GLS Leasco Inc. v. MNR, 86 DTC 1484, [1986] 2 CTC 2034 (TCC)

Brulé, T.C.J.:—The appellants herein are both wholly-owned subsidiaries of a United States corporation and conducted business with each other. G.L.S. Leasco Inc. ("GLS”) is appealing from notices of determination of losses in respect of the 1977 to 1980 taxation years, and McKinlay Transport Limited (“McKinlay’’) is appealing from a notice of reassessment in respect of the 1976 taxation year and from notices of assessment in respect of the 1977 to 1980 taxation years. By consent filed at the hearing counsel for the appellant, McKinlay, and the Minister came to an agreement with respect to payments made by the appellant McKinlay to GLS during the relevant period.

The only issue involved in these appeals is the determination of whether GLS was carrying on business in Canada during the years in question.

Facts

G.L.S. Leasco is a corporation incorporated under the laws of the State of Michigan and is a wholly-owned subsidiary of Centra Inc., a corporation incorporated under the laws of the State of Delaware, one of the United States of America.

McKinlay is a corporation incorporated under the laws of the Province of Ontario. McKinlay is a wholly-owned subsidiary of Central Cartage Co., a corporation incorporated under the laws of the State of Michigan, one of the United States of America. Central Cartage Co. is a wholly-owned subsidiary of Centra Inc.

GLS carries on the business of leasing transportation equipment, transportation terminal properties and other capital assets associated with the transportation business in the United States. During each of its 1977 to 1980 taxation years it leased transportation equipment in Canada, primarily to McKinlay.

GLS submitted that it carried on business in Canada throughout each of its 1977 to 1980 taxation years and realized the following income or losses:

GLS computed that its taxable income for each of its 1979 and 1980 taxation years was nil. This computation resulted from the appellant deducting its non-capital losses realized by its 1977 and 1978 taxation years from the income the appellant earned in its 1979 and 1980 taxation years.

By reassessments, notices of which were posted on October 29, 1983, the respondent determined that GLS did not maintain a permanent establishment in Canada during each of its 1977 to 1980 taxation years and therefore the respondent stated that the original losses claimed by the appellant were "disallowed".

By letters dated April 21, 1983, GLS requested that, pursuant to subsection 152(1.1) of the Income Tax Act, the respondent determine the amount of its non-capital losses for each of its 1977 to 1980 taxation years.

By notices of determination of a loss each dated July 8, 1983, the respondent determined that GLS's non-capital losses for each of its 1977 to 1980 taxation years was nil.

By notices of objection, each dated September 23, 1983, GLS objected to the said notices of determination.

By notification of confirmation dated November 29, 1983, the respondent confirmed the notices of determination of a loss issued in respect of each of GLS's 1977 to 1980 taxation years and stated, inter alia, that:

. . . you were a corporation not resident in Canada in the years and that you did not carry on business in Canada within the meaning of subsection 2(3) of the Act or within the extended meaning thereof as set out in Section 253 of the Act, thus you are not taxable under Part I, Divison A of the Act and accordingly your noncapital losses in the year are nil and there are no amounts deductible within the provisions of paragraphs 111(8)(b) and 111(1)(a) of the Act.

McKinlay carries on the business as a common carrier in Canada. During the 1976 taxation year GLS entered into an agreement with McKinlay whereby GLS agreed that the appellant would be a preferred and primary customer of its Canadian business and that the appellant would have a right of first refusal for the rental of all transportation equipment owned by GLS and used by it in Canada.

During each of McKinlay's 1976 to 1980 taxation years, McKinlay leased transportation equipment owned by GLS and used it in its Canadian business. As a result of these rentals, McKinlay made rental payments (net of the seven per cent Ontario retail sales tax) to GLS.

By assessments, notices of which were each posted on the 27th day of August, 1982, the respondent assessed McKinlay in respect of each of its 1976 to 1980 taxation years and stated that it had failed to deduct or withhold 15 per cent of the rental payments made to GLS and had failed to remit the said 15 per cent amount to the Receiver General as required by Part XIII of the Income Tax Act.

By notices of objection dated November 1982, McKinlay objected to the assessments issued in respect of each of its 1976 to 1980 taxation years. (There was a subsequent reassessment with respect to the 1976 taxation year.)

By notification of confirmation dated October 20, 1983, the respondent confirmed the assessments issued in respect to each of McKinlay's 1977 to 1980 taxation years and stated that:

You have been properly assessed in accordance with the provisions of paragraph 212(1)(d) and subsections 214(1), 215(1), 215(6), 227(8) and 227(10) of the Act.

Appellants' Position

Counsel for the appellants pointed out that if GLS is found to have carried on business in Canada then the appeal of McKinlay should be allowed. In support of his argument for GLS it was said that no one factor can determine whether or not a company is carrying on business in Canada. All the facts must be reviewed. It was admitted that GLS did not have much infrastructure in Canada, and such was not necessary because of its captive customers from its group of related companies.

