Brulé, T.C.C.J.:—The appellants, Saratoga Construction Ltd. ("Construction"), Saratoga Building Corporation ("Building") and Habitations Montvillage Inc. ("Habitations"), appeal against reassessments issued for the 1972-1974 taxation years pursuant to a direction issued by the Minister of National Revenue ("respondent") under subsection 247(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") wherein the respondent directed that the appellants be deemed “associated” for the purpose of calculating income tax for each taxation year. Other years were involved in these appeals but all were abandoned and are dismissed. The appeals were heard on common evidence.
The sole issue involved was whether or not the respondent was correct in directing that the appellants be deemed "associated" pursuant to subsection 247(2) of the Act.
Appeals such as these are primarily decided by the facts. With this in mind a detailed review of the facts is warranted, and follows.
Mark Schwartz associated in the late 1950s with Herman Luger, Saul Luger and David Nisker in a real estate partnership. This partnership lasted ten years and began with the development and sale of land in Châteauguay and eventually included the sale and development of land both in and outside the greater Montreal area. The partnership dissolved in 1968 with the result that Mark Schwartz acquired all shares in Saratoga Development; model homes in the Montreal suburb, Kirkland; and, exclusive rights to proceed with independent projects under the name "Saratoga Development Corporation". He was also given the right to use the name " Saratoga Construction Ltd." in place of the name "Saratoga Development Corporation”.
During the separation process, Mark Schwartz caused Construction to be incorporated on December 15, 1967. Construction's controlling common shareholder was Mark Schwartz and the other common shareholders were Esperanza Schwartz, his wife, and Sofia Schwartz, his mother. Saratoga Development owned all of the preferred shares in Construction. Saratoga Development advanced all start-up funds to Mark Schwartz and Construction. Much of Mark Schwartz's equity was tied up in Saratoga Development.
In 1968, Construction began its business of building and selling houses in Kirkland. Its year end was completed December 31 but, in 1973, its year end changed to August 31. In 1968 Mark Schwartz founded Windsor Holdings Inc. ("Windsor") to acquire more land in Kirkland but Construction continued to build and sell homes in Kirkland. On cross-examination, Mark Schwartz indicated that Windsor may have been created as early as the 19505. The advertising of Construction was in English.
Habitations was incorporated March 26, 1969 and all of its issued capital stock was held in trust for Lisa and Gabriella Schwartz, the children of Mark Schwartz. This trust was created by deed settled on December 31, 1971. Lisa and Gabriella Schwartz were seven and ten years old respectively at the time of incorporation.
Habitations did not operate as a builder. It carried on business in St. Bruno and Brossard, French suburbs of Montreal. This work had previously been undertaken by Construction whose corporate name was gradually phased out of the area. Habitations had a French trade name and advertising in the French and English languages but French was predominant. In addition/'spec" books and floor plans were provided in French. There was evidence from Mark Schwartz that the purpose of incorporating Habitations was, inter alia, to insulate it and the beneficial owners from risks associated with simultaneous projects being developed on the West Island, another Montreal suburb, and with the construction end of the business in general.
In 1969, an agreement was entered into between Construction and Habitations to clarify liabilities and ownership of residential housing projects in Brossard and St. Bruno. Construction had been acting as the “ prête-nom" for Habitations in acquiring property rights and financing arrangements. It had also been constructing houses on behalf of Habitations. In the agreement, the parties mutually acknowledged and confirmed that Habitations was the “ real owner and developer"; that Habitations was responsible for the projects; and, that Construction was obliged to transfer on demand “all of the property rights and obligations” in connection with projects in Brossard and St. Bruno. Beginning in 1970, the sales made in St. Bruno were reflected in Habitations’ books and reported accordingly.
Building was incorporated May 16, 1969 and carried on the business of selling houses built by Construction. It did not build houses and was solely owned by shareholder, Esperanza Schwartz, who also acted as its president. Construction became the general contractor for Building. On December 5, 1967, the corporate ledger indicated that Esperanza Schwartz transferred her shares. The appellant, on cross-examination, was unable to explain why.
