Décary,
J:—The
issue
in
this
appeal
is
whether
a
direction
of
the
Minister
of
National
Revenue
under
subsection
138A(2)
of
the
Income
Tax
Act
RSC
1952,
c
148
that
in
the
1967,
1968
and
1969
taxation
years
the
plaintiff
and
two
other
corporations
should
be
deemed
to
be
associated
ought
to
be
vacated.
During
the
relevant
period
the
subsection
provided
that:
Where,
in
the
case
of
two
or
more
corporations,
the
Minister
is
satisfied
(a)
that
the
separate
existence
of
those
corporations
in
a
taxation
year
is
not
solely
for
the
purpose
of
carrying
out
the
business
of
those
corporations
in
the
most
effective
manner,
and
(b)
that
one
of
the
main
reasons
for
such
separate
existence
in
the
year
is
to
reduce
the
amount
of
taxes
that
would
otherwise
be
payable
under
this
Act
the
two
or
more
corporations
shall,
if
the
Minister
so
directs,
be
deemed
to
be
associated
with
each
other
in
the
year.
Under
subsection
138A(3)
On
an
appeal
from
an
assessment
made
pursuant
to
a
direction
under
this
section,
the
Tax
Appeal
Board
or
the
Exchequer
Court
may
(a)
confirm
the
direction;
(b)
vacate
the
direction
if
(ii)
in
the
case
of
a
direction
under
subsection
(2),
it
determines
that
none
of
the
main
reasons
for
the
separate
existence
of
the
two
or
more
corporations
is
to
reduce
the
amount
of
a
tax
that
would
otherwise
be
payable
under
this
Act;
or
(c)
vary
the
direction
and
refer
the
matter
back
to
the
Minister
for
reassessment.
The
question
to
be
decided
is
thus
whether
it
has
been
established
that
none
of
the
main
reasons
for
the
separate
existence
of
the
plaintiff
and
the
other
corporations
was
to
reduce
the
amount
of
tax
that
would
otherwise
be
payable
under
the
Act.
The
question
is
one
of
fact.
But,
in
considering
it,
it
is
to
be
borne
in
mind
that
it
is
quite
possible
that
there
may
be
more
than
one
main
reason
for
the
separate
existence
of
two
or
more
corporations.
Indeed
that
is
recognized
by
the
language
of
both
subsection
2
and
subsection
3,
and
that
the
question
is
not
whether
there
were
other
main
reasons
but
whether
one
of
the
main
reasons
was
to
reduce
the
amount
of
tax
that
would
otherwise
be
payable.
The
fact
that
there
were
other
main
reasons
is
no
doubt
relevant
and
may
in
some
cases
help
to
negative
a
conclusion
that
the
reduction
of
tax
was
a
main
reason.
But,
the
existence
of
other
main
reasons
while
relevant
and,
conceivably,
depending
on
their
nature,
persuasive,
will
not
alone
answer
the
question
unless
such
reasons
are
inconsistent
with
or
are
enough
to
negative
the
reduction
of
tax
payable
as
a
main
reason.
On
the
other
hand
the
word
“main”
must
be
given
its
significance.
In
the
French
language
version
of
the
statute,
the
corresponding
word
is
“principaux”.
Not
every
reason
will
meet
this
standard.
Thus,
even
where
the
reduction
of
taxes
payable
is
a
reason,
a
judgment
must
still
be
made
as
to
whether
it
was
a
main
or
principal
reason.
Another
word
that
must
be
given
its
significance
is
“separate”.
In
its
context
it
qualifies
and
means
the
scope
of
the
word
“existence”.
The
inquiry
is
not
therefore
to
ascertain
the
main
reason
for
the
existence
of
the
corpora-
tion
but
the
main
reasons
for
its
existence
as
an
entity
separate
from
the
other
corporation
or
corporations
in
question.
Reported
cases
on
these
provisions
are
fairly
numerous
but
each
of
them
turns
on
its
particular
facts.
Two
cases
serve
to
illustrate
how
the
Courts
have
dealt
with
the
question.
