Muldoon,
J.:—The
issue
in
contention
in
this
appeal
is
whether
or
not
the
plaintiff
was
obliged,
in
regard
to
its
1978
and
1979
taxation
years,
to
have
deducted
or
withheld
for
remission
to
the
Receiver
General,
tax
equal
to
15
per
cent
of
the
amounts
paid
or
credited
to
Kenmar
Corporation
(hereinafter:
Kenmar)
or
to
Kenneth
Elliott,
its
principal
shareholder
president,
treasurer
and
a
director,
pursuant
to
subsection
215(1)
of
the
Income
Tax
Act
and
paragraph
1
of
article
XI
of
the
Canada-U.S.
Tax
Convention.
plaintiff
asserts
and
the
defendant
denies
that
each
amount
so
paid
or
credited
was
not
“a
management
or
administration
fee
or
charge”
mentioned
in
paragraph
212(1)(a)
of
the
Act,
being
excluded
therefrom
by
subsection
212(4)
of
the
Act.
For
the
reasons
which
follow,
the
Court
holds
that
the
defendant's
contentions
in
this
matter
prevail.
The
main
statutory
provisions
are
these:
212(1)
Every
non-resident
person
shall
pay
an
income
tax
of
25%
[15%
pursuant
to
the
Tax
Convention]
on
every
amount
that
a
person
resident
in
Canada
pays
or
credits,
or
is
deemed
by
Part
I
to
pay
or
credit,
to
him
as,
on
account
or
in
lieu
of
payment
of,
or
in
satisfaction
of,
(a)
a
management
or
administration
fee
or
charge;
212(4)
For
the
purpose
of
paragraph
(1)(a),
"management
or
administration
fee
or
charge”
does
not
include
any
amount
paid
or
credited
or
deemed
by
Part
I
to
have
been
paid
or
credited
to
a
non-resident
person
as,
on
account
or
in
lieu
of
payment
of,
or
in
satisfaction
of,
(a)
a
service
performed
by
the
non-resident
person
if,
at
the
time
he
performed
the
service
(i)
the
service
was
performed
in
the
ordinary
course
of
a
business
carried
on
by
him
that
included
the
performance
of
such
a
service
for
a
fee,
and
(ii)
the
non-resident
person
and
the
payer
were
dealing
with
each
other
at
arm's
length,
or
(b)
a
specific
expense
incurred
by
the
non-resident
person
for
the
performance
of
a
service
that
was
for
the
benefit
of
the
payer,
to
the
extent
that
the
amount
so
paid
or
credited
was
reasonable
in
the
circumstances.
Opposing
counsel
in
this
appeal
have
most
helpfully
co-operated
in
preparing
an
agreed
statement
of
facts
which
is
Exhibit
1,
herein.
It
runs
thus:
1.
The
Plaintiff
was
incorporated
under
the
laws
of
Ontario
on
March
27,
1975.
At
all
material
times,
its
fiscal
year
end
was
January
31st.
2.
The
Plaintiff
carried
on
the
business
of
manufacturing
and
marketing
plastic
substances
and
articles,
primarily
plastic
parts
and
plastic
injection
mouldings
used
in
the
manufacture
of
automobiles.
3.
Shares
were
issued
and
allotted
by
the
Plaintiff
as
follows:
|
NUMBER
OF
|
PRICE
|
NUMBER
OF
|
PRICE
|
|
COMMON
|
PER
|
PREFERENCE
|
PER
|
|
SHAREHOLDER
|
SHARES
|
SHARE
|
SHARES
|
SHARE
|
|
Richard
R.
Walker,
|
|
|
Trustee
for
|
|
|
Kenneth
Elliott
|
400
|
$.25
|
14,400
|
$1.00
|
|
Richard
R.
Walker,
|
|
|
Trustee
for
|
|
|
John
Morillo
|
330
|
$.25
|
11,800
|
$1.00
|
|
Leonard
Melvin
|
|
|
McBride
|
270
|
$.25
|
9,720
|
$1.00
|
4.
On
January
1,
1977,
Kenneth
Elliott
transferred
his
shares
to
his
wife,
Mary
Elliott
by
way
of
gift.
5.
By
an
Agreement
which
was
to
take
effect
from
October
16,
1978
Leonard
McBride
sold
[to]
Maclen
Industrial
Management
Limited
(Maclen)
his
270
common
shares.
6.
During
the
Plaintiff’s
1978
and
1979
taxation
years,
its
shareholders
and
their
respective
holdings
of
the
issued
and
outstanding
common
shares
of
the
Plaintiff
were
as
follows:
|
Mary
Elliott
|
40%
|
|
John
Morillo
|
33%
|
|
Maclen
|
27%
|
|
(from
October
16,
1978)
|
|
7.
Pursuant
to
written
agreements
dated
May
15,
1975,
the
Plaintiff
engaged
John
Morillo
and
Kenmar
Corporation
to
act
as
co-managers
of
the
Plaintiffs
business.
8.
Kenmar
Corporation
was
incorporated
under
the
laws
of
the
State
of
Michigan
on
April
12,
1961.