The different suburbs herein noted are composed of subdivisions inhabited by different types of residents with differing income levels. The West Island comprises principally of three suburbs: Beaconfield, Kirkland and Dollard-des- Ormeaux. These are listed in diminishing order of price range and are anglophone communities. The South Shore, consisting of St. Bruno and Brossard, are lower income and francophone communities. It was the evidence of Mark Schwartz that, in the late 1970s and early 1980s, the name "Saratoga" was phased out of the French speaking areas and eventually only Habitations operated in these areas. It was the evidence of Mark Schwartz that each corporate entity was designed to target a specific financial and linguistic clientele. Jean-Paul Bourbonnière testified on behalf of the appellant to the effect that he worked as a sales and construction manager for the appellants and Mark Schwartz. He became manager in 1990. He indicted that Saratoga operated mainly on the West Island and that Habitations did not operate there.
All three appellants had their own books and records where these transactions were reflected. They shared a head office but Habitations and Building each had a separate sales office on location. Habitations and Building had separate phone numbers but these numbers were not advertised in the phone book. The appellants submitted documentary evidence which established that Habitations and Building used separate and distinctive letterhead, business documents and business cards. Each of these items bore the respective corporate name.
Each corporation had a separate bank account; however, Mark Schwartz was authorized to execute all transactions on behalf of all appellants. It was assumed by the respondent and not rebutted by the appellants that Habitations and Building used the bank accounts for limited purposes such as receiving mortgage payments and investing in term deposits and affiliated companies while the day-to-day operations such as employee-salary payment were conducted through Construction's banking facilities.
Mark Schwartz acted as the operating manager for all the appellants. Esperanza Schwartz was not active in the operation of any of the appellants and had no signing authority over Building.
Some lending institutions, such as Canada Permanent Trust and Prudential Life, required the personal guarantee of Mark Schwartz for loans; other banks, such as Royal Bank of Canada, and Toronto-Dominion Bank did not. His liability for personal guarantees according to his balance sheet dated April 25, 1978, was $200,000 for bank advances to Construction. According to the same balance sheet, his contingent liability for mortgages to Construction and “other companies" for houses under construction was $5,200,000.
There was only one instance of an inter-company guarantee. In that case, a line of credit to Construction was backed by the other two appellants. In 1973, the line of credit was granted to Construction by the Toronto-Dominion Bank which required guarantees from Habitations and Building. For the period ending August 31, 1974, the notes to the financial statements of Building and for Habitations indicate a joint and severable liability as guarantors for bank advances made to Construction in the amounts of approximately $1,000,000. By 1975, the notes to the balance sheets of Habitations indicate that the liability had been reduced to $600,000 and, for 1979, the notes to the balance sheets of Habitations indicate liability for $345,807. Ultimately the amount was reduced to nil. The line of credit was secured by a general assignment of Construction's book debts.
There was a conflict in the evidence over whether there was at the relevant times a limit to the mortgages available to builders because of a quota imposed by the banks. Mark Schwartz's evidence was that the Kinross Corporation (affiliated with Canadian Imperial Bank of Commerce) refused mortgages because banking operations were exclusively with Toronto-Dominion Bank. Thus when Habitations was formed, the Canadian Imperial Bank of Commerce ultimately was appointed as its banker. However, it was revealed on cross- examination that Habitations made two banking resolutions. A resolution dated October 7,1971 appointed Toronto-Dominion and an earlier resolution dated May 11,1971 had appointed the Canadian Imperial Bank of Commerce. Gilles Vermette testified that he was an engineer and had known Mark Schwartz since 1966. He was an engineer with Canada Mortgage and Housing Corporation "CMHC" and in 1970, he was responsible for inspections. He testified that certain programs obtained more attention than others in the way of loans. He testified that, to get around the quota on loans, it was common practice to have companies use other companies which dealt in different areas to apply at branch offices for loans. He left CMHC in 1979.