GLS had no outward commercial trappings in Canada but such were not necessary because of its modus operandi. GLS maintained that what it did was purchase equipment in Canada, lease this out and receive rent. This, GLS maintained was its business. While it did not have a permanent office in Canada, nor employees, it did have the use of an office at McKinlay Transport, and it used this office physically for signing documentation and as a mailing address. There was a bank account in Canada and two employees of McKinlay helped GLS as required.

All purchase orders were made in Canada under the name “G.L.S. Leasco — Canada”, paid for in Canadian dollars and delivery of the equipment taken in Canada for use in Canada. Because of the streamlined nature of the group of Centra Inc. companies, the accounting was done in the United States, cheques were issued from there, requisitioned by a Mr. Mason, a vice-president of the parent company, who supervised the Canadian operation, and who did much of the supervision while in Canada on frequent trips.

The decision by GLS to carry on business in Canada arose when McKinlay had trouble financing for new equipment needed in its Canadian operation. GLS then made a survey and proposed to carry on in Canada as they did in the United States. This involved a separate Canadian operation albeit controlled by United States employees and adapted to a part of the United States computer accounting system which included some 24 separate companies. A memo showing this analysis for a proposed Canadian operation was introduced as evidence to the Court. This memo outlined some 34 steps required to set up a proper Canadian operation and included a cash flow sheet for the transaction with a projected seven-year analysis.

In support of his argument that GLS was carrying on business in Canada reference was made to the following cases:

Hermann Gustav Erichsen v. Last (1881), 4 T.C. 422; 8 Q.B.D. 414 (C.A.);

Grainger & Son v. Gough, [1896] A.C. 325; 3 T.C. 462;

F.L. Smidth & Co. v. Greenwood, [1922] 1 A.C. 417; 8 T.C. 193;

Firestone Tyre & Rubber Co., Ltd. v. Lewellin (1957), 37 T.C. 111; [1957] 1 All E.R. 561 (H.L.);

The Queen v. Gurd's Products Company Limited, [1985] 2 C.T.C. 85; 85 D.T.C. 5314 (F.C.A.);

United Geophysical Company of Canada v. M.N.R., [1961] Ex. C.R. 283; [1961] C.T.C. 134;

Atlas-Gest Inc. et al. v. M.N.R., [1985] 2 C.T.C. 2066; 85 D.T.C. 430, (T.C.C.).

I shall refer to some of these cases later.

Minister's Position

It was put to the Court that GLS was not carrying on business in Canada and that McKinlay made payments to a non-resident during the 1976 to 1980 taxation years without withholding and remitting tax as required by the Income Tax Act. As a result both appeals should fail. In support of this position counsel said that if the substance of the GLS operations is properly analysed it will be seen that this is really a non-resident company using non-resident employees to conduct certain functions in Canada. The Minister in his reply to notice of appeal re GLS said inter alia:

with respect to the Appellant's operations, at all material times, all control rested, all decisions were made and all books and records were kept at the Appellant’s head office in the State of Michigan, U.S.A.;

the Appellant, at all material times had no office in Canada and it did not keep any employees in Canada;

the Appellant, at all material times, did not keep an agent or employee in Canada with authority to contract on behalf of the corporation;

the Appellant, at all material times, did not solicit orders or offer anything for sale in Canada;

From the precedents submitted to the Court, counsel in support of his arguments referred to the following cases:

Erichsen v. Last, supra;

Grainger & Son v. Gough, supra;

Standard Ideal Company v. Standard Sanitary Manufacturing Company, [1911] A.C. 78;

Geigy (Canada) Ltd. v. Commissioner, Social Services Tax, [1969] C.T.C. 79; 66 W.W.R. 689;

Smidth & Co. v. Greenwood, supra;

Firestone Tyre & Rubber Co. Ltd. v. Lewellin, supra;

Capitol Life Insurance Co. v. The Queen, [1984] C.T.C. 141; 84 D.T.C. 6087;

United Geophysical Co. of Canada v. M.N.R., supra;

Loeck v. The Queen, [1982] C.T.C. 64; 82 D.T.C. 6071.

Analysis

There is no argument that the question of whether or not a company is “carrying on business” is a matter of fact. This is supported by the authorities. Mr. Justice Urie in the recent Federal Court of Appeal decision of The Queen v. Gurd's Products Company Limited, [1985] 2 C.T.C. 85; 85 D.T.C. 5314 reiterated at 92 (D.T.C. 5319) what was said as far back as 1881 in the case of Erichsen v. Last (supra), by the Master of the Rolls as follows:

Now the facts as I understand them are clear enough, and the question is whether what the Company do amounts to carrying on trade within the meaning of the Act. I do not think there is any principle of law which lays down what carrying on of trade is. There are a multitude of incidents which together make the carrying on a trade, but I know of no one distinguishing incident which makes a practice a carrying on of trade, and another practice not a carrying on of trade. If I may use the expression, it is a compound fact made up of a variety of incidents.