Kenmar
is
a
non-resident
of
Canada
and
a
resident
of
the
United
States
of
America.
9.
Pursuant
to
an
Agreement
dated
May
15,
1975,
the
Plaintiff
engaged
Leonard
McBride
to
act
as
general
manager
of
its
business.
10.
Pursuant
to
an
Agreement
dated
June
24,1977,
the
Plaintiff
engaged
Maclen
as
general
manager
and
Maclen
agreed
to
supply
the
services
of
Leonard
McBride.
The
prior
agreement
of
May
15,
1975
was
terminated
as
of
May
31,
1977.
11.
The
shareholders
of
Kenmar
Corporation
during
the
Plaintiff’s
1978
and
1979
taxation
years
were
Kenneth
Elliott
and
his
eight
children.
Kenneth
Eliott
held
15,000
shares
and
each
of
his
eight
children
held
500
shares.
12.
During
the
Plaintiff’s
1978
and
1979
taxation
years,
and
throughout
the
1978
and
1979
calendar
years,
the
directors
and
officers
of
the
Plaintiff
were:
|
Leonard
McBride
|
—
Director,
President
|
|
Richard
Walker
|
—
Director,
Secretary
|
Richard
Walker
was
a
nominee
director
for
Mrs.
Elliott
and
Mr.
Morillo.
13.
During
the
Plaintiff’s
1978
and
1979
taxation
years,
and
throughout
the
1978
and
1979
calendar
years,
the
directors
and
officers
of
Kenmar
Corporation
were:
|
Kenneth
Elliott
|
—
Director,
President
and
Treasurer
|
|
Mary
Elliott
|
—
Director
and
Secretary
|
|
Charles
McDonald
|
—
Assistant
Secretary
|
|
Brian
Sullivan
|
—
Director
|
14.
The
Plaintiff
accrued
management
fees
in
favour
of
the
three
managers
in
respect
of
its
January
31,
1978
fiscal
year
in
the
following
amounts:
|
Maclen
|
$121,900
|
|
John
Morillo
|
$
89,100
|
|
Kenmar
Corporation
|
$108,000
|
15.
The
plaintiff
accrued
management
fees
in
favour
of
the
three
managers
in
respect
of
its
January
31,
1979
fiscal
year
in
the
following
amounts:
|
Maclen
|
$410,000
|
|
John
Morillo
|
$285,000
|
|
Kenmar
Corporation
|
$345,000
|
16.
The
amounts
referred
to
in
paragraph
14
above
were
paid
or
credited
by
the
Plaintiff
during
the
1978
calendar
year.
17.
The
amounts
referred
to
in
paragraph
15
above
were
paid
or
credited
by
the
Plaintiff
during
the
1979
calendar
year.
Evidence
was
adduced
at
trial
consisting
of
testimony
and
documents
to
the
number
of
22,
if
one
includes
the
plaintiff’s
income
tax
returns
and
various
notices
certified
as
being
relevant
to
this
appeal
by
the
Minister.
A
tabbed
book
of
documents
was
received
as
Exhibit
2,
and
its
contents
are
Exhibits
2-1
to
2-16.
The
testimony
and
oral
arguments
of
counsel
were
transcribed
into
typescript
form.
According
to
the
documents
received
as
Exhibits
2-10
to
2-14,
inclusive,
there
were
two
Kenmar
companies,
Kenmar
Corporation
and
Kenmar
Sales
Corporation,
but
it
appears
that
nothing
in
this
litigation
turns
upon
that
fact,
as
explained
by
the
plaintiff’s
witness,
Charles
R.
McDonald,
a
Michigan
attorney.
(Transcript:
pp.
79
and
80.)
The
fundamental
management
contract
is
Exhibit
2-10,
a
written
agreement
made
“to
take
effect
as
and
from
the
15th
day
of
May,
1975"
between
the
plaintiff,
therein
called
the
“Corporation"
and
Kenmar
Corporation,
therein
called
the
“Manager."
The
agreement
is
not
unduly
lengthy
in
its
provisions
and
can
be
profitably
recited
here
in
full,
thus:
1.
For
the
term
and
subject
to
the
terms
and
conditions
hereinafter
contained,
the
Corporation
hereby
engages
the
Manager
and
the
Manager
hereby
accepts
such
engagement
as
a
co-manager
of
the
Corporation's
business.
2.
For
its
services
during
the
term
of
this
Agreement
there
shall
be
allocated
to
the
Manager
of
the
Corporation
such
share
of
the
net
profits
of
the
Corporation
before
taxation
in
each
fiscal
year
of
the
Corporation
as
its
board
of
directors
in
their
discretion
shall
determine,
and
any
such
share
of
the
net
profits
so
allocated
shall
be
paid
by
the
Corporation
to
the
Manager
at
such
time
thereafter
as
they
shall
mutually
agree
upon,
but
in
any
event
not
later
than
the
end
of
the
immediately
succeeding
fiscal
year
after
such
allocation
is
made.
3.