Raymond Lalonde, accountant and Chief Auditor for Revenue Canada, Montreal Office, testified for the respondent. He stated that Revenue Canada had been advised by letter that the criteria used by banks to grant mortgages was the working capital of the client and that there was no corporate ceiling. Mr. Lalonde was relying on hearsay contained in the document and did not profess to have personal knowledge of the facts.
Mark Schwartz gave evidence that he received no advice regarding tax planning in the devising of this corporate structure. He further testified that the tax saving was small in any event because, after 1976, he could not claim the small business deduction. His evidence was that he would have incorporated in this manner even if there had been no tax saving.
The respondent's calculations, as taken from the notices of reply, show that, by claiming the small business deduction, if the corporations were not to be deemed "associated" the following would result:
[Chart not reproduced.]
In 1975, the three appellants came to the attention of Raymond Lalonde who, on February 6, 1976, wrote a letter to each of the appellants informing them that Revenue Canada intended to refer the corporations to the respondent in order to obtain a direction pursuant to subsection 247(2) of the Act deeming the appellants to be associated in the 1972, 1973 and 1974 taxation years. This letter was replied to by Mark Schwartz in a letter dated February 20, 1976, writing in his capacity as president of Construction. He claimed in this letter that incorporation was necessary for protection of personal net worth invested in Construction and to obtain sufficient mortgage funds. It was subsequently directed by the respondent that the appellants be deemed associated for the 1972-74 taxation years.
In support of their positions, counsel for the respondent and counsel for the appellants referred the Court to the below noted cases. Some of these authorities will be referred to in the judgment of this Court.
Abbotsford Building Supplies Ltd. v. M.N.R.,  Tax A.B.C. 314, 70 D.T.C. 1215 (T.A.B.);
Alpine Furniture Co. v. M.N.R.,  C.T.C. 532, 68 D.T.C. 5338 (Ex. Ct.);
The Queen v. Arthill Enterprises Ltd.,  C.T.C. 594, 75 D.T.C. 5419 (F.C.T.D.);
The Queen v. Bobbie Brooks (Canada) Ltd.,  C.T.C. 341, 73 D.T.C. 5357 (F.C.T.D.);
Capital Garment Co. v. M.N.R.,  C.T.C. 2199, 74 D.T.C. 1164 (T.R.B.);
Continental Stores Ltd. v. The Queen,  C.T.C. 688, 79 D.T.C. 5213 (F.C.T.D.);
Les Magasins Continental Ltée v. The Queen,  C.T.C. 428, 81 D.T.C. 5175 (F.C.A.);
Doris Trucking Co. Ltd. v. M.N.R.,  C.T.C. 303, 68 D.T.C. 5204 (Ex. Ct.);
M.N.R. v. Furnasman Ltd.,  C.T.C. 830, 73 D.T.C. 5599 (F.C.T.D.);
Grimshaw Planing Mills Ltd. v. M.N.R.,  C.T.C. 257, 69 D.T.C. 207 (T.A.B.);
Heath & Sherwood Drilling Ltd. v. M.N.R.,  Tax A.B.C. 518, 71 D.T.C. 338 (T.A.B.);
Holt Metal Sales of Manitoba Ltd. v. M.N.R.,  C.T.C. 144, 70 D.T.C. 6108 (Ex. Ct.);
Honeywood Ltd. v. The Queen,  C.T.C. 38, 81 D.T.C. 5066 (F.C.T.D.);
Jabs Construction Ltd. v. M.N.R.,  C.T.C. 2668, 83 D.T.C. 633 (T.C.C.);
Jordan Holdings Ltd. v. M.N.R.,  C.T.C. 2287, 75 D.T.C. 216 (T.R.B.); Jordans Rugs Ltd. v. M.N.R.,  C.T.C. 445, 69 D.T.C. 5290 (Ex. Ct.);
Kitchener News Leaseholds Ltd. v. M.N.R.,  C.T.C. 2305, 74 D.T.C. 1226 (T.R.B.);
Leggat Leasing (Halton) Ltd. v. M.N.R.,  C.T.C. 2030, 78 D.T.C. 1035 (T.R.B.);
Lenco Fibre Canada Corp. v. The Queen,  C.T.C. 374, 79 D.T.C. 5292 (F.C.T.D.);
Les Installations de I'Est Inc. v. The Queen,  1 C.T.C. 324, 90 D.T.C. 6174 (F.C.T.D.);
C. P. Loewen Enterprises Ltd. v. M.N.R.,  C.T.C. 396, 72 D.T.C. 6298 (F.C.T.D.);
Rosner Management Inc. v. M.N.R.,  1 C.T.C. 2153, 93 D.T.C. 127 (T.C.C.); Sandell Developments Ltd. v. M.N.R.,  C.T.C. 2393, 76 D.T.C. 1293
Veltri & Son Ltd. v. M.N.R.,  1 C.T.C. 2691, 91 D.T.C. 862 (T.C.C.); Warren Packaging Ltd. v. M.N.R.,  C.T.C. 2028, 83 D.T.C. 1 (T.R.B.).
