Feinstein v. The Queen, 79 DTC 5236, [1979] CTC 329 (FCTD)

Walsh, J:—There is one principal issue and two subsidiary issues to be decided in the present case which concerns reassessments to plaintiff’s personal income for the years 1969,1970 and 1971. The principal issue concerns the question of whether he should be personally assessed for all the taxable income made by his company Bernard Feinstein Inc (sometimes erroneously referred to as B Feinstein Inc) during its fiscal year terminating on May 31st, in each of the years in question, as the Minister has done, or whether he should only be assessed on the basis of his net drawings from it with the company, having a separate corporate personality, being taxed in the ordinary way at corporation tax rates on its net income after having deducted his drawings as an expense item.

The second issue concerns an amount of $5,264.20 for travel expenses paid to him by Modes Bilboquet Inc, which, being unsupported by sufficient documentation was included in his income in the 1970 taxation year. After hearing his evidence on this it was agreed by counsel for defendant that this represented reimbursement for business expenses properly incurred and should not have been added back to his income so this is no longer an issue. The third issue concerns the deduction by plaintiff of $1300 in 1969 and $900 in 1970 as alimony expenses paid to his former wife prior to September 1, 1970. On this latter issue evidence was produced that his former wife Marlene Judith Feinstein had obtained a divorce from him by Act of Parliament receiving royal assent on December 21, 1963. During the years in question he paid alimony to her pursuant to an agreement, but he was unable to produce any written separation agreement providing for this. In his evidence he testified that such an agreement had been signed but left in the office of his attorney the late John Herschorn QC but, as a result of a fire in his office could not be produced. From time to time following the divorce the issue was raised with the Department of National Revenue as to whether these payments could be properly deducted from his income. He was able to establish proof that the payments were in fact made, but not any agreement calling for them and it is his recollection that in some years deductions were allowed and in other years refused. At the hearing he filed a copy of a letter dated October 25, 1968 from Mr Herschorn to the Department of National Revenue referring to the fact that since the written agreement to which his client had referred had been lost or mislaid a declaratory judgment would be sought by motion in the Superior Court confirming the alimentary allowance payment of $25.00 a week for the support of a minor daughter. In an earlier letter dated May 13,1968 addressed To Whom It May Concern Mr Herschorn was less definite however, stating that he was the attorney of record in the divorce, that no separation action was taken nor was any judgment rendered on the question of alimentary allowance for the child but to the best of his recollection ‘‘a sum of $25.00 per week was settled as the amount of alimentary allowance in the year 1962”. He does not know if all or any of it had been paid. In any event a declaratory judgment was obtained dated January 28, 1971, by consent, which condemned him to pay alimentary allowance of $40 per week as a contribution towards the maintenance and support of the child commencing from September 1, 1970. The Minister does not contest that payments following that date are properly deductible, but in the absence of a judgment or written separation agreement disallows the payment made in 1969 and 1970 up to that date.

Subsection 11 (1)(l) of the Income Tax Act in effect at the time, RSC 1952, c 148, as amended, permitted the deduction of

(1) an amount paid by the taxpayer in the year, pursuant to a decree, order or Judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year.

It is clear that the agreement had to be a written one and the mere proof that payments were made is insufficient. The evidence is by no means clear even that such an agreement ever existed, but if it did, the burden would be on the taxpayer claiming the deduction to produce it. The Minister therefore properly disallowed these claims for deductions by plaintiff in the years 1969 and 1970 up to September 1st, the effective date of the alimony judgment.

With respect to the principal issue it was agreed between counsel for the parties at the opening of the hearing that, in order to avoid the introduction of lengthy evidence as to the nature of various expense items claimed in the company’s return, some of which might well be disallowed if it were found that the entire net income of the company should be attributable to plaintiff personally as the Minister contends, the Court would be asked first to decide whether plaintiff was properly assessed on this basis.

