Don Fell Ltd. v. The Queen, 81 DTC 5282, [1981] CTC 363 (FCTD)

Cattanach, J:—These are six appeals from assessments to income tax made by the Minister of National Revenue for the fiscal and taxation years of each of the three plaintiffs ending December 15, 1971 and April 30, 1972 which six appeals were heard together on common evidence the issue with respect to all six appeals being the same but only the amounts differ in the three appeals for the 1971 and 1972 taxation years respectively otherwise the facts too would have been substantially the same in all six appeals.

There are three brothers, Don, Gordon and Lawrence Fell.

Each brother is the sole officer and the sole shareholder of a corporation which bears his name, ie, Don Fell Limited, Gordon Fell Limited and Lawrence Fell Limited the taxpayers and plaintiffs in these appeals.

For whatever purposes and objects each company may have been incorporated, the sole activity of each corporation has been membership in a partnership known as Fell Fab Products. All such corporate partners have been incorporated prior to 1961 because the partnership was formed in 1961.

The three corporations are the only members in the partnership to which each corporation contributed capital and shared in its profits and losses equally, that is one-third each in accordance with a partnership agreement. (Tab 50, Vol. I of Exhibits)

By virtue of that agreement the management of the partnership was conducted by the three brothers as a committee. There was no provision for their remuneration in the partnership agreement but the three brothers were engaged by the partnership under a verbal arrangement in the capacities for which their respective talents qualified them. Don Fell was the general manager, Gordon the manager of operations and Lawrence the manager of sales.

The partnership carried on the business of the manufacture of specialized textile products in Hamilton, Ontario employing some one hundred or more employees in that enterprise with $1.5 million in sales.

Originally the major product had been tarpaulins for trucks but in 1971 with the advent of container shipping the brothers foresaw the decline of demand for that product and the partnership converted to the manufacture of aircraft interiors, principally seat covers.

For this service the corporate partners were not paid remuneration but each of the three brothers received an annual salary of approximately $20,000, payable in two weekly instalments not from the partnership but from the partners. I would compute the two weeks salary to be about $830, or $1,660 per month.

Even in 1971 that is an inordinate salary for the brothers who devoted their energies, abilities and long working hours to this business. The explanation was that their efforts were being given to a business in its formative Stages but for which they foresaw an established and prosperous future with consequently greater rewards to themselves. They were willing to sacrifice in the meantime.

But they were not completely self-sacrificing. Provision was made by verbal agreement or mutual understanding among the members of the partnership that there would be further remuneration to the brothers, in equal amounts, if the profits of the partnership in a fiscal period so warranted as indicated by the computer printout and consultation with the auditors of the corporate members of the partnership and of the partnership. The same auditors acted for all three partners and the partnership. The governing factor in the declaration of management bonuses or additional salaries or remuneration by whatever name they were called was to be whether there was profit in the partnership operation and how much.

In pursuance of that policy during the fiscal year of the partnership ending June 30, 1971 (which fell in the fiscal year of the corporate partners ending December 15, 1971) the partnership declared management bonuses of $30,000 in favour of each of the three brothers for services rendered by them to the partnership in the partnership’s fiscal year, June 30, 1971.

The corporate partners shortly after June 30, 1971 changed their financial years from the calendar year to April 30.

During the partnership’s fiscal year ending December 31, 1971 (which fell in the fiscal year of the corporate partners’ fiscal year ending April 30, 1972) the partnership declared further management bonuses of $10,000 in favour of each of the three brothers.

Thus as at June 30, 1971 the partnership, Fell Fab Products, had committed itself in bonuses in the amount of $90,000 and as at December 30, 1971 (for a further six-month period) to a further amount of $30,000, for a total of $120,000.

The effect is that the net income of the partnership was reduced by $90,000 for its fiscal year ending June 30, 1971 and by $30,000 for its fiscal period ending December 31, 1971 and similarly the net income of the component corporate members of the partnership, the taxpayers and plaintiffs herein, were likewise reduced by their share of these amounts, those shares being $30,000 and $10,000 in their respective 1971 and 1972 taxation years.