Svend Krag-Hansen v. The Queen,  2 C.T.C. 69, 86 D.T.C. 6122 (F.C.A.);
Alpine Furniture Co. v. M.N.R.,  C.T.C. 532, 68 D.T.C. 5338 (Ex. C.R.);
The Queen v. Covertite Ltd.,  C.T.C. 464, 81 D.T.C. 5353 (F.C.T.D.);
Decker Contracting Ltd. v. The Queen,  C.T.C. 838, 79 D.T.C. 5001 (F.C.A.);
Classic's Little Books Inc. v. The Queen,  C.T.C. 94, 73 D.T.C. 5096 (F.C.T.D.);
Maritime Forwarding Ltd. v. The Queen,  1 C.T.C. 186, 88 D.T.C. 6114 (F.C.T.D.);
Kencar Enterprises Ltd. v. The Queen,  2 C.T.C. 246, 87 D.T.C. 5450 (F.C.T.D.);
Levitt-Safety (Eastern) Ltd. v. M.N.R.,  C.T.C. 483, 73 D.T.C. 5374 (F.C.T.D.);
Veltri & Son Ltd. v. M.N.R.,  1 C.T.C. 2691, 91 D.T.C. 862 (C.C.I.);
Les Magasins Continental Ltée v. The Queen,  C.T.C. 428, 81 D.T.C. 5175 (F.C.A.);
Pay-Less Meat Market Ltd. v. M.N.R.,  C.T.C. 102, 73 D.T.C. 5102 (F.C.T.D.);
Debruth Investments Ltd. v. M.N.R.,  C.T.C. 55, 75 D.T.C. 7012 (F.C.A.);
M.N.R. v. Howson & Howson Ltd.,  C.T.C. 36, 70 D.T.C. 6055 (Ex. C.R.);
Rosner Management Inc. v. M.N.R.,  1 C.T.C. 2153, 93 D.T.C. 127 (T.C.C.).
Counsel for the appellants took the position, based on the facts, that none of the main reasons for the separate existence of the three appellants was to reduce income taxes. Mark Schwartz had created a business plan to limit liability, to develop separate entities for the English and French markets and to enhance financing abilities.
Habitations, which was incorporated with Mark Schwartz's children as beneficial owners, allowed for a separate marketing target while building up assets for the children and shielding its assets from other risks in the overall business endeavours of Mark Schwartz. This incorporation also increased general financing opportunities and as well kept a lower scale product separate from an upper scale one of another company.
Building was incorporated with Esperanza Schwartz in mind as well as separating the construction aspect of the companies from a sales operation. This also gave protection from other risks and increased financial opportunities.
It was argued that this business plan was not necessarily beneficial tax wise because it inhibited the ability to deduct losses and because there was no benefit from the available small business reduction prior to 1972 even though such a tax benefit was available in prior years. Further, counsel argued that the prosperity of Building and Habitations resulted in the loss of small business deductions after 1976. Therefore it was his submission that, even if there had been no tax advantage, the plan would have been adopted in any event.