In the event that it was concluded that plaintiff properly included in his income tax return only his remuneration from the company, then the details of disbursements claimed by the company in its income tax returns would not be an issue before the Court in the present proceedings dealing with the assessments of Bernard Feinstein personally. If, on the other hand it were found that Mr Feinstein was properly assessed by the Minister for the entire income of the company, then in the event that the parties could not agree whether certain deductions should be allowed or not, the hearing would be continued to a later date to hear evidence enabling this to be determined. At the conclusion of the hearing however, defendant’s counsel did concede that, in the latter event credit would certainly have to be allowed for the income tax paid by the company in the years in question as otherwise there would be double taxation. While the issue is not before the Court inthepres- ent proceedings it was also conceded that plaintiff’s wife Mrs Bernard Feinstein had also paid personal income taxes on the basis of her drawings from the company which would also have to be taken into consideration if all the income of the company were to be attributable to him.

Mr Feinstein testified that he has spent his life in the ladies’ wear business, his father having been in it before him. He was not until 1971 in the manufacturing end of the business but had a sales organization for various ladies’ wear manufacturers whose lines of clothing he sold on commission. He also provided them with information and feedback from his retail store customers as to styling, fabrics, colouration and so forth. He sold all types of ladies’ wear on this basis including dresses, sportswear, wedding gowns and other items representing a different manufacturer for each line. His territory went from the head of Lake Superior to Vancouver and he had a number of employees to help him with the sales. He stated that a style that sells well in one part of the county may not sell well in another which is why major department stores have decentralized buying, having buyers in each major city. The various manufacturers he represented would send sample trunks to him, he would employ models to show the garments and would canvass retailers throughout the territory. A suite of hotel rooms and sample rooms would be reserved by him at certain times of the year in each major city. In Vancouver for instance he might be selling coats in one room, his wife might be selling dresses in another and another employee might be selling sportswear in a third simultaneously. He might have three or four people working for him at a time as well as models and orders would be taken from the retailers at the showing. His sales people would of course also solicit orders from regular customers and potential new customers in the area. He might employ 12 to 15 people in all in the course of the year but they were not employed on a full time salary basis. He would use the same people from year to year however. In more remote areas of Alberta, Saskatchewan and parts of Manitoba he and some of his sales people would travel in large vans bringing the sample clothes with them or even by train, arranging appointments in advance for showings. During these periods he would often work from 8:30 AM until after midnight seven days a week. He stated that there are two major trips a year, the first being spring fashions which are shown starting in November of the preceding year and ending in January with a two week break at Christmas when the stores are too busy to buy, which is followed by what is known as market week in the first ten days of January which is in the nature of a trade fair, when all manufacturers are showing their lines, and the autumn fashions for which the sales start in May and carry on until the middle of July. There are also two lesser seasons, a holiday market season for which the sales are made in August and September and a summer season for which the sales are made in February and March. He stated that habitually he would take two major trips and two minor trips a year as well as the market weeks in Vancouver and Winnipeg.

Orders were written on the manufacturer’s forms and the manufacturer would ship the merchandise and invoice the customer. He would keep copies of the orders and the manufacturers would send copies of their invoices to him and pay him his commission when they were paid.

In addition to the direct selling he also conducted fashion shows for customers of large stores showing the lines of his manufacturers, and gave sales clinics to the sales staff of some of these stores. He incorporated his business as Bernard Feinstein Inc in Quebec on May 20, 1965. He stated that both customers and the manufacturers have more confidence dealing with a corporation. In the 1960s he had begun to establish a number of new accounts and as some of these customers were not known to the manufacturers he represented the manufacturers sometimes required him to guarantee payment of the orders before accepting them. This involved some personal liability on his part which is another reason why he decided to incorporate. His wife also worked for the company travelling with him on most occasions and sometimes going with some of his customers to see the manufacturers in connection with the designs or fabrics they wanted. On the average he would be 200 to 225 days a year on the road and his wife 75 to 100. After the incorporation of the business, and this is especially important, all commission payments by the manufacturers were made to Bernard Feinstein Inc and deposited to its account, as appears from a number of T-4A forms filed as exhibits. The company had an office in a building on St Catherine Street West until 1970 when it moved to an address on Meilleur Street as a result of his having started a manufacturing business under the name of Modes Bilboquet Inc in that year. Bernard Feinstein Inc held 50% of the shares in it. It started out to be a style and service management agency and then commenced manufacturing. His last selling trip representing other manufacturers was in March 1970 after which he ceased this type of business. The commissions earned from some of the sales made in that trip however continued to be received by Bernard Feinstein Inc in 1971, bearing in mind that its fiscal year commences on June 1st. He still had to travel extensively to get information from customers as to what styles were desired but the only other employee of the company thereafter was his wife. The travelling expenses of $5,264.20 which were allowed after hearing his evidence were for two trips to Europe in 1970 with a designer known as Lily Dee to attend shows in Paris, purchase textiles in Italy as well as some fabrics in England.

