431543 B.C. Ltd. v. The Queen, docket 97-3453-IT-G

Date: 19991102

Docket: 97-3453-IT-G

BETWEEN:

431543 B.C. LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Beaubier, J.T.C.C.

[1] This appeal pursuant to the General Procedure was heard at Kelowna, British Columbia on October 20, 1999. Dennis Barnes and his wife, Janet, were the only witnesses.

[2] The parties filed a Partial Agreed Statement of Facts which reads:

The Appellant, 431543 B.C. Ltd. and the Respondent, Her Majesty the Queen agree that for the purposes of this appeal, the facts set out below and the authenticity of the documents referred to below, copies of which are attached are true.

1. The Appellant is a taxable Canadian corporation that was incorporated pursuant to the British Columbia Company Act on September 1, 1992.

2. Dennis Barnes and Janet Barnes are husband and wife and are Canadian residents.

3. ... (Struck out.)

4. Edmonton Elevator Advertising Corporation ("Edcorp.") is an Alberta incorporated Company that was incorporated in 1982.

5. Janet and Dennis Barnes were the only shareholders of Edcorp., each holding five common shares until a corporate reorganization in September 1992.

6. J & N Technical Services Ltd. ("J & N") is an Alberta corporation and at all material times the sole shareholder of that Company was Janet Barnes until the shares were transferred to Edcorp.

7. In September 1992 the Appellant Company, Edmonton Elevator Advertising Corporation and J & N Technical Services Ltd. entered into a reorganization ("Reorganization"). A series of diagrams of the Reorganization process is attached as Tab 1.

8. On August 31, 1992 Dennis Barnes' mother Amy Barnes established a fully discretionary inter vivos Family Trust (the "Trust") which had as its beneficiaries Dennis' and Janet's children, Rochelle Barnes and Georgina Barnes (the "Children"), who were ages 11 and 9 respectively at that time.

9. HMW Construction Ltd. and HMW Holdings Ltd. are Alberta companies that were involved in the commercial construction business in Alberta.

10. Dennis Barnes was a partner and vice president of finance and administration in HMW Construction Ltd. and HMW Holdings Ltd. Dennis Barnes' interest in HMW Construction Ltd. and HMW Holdings was, prior to the Reorganization, held by Edcorp.

11. Following the Reorganization and throughout the Taxation Year all of the shares of the Appellant were owned by Dennis Barnes and the Barnes Family Trust as follows:

Dennis Barnes – 5601 Class "A" Voting Common Shares

Barnes Family Trust – 2 Class "B" Non-Voting Common Shares

12. Following the Reorganization and throughout the Taxation Year, the shares of Edcorp. were owned as follows:

Janet Barnes – 5 Class "A" Voting and 100 Class "D" Preferred Shares

Dennis Barnes – 100 Class "C" Non-Voting Preferred Shares

13. Following the Reorganization and throughout the Taxation Year, Edcorp. owned 100% of the shares of J & N.

14. The Appellant was a Canadian-controlled corporation within the meaning of subsection 125(7) of the Act throughout the Taxation Year.

15. The Appellant was governed by the laws of the Province of British Columbia at all material times.

16. Section 21 of the British Columbia Company Act 1996 R.S.B.C. c. 62 and amendments thereto provides that subject to subsection 2 a company has the power and capacity of a natural person of full capacity. (Tab 2)

17. Section 133 of the Company Act provides that every company must have a president and a secretary, who, except in a company with only one member, must be different persons, and other officers as are provided for by the memorandum, the articles or by resolution of the directors. (Tab 2)

18. ... (Struck out.)

19. Section 114(1), formerly section 138(1) of the British Columbia Company Act provides that minor children are precluded from serving as directors of a corporation. Section 133(2) provides that a person who is not qualified under section 114 to become a director of a company must not be an officer of the company. (Tab 2)

20. The Children were resident in the Province of British Columbia at all material times.

21. The Appellant earned $186,571.00 of income from active business carried on in Canada during the Taxation Year within the meaning of subsections 248(1) and 125(7) of the Act.

22. In filing its return for the Taxation Year the Appellant claimed a deduction from its tax otherwise payable pursuant to subsection 125(1) of the Act on the basis that its annual business limit was $200,000.00.

23. On October 23, 1995, the Appellant was issued a Notice of Reassessment for additional taxes of $48,447.07, comprised of $7,138.61 of arrears interest and additional taxes of $41,308.46.

24. The Reassessment was made on the basis that the annual business limit of the Appellant for the Taxation Year was only $386.00.

25. The Appellant filed a Notice of Objection. On March 6, 1996 the Minister of National Revenue informed the Appellant that they confirmed the reassessment, on the basis that the Appellant was associated with Edcorp. and J & N as a result of the application of paragraphs 256(1)(c), 256(1.2)(c) and 256(1.2)(f) and subsections 256(1.3), 256(2.1) of the Act during the Taxation Year in question as set out in the report on objection.

26. Edcorp. and J & N filed their 1993 T2 tax returns on the basis that they were associated with each other and allocated $199,614.00 of the $200,000 annual business limit to Edcorp.

27. ... (Struck out.)

[3] Paragraphs 5, 6 and 7 of the Reply read:

5. The Appellant's claimed small business deduction was reduced by the Minister on the basis that the Appellant's annual business limit, within the meaning of s. 125 of the Income Tax Act (the "Act"), was $386 rather than $200,000 because it as associated with Edmonton Elevator Advertising Corporation ("Edmonton Elevator") and J & N Technical Services Ltd. ("J & N").