Counsel stated due to the increased income of the appellants, the tax advantage of claiming the small business deduction had been eliminated and that under Continental Stores Ltd., supra, therefore the fact that the appellants continued in the same form is evidence that tax avoidance was not a "main reason" for the initial incorporation. He therefore submitted that the reason to incorporate was not” tax driven” and that therefore, none of the main reasons can be considered to be the "reduction of tax".
He submitted that risk minimization or the validity of separation of risky ventures from non risky ventures has been recognized consistently by the courts particularly where loans are not generally guaranteed between and among the corporations. He submitted that such recognition applies even more so to the case at bar because there was only one guarantee and the downfall of Construction would not necessarily cause the downfall of Building or Habitations.
It was noted that the French/English, expensive/inexpensive diversity of market meant that marketing would be more efficient with separate corporate vehicles. This marketing strategy was, in counsel's submission, unimpaired by the existence of a shared head office since this fact was unknown to customers. He submitted that under the Quebec Companies Act, R.S.Q., c. C-38, sections 33 and 34, if one corporation undertook two marketing schemes such as this, both corporate names are required on contracts, thus negating the effect of separate marketing schemes. Therefore, it was his submission that the creation of two separate corporate vehicles was the only practicable way to achieve the desired market results.
Further by presenting two separate applications for loans, financing opportunities were increased because there were quotas by the lending institutions on the number of mortgages to be granted to each company. Therefore, counsel submitted that the vitality and scope of business operations was improved and that this was a valid business consideration.
The family of Mark Schwartz held their interests to avoid potential attack by the creditors of Mark Schwartz pursuant to personal guarantees on corporate loans. The courts have recognized the validity of such estate planning and risk minimizing considerations. The fact that Mark Schwartz was the sole driving influence did not derogate from these purposes.
Habitations and Building were taking on new enterprises in areas in which Construction did not operate. Therefore, these were new and totally different ventures creating higher total income and therefore adding to total taxes payable.
It was the respondent's position that the appellants were associated for several reasons. There was a family relationship between and among all shareholders of the three companies. The business of the three companies were all in the relatively same field and for the three there was common management and de facto control by Mark Schwartz. This management included a common daily bookkeeping which was only reconciled on an annual basis.
The names of Building and Habitations did not appear in advertising nor on the front of the office building nor in the phone directory. All three had the same lawyers, auditors and notaries. Construction dealt with all suppliers and subcontractors for each of the three companies and all were paid by Construction.
Respondent's counsel argued that the Court must infer from the nature of the plan adopted and the circumstances preceding its adoption that the probability of the reduction of tax was a“ main reason” for the adoption of the arrangement. He submitted that a“ "dominant reason” for separate incorporation was tax reduction in view of all the intimate connections between the individual parties, to reduce tax. Under Maritime Forwarding Ltd., supra, the assertations by the taxpayer as to intent were only persuasive to the extent that they may be directly or indirectly confirmed by or be consistent with known and objective fact. There was little or no confirmation of Mark Schwartz's assertions of intent given in evidence.
Counsel further submitted that, under Kencar Enterprises Ltd., supra, despite a stated intent to estate freeze, the appellants were nonetheless associated.
Several of the cases listed above were referred to by counsel in argument leading to the submission that the Court should find that the respondent was correct in deeming the appellants to be "associated".
The governing subsection of the Act (247(2)) reads as follows:
247(2) Associated corporations.—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.
In making a determination as to the validity of such a finding an examination of the motives behind the different companies and their existence will be realized in considering the facts as set out in the evidence and the credibility of the witnesses. These are the determining factors in deciding whether or not a determination of association by the respondent is correct. The case law dealing in this area has been very inconsistent and as a result jurisprudence is of limited help.
It is interesting however to consider some of the applicable jurisprudence. In Decker Contracting Ltd., supra, the argument was made that, because there was no reduction in tax by virtue of separate incorporation, the companies could not be deemed by the respondent associated. Urie, J. held, in respect of that argument, as follows at page 843 (D.T.C. 5004):
The phrase "to reduce the amount of taxes that would otherwise be payable under this Act" refers to the tax which would have been payable if the companies under consideration had not had a separate existence; in the circumstances of this case it must refer to the tax which would have been payable had the appellant either employed its own mechanics and owned its own premises, or had an associated company do so.