He testified that normally he had no written contract with the manufacturers he represented. Some of his sales persons and models had been working for him as far back as 1961 before the incorporation but they did not work exclusively for him nor work full time and no deductions were made for tax or otherwise from their remuneration. Hotel accounts were billed to Bernard Feinstein Inc and all payments and receipts were passed through the company’s accounts. The company’s name was on the office premises and in the telephone directory in Montreal in 1969 and in 1970 but was apparently left out in 1971 when he commenced his manufacturing business under the name Modes Bilboquet Inc, operating with Bernard Feinstein Inc from the same premises. He insisted that this was an error of the telephone company resulting from the move however, and that Bernard Feinstein Inc always had a separate telephone number.

The Minister’s contention that the income of the company of Bernard Feinstein Inc should not be considered as separate and distinct from the business income of Mr Feinstein personally appears to have been the result of certain carelessness on his part in correspondence and in his tax returns which, although prepared by his auditor were signed by him and he is therefore responsible for the contents. Counsel for defendant produced a letter dated February 17, 1967 from Primrose Garment Company Limited which sets out the written agency agreement between them. Instead of being addressed to the company it is addressed to Bernard Feinstein at his home address and contains statements such as the following:

You are to be our sole representative in Western Canada including the Lake Head and that, at no time, may anyone else, other than yourself, present the Line, without our written consent.

All commissions owing to you will be paid to Bernard Feinstein Inc, 4018 St Catherines Street West, Suite 111, Montreal, PQ on your behalf.

He countersigned this letter, signing personally.

A subsequent letter dated February 6,1968 on the letterhead of Primrose Garment Co Limited signed again personally by Mr Bernard Feinstein deals with the prolonged showings and solicitations of orders and it is stated that for the purpose of adjustment of commissions as a compensation for showings the total house bookings should not exceed 15% of the amount booked by Mr Bernard Feinstein, and “The amount of units booked by Mr Bernard Feinstein will not include the account of Woodward Stores Limited”. Mr Feinstein explained that the firm he had represented formerly for coats had gone out of business but he had a very good clientele for them and was anxious to get the contract with Primrose Garment Company Limited, a very large manufacturer. While that company may have looked to him personally for guaranteeing the carrying out of the contract all revenue from it was paid to the company.

These letters were obviously not prepared nor approved by the attorneys of either party. Certainly when the Primrose Company which wrote the contract letter state that Mr Feinstein is to be the sole representative and that no one but he may represent their line without consent it must have been intended to include Mr Feinstein’s employees, (who were in fact employees of the company).

Primrose were certainly aware of the existence of the company since it is stated that all commissions owing will be paid to the company as infactwas done. The addition of the words “on your behalf” was probably because the letter was addressed to Mr Feinstein personally. Certainly the gross amount of all commissions from these sales would not accrue to Mr Feinstein as the company would have certain expenses of operation to deduct, and revenue from this line would not be segregated in the company’s books from the revenue from other sales for the purpose of deductions of general business expense. While it is true, as defendant’s counsel contended, that a person cannot by assigning revenue to which he is entitled to another person or company, avoid taxation on it, I believe that to look at the true situation realistically it must be concluded that Mr Feinstein was acting on behalf of the company when he made the agreement with Primrose Garment Company Limited although he was careless in not signing it Bernard Feinstein Inc per Bernard Feinstein, President, and if Primrose required it adding his personal guarantee. The fact that Primrose chose to overlook the separate corporate existence of Bernard Feinstein Inc in the manner in which the letter is drawn is not in my view sufficient to conclude that all of the company’s income, not only from this contract but from all other contracts entered into verbally with other manufacturers should be considered as income of Mr Feinstein personally.