In
The
Queen
v
Decker
Contracting
Limited,
[1976]
CTC
731;
[1978]
CTC
838;
76
DTC
6477;
79
DTC
5001,
where
the
taxpayer
failed,
the
Court
was
not
persuaded
that
the
reasons
put
forward
for
the
existence
of
separate
corporations
were
the
only
reasons
and
that
tax
reduction
was
a
main
reason.
The
situation
was
that
one
of
the
companies,
owned
by
the
wives
of
the
shareholders
of
the
other,
performed
equipment
repair
services
for
and
rented
business
premises
to
the
other.
Prior
to
the
incorporation
of
the
wives’
company
the
premises
had
been
owned
by
the
husbands’
company
and
it
had
done
its
own
equipment
repair
work.
In
The
Queen
v
Bobbie
Brooks
(Canada)
Limited,
[1973]
CTC
431;
73
DTC
5357,
where
the
taxpayer
succeeded,
the
situation
was
also
one
that
might
be
referred
to
as
a
husband
and
wife
situation.
The
Court
was
persuaded
that
the
husband’s
company
never
did
want
to
take
on
the
manufacture
and
sale
of
the
new
line
of
sports
wear
marketed
under
the
name
of
“Bobbie
Brooks”
which
was
a
distinct
business
from
that
of
the
manufacture
and
sale
of
ladies
dresses
and
not
normally
carried
on
by
the
same
company,
and,
(2)
did
not
want
to
jeopardize
its
assets
in
a
new
speculative
venture.
I
turn
now
to
the
facts.
The
two
corporations
with
which
it
was
directed
that
the
plaintiff
be
deemed
associated
were
Ben
Mandelcorn
Inc
and
Lenco
Fibre
Corporation.
At
all
material
times
both
were
owned
outright
by
Leonard
Mandelcorn
and
were
on
that
account
associated
with
each
other
for
the
purposes
of
the
Income
Tax
Act
under
section
39.
There
is
no
issue
as
to
that.
Leonard
Mandelcorn
is
the
husband
of
Elaine
Mandelcorn
who
at
all
material
times
has
been
the
owner
of
all
the
issued
shares
of
the
plaintiff.
Ben
Mandelcorn
Inc
was
incorporated
in
1959
to
continue
a
business
that
had
been
carried
on
for
many
years
prior
to
his
death
by
Ben
Mandelcorn,
the
father
of
Leonard
Mandelcorn.
The
operation
was
one
of
purchasing
old
mattresses,
jute
bags,
cotton
and
synthetic
waste
material
and
selling
it.
In
the
taxation
years
in
question
it
had
a
warehouse
on
St
Dominique
Street
in
Montreal
and
seven
employees.
Lenco
Fibre
Corporation
was
also
incorporated
in
1959.
Some
years
earlier
Leonard
Mandelcorn
had
been
one
of
the
principals
in
a
corporation
known
as
Allen
Waste
Corporation
whose
business
had
been
the
purchase
from
producers
and
others
of
synthetic
fibre
material
and
selling
it.
The
company
had
failed
and
gone
into
bankruptcy.
The
incorporation
of
Lenco
Fibre
Corporation
was
Mandelcorn’s
second
venture
into
the
synthetic
fibre
business
but
this
time
the
driving
force
behind
it
was
his
wife,
Elaine.
As
he
no
longer
had
credit
with
the
producers,
it
was
she
who
had
to
approach
and
persuade
them
to
sell
material
to
the
new
company
and
in
this
she
succeeded
where
her
husband
could
not.
The
business
was
materially
different
from
that
of
Ben
Mandelcorn
Inc.
It
consisted
in
acquiring,
when
opportunity
presented,
from
producers
such
as
Dupont
of
Canada
or
Canadian
Celanese
bulk
quantities
not
of
waste
but
of
surplus
or
substandard
synthetic
fibres,
and
selling
them
in
bulk
for
use
in
mills
where
they
could
be
blended
with
other
fibres.
These
surplus
or
substandard
fibres
were
material
that
the
producers
would
not
use
in
producing
goods
for
their
own
market
but
which
they
were
prepared
to
sell
on
terms
requiring
that
the
material
be
exported.