It was held that the companies were associated.
It is clear in these appeals that the separate incorporation of the taxpayers resulted in a tax saving of $74,567 under this type of analysis. Therefore, the question is whether one of the main reasons for separate existence in the taxation years was to reduce the amount of taxes that would otherwise be payable. This is a question of fact and involves assessing what Mark Schwartz’ intention was at the time that the companies were incorporated (Furnasman Ltd. et al., supra).
In Alpine Furniture Co., supra, it was held by Cattanach, J. at page 542 (D.T.C. 5345):
The fact that there may be two ways to carry out a bona fide commercial transaction, one of which would result in the imposition of a maximum tax and the other would result in the imposition of much less tax, does not make it a necessary consequence to draw the inference that in adopting the latter course one of the main objects is the avoidance of tax. (See C.I.R. v. Brebner,  1 All E.R. 779, Lord Upjohn at page 784). However, the foregoing proposition contemplates that the sole purpose to be accomplished is the bona fide commercial transaction.
In Jordans Rugs Ltd., supra, Sheppard, D.J., speaking for the Exchequer Court, considered corporations reorganized for various reasons including estate planning and regional control. The reorganization took place under a business plan which involved the creation of seven separate corporations. The evidence established that this plan was entered into to correct problems in marketing and management. There was also evidence to suggest that taxation was not considered in the formulation of the business plan. It was held, relying on Doris Trucking Co., supra and Alpine Furniture Co. et al., supra, that none of the main reasons for incorporation was income tax reduction.
Holt Metal Sales of Manitoba Ltd. et al., supra, (considered by the Federal Court of Appeal in Les Magasins Continental Ltée, supra,) was a decision of Jackett, J. for the Exchequer Court involving companies engaged in the scrap metal business. The two appellant companies were involved with a third company, Holt Metals, which was originally incorporated in 1955. All the shares in Holt Metals were owned by Mr. Holt. One appellant, Holt Metal Sales, was incorporated in 1958 to act as a broker for Holt Metals. All shares in Holt Metal Sales were owned by Mr. Holt's wife. The second appellant, Industrial Metals was incorporated in 1959 and dealt only with the buying and selling of ferrous scrap metals. All shares of Industrial Metals were held in trust for Mr. Holt's children. All companies were managed by Mr. Holt and shared the same office staff. The evidence established that there was a substantial tax savings resulting from the incorporations. The Court also noted that there was no change in business operations after the incorporations. There was evidence from Mr. Holt that he did not know about tax advantages when he chose to incorporate in this manner. His evidence suggested that the incorporation was for the purposes of estate planning and to segregate the risky end of the business from the safer ones.
At pages 149-50 (D.T.C. 6111-12), the Court recognized that:
If the evidence were such as to convince me that some or all of these and other reasons that have been advanced were sufficiently compelling in the minds of William Holt and his advisers to constrain them to select the creation of the appellants in preference to all other possible methods of achieving the same results. I should have thought that it might be open to me to conclude that the probable reduction in income taxes through having three companies instead of one to enjoy the 18 per cent tax rate was not one of the “main” reasons for deciding to have three companies instead of one.
The respondent's assessment was confirmed on the basis that there was no evidence to show that, in the minds of Mr. Holt and his advisors, the only practicable method to achieve the stated objectives was the creation of multiple companies.
In the present appeals the evidence would appear to be stronger than in Holt and the method used was practicable to achieve Mark Schwartz' objectives.
C.P. Loewen Enterprises Ltd., supra, was a decision of the Federal Court, Trial Division, enunciated by Cattanach, J. The Court considered whether two groups of lumber companies which were owned by three brothers were associated. Initially, there was only one corporation, but to facilitate a share purchase agreement effective on death of any brother, it was reorganized into two companies.
There was evidence to the effect that the brothers were aware that there might be a possibility of tax saving. They did not know that there was a possibility that the two groups of companies could be deemed associated by the respondent.