The personal income of the three brothers was not increased by $30,000 and $10,000 in their 1971 and 1972 taxation years because they never received those amounts.

Shortly after this declaration of management bonuses by the corporate partners, acting through their respective only officer and shareholder, the partners, again acting through each respective officer, one of the three brothers, decided to put the bonuses so declared to use in the furtherance of the partnership’s business.

The totals of the bonuses, ie, $90,000 and $30,000, were entries in the partnership’s books of account for its year end at June 30, 1971 and December 31, 1971 respectively.

In filing their income tax returns for their 1971 taxation year each plaintiff herein deducted one-third of the bonus of $90,000 as an expense of the partnership of which they were members as an expense in computing their income for that year and each plaintiff likewise deducted one-third of the bonus of $30,000 in their 1972 taxation years as an expense in computing their income in that year.

The Minister reassessed each plaintiff in their 1971 taxation year by adding back to the reported income of each the sum of $30,000 claimed by each as a deduction and likewise in the 1972 taxation years of the plaintiffs by disallowing the deduction of $10,000 claimed by each in computing their income for that year.

The Minister in assessing the plaintiffs as he did, did so on the basis that the amounts so claimed as deductions from income were not outlays or expenses made or incurred by them for the purposes of gaining or producing income within the meaning of paragraph 12(1 )(a) of the Act but were contingent liabilities disallowed pursuant to paragraph 12(1 )(e).

The contention on behalf of the plaintiffs is that the management bonuses were valid and enforceable liabilities on the part of the partnership as of the year ends for the fiscal periods in which they were declared and that they were subsequently waived by the payees for valid business reasons does not alter the fact that the legal liability subsisted until later waived and that the one-third share of the bonuses for each of the plaintiffs were outlays or expenses incurred for the purposes of earning income and were not contingent liabilities.

In assessing the plaintiffs to income tax for their 1971 and 1972 taxation years the Minister did so upon the following assumptions of facts:

(a) that there was no contract or agreement between the partnership or the plaintiff and the persons to whom the alleged accrued management bonuses were owing that a bonus would be paid;

(b) that there was no contract of employment between the partnership or the plaintiff and any person who was within the management category requiring the payment of a stated management bonus;

(c) that the alleged accrued management bonuses were not bona fide expenses made or incurred for the purposes of gaining or producing income from a business;

(d) that the deduciton of the alleged accrued management bonus expenses, if in fact expenses made or incurred, would unduly or artificially reduce the income of the plaintiff;

(e) that the plaintiff or the partnership did not intend to create nor did it create a legal obligation to pay the alleged accrued management bonuses;

(f) that the claim of accrued management bonuses payable as an expense is in effect the transferring or crediting of an amount to a reserve;

(g) that in each of its fiscal periods since 1965 the plaintiff has accrued management bonuses, expensed them and in subsequent years cancelled them in whole or in part.

It is upon the basis of those premises the defendant contends the management bonuses were not expenses made or incurred for the purpose of gaining or producing income from a business within the meaning of paragraph 12(1)(a) (later 18(1)(a) ) because the plaintiffs, the corporate partners, did not intend, in fact, that the partnership sould pay the bonuses from which it follows that they were not expenses made or incurred and that they were not paid out and furthermore that these transactions were not genuine business transactions.

It was also contended that the effect was to transfer or credit an amount to a reserve the deduction of which is prohibited by paragraph 12(1 )(e) of the Act (later 18(1 )(e)).

In the alternative it is contended that even if the management bonuses were construed as being expenses, their deduction would unduly or artificially reduce the incomes of the plaintiffs and thus their deduction is prohibited by subsection 137(1) (now subsection 245(1) ) of the Income Tax Act.