If
at
any
time
during
any
fiscal
year
of
the
Corporation
while
this
Agreement
is
in
force
and
effect
the
Manager
shall
draw
amounts
as
may
be
approved
by
the
Corporation
all
such
amounts
shall
be
charged
to
the
Manager’s
drawing
account
which
the
Corporation
shall
establish
for
the
Manager,
and
such
amounts
shall
be
a
debt
due
to
the
Corporation
which
the
Manager
agrees
to
repay
to
the
Corporation
on
or
before
the
end
of
the
year
following
the
fiscal
year
in
which
any
such
drawing
is
made.
4.
During
the
term
of
this
agreement,
the
Manager
shall
devote
its
best
efforts
to
the
business
and
affairs
of
the
Corporation,
it
being
understood
and
agreed,
however,
that
the
Manager
is
otherwise
engaged
in
the
business
and
operations
of
the
Manager
and
other
business
affairs
and
accordingly
the
efforts
and
time
of
the
Manager
must
necessarily
be
allocated
in
accordance
with
the
discretion
of
the
Manager.
5.
This
Agreement
shall
enure
to
the
benefit
of
and
be
binding
upon
the
parties
hereto,
but
shall
not
be
assignable
by
either
party
without
the
consent
of
the
other
party
thereto.
6.
This
Agreement
shall
continue
in
full
force
and
effect
if
and
so
long
as
Kenneth
Elliott
(the
principal
shareholder
of
the
Manager)
shall
continue
to
be
a
shareholder
of
the
Corporation
(either
personally
or
through
means
of
a
trustee)
and
upon
his
ceasing
to
be
a
shareholder
this
Agreement
shall
automatically
terminate.
Although
this
contract,
Exhibit
2-10
with
its
amending
agreement,
Exhibit
2-11,
leaves
it
to
the
imagination
to
divine
what
services
are
to
be
performed
by
Kenmar
for
the
plaintiff,
it
can
hardly
be
pretended
that
paragraphs
2
and
3
do
not
provide
for
a
“management
or
administration
fee
or
charge"
within
the
meaning
of
paragraph
212(1
)(a)
of
the
Income
Tax
Act.
Is
it,
however,
excluded
from
the
operation
of
section
215
because
of
the
provisions
of
subsection
212(4)?
The
services
performed
by
Kenmar
for
the
plaintiff
were
those
described
in
paragraph
6
of
the
statement
of
claim,
as
Mr.
McDonald
elaborated
in
his
testimony.
(Transcript:
pp
73
to
77.)
Paragraph
6
asserts
this:
6.
Pursuant
to
the
Agreement
dated
May
15,
1975,
Kenmar
performed
the
following
services
for
the
Plaintiff
during
its
1978
and
1979
taxation
years:
(a)
Market
research
and
product
direction;
(b)
Know-how
and
expertise
in
the
automobile
industry;
(c)
Operations
planning;
(d)
Financial
planning;
(e)
Annual
audit
assessment.
Mr.
K.
M.
McBride,
the
plaintiff’s
president
since
1977,
also
explained
in
some
detail
what
services
were
provided
to
the
plaintiff
by
Mr.
Elliott's
company,
Kenmar.
(Transcript:
pp.
39
to
41.)
According
to
the
structure
of
subsection
212(4),
the
first
question
arises
in
subparagraph
(a)(i)
as
to
whether
at
the
times
at
and
during
which
Kenmar
performed
those
services
for
the
plaintiff,
each
of
the
services
“was
performed
in
the
ordinary
course
of
business
carried
on
by
“[Kenmar]”
that
included
the
performance
of
such
a
service
for
a
fee.”
Exhibit
2-14
is
a
management
agreement
made
by
Kenmar
Sales
Corporation
and
a
Brazilian
company,
whose
name
is
obscured,
for
sales
promotion
and
for
performance
of
“all
services
required
to
manage
the
business
affairs
of
[the
Brazilian
company]
in
the
Territory,
including,
but
not
limited
to,
bookkeeping,
management
services,
warehousing
and
shipping
of
Products
in
the
Territory
.
.
.,”
as
more
particularly
set
out
in
Clause
10
of
the
agreement.
Clause
6
of
that
agreement,
Exhibit
2-14,
provides
for
a
commission
schedule
of
specific
fees
or
charges
payable
to
Kenmar
calculated
upon
stated
percentages
of
aggregate
net
sales
per
year.
Exhibits
3
and
4
constitute
an
exchange
of
correspondence,
in
1978,
between
Chamberlain
Plastics
Limited,
of
England
regarding
very
precisely
specified
commissions
it
would
pay
to
Kenmar
on
sales
promoted
by
the
latter
in
Canada
and
the
U.S.A.
The
plaintiff
also
contracted
for
management
services
with
its
president's
corporation,
Maclen,
and
with
one
John
Morillo,
now
deceased.
Those
contract
documents
are
exhibited
as
Exhibits
2-5,
2-6,
2-7,
2-8
and
2-9.
They
are
quite
similar
to
Kenmar's
contract
with
the
plaintiff,
Exhibit
2-10,
in
many
aspects.