The Court found that the plan evolved as the most practicable way of achieving the desired objectives herein stated. Relying very strongly on the credibility of one witness, the Court held that the arrangement was dominated by considerations other than tax advantages and the respondent was incorrect in deeming the two groups of companies to be associated.
Furnasman Ltd. et al., supra, considered whether a ministerial direction under subsection 247(2) of the Act should be vacated in light of evidence which suggested that income tax savings was a consideration along with estate planning, family security, efficacy of operation, incentive, and sales control. The respondent's appeal was dismissed in light of the fact the main reason for incorporation was business efficacy. The Court stated as follows, at pages 836-37 (D.T.C. 5604), regarding the onus of proof:
Whenever, contrary to the great majority of taxation problems, a question of intention is paramount, credibility is of a very great importance. When evidence of intention is given by the party mainly responsible for the separate existence of the two corporations, to the effect that the question of income tax saving was not one of the main intentions for this separate corporate existence, and when, having regard to all of the other evidence and the other circumstances of the case, the Court is prepared to accept that evidence, then the burden of proof which the taxpayer must discharge has been satisfied and the Court must then find that the companies must be deemed to have not been associated. . . .
In my decision in Veltri & Son Ltd. et al., supra, one of the issues was whether the corporation Veltri & Son Ltd. ("Veltri") was associated with Lianna Developments Inc. ("Lianna") and 511060 Ltd. All of the shares of Veltri, which was in the construction and development business, were owned by Mario Veltri. All shares of Lianna were owned by Anna Veltri, wife of Mario Veltri. The one share of 511060 was sold to Frank Veltri, son of Mario Veltri.
The evidence established that Lianna was incorporated to protect the assets of Anna Veltri. There was further evidence to show that 511060 was purchased as a dormant company by the son who then entered into the construction business on his own but supervised by his father.
I considered the cases of Svend Krag-Hansen, supra, at page 71 (D.T.C. 6123), wherein it was stated:
In our opinion, the two paragraphs of subsection 247(2) require the Minister to make what is in substance only one determination, namely that the existence of the various corporations is not solely for the purpose of carrying out business in the most effective manner because one of the main reasons for the existence of separate corporations is to reduce the amount of tax payable under the Act.
I also relied on the case of The Queen v. Covertite Ltd., supra, at page 467 (D.T.C. 5355) for the onus of the burden of proof wherein it was stated:
To succeed, the taxpayer must: (a) disprove the facts assumed by the Minister in reaching his conclusion; or (b) convince the Court that the inferences drawn by the Minister from the facts assumed were unreasonable and unwarranted; or (c) add further facts capable of changing the whole picture and leading to different inferences pointing to the conclusion that the other reasons alleged have actually been prevalent.
I held that Veltri and Lianna were associated because there was an overlap of business activity, resources and overhead to the point where Lianna was an extension of Veltri. However, I held that 511060 was not associated since it provided a vehicle for the son to create his own enterprise without undue reliance on the other companies.
In Rosner Management Inc., supra, this Court relied on the test enunciated in Jordans Rugs Ltd., supra. The Court considered an operating corporation, Bryan's Fashions, which was owned by two corporations. One of the two corporations was in turn owned by Brian Rosner and the other by the comptroller of Bryan's Fashions and the corporate taxpayer. The corporate taxpayer was subject to and owned by a family trust of which Brian Rosner's two teenage sons were the beneficiaries. Brian Rosner provided management services to Bryan's Fashions and was the effective voice of both it and the corporate taxpayer. Because there was insufficient evidence to establish that the reasons cited; namely estate freezing and establishment of a vehicle to provide management services and risk minimization from labour disputes, the Court held that, under the test in Jordans Rugs Ltd., supra, there would have been no incorporation if there was no tax advantage to doing so. The respondent's direction was confirmed.
In Leggat Leasing (Halton) Ltd., supra, at page 2033 (D.T.C. 1037), Prociuk, Q.C., endorsed the principle that, merely because one individual is the driving force behind the entire operation does not create evidence that the separate existence of the taxpayer corporations was not solely for the purpose of carrying out business in the most effective manner.
