Urie, J:—This is an appeal from a judgment of the Trial Division allowing the respondent’s appeal from a decision of the Tax Review Board wherein the appellant’s appeal from assessments for the 1969 and 1970 taxation years made on the basis of a Ministerial direction pursuant to subsection 138A(2) of the Income Tax Act, RSC 1952 c 148 that Garyray Equipment Repairs Limited and the appellant were deemed to be associated with each other in those taxation years, was allowed and the Minister’s direction was ordered to be vacated.
Briefly the relevant facts follow. The appellant was. incorporated under The Business Corporations Act of Ontario on April 13, 1966. It has three equal shareholders and carries on the'business of an excavations, sewers and watermains contractor. For the purpose of its business, it was the owner of heavy construction equipment such as back hoes, bulldozers, front-end loaders, trucks and miscellaneous pumps, compactors and the like.
The shareholders of the appellant caused Garyray Equipment Repairs Limited (hereinafter referred to as Garyray) to be incorporated in Ontario by Letters Patent dated November 28, 1968, the three equal Shareholders of which were to be, and, in fact, at all material times were, the wives of the shareholders of the appellant. It is in the business of repairing and renting construction equipment, almost exclusively for and to the appellant, and in the ownership and rental of business premises to the appellant.
It is not possible to ascertain from the sparse evidence adduced at trial, the extent of the involvement, if any, of the wives in the operations of Garyray.
Counsel for the appellant submitted that the evidence adduced at trial disclosed that the nature of the appellant’s business entailed three risks:
(1) the economic risk of financial loss extending to possible bankruptcy arising out of potential failure to properly evaluate for bidding purposes, the nature of the soil and rock being excavated and the delays in completing contracts on schedule due thereto as well as due to inclement weather conditons; ‘
(2) the requirement that performance bonds be furnished for the appellant’s various contracts and the bonding companies’ requirement that the personal assets of the appellant’s shareholders and their respective wives be pledged if the bonds were to be furnished, entailed the risk that all could be lost if the bonding companies were called upon to complete a job or jobs on behalf of the appellant; and,
(3) the risk that the appellant’s construction equipment could not be repaired by union mechanics in the event that any of its construction workers who were union members went out on strike during the course of the fulfillment of any of its contracts.
Garyray was incorporated, it was said, to reduce or eliminate all of those risks although the primary purpose was to preserve some of the assets in Garyray for the benefit of the wives and families of the appellant’s shareholders in the event the appellant should become bankrupt or for any reason the shareholders and their wives were called upon to honour their personal guarantees to the bonding company. In addition, counsel submitted, since Garyray’s mechanics were non-union, it could continue to repair the appellant’s equipment during any strike which might shut down the latter’s operations. Furthermore, since Garyray was not in the contracting business it would not require bonding and its shareholders thus would not have to personally guarantee any bonds. There were, as well, it was said, some unspecified estate tax benefits.
Those reasons for creating Garyray, with the exception of the last, were each dealt with by the learned Trial Judge but before examining his findings the relevant statutory provisions should be examined. Subsections 138A(2) and (3) of the Income Tax Act as they appeared during the 1969 and 1970 taxation years read as folows:
(2) 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.
(3) On an appeal from an assessment made pursuant to a direction under this section, the Tax Review Board or the Federal 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 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 judgment of the Tax Review Board vacated the direction by virtue of paragraph 3(b) while the effect of the Judgment of the Trial Division was to restore it.