Counsel for the defendant in support of his contention that the partnership never intended in fact to pay the bonuses looked to the conduct of the appellants as objective indicia of the intention. Intention is rarely the subject of direct evidence apart from the plaintiff’s statements at trial as to what their intention was. These statements are only part of the evidence. Such evidence may be given in all sincerity and still may not reflect the true purpose at the time of the declaration of the management bonuses. The ques- tion of fact as to what the partnership intention was on declaring the bonuses is one that must be decided upon a consideration of all of the evidence. The subjective statements of intention by the plaintiffs must be considered along with objective facts.

The complexity of the corporate and partnership structure adopted to conduct the business requires interpretation as to how the intention of a corporate entity is formed and, in this instance, of the partnership comprised as it is exclusively of corporate entities.

A corporation being a fictitious person can only act through natural persons. Some of these persons in the company are merely employees who do the day to day routine work. They do not represent the mind or will of the corporation. It is the directors of a corporation who are its directing mind and will and who control what the corporation does. The state of mind of the board of directors of a corporation is the state of mind of the corporation and is treated in law as such. Thus the intention of a corporation is the intention of its board of directors normally evidenced by resolutions passed.

In the present instance the plaintiffs, Don Fell Limited, Gordon Fell Limited and Lawrence Fell Limited are corporations created under modern concepts and legislation. None of these three corporations has a board of directors. In each instance there is but one shareholder and but one director who holds all offices. He is the president, the vice president, the secretary and every other conceivable corporate office [sic]. Therefore the intention of Don Fell Limited is coincident with the intention of Don Fell, and likewise the intention of Gordon Fell Limited is that of Gordon Fell and that of Lawrence Fell Limited is that of Lawrence Fell.

The partners in Fell Fab Products, are the three corporations and the decision of the partnerships can only be exercised through the self-same officers and shareholders, who are Don Fell, Gordon Fell and Lawrence Fell.

And incidentally the three brothers are the management Committee of the partnership.

Therefore, regardless of the capacity in which the brothers purport to act, their respective intentions are the intentions of the respective plaintiff corporations they control and so too the intention of the partnership through the corporations which comprise it, is the intention of Don, Gordon and Lawrence Fell as natural persons and individuals. Most certainly Don Fell, Gordon Fell and Lawrence Fell dictate what the corporations bearing their names shall do and it is they who also dictate collectively what the partnership shall do.

Reverting to the intention of the corporate plaintiffs, each composed entirely of one brother, in directing the partnership to declare bonuses to the management committee of the partnership composed of themselves, counsel for the defendant introduced evidence of a comparatively consistent pattern of conduct during the fiscal years of the partnership from June 30, 1965 to June 30, 1977.

While this evidence extends to transactions before and after the financial years of the plaintiffs which are the subject matters of these appeals nevertheless I accepted that evidence as being properly admissible as being relevant to a question at issue as to the assessments in the taxation years under appeal. I might add that counsel for the plaintiffs was invited to object to the admission of this evidence which invitation he did not accept.

The evidence is included in numerous exhibits which were admitted on consent by counsel.

Accounting principles and practices are directed to producing financial statements of a business that truly represent its financial position at its financial year end. It is designed primarily to inform shareholders of the financial state of the company in which their money is invested. Perhaps the same principles remain applicable when a company has but one shareholder. The accountant speaks by figures rather than by words.

This evidence which is primarily figures can therefore best be reproduced in tabular form as follows:

FELL FAB PRODUCTS

(A Corporate Partnership)

History of Bonus Accruals, Payments and Cancellations

Thus from June 30, 1965 to June 30, 1977:

(a) bonuses were set up by accounting entries in the total amount of $1,332,300;

(b) bonuses so set up were cancelled in the total amount of $1,150,050, and

(c) bonuses were paid to the three members of the partnership’s management committee over a twelve-year period in the total amount of $122,250 or, I would assume, $40,750 to each.

When bonuses were set up in the partnership accounts at the end of the fiscal year as accounts payable, thus constituting a liability and debit entry.

In the financial year ending June 30, 1967, a portion of the bonus accrued in June 30, 1965 and June 30, 1966 in the amount of $75,000 the portion so paid being $3,750.