From
the
time
of
its
incorporation
until
1966
sales
of
this
material
by
the
plaintiff
were
made
only
to
dealers
in
the
United
States
who
in
turn
sold
the
fibres
to
European
mills.
In
those
years
Elaine
Mandelcorn
acted
as
a
part
time
employee
of
the
company
and
drew
a
salary
commencing
in
1961
at
$1200,
which
by
1966
had
increased
to
$7800
from
Lenco
Fibre
Corporation
and
$3500
from
Ben
Mandelcorn
Inc.
The
operation
of
Lenco
Fibre
Corporation
involved
only
occasional
need
for
warehousing
as
most
of
the
material
moved
directly
from
the
producer
to
the
plaintiff’s
customers.
The
company
had
no
employees
other
than
Leonard
and
Elaine
Mandelcorn.
Elaine
Mandelcorn
was
registered
as
the
holder
of
one
share,
which,
with
the
others,
belonged
to
her
husband,
and
she
was
a
director
of
the
Company.
In
May
1966
shortly
before
the
incorporation
of
the
plaintiff
she,
at
the
insistence
of
a
solicitor
who
acted
for
her
husband
and
his
companies
and
for
her
as
well,
transferred
the
share
to
one
of
the
solicitor’s
employees.
She
also
ceased
to
be
an
employee
of
her
husband’s
companies.
Thereafter
her
services
continued
as
before
but
were
paid
for
as
commission
earned
by
her
company.
Since
its
incorporation
in
May,
1966,
the
plaintiff
has
carried
on
only
as
an
agent
in
the
purchasing
and
selling
of
synthetic
fibres
for
Lenco
Fibre
Corporation
and
synthetic
waste
material
for
Ben
Mandelcorn
Inc.
Apart
from
some
minor
amounts
of
interest
on
investments,
its
revenue
consists
only
of
commission
agreed
upon
between
Leonard
and
Elaine
Mandelcorn,
the
amount
depending
on
the
financial
success
of
each
purchase
and
sale
in
which
the
plaintiff
is
involved.
The
company
has
no
employees
other
than
Elaine
Mandelcorn.
Its
office
is
a
room
in
the
basement
of
the
Mandelcorn
home.
The
office
has
a
filing
cabinet,
a
chair,
a
typewriter
and
stationery.
Its
listed
telephone
number
is
the
number
of
the
Mandelcorn
residence.
The
occasion
for
the
incorporation
of
the
plaintiff
arose
when
the
Mandelcorns
set
out
to
sell
the
Lenco
Fibre
Corporation’s
synthetic
fibres
directly
to
the
European
mills
and
thus
to
increase
the
profit
by
eliminating
the
US
dealers.
For
this
purpose
they
went
to
Europe
in
1966
and
succeeded
in
securing
several
customers.
Thereafter
sales
were
made
directly
to
European
mills
as
well
as
to
United
States
dealers.
In
the
years
that
followed,
sales
and
profits
of
the
husband’s
companies
increased
substantially
and
by
1969
were
more
than
double
what
they
had
been
in
1966.
The
sales
of
these
companies,
their
gross
profits
and
the
commission
paid
to
the
plaintiff
were
as
follows:
|
Lenco
Fibre
|
Ben
Mandelcorn
|
|
Lenco
Fibre
Corp
|
Canada
Corp
|
|
Gross
|
|
Year
Sales
|
Profit
|
Sales
|
Profit
|
Commissions
|
1965
|
$320,816
|
$72,922
|
$429,654
|
$37,033
|
|
1966
|
517,387
|
79,757
|
518,060
|
63,415
|
|
1967
|
476,283
|
76,051
|
517,231
|
113,537
|
$21,391
|
1968
|
521,915
|
150,405
|
630,775
|
103,116
|
24,753
|
1969
|
993,401
|
163,445
|
1,037,399
|
80,210
|
51,643
|
On
the
evidence
there
is
no
reason
to
question
the
reasonableness
of
the
amounts
paid
as
commissions.