The significance of these sections arises by virtue of section 39, as it read during the taxation years in issue, which, by subsection (1), imposed a tax of 18% on a company’s taxable income if such income did not exceed $35,000 and 47% on all taxable income in excess of $35,000. The lower rate of 18% was not available to two or more corporations if they were “associated” within the definition of that term set forth in subsection (4) of section 39. On the facts of this case it would appear that the appellant and Garyray are not associated. However, as can be seen subsection 138A(2) “deems” two or more corporations to be associated if the separate existence of the companies is not solely for the purpose of carrying out their business in the most effective manner and if one of the main reasons for such separate existence is to reduce the amount of tax which would be otherwise payable under the Act. A direction having been made by the Minister, the onus lies upon the appellant to satisfy the Court, if it is to be successful on its appeal from an assessment arising as a result of the direction, that none of the main reasons for the separate existence of the two companies is to reduce the tax that would otherwise be payable under the Act. That is a question of fact to be decided upon the evidence adduced at trial and the inferences properly drawn therefrom. The question to be decided, then, has the appellant discharged the above-mentioned onus?
The learned Trial Judge had no difficulty in finding that it had not and allowed the Minister’s appeal from the decision of the Tax Review Board. He dealt with the evidence of the only two witnesses called at trial, namely, the President of the appellant and its auditor, with respect to the reasons for incorporating Garyray, as referred to earlier herein, in the following fashion:
I find it impossible to believe that Garyray was incorporated in order that the defendant’s equipment could be repaired in a non-union shop. Its continual existence as a non-union shop depended on the wishes of its mechanics and the decision of the Ontario Labour Relations Board so there was no assurance that it could continue as a non-union shop even for a day. An efficient organization would engage a staff or mechanics large enough to make repairs as they were needed. If the defendant’s union employees went on strike its construction operations would cease and so would the need for repairs to its equipment. It is very significant that Mr Williams, the auditor, on whose advice Garyray was incorporated, never mentioned the advantages of a non-union shop when giving the purpose of the incorporation. I am convinced that this alleged purposed was an afterthought.
The second purpose pleaded, the desirability of placing assets out of reach of creditors, is plausible but does not bear a critical examination. When Garyray was incorporated on November 28, 1968, the wives of the defendant’s shareholders were guarantors of the defendant’s liability to the bond companies and they continued to be guarantors for some years. No one could have known in 1968 that their guarantees would ever be released SO incorporating Garyray did not protect any assets from the defendant’s liabilities. The third purpose pleaded, the creation of separate estates for the wives is subject to the same objection. It follows that incorporating the second corporation in November 1968 would not have served to protect any assets from the bond company liability.
Those inferences, drawn from facts adduced in evidence are, in my view, certainly supportable and thus ought not to be disturbed by this Court. They are, in fact, conclusions which, even without the advantage of having heard and seen the witnesses, I would have reached after a careful review of the transcript of evidence.
The only other reason given during the argument of’ the appeal was the suggestion of estate tax benefits, a reason which, apparently, was not raised in argument before the Trial Judge. The only evidence whatsoever relating to estate tax arose out of a question put to the Companies’ auditor by appellant’s counsel as to why Garyray had been incorporated. He gave three reasons, viz, limited liability, the preference for the assets being in company rather than a partnership and “thirdly, it was for estate planning purposes for the future’’. Clearly, the answer given was directed, not to the question of the purposes of incorporating Garyray, but rather to explain the reasons for choosing a corporation in preference to a partnership of the wives for the operation of the proposed business. The nature of the possible benefits was not specified nor was any supporting evidence tendered. The submission was made for the first time on the appeal on the basis of an answer to a question unrelated to the purposes of the second business as reinforcement for the appellant’s other contentions. In my opinion, it cannot, therefore, be considered as support for the appellant’s contention that the separate existence of Garyray was unrelated to tax advantages.
During the course of argument a suggestion was made that it had not been shown that any reduction of the tax payable by the appellant had been effected by the incorporation of Garyray. As I understand it, this suggestion was based on the assumption that the appellant, before the second incorporation, had repairs to its equipment carried out by third parties and had paid rent for its business premises to others, all of which costs were deductible as business expenses in the computation of its taxable income. Similarly, the payments for repairs and rents made later to Garyray were deductible and thus the taxable income of the appellant was not reduced by the creation of the second company. Since section 138A(2) requires that one of the main reasons for the existence of the second company is to reduce the amount of taxes otherwise payable and there was, in fact, it was suggested, no such reduction, the Minister’s direction deeming the two companies to be associated was invalid.