In the financial year ending June 30, 1970 accrued bonuses totalled $186,000. These bonuses were cancelled in that year but further bonuses in the amount of $216,300 were set up against which $82,500 was paid leaving a net bonus expense to the extent of $30,300 and a further net accrual of $133,800.

At the beginning of the year June 30, 1971 there was thus $133,800 accrued bonuses set up. Bonuses in the amount of $90,000 were declared (this is the amount here under review in the first three appeals). The amount of the bonuses was then increased to $223,800 but was reduced by a payment of $36,000 to a total of accrual bonus at the year end of $187,000.

Now arise the transactions giving rise to the assessments here in question.

In the partnership year ending June 30, 1971 the accrued bonuses at the beginning stood at $133,800 and the bonuses now under dispute in the amount of $90,000 were declared and in the half-year period ending December 30, 1971 the further bonuses in the amount of $30,000 were declared.

In the beginning of December 31, 1971 the accrued bonuses stood at $187,800, it was increased by $30,000 to $217,800 and reduced to $120,000 by the cancellation of $97,800.

Therefore at the beginning of the year June 30, 1972 the accruals stood at $120,000 represented by the bonuses of $90,000 and $30,000 declared just prior to June 30, 1971 and December 31, 1971 respectively although the formal written resolution confirming this did not come into being until thereafter.

The accruals of $120,000 thus created by the bonuses of $90,000 and $30,000 were reduced to nil by the cancellation of these bonuses in 1972.

The bonuses remained at nil in the June 30, 1973 financial year but the process began again in the June 30, 1974 year.

All of these circumstances are reflected in the tabulation.

The bonuses had been set up as accounts payable. When a portion of the bonuses previously accrued was paid the balance may have been credited to loan accounts or credited to income.

The bonuses declared in the years June 30, 1965 to December 1969 range from nil to a high of $97,500. June 30, 1970 is an unusual year.

There does not appear to be any consistency.

From June 30, 1971 to June 30, 1977 the bonus set up a range of nil to a high of $210,000.

Again there does not appear to be any consistency in amounts so set up.

This lack of consistency is not conclusive one way or the other. Counsel for the Minister sought to imply that such a variation in amounts of the bonuses is not compatible with the payment of salaries to the three brothers. That is not necessarily so. The amounts were bonuses to be paid for management services if the income of the partnership so warranted and when declared might well be a reward for more than one year’s service. The amount is subject to variation in the years in which they may be declared and in the amounts declared.

In the taxation years of the plaintiffs, the corporate partners, from 1967 to 1971 the low rate of 21% was available on Canadian active business income of a Canadian controlled private corporation on the first $35,000 of taxable income.

From 1972 to 1978 the low rate available was 25%.

In 1972 the low rate available was made available on the first $50,000, an increase over the previous amount of $35,000.

In 1974 the first amount of taxable income to which the low rate applied was increased from $50,000 to $100,000.

In 1976 the first amount of taxable income to which the low rate applied was again increased. This time from $100,000 to $150,000.

The three plaintiffs qualified as Canadian controlled active businesses.

There was introduced in evidence a table prepared which shows the amount of the bonus set and the timing of its reversal and the effect of the reversal of the bonuses on the taxable income of Don Fell Limited in the particular years 1967 to 1978.

While the taxable income in the table applies only to the appellant, Don Fell Limited, the income of the other two plaintiffs would be substantially the same, bearing mind that the income of all three plaintiffs came from the Fell Fab Products partnership. That table is reproduced:

From that table it is clear that in the years April 30, 1967 to December 15, 1971 the reductions in the bonus accruals brought the net income of each partner below $35,000 taxable income and the income was therefore subject to the low rate of 21%. In the years April 30, 1972 and 1973 the taxable income was below $50,000 so there was no need to reduce the bonus accruals to fall within the first amount of taxable income which enjoyed the low rate of 25%.

In 1974 the bonus accruals had been reduced to nil and the taxable income was below the first $100,000 and so the low rate of 25% prevailed upon the plaintiffs’ income.