According
to
Mr.
McDonald,
Kenmar
also
provided
management
services
to
another
corporation,
Peerless
Plastics
Limited
in
Windsor.
(Transcript:
p.
82
and
p.
87.)
The
late
John
Morillo
was
its
president
from
1971
until
his
death
in
1982.
(Transcript:
pp.
12
and
13.)
It
is
the
contention
of
the
defendant's
counsel
that
the
plaintiff's
payments
to
Kenmar
did
not
meet
the
exigency
of
subparagraph
212(4)(a)(i)
of
the
Act.
Why?
Counsel
related
his
contention
to
an
example
which
he
elicited
in
cross-examination
of
Charles
McDonald.
Counsel
asked
Mr.
McDonald
about
fixing
commissions
according
to
a
percentage
of
sales
promoted,
and
the
cross-examination
proceeded
as
follows:
A.
No,
I
think
the
majority
of
KENMAR’s
contracts
do
not
have
a
decreasing
commission
rate
with
increasing
sales
as
this
one
does.
Q.
I’m
sorry,
I
didn’t
mean
in
particularities
but
a
normal
commercial
agreement
will
have
specific
percentage
rates
and
so
on?
A.
Yes.
Q.
You
wouldn’t
normally
leave
it
up
to
the
person
you’re
working
for
to
determine
unilaterally
how
much
you’re
going
to
make,
would
you?
A.
I
don’t
suppose
I
would.
Q.
No.
A.
I
guess
if
I
owned
40
per
cent
of
that
person
I
might
consider
it.
Q.
Why
is
that?
A.
Because
I’d
have
some
influence
over
what
the
amount
would
be.
(Transcript:
pp.
99
and
100.)
Counsel
then
correctly
contended
that
every
aspect
of
the
statutory
exclusion
of
the
subparagraph
must
be
complied
with,
but
went
on
to
argue
that
to
perform
the
service
"in
the
ordinary
course
of
business/'
it
must
be
performed
for
the
"ordinary
fee.”
(Transcript:
p.
163.)
In
dialogue
with
the
Court,
counsel
reiterated
that
contention
as
may
be
seen
on
pages
171
and
172
of
the
transcript.
Counsel
indicated
that
he
had
no
authority
for
this
contention,
other
than
what
he
asserted
is
the
plain
reading
of
the
provision.
(Transcript:
p.
163.)
Counsel
was,
no
doubt,
anticipating
his
argument
on
arm's
length
dealing.
In
any
event,
the
plain
reading
of
the
subparagraph
discloses
that
Parliament
is
not
at
all
concerned
with
the
ordinariness
or
otherwise
of
the
fee,
so
long
as
there
be
a
fee.
The
provision
contemplates
“a
fee"
for
"the
service
..
.
performed
in
the
ordinary
course
of
a
business
carried
on
by
him
[the
non-resident
person]"
which
business
"includes
the
performance
of
such
a
service
for
a
fee.”
Parliament
is
concerned
that
the
business
in
its
ordinary
course
be
a
revenue-generating
business.
It
is
obviously
quite
unconcerned
about
the
basis
of
calculation
or
other
manner
of
fixing
the
amount
of
the
fee,
so
long
as
that
"amount
so
paid
or
credited"
be
"reasonable
in
the
circumstances.”
The
evidence
here
clearly
reveals
that
the
providing
of
management
services
was
indeed
the
ordinary
course
of
one
of
Kenmar's
businesses.
The
other
business
was
and
remains
sales
promotions.
One
way
or
another,
depending
on
the
customers'
needs
or
proclivities
—
as
one
may
reasonably
infer
—
the
providing
of
management
services
generates
“a
fee"
and
that
is
the
ordinary
course
of
Kenmar’s
business.
There
is
no
evidence
that
it
provides
management
services
gratuitously
or
even
for
charity.
Kenmar
is,
in
the
ordinary
course
of
its
businesses,
dedicated
to
earn
fees,
in
reasonable
amounts
in
all
circumstances,
no
matter
how
such
fees
are
calculated
or
charged.
Clearly
the
management
fee
paid
by
the
plaintiff
to
Kenmar
in
and
for
1978
and
1979
does
not
run
afoul
of
subparagraph
212(4)(a)(i)
of
the
Act.
How
does
it
fare
in
regard
to
subparagraph
212(4)(a)(ii)
which
exacts
that
"the
non-resident
person
[Kenmar]
and
the
payer
[the
plaintiff]
were
dealing
with
each
other
at
arm’s
length"?
This
is
quite
a
different
matter.
On
this
issue
there
is
copious
jurisprudence.
Opposing
counsel
seemed
to
agree
that
the
locus
classicus
on
arm's
length
dealing
is
the
decision
of
the
Supreme
Court
of
Canada
in
M.N.R.
v.
Sheldon’s
Engineering
Limited,
[1955]
S.C.R.
637;
[1955]
C.T.C.
174.
That
case
is
much
cited
in
subsequent
jurisprudence
and
can
be
adequately
sampled
in
a
passage
from
Swiss
Bank
Corporation
and
Swiss
Credit
Bank
v.