The argument has the virtue of simplicity, but, in my opinion, overlooks the plain meaning of subsection 138A(2) and the undisputed facts in this case. The fact that Garyray was incorporated for the purpose of repairing the appellant’s equipment and renting to it its business premises, and that it did in fact perform those functions, unquestionably indicate that the directors of the appellant had decided to change, at least in part, some of its former practices in operating the business. To accomplish this result the appellant itself, it seems to me, could have employed mechanics and purchased its own business premises or could have incorporated a separate but associated company to carry out its intentions. Rather than do so, the appellant’s shareholders, according to the evidence, caused Garyray to be incorporated, with its shareholders to be the wives of the appellant’s Shareholders. I think it is important again to observe that the wives did not cause Garyray to be incorporated.
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. The evidence discloses that in the 1969 and 1970 taxation years the appellant and Garyray had taxable income as follows:
From those figures it can be plainly seen that if Decker and Garyray were associated or if Decker effected its own equipment repairs, and owned its own premises, “the amount of taxes otherwise payable” under the Act would, by virtue of section 39, have been at the 47% rate, because the incomes of the two companies would have been merged in the tax years in issue. Put another way, clearly in the 1969 and 1970 tax years the tax payable by the appellant would have been considerably higher had Garyray not existed. Since the learned Trial Judge has found that the various reasons advanced by the witnesses for incorporating Garyray with different shareholders than those of the appellant and maintaining its separate existence did not withstand scrutiny, it appears to me to be a fair inference that at least one main reason, if not the only one, for doing so must have been in the desire to effect a reduction in tax “otherwise payable”.
Accordingly, for all of the above reasons, I would dismiss the appeal with costs.
MacKay, DJ:—By a direction dated April 19, 1973, the Minister of National Revenue under the provisions of subsection 138A(2) Of the Income Tax Act, RSC 1952, c 148 (as amended), directed that Decker Contracting Limited (hereinafter referred to as “Decker”), and Garyray Equipment Repairs Limited (hereinafter referred to as “Garyray”) be deemed to be associated with each other for the 1969 and 1970 taxation years.
Subsection 138A(2) is as follows:
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 directs, be deemed to be associated with each other in the year.
Decker filed a Notice of Objection and the Minister, at Decker’s request, referred the matter to the Tax Appeal Board.
The Chairman of the Board reached the conclusion that there were sound business and planning reasons for the incorporation of Garyray and that none of the main reasons for the separate existence of Garyray and Decker was to reduce the tax otherwise payable by Decker under the Income Tax Act and therefore the companies were not associated and directed that the direction of the Minister be vacated.
The Minister appealed to the Trial Division of the Federal Court on that appeal, heard as a trial de novo; the trial Judge allowed the appeal and restored the Minister’s direction.
From that decision, Decker appeals.
Decker was incorporated as an Ontario Company on April 13, 1966. There were three shareholders, each holding an equal number of shares.
The business of the company was that of contracting for the construction of sewers. and watermains and excavation work. As its contracts were mostly with municipalities and governments, performance bonds were required and the company was required to employ labour union members (there were three collective agreements covering three different classifications of employees).
The company bonding Decker required personal guarantees from the three shareholders and their wives.
The Garyray Company was incorporated on November 28, 1968. The shareholders were the three wives of the three shareholders of Decker. They each held an equal number of the issued shares.
The purposes of the company as set out in their charter were to do repairs and maintenance work on heavy construction equipment and trucks; the leasing of equipment; and to acquire and hold land and buildings for conducting such business.
The company acquired land and erected a garage building measuring 70 by 100 feet.
Its revenue was derived from the repair and maintenance of the construction equipment and vehicles owned by Garyray and the leasing to Decker of office space and a part of its land for the storage of materials.