In 1975 and 1976 there were reductions of amounts sufficient to reduce the taxable income below $150,000 so that the low rate of 25% applied to the partners’ taxable income in those years.

In 1977 the taxable income was below $150,000 so no adjustment of bonus accruals was necessary to take advantage of the low rate of taxation on the partners’ income.

The implications from that table are obvious and the contention by counsel for the Minister was that the amount of bonuses set in each year was determined by the tax advantages. The plaintiffs were able to report in each year taxable income no more than would attract tax at the low rate of corporate tax in the particular taxation year.

The testimony of Mr Don Fell was substantially to the effect that in each year in which management bonuses were declared the financial position of the partnership permitted so doing but in the next following financial year the partners found it expedient to plough back the amounts of the bonuses (or a substantial part thereof in some years) to increase the working capital of the partnership. The decision to do this was contended to be for a genuine business purpose.

Mr Fell testified that hindsight justified the adoption of this policy by the three brothers, as the controlling officers and shareholders of the plaintiffs, the members of the partnership, and as comprising the management committee of the partnership, of forgiving bonuses declared to them in a prior year so that those amounts would be available for the working capital of the partnership in the subsequent years.

That basic policy acknowledged to have been adopted, the wisdom of which was proven by its ultimate success, was simply one of restraint in expenditures which could be readily controlled and using the funds so saved as working capital for the development of the partnership business.

The expenditure most readily controllable by the three brothers was the restraint in the remuneration for executive services supplied by themselves.

While this objective could have been accomplished by straightforward means the three brothers, through their separate corporate entities, which they each controlled, as partners in the partnership, with professional accounting advice adopted the means which have been described.

At each financial year end, with the exception of 1972 and 1973, from 1965 to 1977 (which is for six financial years preceding the transactions in the 1971 and 1972 financial years the assessments for which years are here under review) the partnership immediately prior to the year end declared management bonuses to the management committee (the three brothers in equal amounts). Almost invariably the three brothers forgave the indebtedness, shortly after its creation, in the subsequent year. There were three exceptions to this consistent practice, one in 1967 with respect to a bonus created in 1965, second in 1970 with respect to bonuses created in 1966, 1967 and 1969 and in 1971. With respect to the bonuses of $90,000 and $30,000 created in the years June 30, 1971 and December 31, 1971 respectively (the transactions pertinent to the assessment issue) they were cancelled in 1972.

But in each exception only a small portion of the bonus accruals were not forgiven.

The particulars of these transactions are contained in the table under the descriptive heading of “Fell Fab Products — History of Bonus Accruals, Payments and Cancellations” previously reproduced. In the fourteen successive financial years there set forth, bonuses in the amount of $1,332,300 were declared, $1,150,050 were cancelled and only an amount of $122,250 was divided amongst the brothers.

Thus the amount of $1,156,050 was made available for use in the furtherance of the partnership business which would not have been so available if that amount had not been forgiven by the three brothers but had been claimed by them.

That was the policy followed and the business purpose achieved.

The tax advantages which resulted from the method adopted to achieve the purpose of making more funds available for partnership ends are obvious.

The income of the partnership in its financial year ending June 30, 1971 was reduced by $90,000 and in its financial year ending December 31, 1971 by $30,000.

Because it is the partners who are taxable for partnership profits, the reductions of $90,000 and $30,000 in the partnership income become proportionate reductions in the income of the corporate partners, the plaintiffs herein, in their 1971 and 1972 taxation years, the assessments for which are under review.

The effect of these reductions over the years April 30, 1967 to April 30, 1978 are set forth in the table reproduced previously.

Because the three brothers are natural persons their personal income is taxed on a cash basis. Because payment of the bonuses (with the minor exceptions mentioned) were never received by them, they were not taxable thereon.