Nor
would
their
amount
have
been
unreasonable
had
they
been
paid
directly
to
Elaine
Mandelcorn
for
her
services
rather
than
to
her
corporation.
Further,
there
is,
in
my
view,
no
inference
unfavourable
to
the
plaintiff
to
be
drawn
from
the
fact
that,
from
the
time
of
its
incorporation,
the
services
provided
by
Elaine
Mandelcorn
to
her
husband’s
companies
were
remunerated
by
commissions
rather
than
or
in
place
of
salary.
Elaine
Mandelcorn’s
evidence
as
to
her
object
in
having
the
plaintiff
incorporated
was
as
follows:
Q.
Why
was
the
company
formed?
Lenco
Fibre
Canada
Corporation.
A.
Because
I
wanted
to
build
up
my
own
capital.
I
.
.
.
my
husband’s
company
was
very
susceptible
to
claims,
and
I
wanted
to
be
able
to
build
up
an
independent
capital.
Q.
And
did
you
conceive
this
Lenco
Fibre
Canada
Corporation
as
being
a
way
of
doing
this?
A.
I
did.
Yes,
I
did.
Q.
I
see.
Now,
then,
did
you
consult
your
accountant,
Mr
Spector,
about
the
tax
consequences
of
forming
Lenco
Fibre
Canada
Corporation?
A.
No,
I
did
not.
Q.
Did
you
discuss
this
with
your
other
accountants?
A.
No.
Q.
Did
you
discuss
it
with
a
lawyer,
whether
there
were
any
special
tax
consequences
to
forming
Lenco
Fibre
Canada
Corporation?
A.
No,
I
did
not.
Q.
Did
you,
at
this
time,
know
that
there
were
2
different
rates
for
corporate
taxes
for
companies?
A.
No,
I
did
not.
Q.
When
did
you
find
out
about
it?
A.
I
don’t
remember,
but
later;
at
a
later
date.
Leonard
Mandelcorn’s
evidence
on
the
same
point
was
as
follows:
Q.
Do
you
remember
what
her
opening
salary
was?
A.
$100
a
month.
Q.
Did
there
.
.
.
and,
during
the
period
of
time,
say,
1965
and
66,
did
she
continue
to
work
for
the
company?
A.
Yes.
She
did.
Q.
Did
you
find
her
work
satisfactory?
A.
If
it
wasn’t
for
her,
I
wouldn’t
have
been
in
business.
Q.
I
see.
Did
there
come
a
time
when
there
was
cause
to
be
incorporated,
a
company
called
Lenco
Fibre
Canada
Corporation?
A.
Yes.
Q.
Would
you
indicate
who
caused
that
company
to
be
formed?
A.
My
wife
did.
Q.
Why?
A.
She’s
a
very
independent
individual.
And
she
always
wants
to
be
secure.
When
her
father.
.
.
she’s
an
only
child,
and
her
father,
who
had
a
big
business
.
.
.
when
I
say
“big”:
he
employed
over
a
hundred
people!
Q.
Yes.
A.
And
he
wanted
her
to
do
certain
things
for
him,
and
she
.
.
.
and
if
she
didn't
do
it,
she
wouldn’t
have
inherited
the
business.
And,
subsequently,
she
didn't
do
it,
and
she
was
disowned!
Q.
She
was
.
..
A.
As
an
only
child!
Q.
She
was
.
..
A.
She
was
the
only
child!
Q.
I
see.
Now,
you
were
saying
that
your
wife
caused
this
company
to
be
formed?
Did
you
consult
with
any
accountant?
With
Mr
Spector,
or
any
other
accountant,
about
any
tax
consequences
of
forming
Lenco
Fibre
Canada
Corporation?
A.
No.
Q.
Did
you
talk
to
any
lawyers
about
the
tax
consequences?
A.
No.
Q.
Were
you
aware,
at
that
time,
whether
the
company
...
2
companies
could
be
taxed
at
different
rates
of
taxation?
A.
No,
I
wasn’t.
Q.
Did
you
subsequently
find
out?
A.