The acquisition of land, buildings and equipment by Garyray was financed by the three wives advancing to Garyray money from their savings (they had all been working before and after their marriages) and money that their respective husbands loaned to them. These loans were all subsequently repaid, as were loans made by them to their husbands at the time of the incorporation of Decker.
Decker, from its inception, did not do any of the repair and maintenance work on its equipment and trucks. It did not have a garage or equipment to do this work, nor did it employ mechanics. Prior to the incorporation of Garyray, it employed three different independent repair shops to do this work.
There was no evidence or allegation that Decker or its shareholders took part in or interfered in the control or management of Garyray, who employed a full time manager to supervise its repairs and maintenance business.
The two companies were not associated companies under the provisions of subsection 39(4) of the Act.
In the Federal Court, paragraph 3 of the Statement of Claim filed by the Deputy Attorney General of Canada is as follows:
In making that direction, the Minister of National Revenue was satisfied:
(a) that the separate existence of those corporations for the 1969 and 1970 taxation years was 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 1969 and 1970 taxation years of those corporations was to reduce the amount of taxes that would otherwise be payable under the Income Tax Act.
On consent, copies of the tax returns and related financial statements of Decker for the years 1967 to 1972 and the tax returns and financial statements of Garyray for the years 1969, 1970 and 1971 were filed as exhibits.
The only other evidence was that of Mr Kakorduz, the President of Decker and Mr Williams, a chartered accountant who was the auditor for both companies.
In his Reasons for Judgment, the trial Judge said:
I find it impossible to believe that Garyray was incorporated in order that the defendant’s equipment could be repaired in a non-union shop. Its coni’. tinual existence as a non-union shop depended on the wishes of its
mechanics and the decision of the Ontario Labour Relations Board so there was no assurance that it could continue as a non-union shop even for a day. An efficient organization would engage a staff of mechanics large enough to make repairs as they were needed. If the defendant’s union employees went on strike its construction operations would cease and so would the need for repairs to its equipment. It is very significant that Mr Williams, the auditor, on whose advice Garyray was incorporated, never mentioned the advantages of a non-union shop when giving the purpose of the incorporation. I am convinced that this alleged purpose was an afterthought.
The second purpose pleaded, the desirability of placing assets out of the reach of creditors, is plausible but does not bear a citical examination. When. Garyray was incorporated on November 23, 1968, the wives of the defendant’s shareholders were guarantors of the defendant’s liability to the bond companies and they continued to be guarantors for some years. No one could have known in 1968 that their guarantees would ever be released so incorporating Garyray did not protect any assets from the defendant’s liabilities. The third purpose pleaded, the creation of separate estates for the wives is subject to the same objection. It follows that incorporating the second corporation in November 1968 would not have served to protect any assets from the bond company liability.
But there was a business reason for the incorporation, namely the provision of the Income Tax Act by which the rate of tax increased from 18% to 47% when a company’s taxable income exceeded $35,000. The taxable income of the two Corporations was as follows:
The defendant had the Taxable Income as listed below:
Garyray had a Taxable Income as listed below:
Even in 1969 the tax saving would have been substantial. But since the taxable income of Garyray included the cost of repairing the defendant’s equipment which, if Garyray had not been incorporated, would have been paid to other repairers, the figures quoted cannot reveal the amount of tax saved in 1969 and 1970 by the separate existence of the two corporations. It is in evidence that part of Garyray’s income was rental paid by the defendant for construction equipment owned by Garyray. If in future years Garyray owned and rented all the construction equipment used by the defendant, this would transfer a large part of the defendant’s income to Garyray and result in a large tax Saving.