M.N.R.,[1971]
C.T.C.
427;
71
D.T.C.
5235,
a
judgment
of
Chief
Justice
Thurlow,
then
of
the
Exchequer
Court
of
Canada.
At
436-38
(5240-41),
Thurlow,
J.
is
reported
as
having
written
this:
A
useful
discussion
of
the
concept
involved
in
the
expression
“dealing
at
arm's
length"
and
similarly
worded
expressions
in
the
Income
Tax
Act
and
the
Estate
Tax
Act
is
found
in
the
judgment
of
my
brother,
Cattanach,
J.
in
M.N.R.
v.
T.
R.
Merritt
Estate,
[1969]
2
Ex.
C.R.
51;
[1969]
C.T.C.
207,
where
at
page
61
[216]
he
said:
In
M.N.R.
v.
Sheldon's
Engineering
Ltd.
(1955),
S.C.R.
637;
[1955]
C.T.C.
174,
Locke,
J.,
delivering
the
judgment
of
the
Supreme
Court
of
Canada,
had
occasion
to
comment
upon
the
expression
“dealing
at
arm’s
length"
as
it
appeared
in
a
provision
in
the
Income
Tax
Act.
He
said
at
page
643
[p.
179]:
The
expression
is
one
which
is
usually
employed
in
cases
in
which
transactions
between
trustees
and
cestuis
que
trust,
guardians
and
wards,
principals
and
agents
or
solicitors
and
clients
are
called
into
question.
The
rea-
sons
why
transactions
between
persons
standing
in
these
relations
to
each
other
may
be
impeached
are
pointed
out
in
the
judgments
of
the
Lord
Chancellor
and
of
Lord
Blackburn
in
McPherson
v.
Watts
(1877),
3
App.
Cas.
254.
It
becomes
important,
therefore,
to
consider
what
help
can
be
obtained
from
the
judgment
in
Sheldon’s
Engineering
as
to
the
meaning
of
the
words
"persons
dealing
at
arm’s
length”
when
taken
by
themselves.
The
passage
in
that
judgment
from
which,
in
my
view,
such
help
can
be
obtained,
is
that
reading
as
follows:
Where
corporations
are
controlled
directly
or
indirectly
by
the
same
person,
whether
that
person
be
an
individual
or
a
corporation,
they
are
not
by
virtue
of
that
section
deemed
to
be
dealing
with
each
other
at
arm’s
length.
Apart
altogether
from
the
provisions
of
that
section,
it
could
not,
in
my
opinion,
be
fairly
contended
that,
where
depreciable
assets
were
sold
by
a
taxpayer
to
an
entity
wholly
controlled
by
him
or
by
a
corporation
controlled
by
the
taxpayer
to
another
corporation
controlled
by
him,
the
taxpayer
as
the
controlling
shareholder
dictating
the
terms
of
the
bargain,
the
parties
were
dealing
with
each
other
at
arm’s
length
and
that
Section
20(2)
was
inapplicable.
In
my
view,
the
basic
premise
on
which
this
analysis
is
based
is
that,
where
the
“mind”
by
which
the
bargaining
is
directed
on
behalf
of
one
party
to
a
contract
is
the
same
"mind”
that
directs
the
bargaining
on
behalf
of
the
other
party,
it
cannot
be
said
that
the
parties
are
dealing
at
arm’s
length.
In
other
words
where
the
evidence
reveals
that
the
same
peron
was
"dictating”
the
"terms
of
the
bargain”
on
behalf
of
both
parties,
it
cannot
be
said
that
the
parties
were
dealing
at
arm’s
length.
To
this
I
would
add
that
where
several
parties
—
whether
natural
persons
or
corporations
or
a
combination
of
the
two
—
act
in
concert,
and
in
the
same
interest,
to
direct
or
dictate
the
conduct
of
another,
in
my
opinion
the
"mind”
that
directs
may
be
that
of
the
combination
as
a
whole
acting
in
concert
or
that
of
any
one
of
them
in
carrying
out
particular
parts
or
functions
of
what
the
common
object
involves.
Moreover
as
I
see
it
no
distinction
is
to
be
made
for
this
purpose
between
persons
who
act
for
themselves
in
exercising
control
over
another
and
those
who,
however
numerous,
act
through
a
representative.
On
the
other
hand
if
one
of
several
parties
involved
in
a
transaction
acts
in
or
represents
a
different
interest
from
the
others
the
fact
that
the
common
purpose
may
be
to
so
direct
the
acts
of
another
as
to
achieve
a
particular
result
will
not
by
itself
serve
to
disqualify
the
transaction
as
one
between
parties
dealing
at
arm’s
length.
The
Sheldon's
Engineering
case,
(supra),
as
I
see
it,
is
an
instance
of
this.
Reference
may
also
be
made
to
the
judgments
of
Cameron,
J.
in
M.N.R.
v.
Kirby
Maurice
Company
Limited,
[1958]
Ex.
C.R.