Attention was also drawn to Mr Feinstein’s income tax returns for the years in question in which his earning are shown as “commission earned” and underneath that “Bernard Feinstein Inc”. Since it was Bernard Feinstein Inc which was earning commissions in substantially greater amounts from the manufacturers represented, the use of the term “commission earned” for his income from the company is inaccurate. The fact that it is so designated rather than being designated as remuneration does not appear to be legally significant however, as it in fact represents the amounts he received from the company. On page 4 of his 1969 return plaintiff shows himself as being self-employed as a travelling salesman, under name of firm writing in B Feinstein, followed by his home address. This error was not repeated in the 1970 or 1971 returns, both of which show on the front page thereof that he is a commission agent employed by B Feinstein Inc. The erroneous statement in the 1969 return again appears to have been a result of carelessness on his part and a confusion which all too often occurs in a one man company between the individual himself and the corporation. It is in any event contrary to the real facts which establish that his remuneration was received from the company, although perhaps erroneously designated as “commission earned”.

There is nothing to indicate that when he incorporated the company in 1965 he did so with a view to avoid or minimize taxation. The fact that his personal tax rate in the years in question would no doubt be higher than the minimum corporation tax rate which would be applicable and that it would therefore be advantageous for the Minister to tax all the income of the company as if it had been income earned by him personally, cannot enter into the question nor can the fact that the Minister accepted the company’s income tax returns for the years 1969,1970 and 1971 without reassessment of same and that it is now too late to do so, having instead chosen to reassess plaintiff as if all the company’s income were his. In the case of Crossland (H M Inspector of Taxes) v Hawkins, [1961] 2 All ER 812, Donovan, LJ, said at p 814:

The heavy incidence of surtax on large incomes has for some time led artistes and others in the world of entertainment to adopt the device of forming a limited company which they control and giving the company, by means of a service agreement, the right to their services. In return the company pays the artiste some modest salary. The company then hires the artiste out to whomsoever requires his services and itself obtains the consideration for them. . . .

In the next following paragraph he adds:

All this is perfectly legitimate and indeed, in the case of persons whose high earnings may be short-lived, understandable. . . .

Defendant relies on the case of The Queen v Gerald J Burns, [1973] CTC 264; 73 DTC 5219, and the case of Eugene Lagacé and Georges Lagacé v MNR, [1968] CTC 98; 68 DTC 5143, but the facts are somewhat different. In the Burns case a taxpayer had always worked for a certain company selling on a commission basis, but subsequently incorporated a company of his own, continuing to sell for the company which had formerly employed him as a salesman. He in turn hired sales people who were paid by the original company, these payments being charged up against his commission. All payments by the original company for the net commissions were paid to him and endorsed over by him to the company he had incorporated. This latter is the converse of the situation respecting plaintiff’s contract with Primrose Garments which directed that all the payments be made to his company. Primrose Garments was only one of a number of companies for whom he sold on commission, and he had before incorporating his company not been associated with Primrose Garments at all, this being a new agency which he obtained. While it is true that plaintiff's company was not privy to the agreement and could not have sued to enforce it, and this was one of the issues discussed in the Burns case, the judgment reads at p 267 (5221):

The control of all employees employed by either Burns or the company remained in the control of GWG in that there was no competing line in any of the added lines, and had there been any competition with GWG, that line would not have been continued.

The employees of the Edmonton office, including Burns, were regarded by GWG as employees of that company, and were paid by GWG when necessary, although charged against Burns’ commission, and reported to Burns.

GWG was the company by whom he had always been employed as a sales agent. Certainly no such relationship existed between plaintiff in the present case and Primrose Garments. It is true that he did not properly assign his contract with Primrose Garments to Bernard Feinstein Inc or cause it to enter into a new contract with the company as was done in the case of Ralph J Sazio v MNR, [1968] CTC 579; 69 DTC 5001, but certainly the reality of the situation was that Bernard Feinstein Inc received and dealt with all the income received from the Primrose Garment agency in the same manner as from all the other agencies from manufacturers with which there was no written agreement.