In concluding his reasons, the trial Judge said:
The evidence of the defendant’s president, Mr Kakorduz, and Mr Williams, the defendant’s auditor has not convinced me that one of the main purposes of the incorporation of Garyray Equipment Repairs Limited and the continued separate existence of the two corporations in 1969 and 1970 was not to obtain the advantage of a reduction in the amount of tax that would otherwise be payable under the Income Tax Act. Since the onus of proof that none of the main reasons for the separate existence of the two corporations was to reduce the amount of tax that would otherwise be payable rests on the defendant and any doubt as to the adequacy of such proof must be resolved in form of the Minister of National Revenue, it is merely necessary for me to find that the onus has not been discharged.
With respect, I find myself unable to agree with these conclusions.
Mr Kakorduz, in his evidence, said that strikes, being of common occurrence in the construction business in which Decker was engaged, it was important that they have their maintenance and repair work done by a non-union shop so that in the event of a strike by Decker employees, their repair and maintenance work could continue during the period of the strike so that all of their machines and equipment would be in good condition when the strike ended and they could resume work.
He also said that the independent companies that did this work for Decker prior to the incorporation of Garyray also did repair and maintenance work for other construction companies and that there were often delays caused by having to wait their turn to have their work done. By employing Garyray this did not happen, because Garyray did this work only for Decker.
“As to whether there was a reasonable probability that Garyray employees would become unionized, while the witnesses were not asked as to the number of employees of Garyray, its financial statements show total wages for 1969 to be $17,460. and for 1970 $27,441. As these amounts would include the wages of the Manager employed to manage the repair shop, the number of employees must have been so few that it would not be worthwhile for anyone to attempt to unionize them.
As to the possibility of the Ontario Labour Board directing that the employees of Garyray become members of one of the Decker unions On the ground that Decker and Garyray were associated companies, the Board would have to find that the two companies were under common management or control, which was not the case. I think there was good reason for the belief that the employees of Garyray would not be unionized.
The trial judge seemed to think that there was some obligation on Decker to do its own repair work, to own its own office and storage space and to own rather than rent additional equipment that would be required for large contracts. Having its repair and maintenance work done by independent repair shops, renting additional equipment, office and storage space enabled Decker to charge the amounts paid in respect of these matters as legitimate operating expenses. As Mr Williams pointed out, whether these payments were made to Garyray or some other independent company, Decker’s taxable income would not be affected.
This practice also avoided the tying up of the substantial. capital that would be required to establish the facilities necessary for these purposes.
The fact that there were three companies in the area in which Decker operated, whose business was the repair and maintenance of heavy construction equipment and trucks for companies in the contracting business would indicate that having this work done by independent companies was not an unusual practice, nor, I would think, is the renting, rather than buying, of office and storage space.
I think the statement of Lord Upjohn in /RC v Brebner,  All ER 779 applies in the present case, at 784, where he said:
My lords, I would conclude my judgment by saying only that, when the question of carrying out a genuine commercial transaction, as. this was, is considered, the fact that there are two ways of carrying it out—one by paying the maximum amount of tax, the other by paying no, or much less, tax—it would be quite wrong as a necessary consequence to draw the inference that in adopting the latter course one of the main objects is for the purposes of the*'section, avoidance of tax. No commercial man in his senses is going to carry out commercial transactions except on the footing of paying the smallest amount of tax involved.
As I understood it, the second purpose for the incorporation of Garyray was not, as the trial Judge suggests, to put the assets of Decker out of the reach of its creditors in the event of the bankruptcy of that company. The assets of Garyray were not those of Decker. Garyray’s assets belonged to the three wives who were the shareholders and who had furnished the money for the Garyray operation. This purpose was to enable the three wives to build up separate independent estates for themselves and for estate planning purposes. These purposes would only be defeated if (a) Decker became bankrupt, and (b) the wives were still guarantors of the Decker bond and the assets of Decker, the primary debtor, were insufficient to cover the default.
Williams said that prior to the incorporation of Garyray, he had asked the bond company to release the three wives from the bond and that they had refused, but that he had reason to believe that they would be released some time in the future. Williams’ judgment that this purpose for the incorporation of Garyray had a reasonable probability of being achieved was justified in that rather than becoming bankrupt, Decker increased its taxable income and assets and in 1972 the wives were released from their guarantees of the Decker bond.