When
this
all
came
about,
with
the
.
.
.
with
the
government
here,
I
started
to
learn
about
it.
Q.
I
see.
Now,
then,
did
you
object
to
your
wife
incorporating
the
company?
A.
No!
She
is
always
very
independent
in
all
her
ways!
So
.
.
.
it
didn’t
matter
to
me.
Q.
There
wasn’t
any
quarrel
about
it,
or
anything?
A.
Oh,
no!
None
of
this
evidence
was
shaken
in
cross-examination
and,
in
my
view,
it
is
consistent
with
the
other
evidence
and
is
credible.
I
find
from
it
as
well
as
from
the
whole
of
the
evidence
that
the
main
reason
for
the
existence
of
the
plaintiff
as
an
entity,
separate
from
that
of
the
two
corporations
owned
by
Leonard
Mandelcorn
in
the
years
in
question,
was
to
enable
Elaine
Mandelcorn
to
realize,
through
a
corporation
of
which
she
was
the
owner,
the
value
of
the
services
she
was
rendering
to
her
husband’s
corporations
free
from
any
claims
against
them
that
might
threaten
the
result
of
her
efforts
to
build
up
the
business
if
she
simply
continued
to
act
as
a
salaried
employee.
She
might,
of
course,
have
guarded
against
that
danger
by
receiving
commissions
directly,
instead
of
salary,
with
the
same
result
for
the
profits
of
her
husband’s
companies.
But
the
fact
that
she
elected
to
receive
the
commissions
through
a
corporation
was
an
alternative
way
that
was
open
to
her
for
accomplishing
the
same
purpose.
The
existence
of
the
plaintiff
as
an
entity
separate
from
Mrs
Mandelcorn
as
an
individual
and
the
reasons
therefor
are
not
what
is
in
issue,
whether
the
result
is,
or
is
not,
a
reduction
in
taxes
that
might
otherwise
be
payable.
I
also
find
that
none
of
the
main
reasons
for
the
incorporation
and
separate
existence
of
the
plaintiff
was
to
reduce
income
taxes
that
would
otherwise
have
been
payable.
I
assume
that
the
solicitor
was
aware
that
the
effect
of
Elaine
Mandelcorn
continuing
as
a
shareholder
of
Lenco
Fibre
Incorporated
after
the
incorporation
of
the
plaintiff
would
be
that
the
two
corporations
would
be
associated
for
income
tax
purposes
and
that
it
was
for
that
reason
that
he
arranged
for
her
to
transfer
the
share
of
Lenco
Fibre
Corporation,
registered
in
her
name,
before
the
plaintiff
was
incorporated.
But
that
in
itself
does
not
show
that
a
reduction
in
taxation
was
a
reason,
let
alone
a
main
reason,
for
the
plaintiff’s
incorporation
and
its
existence
as
an
entity
separate
from
the
other
companies.
It
would
mean
that
the
solicitor
was
aware
of
the
danger
and
took
proper
care
of
his
client’s
interests.
And
in
view
of
the
evidence
of
both
Mandelcorns
that
they
were
unaware,
at
the
time,
of
the
difference
in
the
tax
rates
applicable
to
the
corporations,
there
is,
in
my
view,
nothing
in
the
evidence
upon
which
a
conclusion
that
the
reduction
of
taxes
was
a
main
reason
of
either
Mrs
or
Mr
Mandelcorn
for
the
incorporation
and
the
existence
of
the
plaintiff
separate
from
that
of
Mr
Mandelcorn’s
corporations
could
properly
be
based.
Moreover,
nothing
in
the
figures
as
to
sales
and
profits
or
in
the
reasons
which
appear
to
have
influenced
the
Minister’s
decision
would,
in
my
view,
serve
to
rebut
or
outweigh
the
evidence
of
Mrs
Mandelcorn
and
her
husband
on
the
question.
The
appeal
will
therefore
be
allowed,
with
costs,
the
direction
of
the
Minister
under
section
138A
will
be
vacated
and
the
reassessments
will
be
referred
back
to
the
Minister
for
reassessment
accordingly.