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,  CTC 731;  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,  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:
|Ben Mandelcorn||Lenco Fibre Corp||Canada Corp|
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?
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?
Q. Would you indicate who caused that company to be formed?
A. My wife did.
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!
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?
Q. Did you talk to any lawyers about the tax consequences?
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.