting of employees of Central Park Estates Limited, of whom five were office employees and the remainder were the employees required to perform the necessary work in and around the properties. Moreover, while no partnership had been formed, commencing in May, 1965, the trade name Central Park Management Company was used in connection with the apartment management operations and, in particular, the bank accounts used were in that name.

In fact, the individuals who were the directors of Central Park Estates Limited continued to manage that company’s apartment blocks until June 1966, when the apartment blocks were sold. It is common ground that the directors were performing such management functions as directors of the company until November 1, 1965. After November 1, 1965, however, according to the appellant, the directors were not managing this branch of the business of Central. Park Estates Limited as directors of that company but on behalf of a partnership, known as Central Park Management Company, consisting of the Oelbaum group of companies and a Reichman company, with which partnership Central Park Estates Limited entered into a contract for management services. (The appellant’s position is that such a partnership came into existence on November 1, 1965 and that the management contract was entered into on the same day.)

What the appellant contends is, in effect, that, from November 1, 1965 until May 1966, Amrose was one of nine partners that were supplying management services to Central Park Estates Limited, that that constituted the carrying on of “an active financial, commercial or industrial business”, and, as that period falls partly within Amrose’s 1965 taxation year and partly within its 1966 taxation year, it follows that Amrose was not a personal corporation for either of those years.

It does not seem to be in doubt that the reason for the. scheme under which the corporations in question would be constituted a partnership to undertake management services for Central Park Estates Limited was to achieve tax advantages for the individuals owning the shares of some or all of those corporations.* [2] While this does not affect the result actually achieved by what was done, it does, in my view, warrant a very careful appraisal of the evidence when considering whether what was projected with that end in view was actually carried out.

As I appreciate it, there are several questions that have to be answered in the appellant’s favour before she can succeed. In the first place, were the management services in respect of the apartment blocks actually carried out for Central Park Estates Limited by a partnership of which Amrose was a member during the period from November 1, 1965 to May, 1966? Secondly, even assuming that such a partnership carried out such services for Central Park Estates Limited, can that be characterized as the carrying on of an “active” business within the meaning of subsection 68(1) of the Income Tax Act? Thirdly, assuming that the partnership carried on an active commercial business, does it follow, as a matter of law, that Amrose carried on an active commercial business within the meaning of paragraph 68(1)(c)?

The learned trial judge assumed “that a partnership, in fact, was formed which included Amrose and these other family companies and that the partnership carried on in the fiscal years 1965 and 1966 a small commercial business sufficient for it to be characterized as active rather than inactive or passive”. In other words, he assumed, without deciding, that the answers to the first two questions that I have raised are favourable to the appellant. Having made that assumption, he then found “on the evidence” that Amrose did not carry on “an active commercial business”.

The learned trial judge makes that finding “on the evidence” as follows (p 817):

None of the shareholders in Amrose had anything to do with the management of the complex. Admittedly the appellant’s husband did contribute to the activities of the partnership, but he personally was not a shareholder in Amrcse. He was unsure whether or not he was an officer of Amrose in 1965, and he conceded he may not have been an officer until May of 1966. His family company, Adro, was a shareholder. Mr. Rose was personally paid some salary by Amrose in 1965 and 1966, but this remuneration, in my view, was primarily for services to Amrose other than those relating to his contribution to the management of the apartment complex.

I do not think the activities of the appellant’s husband and Adro confer any different status on Amrose within the meaning of Section 68(1 )(c) of the Income Tax Act.

The mere fact that by virtue of the partnership agreement and under the law of Ontario and other common law jurisdictions Amrose subjected itself to the liability of an individual partner (for example, to third persons) does not to me convert Amrose from an inactive commercial business to an active one,

I have difficulty in accepting the learned trial judge’s manner of reaching this result. For the purpose of deciding whether Amrose carried on an active business, I do not see the relevance of what Amrose’s shareholders did or did not do in the operation of the business. I have no doubt that a company can carry on an “active’’ business even though none of its shareholders have anything to do with the business except, as shareholders, to elect directors, and, as directors, to employ the management team. An active business is carried on by a corporation, in my view, if it is carried on, on behalf of the corporation, by officers and servants duly employed by the corporation, It follows, in my view, that a partnership consisting of corporations carries on an active business, if such a business is carried on, on behalf of the partnership, by officers and servants duly employed to act on behalf of the partnership.