The case of Lagacé can also, I believe, be distinguished. In that case Jackett, P, as he then was stated at p 107 (5149):

The most significant feature of the appellants’ contention in this Court, as it strikes me, is that it is inherent in the contention that profits that would otherwise have accrued to the appellants have ended up in the name of a company controlled by them, not because of bona fide business transactions between the appellants and such company, but because of transactions that have been arranged between them to implement a contract between the appellants and a third person to accomplish objects desired by the third person. In other words, the contention is based on the assumption that profits of the appellants’ business operations were put into the hands of the company by a device and that the profits were not the result of the company having embarked on business transactions. In my view, therefore, the short answer to the contention, even assuming the facts to have been established, is that, for the purposes of Part I of the Income Tax Act, profits from a business are income of the person who carries on the business and are not, as such, income of a third person into whose hands they may come.

The fact that defendant has cast some doubt as to the right of the company to income earned from the contract with Primrose Garments is not in my view sufficient to conclude that all the income earned by the company through the efforts of Mr Feinstein, his wife, and other employees of the company from sales of garments for other manufacturers should be deemed to be income of Mr Feinstein personally and not of the company.

As Cattanach, J, stated in the Sazio case (supra) at p 588 (5007):

Ever since the Salomon case, [1897] AC 22, it has been a well settled principle, which has been jealously maintained, that a company is an entirely different entity from its shareholders. Its assets are not their assets, and its debts are not their debts. It is only upon evidence forbidding any other conclusion can it be held that acts done in the name of the company are not its acts or that profits shown in its accounts do not belong to it. The fact that a company may have been formed to serve the interests of a particular person is not sufficient to establish the relationship of principal and agent between that person and the company. In order to hold otherwise it must be found that the company is a “mere sham, simulacrum or cloak”.

It is my view that the evidence in the present appeals is conclusive that such is not the case. It must also be borne in mind that the company engaged in a variety of activities other than supplying the football coaching services of the appellant and I can see no logical reason for segregating the football coaching services from those other activities.

Similarly I can see no logical reason for segregating the income from the Primrose Garments’ contract from the other income earning activities of the company.

For the year 1971 I might have had more doubt but for the fact that Bernard Feinstein Inc continued to have residual income from commissions for sales completed before the end of its fiscal year on May 31, 1970 even though no commission sales activities were being carried on after that date. In the spring of 1970 and thereafter Mr Feinstein was no longer a sales agent but had his own manufacturing business Modes Bilboquet which in turn as previously indicated was 50% owned by Bernard Feinstein Inc. The nature of his work changed and he was now primarily performing styling services and what he refers to as service management for Modes Bilboquet. Instead of being paid directly by that company however it paid Bernard Feinstein Inc for his services. This appears to be a rather indirect manner for him to be remunerated for what were at that time essentially personal services. However since this was not the only source of income for Bernard Feinstein Inc for the year in question I do not find that it justifies attributing all the income of that company to him. In the case of The Commissioners of Inland Revenue v Peter McIntyre Ltd, 12 TC 1006, referred to by Cattanach, J, in the Sazio judgment the respondent company carried on the business of auctioneers. The whole conduct of the business was in the hands of the managing director who held more than half the shares, the remainder being held by near relatives. The question arose as to whether the company could claim an exemption for profits of ‘’any profession the profits of which are dependent mainly on the personal qualifications of the person by whom the profession is carried on”. The Lord President (Clyde) pointed out the profits were earned by the company in the business carried on by it. That business consisted in performing for its clients the services of an auctioneer, valuator and estate agent. Such a business was, in part at least, what is known as a profession. Later he added, “For a professional business may be carried on by a company as well as by an individual’’.

While Canadian cases such as Kindree v MNR, [1965] 1 Ex CR 305; [1964] CTC 386; 64 DTC 5248, have held that a profession such as the practice of medicine cannot be carried on by a corporation due to the provisions of the Medical Act and the code of ethics of the profession, that is not the case here.

In conclusion therefore plaintiff’s reassessments for the 1969, 1970 and 1971 years are referred back to the Minister for reassessment in accordance with these Reasons, on the basis of not assessing him for business income transferred from Bernard Feinstein Inc, that he be allowed as a deduction that portion of his reassessment adding to his remuneration the amount of $5,264.20 in his 1970 taxation year, but that payments to his former wife as alimony only be allowed as a deduction following September 1, 1970.