By virtue of subsection 78(3) applicable to the 1972 taxation year and subsection 18(3) applicable to the 1971 taxation year a deductible expense owing by a taxpayer as remuneration if unpaid at the end of the year in which the expense was incurred must be included in the taxpayer’s income in its next taxation year. Subsection 18(3) is applicable to expenses incurred in a taxation year ending after October 22, 1968. Therefore if the expense incurred in the first year is forgiven before the advent of the second year the taxpayer is not obliged to take that expense into its income in the second year.

On referring to the table headed “Fell Fab Products” it will be seen that in the financial year from June 30, 1969 (the first financial year after October 22, 1968) the bonus accruals created in a financial year were forgiven in the next financial year.

The amounts so forgiven were taken into the financial statement of the partnership under entries indicating that they were loans. The other entries appear innocuous and non-committal. I fail to follow that a debt forgiven could be considered to be income under normal conditions other than by a deeming section.

Tax avoidance is permissible.

The dispute between the parties to these appeals is whether the course followed by the plaintiffs is legitimate tax avoidance ratherthan tax evasion.

The Minister in assessing the plaintiffs as he did relied on the assumption, amongst others, that neither the partnership nor the partners, (the plaintiffs) intended to create, nor was there created a legal obligation to pay the accrued management bonuses.

In my view the declaration of the management bonuses did in fact create a legal obligation to pay those bonuses and that legal obligation subsisted between the interval from the time of declaration by the partnership by which they were created to the time of their cancellation by the three brothers to whom they were payable.

The irresistible inference from the consistent course of conduct by the partnership, the partners and the three brothers from June 30, 1969 to June 30, 1977 of declaring management bonus in one financial year and cancelling the bonuses so declared in the next financial year is that the bonuses were never intended to be paid nor payment accepted or exacted by the creditors subject only to the minor exceptions mentioned, that is in two financial years when bonuses were not declared (perhaps explainable by the retooling for a different product resulted in revenue being insufficient to warrant the bonuses) and three times when a small part of the bonus accruals were accepted while a greater portion was cancelled. None of these exceptions directly affect the transactions giving rise to the assessments in the plaintiffs’ 1971 and 1972 taxation years here in issue.

The assumption made by the Minister in these respects reads:

(e) that the plaintiff or the partnership did not create nor did it create a legal obligation to pay the alleged accrued management bonuses.

Assumption (e) is immediately preceded by assumption (d) reading:

(d) that the deduction of the alleged accrued management bonus expenses, if in fact expenses made or incurred, would unduly or artificially reduce the income of the plaintiff.

Despite their juxtaposition the two assumptions are separate and distinct.

For the reasons I have expressed I think that the plaintiffs may have demolished assumption (e) which alleges the lack of intention to create or the creation of a binding legal obligation to pay. By its overt acts I think the partnership did in fact create such an obligation. However the evidence established by irresistible inference that there was no intention among the natural and artificial persons involved that the bonuses created would be paid. That differs from the language used in setting forth the assumption.

Assumption (d) is an invocation of subsection 137(1) which reads:

137. (1) In computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation, that, if allowed, would unduly or artificially reduce the income.

Subsection 137(1) is applicable to the plaintiffs’ 1971 taxation year and is now replaced by subsection 245(1) applicable in the plaintiffs’ 1972 taxation year. Subsection 245(1) is identical with former subsection 137(1) and the marginal note to both is “Artificial transactions”.

Sham transactions are those in which a taxpayer has resorted to various “cosmetic” technicalities or devices for the purposes of tax evasion.

Lord Diplock has given the classical and widely accepted definition of the “popular and pejorative” word “sham” in Snook v London & West Riding Investments, Ltd [1967] 1 All ER 518 at 528 reading:

. . . it means that acts done or documents executed by the parties to the “sham” which are intended by them to give to their parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.

Assumption (e) as pleaded by the Minister in his statement of defence is susceptible of the contention that it covers a “sham” as defined by Lord Diplock in that it was not intended by the parties to the management bonus arrangement that the bonuses should be collected but would be forgiven in whole or in part.

To do so, however, in my view, would be an unwarranted extension of the language in which the Minister did not contend that the transactions in question were “shams”.