The facts, of course, must be considered in accordance with the provisions of the Income Tax Act. "Business" is defined in subsection 248(1) as including a profession, calling, trade, manufacture, or undertaking of any kind whatever, and an adventure in the nature of trade. The meaning of "carrying on business" in Canada has been more particularly defined by section 253 of the Act which provides:

253 Where, in a taxation year, a non-resident person

(b) solicited orders or offered anything for sale in Canada through an agent or servant whether the contract or transaction was to be completed inside or outside Canada or partly in and partly outside Canada,

he shall be deemed, for the purposes of this Act, to have been carrying on business in Canada in the year.

Further when a non-resident company is involved the provisions of the Income Tax Act in paragraph 2(3)(b) and in subparagraph 115(1)(a)(ii) make the company liable for tax if the company is carrying on business in Canada.

Counsel for the Minister agreed that the substance of the operation must be examined, and in so doing he said that it would be seen that not all the necessary indicia were present to conclude that GLS was carrying on business in Canada. From the cases listed above by the respondent, two points were put forth as being the basis of certain decisions.

Where an agent was the representative in the foreign jurisdiction, and that was the only principal factor, as in the Standard Ideal and Loeck cases (supra) the courts held that the respective appellants were not carrying on business in the other jurisdiction.

The place where the contract was made was held to be paramount in the Erichsen, Grainger, Geigy, Smidth, Firestone and Capitol Life cases (supra).

In United Geophysical Co. of Canada v. M.N.R., (supra) there is a closer comparison to be made to the present case. This Exchequer Court decision dealing with the rental of equipment to a Canadian subsidiary of a United States company was to the effect that the Canadian subsidiary was carrying on business in Canada and not the United States parent. There were five points raised by the Court:

(1) The governing contract was made in the United States.

(2) The amount of the rental was to be determined in the United States.

(3) Rental was to start when the equipment was supplied to the appellant in the United States.

(4) Payment was received in the United States.

(5) Rental was as a result of the use by the appellant in Canada of the equipment and not because the U.S. company was obliged to service or repair it in Canada.

For these reasons the Court held that the parent United States company was not carrying on business in Canada and that the Canadian subsidiary was liable for withholding tax on the payments made to the parent. This, it was argued by the respondent, is the situation in the present case and should be taxed accordingly.

There are many distinguishing factors in the United Geophysical case and the GLS case. First of all GLS executed by its officer the contracts in Canada as was stated in evidence and supported by exhibits. Where the amount of the rental was determined it was not disclosed in evidence. Mr. Mason the vice-president of the appellant McKinlay's parent company, Central Cartage Co., was also responsible for GLS. He was involved in all aspects of the purchasing and leasing of equipment both in the United States and Canada. He frequently used the office provided to GLS by McKinlay in Windsor and whether or not the amounts of rental were determined in Windsor or Detroit was not disclosed, but in any event I do not consider this significant.

All purchases of equipment were made in Canada and delivered to McKinlay. All purchase orders were labelled “G.L.S. Leasco — Canada”. Payments were made by McKinlay in Canadian dollars to a Canadian bank account of GLS but forwarded to Detroit where all the accounting took place. There is a similarity in that the equipment was used in Canada and rental payments resulted.

Reference by the appellant’s counsel was also made to the Erichsen, Grainger, Smidth, Firestone and United Geophysical cases (supra) and in each instance pointed out why the facts in these cases and the judgments rendered did not pertain to the GLS situation. I tend to agree.

The decision of The Queen v. Gurd's Products (supra) dealt with a similar problem and the Federal Court of Appeal held that a business was being carried on in Canada because the company:

(1) intended to carry on business in Canada;

(2) established a bank account in Canada;

(3) purchased product in Canada and earned a profit therefrom;

(4) had an official agent in Canada; and

(5) its associates involved were not dealing at arm's length.

While the Minister's counsel suggested that the Gurd's case does not set out the guiding principles of what carrying on business in Canada should be, I believe there is enough similarity to reach a similar conclusion.

GLS intended to do business in Canada as was set out in evidence and supported by a memorandum provided to the Court. There was a Canadian bank account and the equipment was all purchased in Canada. While there was no Official agent in Canada, two employees of McKinlay were always available to help GLS in Canada. In addition Mr. Mason spent a great deal of time in Canada supervising the operation. In the Gurd's case, the company did not have an office, no phone number, no employees and all decisions and negotiations were performed in the United States. Still the Federal Court of Appeal said the company was carrying on business in Canada.

GLS in the United States did not have any employees, offices, signs, nor telephones yet carried on business there, as was admitted by the Minister. In Canada the office made available by McKinlay was used physically by Mr. Mason, all documentation used this address, mail was received there, such address was accepted by the Government, and a sales tax exemption permit was given to GLS treating the company as doing business in Canada.

While perhaps not all the form was present, the substance of doing business in Canada was evident in this case with the result that the appeals of both appellants are allowed with costs, to be taxed on a party and party basis.

Appeals allowed.