The trial Judge did not give reasons for his conclusion that the incorporation of Garyray effected a substantial tax saving to Decker in the 1969 and 1970 taxation years. Williams said that prior to the incorporation of Garyray, there was discussion as to the relative merits of the three wives’ forming a partnership to carry out the repair business (in which case subsection 138A(2) could have no application) rather than incorporating a company for this purpose. He said that while a company would pay a slightly higher tax than would a partnership that, having regard to other factors and his opinion that the formation of a company with the three wives as shareholders would not bring Decker within the provisions of subsection 138A(2) of the Income Tax Act, that the advantages of a company outweighed that of a partnership.
The trial Judge’s conclusions are based on the inferences which he drew from the uncontested facts and his view as to the credibility of the witnesses and should not be lightly interfered with by an appellate Court. In doing so in this case I rely on the statement of Lord Wright in Powell and Wife v Streatham Manor Nursing Home,  AC 243 at 267 where he said:
. . many, perhaps most cases, turn on inferences from facts which are not in doubt, or on documents: in all such cases the appellate Court is in as good a position to decide as the trial judge.
and the observations of O’Halloran, JA, in the case of Faryna v Chorney,  DLR 354 at 357 and 358, he said:
If a trial judge’s finding of credibility is to depend solely on which person he thinks made the better appearance of sincerity in the witness box, we are left with a purely arbitrary finding and justice would then depend upon the best actors in the witness box. On reflection it becomes almost axiomatic that the appearance of telling the truth is but one of the elements that ener into the credibility of the evidence of a witness...
... A witness by his manner may create a very unfavourable impression of his truthfulness upon the trial Judge, and yet the surrounding circumstances in the case may point decisively to the conclusion that he is aCtually telling the truth . . .
The credibility of interested witnesses, particularly in cases of conflict of evidence, cannot be gauged solely by the test of whether the personal demeanour of the particular witness carried conviction of the truth. The test must reasonably subject his story to an examination of its consistency with the probabilities that surround the currently existing conditions. In short, the real test of the truth of the story of a witness in such a case must be its harmony with the preponderance of the probabilities which a practical and informed person would readily recognize as reasonable in that place and in those conditions . . .
There is high authority to support the foregoing, namely, a case in the House of Lords in 1935 to which Lord Greene MR referred in Yuill v Yuill,  P 15, and described it as inadequately reported. The case was Hvalfangerselskapet Polaris A/S v Unilever Ltd (1933), 46 LIL Rep 29. In that case the trial Judge had disbelieved material witnesses and found that their evidence was invented on the spur of the moment.
In the Court of Appeal Scrutton LJ, giving the leading judgment said the trial Judge had seen the witnesses and heard the conflicting testimony and because of that it was impossible for the Court of Appeal to interfere with the trial Judge’s finding on credibility. But the House of Lords did interfere. It said that the strictures cast by the trial Judge on the two witnesses were unjustified and that the evidence of these two witnesses ought to have been received. The House, Lord Atkin presiding, came to that conclusion because it was satisfied that the evidence of the witnesses disbelieved by the trial Judge was entirely consistent with the probabilities and the business conditions proved to be in existence at the time.
Commenting on the Unilever case in Yuill v Yuill, Lord Greene said that it showed how important it is that a trial Judge’s impressions on the subject of demeanour should be carefully checked by a critical examination of the whole of the evidence, and added that, if the trial Judge in the Anilever case had done so, as was done in the House of Lords, then he could not have disbelieved the witnesses as he did.
Being of the opinion that there were sound business reasons for the incorporation of Garyray and that none of the main reasons for the separate existence of Decker and Garyray was to reduce the amount of tax that would otherwise be payable by Decker, I would allow the appeal with costs here and below and direct that the Minister’s direction be vacated.