On the other hand, I am satisfied, as I will now explain, that the facts relied on by the trial judge lead to his conclusion in this case because when they are considered in the context of the whole matter, on the evidence that has been put before the Trial Division, the balance of probability is that the “partnership” did not perform management services for Central Park Estates Limited,

As I understand the appellant’s case, it was incumbent on the appellant to establish

(a) that on or about November 1, 1965, the nine family corporations formed a partnership called “Central Park Management Company”,

(b) that on or about the same time, Central Park Estates Limited entered into a contract with the partnership under which the partnership was to manage the apartment blocks,

(c) that the partnership thereupon authorized the five active directors to act for it in carrying out the management services under that contract, and

(d) that, commencing November 1, 1965, the five active directors carried on the management of the apartment blocks on behalf of the partnership and not as directors of Central Park Estates Limited.

In my. view, the appellant. has failed to make out that case because it has not established that the contract between the partnership and Central Park Estates Limited for the management of the apartment blocks was executed before that corporation sold their blocks, That contract could not have been executed prior to May 31, 1966. It was not until that day that the directors of Central Park Estates Limited passed a resolution authorizing the president and treasurer of the company to execute “the Agreement dated the 1st day of November, 1965 between the Company and Central Park Management Company hereinbefore referred to in connection with the management of the apartment buildings owned by the Company” and, in June 1966, those buildings were sold, There is no evidence that the contract was executed In the meantime and i must be remembered that the onus of proof was on the appellant.” [3]

It is to be noted that while the chairman advised the meeting that, on November 1, 1965, the company had “engaged” the services of the partnership, he does not state that the partnership had commenced to perform the services. Furthermore, what was obtained from the directors was authority to execute the agreement not ratification such as would have been appropriate if the agreement had been implemented as though it were in force from some earlier time.

Furthermore, as it seems to me, there is a complete absence of any evidence that the partnership ever authorized the five directors to carry on the partnership business. There is nothing in the partnership articles as to how the partnership business is to be carried on. This is probably not necessary in the case of a partnership whose partners are individuals because it may well go without saying that the partners in such a case will themselves do what is necessary. In a case where the partners are corporations, however, I should have thought that, before individuals can carry on business on behalf of the partnership, they must have some authority from the corporate partners and that it would ordinarily be given by way of corporate resolutions. Even assuming corporate resolutions are unnecessary, at least the responsible officers of all the corporate partners should have given the necessary authority either in writing or verbally. There is no evidence of any such authority having been given in this case and, having regard to the way that the appellant’s case was presented, ! have no doubt that, if any such authority had been given, it would have been proven.

As I appreciate the evidence in this case, the five individuals in question, believing that a partnership agreement had been executed and knowing that there was intended to be a services agreement, decided in their own minds that they would act on behalf of the partnership in performing the services to be provided under that agreement. In my view, where corporations are involved and the existence of such relationship is important as against third persons such as the Revenue, this is not sufficient.

It may well be that, after Central Park Estates Limited subsequently executed the back-dated services contract and after the corporate partners accepted payment as though they had performed the services

Company. However, the Chairman reported that the Agreement between the Company and Central Park Management Company in respect of the management of the buildings had been contemplated and authorized in the original agreement between the Company, S. Reichmann & Son Limited and Webb & Knapp (Canada) Limited in connection with the acquisition of Flemingdon Park. ON MOTION duly made, seconded and unanimously carried, it was

RESOLVED —

1. That the Agreement dated the 1st day of November, 1965 between the Company and Central Park Management Company hereinbefore referred to in connection with the management of the apartment buildings owned by the Company be and the same is hereby approved and the President and Treasurer of the Company be and they are hereby authorized to execute the aforementioned Agreement on behalf of the Company and to affix thereto the corporate seal of the Company.

under that contract, the situation was the same, as among the parties, as though everything had been regularly done on November 1, 1965. In other words, as among the parties, the services would then be regarded as having been performed by the five directors on behalf of the partnership and not as directors and as having been performed by the partnership under the management contract even though that contract did not exist at the time that they were rendered. However, in my view, no such back-dating of transactions can affect the fact that, during the period from November 1, 1965 to June 1966, there was no services contract and no relationship between the partnership and the five directors.

In other words, the fact is that the partnership did not carry on any business during the relevant period. It is that fact, and not some ex post facto arrangement that is relevant to the application of paragraph 68(1)(c).

Having concluded that the partnership did not carry on business during the relevant period, it is not necessary to consider the other questions to which I have referred.

For the above reasons, I am of opinion that the appeal should be dismissed with costs.