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.
Issue
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.
Facts
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.
Authorities
cited
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.
Appellant
Abbotsford
Building
Supplies
Ltd.
v.
M.N.R.,
[1970]
Tax
A.B.C.
314,
70
D.T.C.
1215
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Furniture
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M.N.R.,
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v.
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M.N.R.
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Ltd.,
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Heath
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M.N.R.,
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Tax
A.B.C.
518,
71
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Holt
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Manitoba
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M.N.R.,
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C.T.C.
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70
D.T.C.
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Honeywood
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81
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Jabs
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2668,
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Jordan
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C.T.C.
2287,
75
D.T.C.
216
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Jordans
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[1969]
C.T.C.
445,
69
D.T.C.
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Kitchener
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C.T.C.
2305,
74
D.T.C.
1226
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Leggat
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v.
M.N.R.,
[1978]
C.T.C.
2030,
78
D.T.C.
1035
(T.R.B.);
Lenco
Fibre
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The
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[1979]
C.T.C.
374,
79
D.T.C.
5292
(F.C.T.D.);
Les
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de
I'Est
Inc.
v.
The
Queen,
[1990]
1
C.T.C.
324,
90
D.T.C.
6174
(F.C.T.D.);
C.
P.
Loewen
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Ltd.
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M.N.R.,
[1972]
C.T.C.
396,
72
D.T.C.
6298
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Rosner
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M.N.R.,
[1993]
1
C.T.C.
2153,
93
D.T.C.
127
(T.C.C.);
Sandell
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Ltd.
v.
M.N.R.,
[1976]
C.T.C.
2393,
76
D.T.C.
1293
(T.R.B.);
Veltri
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Ltd.
v.
M.N.R.,
[1991]
1
C.T.C.
2691,
91
D.T.C.
862
(T.C.C.);
Warren
Packaging
Ltd.
v.
M.N.R.,
[1983]
C.T.C.
2028,
83
D.T.C.
1
(T.R.B.).
Respondent
Svend
Krag-Hansen
v.
The
Queen,
[1986]
2
C.T.C.
69,
86
D.T.C.
6122
(F.C.A.);
Alpine
Furniture
Co.
v.
M.N.R.,
[1968]
C.T.C.
532,
68
D.T.C.
5338
(Ex.
C.R.);
The
Queen
v.
Covertite
Ltd.,
[1981]
C.T.C.
464,
81
D.T.C.
5353
(F.C.T.D.);
Decker
Contracting
Ltd.
v.
The
Queen,
[1978]
C.T.C.
838,
79
D.T.C.
5001
(F.C.A.);
Classic's
Little
Books
Inc.
v.
The
Queen,
[1973]
C.T.C.
94,
73
D.T.C.
5096
(F.C.T.D.);
Maritime
Forwarding
Ltd.
v.
The
Queen,
[1988]
1
C.T.C.
186,
88
D.T.C.
6114
(F.C.T.D.);
Kencar
Enterprises
Ltd.
v.
The
Queen,
[1987]
2
C.T.C.
246,
87
D.T.C.
5450
(F.C.T.D.);
Levitt-Safety
(Eastern)
Ltd.
v.
M.N.R.,
[1973]
C.T.C.
483,
73
D.T.C.
5374
(F.C.T.D.);
Veltri
&
Son
Ltd.
v.
M.N.R.,
[1991]
1
C.T.C.
2691,
91
D.T.C.
862
(C.C.I.);
Les
Magasins
Continental
Ltée
v.
The
Queen,
[1981]
C.T.C.
428,
81
D.T.C.
5175
(F.C.A.);
Pay-Less
Meat
Market
Ltd.
v.
M.N.R.,
[1973]
C.T.C.
102,
73
D.T.C.
5102
(F.C.T.D.);
Debruth
Investments
Ltd.
v.
M.N.R.,
[1975]
C.T.C.
55,
75
D.T.C.
7012
(F.C.A.);
M.N.R.
v.
Howson
&
Howson
Ltd.,
[1970]
C.T.C.
36,
70
D.T.C.
6055
(Ex.
C.R.);
Rosner
Management
Inc.
v.
M.N.R.,
[1993]
1
C.T.C.
2153,
93
D.T.C.
127
(T.C.C.).
Appellant’s
position
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.
Respondent's
position
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".
Analysis
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./.R.
v.
Brebner,
[1967]
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.
Appeal
allowed.
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