77;
[1958]
C.T.C.
41,
and
Ancaster
Development
Company
Limited
v.
M.N.R.,
[1961]
Ex.
C.R.
201;
[1961]
C.T.C.
91,
as
well
as
the
judgment
of
my
brother,
Noël,
J.,
in
Pender
Enterprises
Limited
v.
M.N.R.,
[1966]
Ex.
C.R.
180;
[1965]
C.T.C.
343.
As
noted,
the
impugned
control
does
not
have
to
be
exercised
by
only
one
person.
It
may
be
imposed
by
a
group
or
consortium
upon
a
factually
subordinate
entity.
Close
control
may
endure
for
a
long
time
throughout
the
extent
of
the
arrangement,
but
since
most
contractual
relationships
or
similar
arrangements
tend
by
their
very
nature
and
purpose
to
bind
their
participants
into
dealings
of
closer
proximity
than
"arm’s
length,”
the
critical
time
for
the
exercise
or
discernment
of
non-arm’s-length
dealing
is
truly
at
the
inception
of
the
questioned
relationship.
The
testimony
elicited
at
trial
here
is
telling
in
this
regard.
Mr.
McBride
testified
in
chief
thus:
Q.
I
understand
you’re
the
President
of
Windsor
Plastic?
A.
That's
correct.
Q.
Were
there
any
other
directors?
A.
Richard
Walker
is
a
director.
Q.
Were
Mr.
Elliott
or
his
wife
Mary
or
Mr.
Morillo
ever
directors,
per
se,
legal
directors?
A.
No,
they
were
never
legal
directors.
Q.
How
were
business
decisions
in
the
company
made
then?
A.
Well,
in
effect,
Mr.
Walker
was
a
nominee
director
for
Mr.
Morillo
and
for
KENMAR
and
in
reality
the
directors
were
John
Morillo
and
myself
and
Ken
Elliott.
Q.
That
being
so,
then
how
were
directors'
decisions
or
business
decisions
made
between
the
three
of
you?
A.
We
would
meet
and
come
up
with
a
compromise
solution
of
any
problems
and
would
so
direct
the
directors
to
pass
the
resolutions.
(Transcript:
pp.
45
and
46.)
He
further
testified:
Q.
Now,
when
the
principals
decided
to
look
at
the
question
of
paying
management
fees
to
the
co-managers
in
respect
of
the
'78
fiscal
period
and
'79
fiscal
period
of
the
Plaintiff,
when
would
these
meetings
generally
take
place?
A.
The
meetings
would
take
place
in
the
spring
of
the
year
when
the
draft
financial
statements
were
available.
Q.
And
can
you
describe
how
the
amounts
of
management
fees
which
were
eventually
paid
to
KENMAR
and
Mr.
Morillo
in
the
'78
and
’79
fiscal
years
were
determined?
How
did
this
happen?
A.
In
effect,
we
would
determine
a
fee
for
Maclen
Industrial
Management
first
and,
based
on
the
results
of
that
fiscal
year,
there
would
be
a
bonus
applied
based
on
the
performance
of
the
company.
After
that
point
we
would
decide
on
the
participation
of
the
various
managers
for
any
additional
fees
which
would
be
accrued.
This
was
done
through
a
general
agreement
between
the
three
parties.
Q.
All
right.
How
would
you
determine
what
amount
you
were
going
to
be
paying
to
the
co-managers
initially
or
all
of
the
managers?
A.
We
would
basically
determine
what
amount
would
be
paid
based
on
the
contribution
of
the
manager
on
that
fiscal
year.
Q.
Did
you
specifically
discuss
the
allocation
of
management
fees
in
1978
and
'79
with
anybody
from
KENMAR?
A.
Yes,
I
discussed
it
with
Mr.
McDonald
and
with
Mr.
Elliott.
Q.
Was
Mr.
McDonald
present
at
the
meeting
that
you
had
to
discuss
this?
A.
Yes,
he
was.
Q.
Now,
did
Mr.
Elliott
discuss
the
amount
of
fees
that
he
felt
KENMAR
should
receive?
A.
Yes,
he
did.
Q.
And
how
was
it
worked
out
that
KENMAR
would
receive
the
amount
it
did?
A.
Basically,
we'd
work
out
the
Maclen
fee
and
Mr.
Elliott
would
have
conversations
with
Mr.
Morillo
to
find
out
..
.
come
to
a
common
ground
between
those
two
as
well,
and
we
would
arrange
.
.
.
come
up
with
a
number
that
would
be
suitable
for
all
parties
that
we
could
accept.
Q.
Now,
the
amounts
paid
to
Mr.
Morillo
and
KENMAR
Corporation
bear
the
same
relation
as
their
shareholdings
do;
is
that
not
correct?
A.
That’s
correct.
Q.
How
did
that
result
occur?
A.
Through
mutual
agreement
between
Mr.
Elliott
and
Mr.
Morillo.
Q.
Did
Mr.
Elliott
ever
suggest
that
he
should
receive
more
fees
or
less
fees
than
the
amount
that
was
ultimately
resolved?