The concept that estate freezing is a valid objective was affirmed by the Federal Court, Trial Division in Arthill Enterprises Ltd., supra, wherein, in holding that the corporations were not associated, it was stated at page 600 (D.T.C. 5422):
[. . .] a partial estate freeze. It was a legitimate objective in no way connected with taxation under the Income Tax Act. In their circumstances it was a prudent move. Counsel for the plaintiff argues that they could have achieved that objective without incorporating separate companies. He has not suggested how and, while the onus is on the defendants to prove that the separate corporations were necessary for the purpose, they discharged the onus when they proved that it did achieve the purpose and there are no readily apparent alternatives. The onus is then on the plaintiff to suggest the alternatives; it is not up to the defendant to advance hypotheses and explain why they were not viable.
The validity of limitation of liability and of estate planning considerations was also recognized by Decary, J. in Lenco Fibre Canada Corp., supra. Despite estate planning concerns, the taxpayer corporations were held to be associated in light of the financial and de facto control by the same individual in Kencar Enterprises Ltd., supra, per Cullen, J., wherein it was stated at page 250 (D.T.C. 5453):
In my view, the creation of the plaintiff company did create a vehicle for estate planning but it was very much controlled by John Martens Jr., not in the legal, technical sense of holding shares, but in his ability to: secure loans using all of his assets; provide catalogues; provide accounting services thereby saving expenses to the plaintiff; provide the ultimate credit rating for all customers of all the companies; and oversee purchases, arrange for cross-purchases and bulk purchases to save on freight costs and to enable volume purchases. John Martens Jr. had de facto control, a much more effective control than simply owning some of the shares.
In Classic's Little Books Inc., supra, Noël, A.C.J., stated at page 101 (D.T.C. 5101) that the diminishing of risk in the taxation years under review must be considered. In Sandell Developments Ltd. et al., supra, it was held by St. Onge, Q.C., that risk minimization was a valid reason for incorporation despite the facts that one person was the driving force behind all the companies, and that the second corporation had no head office, telephone number, stationary or publicity with which to operate separately.
Jabs Construction Ltd., supra, was a decision of this Court, per St. Onge, T.C.C.J., in which the Court, following inter alia, Grimshaw Planing Mills Ltd., supra, which recognized the taxpayer's intention to ensure financial security for his family by minimizing risk through separate incorporation. It was held that, notwithstanding the fact that the two corporations had the same directing mind, they were not associated.
In Les Installations de L'Est Inc. et al., supra, it was stressed that it is improper to conclude that simply because tax benefits were the result of the creation and separation into two or more corporations that such tax reduction was one of the main reasons for a second company.
I have examined the evidence and note that the evidence of Mark Schwartz was given in a forthright and honest manner. I found him to be a most credible witness. In my opinion, the separate corporations were incorporated primarily for the purposes of market targeting. The separate corporate vehicles allowed for the targeting of both language and quality of product. This was evidenced by the exhibits of advertising submitted and I find that this was the primary consideration of Mark Schwartz when he arranged for the incorporation of the appellants.
I find that there was a secondary intention. That intention was to provide a means of holding property as part of an estate planning scheme and is evidenced by the share structure of each company. By utilizing separate corporate entities, Mark Schwartz was able to protect the assets of his family from the riskier elements of the business and the liability created by his personal guarantees of corporate loans. Moreover, he created a situation where he did not have to pass such assets by will. The authorities sanction such estate planning and risk minimization purposes. Although Mark Schwartz was the controlling mind of all the appellants, he was not necessarily the only person to benefit from potential tax savings since his wife and, by trust his children, were the holders of some of the assets.
I further find that financing opportunities were enhanced by the creation of the separate entities. For these reasons, I hold that the most practicable method to achieve the desired results was separate incorporation. I therefore find that none of the main reasons for incorporation was the savings of tax. Therefore the direction deeming the appellants to be associated is to be vacated and referred back to the respondent for reconsideration and reassessment in accordance with these reasons. The appellants are entitled to one set of costs.