But, in my view, subsection 137(1) and subsection 245(1) are directed not only to sham transactions but to something less as well where the expense, although real, would unduly or artificially reduce a taxpayer’s income.

In Seramco Ltd Superannuation Fund Trustees v ITC, [1976] 2 All ER 28 Lord Diplock said at 35:

“Artificial” is an adjective which is in general use in the English Language. It is not a term of legal art; it is capable of bearing a variety of meanings according to the context in which it is used. . . .

He added that it is not synonymous with “fictitious” and he went on to say:

Where in a provision of an Act an ordinary English word is used it is neither necessary nor wise for a court of construction to attempt to lay down in substitution for it, some paraphrase which would be of general application to all cases arising under the provision to be construed. Judicial exegesis should be confined to what is necessary for the decision of the particular case. . . .

That being so and bearing Lord Diplock’s admonition in mind consideration must be directed to how the bonus arrangement came into being, all circumstances surrounding how it came into effect, if it was carried out and if it was not, the circumstances why it was not carried out all in order to see if the particular transactions under review are properly described as “artificially” reducing income within the meaning of those words as used in the Subsections.

Standard dictionaries are not authoritative as to the meaning of a word used in the context of a Statute but where that word is an ordinary English word used in that sense resort may be had to those works to ascertain the popular meaning of the word.

The word “unduly” relates to quantum and means “excessively” or “unreasonably” and “artificially” means “not in accordance with normality”.

Collier, J in Sigma Explorations Ltd v The Queen [1975] FC 624, [1975] CTC 215; 75 DTC 5121, has said at 632:

The test in deciding whether a deduction is prohibited by subsection 137(1) must, as I see it, be an objective one. The main source of the evidence relating to it is commonly the taxpayer. The evidence is therefore often subjective in nature. An assessment of its weight and reliability is of necessity required, but in the final analysis the overall finding of undueness or artificiality (or not) is a value judgment based on all the facts and factors.

I repeat that the taxpayer’s evidence at trial as to what his intention was, although given in all sincerity, is only part of the evidence. Statements as to intention must be considered along with the objective facts.

In the circumstances of the present appeals the purpose of increasing the funds available in the partnership to carry out its business enterprise could have been accomplished directly by the simple expedient of the partnership not paying additional remuneration to the three brothers without resort to the declaration of a bonus in one fiscal year followed by its cancellation in the next year with the consequent bookkeeping entries to keep pace.

This complex procedure is “not in accordance with normality” and so “artificial” within the adverb form of that word used in the subsections.

But without the resort to that complex procedure there would be no tax saving. Rather the expenditure would remain where it was originally and that was in income and taxable as such.

This being so it follows logically that, although a business purpose was accomplished, the procedure in its true light was a device primarily to minimize tax.

Its purpose was not, in my view, the primary purpose to make further funds available to the business enterprise of the partnership to which an income tax saving was merely incidental.

Rather the paramount motivation was to effect the tax saving to the plaintiffs with no adverse tax consequences to the three brothers or to the plaintiffs in the next ensuing taxation year to which end it was the business purpose that was merely incidental.

The result would have been that a greater amount would have been available to the business enterprise. No tax would have been lost to the tax collector and no doubt the three brothers were convinced that their money was better employed as they employed it. That is not how the tax collectors of Her Majesty have viewed the matter.

Paul the Apostle has enjoined a taxpayer to pay his taxes punctually but the tax collector is likewise enjoined to exact only the fair tax. The tax assessors construe anything which is exigible under the provisions of the Income Tax Act as fair and they cannot be gain-said.

Accordingly the plaintiffs have not discharged the onus of establishing that business advantage was the motive for entering into the transactions and that the saving of income tax was merely incidental.

The contrary is the case.

It follows that the expenses incurred are those which would unduly or artificially reduce the plaintiffs’ income and as such are not allowable deductions.

The six appeals are therefore dismissed with costs because the normal rule is that costs follow the event and there is no compelling reason to depart from that rule.