A.
Not
to
my
knowledge.
Q.
And
on
the
understanding
that
you
had
between
the
three
of
you,
had
he
insisted
that
KENMAR
Corporation
receive
more
fees,
what
would
have
happened?
A.
I
think
there
would
be
a
great
deal
more
discussion.
Q.
Ultimately
would
he
have
been
able
to
get
more
fees?
A.
No.
(Transcript:
pp.
49
to
52.)
Questioned
by
the
court
for
clarification
as
to
what
he
meant
about
the
fees
actually
bearing
the
same
relationship
to
each
other
as
the
three
managers'
shareholding,
the
witness
related
(at
p.
55):
The
fee
after
MacLen
.
.
.
MacLen
was
paid
a
base
fee
and
then
a
bonus
based
on
the
operation.
And
after
that
it
worked
out
that
the
fees,
the
remainder
of
the
profits
were
basically
divided
based
on
the
shareholdings.
That’s
the
way
it
worked
out.
Plaintiff's
counsel
then
attempted
to
lead
this
witness
to
modify
that
statement,
and
then
cross-examination
commenced.
On
cross-examination
Mr.
McBride
testified:
Q.
Could
I
ask
you
to
turn
to
Tab
12
[Ex.
2-12];
and
that’s
again
an
agreement
dated
May
15th,
1975
between
Windsor
Plastic
and
KENMAR
Sales
Corporation.
And,
as
I
understand
it,
KENMAR
Sales
Corporation
was
again
controlled
by
Mr.
Elliott
and
members
of
his
family?
A.
That’s
correct.
Q.
Now,
there’s
also
provision
indicated
that
if
Mr.
Elliott
ceases
to
be
a
shareholder
of
Windsor
Plastic,
again
the
agreement
determined
.
.
.
Who
wanted
that
provision?
A.
This
provision
was
common
to
all
three
of
the
principals
in
the
company.
We
mutually
agreed
that
we
would
all
have
the
same
restrictions.
(Transcript:
pp.
66
and
67.)
Finally,
at
the
end
of
his
testimony,
Mr.
McBride
answered
as
follows:
Q.
Were
any
dividends
ever
paid
by
Windsor
Plastic?
A.
No.
Q.
So,
the
way
that
Mr.
Elliott
was
able
to
get
his
part
of
the
profits
out
of
Windsor
Plastic,
apart
from
5
per
cent,
was
through
the
management
fees
that
were
paid?
A.
That’s
correct.
(Transcript:
p.
71)
An
interesting
passage
occurs
in
the
transcription
of
the
cross-examination
of
Charles
R.
McDonald:
Q.
Okay.
Now,
you
were
indicating
in
your
testimony
that
the
degree
of
shareholding
was
of
no
significance
in
terms
of
the
amounts
that
were
paid
out?
A.
Well,
I
don't
think
it
was
of
no
significance
but
I
think
it
was
.
.
.
it
provided
a
compromise
point
which
was
acceptable
to
the
parties.
It
was
not
a
coincidence
that
they
arrived
at
that
but
it
was
not
any
predetermined
thought.
It
was
where
we
came
out
when
we
sat
down
to
discuss
it.
Q.
You
knew
of
course
that
the
shareholding
ranged
from
27
to
40
per
cent?
A.
Yes.
Q.
Why
were
not
the
shares
equally
divided:
a
third,
a
third
and
a
third?
A.
Because
Mr.
Elliott
was
unwilling
to
do
that.
Q.
Why
was
he
unwilling
to
do
that?
A.
He
wanted
40
per
cent.
He
figured
he
could
bring
the
sales
and
the
other
two
had
to
make
the
parts.
He
figured
that
was
worth
40
per
cent
or
he
could
take
them
elsewhere.
Q.
He
could
...
?
A.
Or
he
could
take
the
sales
elsewhere.
Q.
I
see.
Mr.
Elliott
thought
that
he
could
obtain
the
business?
A.
Well,
he
had
the
business
for
Reflex.
Q.
So,
he
could
in
fact
deliver
the
Ford
contract?
A.
He
felt
that.
Q.
Therefore
he
wanted
40
per
cent
of
the
company?
A.
That’s
correct.
Q.
With
the
idea
he'd
get
40
per
cent
of
the
profits?
A.
I'm
not
sure
that
was
his
idea.
I
think
he
wanted
40
per
cent
of
the
equity.
Q.
Why
did
he
want
40
per
cent
of
the
equity?
A.
Because
he
felt
that
it
was
a
company
that
had
a
good
chance
of
prospering,
as
it
has.
Q.
And
perhaps
he
wanted
40
per
cent
of
the
prosperity?
A.
Yes.
(Transcript:
pp.
97
and
98.)
Mr.
Richard
R.
Walker,
the
plaintiffs
corporate
solicitor
was
the
third
and
last
witness
to
testify.
His
evidence
completes
the
picture:
Q.
I
see.
Now,
have
you
been
a
director
of
the
Plaintiff
since
incorporation
up
until
the
present
time?
A.
Yes,
with
one
qualification:
for
a
period
of
approximately
a
year
after
the
death
of
John
Morillo
I
was
not
a
director.
Q.
I
see.
Now,
it’s
indicated
in
paragraph
3
of
the
Agreed
Statement
of
Facts
that
you
held
common
shares
and
preference
shares
as
trustee
for
Kenneth
Elliott
and
for
John
Morillo?
A.
That's
correct.
Q.
In
that
sense
you
were
then
a
nominee
shareholder
for
them?
A.
That's
correct.
Q.
During
the
1975
to
1979
fiscal
years
of
the
Plaintiff
how
were
corporate
decisions
actually
made?
A.
Well,
in
point
of
fact,
the
decision-making
group
were
the
.
.
.
were
effectively
the
shareholders.
The
directors
were
required,
of
course
as
a
matter
of
corporate
law.
It
was
in
the
circumstances
thought
best
to
have
two
directors
but
both
directors
in
that
sense
were
perceived
as,
in
a
sense,
nominees.
The
decision-making
process
was
carried
on
by
Mr.
McBride,
Mr.
Elliott
and
Mr.
Morillo.
Q.
If
I
could
then
sum
up
what
you
said:
the
effective
directors
were
the
shareholders,
Mr.
Morillo,
Mr.
or
Mrs.
Elliott
and
Mr.
McBride?
A.
Yes.
Q.
Was
there
any
understanding
then
that
you
knew
of
as
to
how
directors'
decisions
would
be
made
by
the
three
shareholders?
A.
Well,
I
was
involved
with
the
organization
of
the
company
from
its
inception.
There
was
no
understanding,
if
by
that
you
mean
a
legal
document.
It
was
clear
as
a
matter
of
practice
that
in
point
of
fact
the
principals
of
the
company,
which
was
a
closely
held
corporation,
were
going
to
arrive
at
decisions
effectively
by
consensus;
and
that
actually
held
true
throughout
the
years;
still
holds
true
today.
Q.
Now,
in
fact,
the
three
shareholders
negotiated
with
respect
to
the
payment
of
management
fees?
A.
Yes.
Q.
If
you
could
take
a
look
at
the
resolution
at
Tab
16
of
Plaintiff’s
Book
of
Documents.
That’s
the
resolution
referred
to
earlier
whereby
certain
management
fees
were
accrued
in
favour
of
the
managers
in
respect
of
the
company's
1978
fiscal
period.
Is
that
your
signature
there
on
that
resolution?
A.
Yes,
that’s
correct.
Q.
Now,
you
and
Mr.
McBride
signed
this
resolution,
I
take
it,
as
directors
of
Windsor
Plastic?
A.
Yes.
Q.
How
did
it
come
to
your
attention
that
fees
in
these
amounts
had
been
accrued
in
favour
of
the
manager
set
out
there?
A.
Well,
first
of
all,
it
may
be
helpful
to
explain
that
the
form
of
that
resolution
is
a
form
which
the
accounting
firm,
Touche,
Ross,
and
I
settled
upon
in
respect
of
like
resolutions
in
other
corporations
that
we
act
for.
And
the
practice
that
exists
between
our
two
offices
is
that
when
management
bonuses
or
commissions
have
been
decided
upon,
they
forward
to
me
a
draft
resolution
in
that
form.
So
that
the
resolution
drafted
but
unsigned
came
to
me
from
the
office
of
Touche,
Ross
and
it
came
from
them
after
the
principals
involved—Morillo,
Elliott,
McBride—had
gotten
together
to
decide
the
matter.
(Transcript:
pp.
105
to
107.)
The
three
founders
of
the
plaintiff
(transcript:
pp.
26
and
27)
always
controlled
it.
The
plaintiff
simply
had
to
award
them
their
management
contracts,
naturally
always
including
that
of
Kenmar,
and
the
plaintiff
simply
had
to
pay
them
each
the
no
doubt
reasonable
fees
which
they
designated
in
concert
for
1978
and
1979.
None
of
them
dealt
at
arm's
length
with
their
captive
creature,
the
plaintiff,
but
it
is
not
necessary
so
to
find
in
regard
to
Morillo
and
Maclen/McBride.
It
follows
necessarily
that
the
non-resident
person,
Kenmar
and
the
payer,
Windsor
Plastic
Products
Limited,
the
plaintiff
were
not
dealing
with
each
other
at
arm’s
length
during
the
material
times.
From
this,
it
must
be
held
that
management
fee
or
charges
in
question
were
not
in
compliance
with
subparagraph
212(4)(a)(ii)
of
the
Income
Tax
Act.
Therefore
those
fees
were
such
as
are
contemplated
in
and
by
paragraph
212(1)(a)
and
subsection
215(1)
of
the
Act.
The
Minister’s
view
of
the
matter
is
correct:
the
sums
in
question
ought
originally
to
have
been
withheld
from
Kenmar's
fee
and
remitted
by
the
plaintiff.
Accordingly
the
plaintiff’s
appeal
is
dismissed
with
costs.
Appeal
dismissed.
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