6. In so reassessing the Appellant, the Minister relied, inter alia, upon the following assumptions:

a) The facts as admitted and stated hereinbefore;

b) Dennis Barnes and Janet Barnes were married to each other at all relevant times;

c) The Appellant was incorporated on September 1, 1992 as part of a reorganization involving Edmonton Elevator, J & N, and Ideal Technical Corporation;

d) Before the reorganization, the three latter corporations were controlled by Dennis and Janet Barnes in such a manner that the three corporations were associated for purposes of claiming the small business deduction;

e) In the reorganization, the active business assets of Edmonton Elevator were transferred to the Appellant and the Barnes Family Trust (the "Trust") was set up;

f) The Trust was a fully discretionary inter vivos trust of which the beneficiaries were the two children, who were under 18 years of age, of Dennis and Janet Barnes;

g) After the reorganization, the shares of the corporations were owned as follows:

Appellant	Owned By
100% Class A common voting shares	Dennis Barnes
100% Class B common non-voting shares	Trust
Edmonton Elevator
100% Class A common voting shares	Janet Barnes
100% Class C preferred non-voting shares	Dennis Barnes

J & N
100% Class A common voting shares	Edmonton Elevator
Ideal Technical
Sold to unrelated party

h) No new capital was infused into the corporations to account for the additional shares which were issued in the reorganization;

i) After the reorganization, both Dennis and Janet Barnes remained equally active in the business operations of their corporations;

j) Edmonton Elevator and J & N filed their 1993 T2 tax returns on the basis that they were associated with each other and allocated $199,614 of the $200,000 annual business limit to Edmonton Elevator;

k) In the Appellant's 1993 taxation year, Edmonton Elevator owned all the common shares of J & N and these two corporations were therefore associated pursuant to s. 256(1)(a) of the Act;

l) the Appellant filed its 1993 T2 tax return on the basis that it was not associated with any other corporation;

m) Although all of the Appellant's Class B common shares of its capital stock were owned by the Trust, those shares are deemed to be owned by the children pursuant to s. 256(1.2(f)(ii) of the Act, because the children's share of the accumulating income or capital from the Trust depended on the exercise of discretion by a person;

n) Further, the children did not take any part in the management of the business and affairs of the Appellant and their deemed shares of the Appellant are deemed to be owned by Janet Barnes pursuant to s. 256(1.3) of the Act;

o) In the Appellant's 1993 taxation year, all of the common shares of the capital stock of Edmonton Elevator were owned by Janet Barnes;

p) Neither the above shares of Edmonton Elevator, nor the shares of the Appellant which are deemed to be owned by Janet Barnes, were shares of a specified class within the meaning of s. 256(1.1) of the Act;

q) Therefore, in its 1993 taxation year, the Appellant was associated with Edmonton Elevator pursuant to s. 256(1)(c) of the Act , and also with J & N pursuant to s. 256(2) of the Act;

r) The Minister correctly allocated $199,614 of the annual business limit to Edmonton Elevator, as filed, and the remaining $386 to the Appellant;

s) It may reasonably be considered that one of the main reasons for the separate existence of the Appellant, Edmonton Elevator and J & N in the Appellant's 1993 taxation year was to reduce the amount of taxes that would otherwise be payable under the Act, within the meaning of s.256(2.1) of the Act.

B. ISSUES TO BE DECIDED

7. The issues to be decided in this appeal are:

a) Whether the Appellant was associated with Edmonton Elevator and J & N pursuant to s. 256(1)(c) of the Act, on the basis that Janet Barnes controlled Edmonton Elevator, that she was related to the person who controlled the Appellant, and, further, that she is deemed pursuant to s. 256(1.3) to own all of the Class B common shares of the Appellant;

b) Whether the Appellant was associated with Edmonton Elevator and J & N pursuant to s. 256(2.1) of the Act, on the basis that it may reasonably be considered that one of the main reasons for the separate existence of the Appellant, Edmonton Elevator and J & N was to reduce the amount of taxes that would otherwise be payable under the Act.

[4] Assumptions 6(b), (c), (d), (e), (f), (g), (h), (j), (k), (l) and (o) are correct or were not refuted. Assumption 6(e) was corrected by Respondent's counsel after the Appellant's case began. It previously read:

e) In the reorganization, the non-active business assets (primary portfolio shares) of Edmonton Elevator were transferred to the Appellant and the Barnes Family Trust (the "Trust") was set up;

[5] Issue 7(a) turns primarily on two deeming clauses in section 256 of the Income Tax Act. They are in subparagraph (1.2)(f)(ii) and subsection (1.3). They read:

(1.2) For the purposes of this subsection and subsections (1), (1.1) and (1.3) to (5) ...

(f) where shares of the capital stock of a corporation are owned, or deemed by this subsection to be owned, at any time by a trust, ...

(ii) where a beneficiary's share of the accumulating income or capital therefrom depends on the exercise by any person of, or the failure by any person to exercise, any discretionary power, those shares shall be deemed to be owned at that time by the beneficiary, except where subparagraph (i) applies and that time is before the distribution date,

(Subparagraph (i) does not apply.)

(1.3) Where, at any time, shares of the capital stock of a corporation are owned by a child who is under 18 years of age, for the purposes of determining whether the corporation is associated at that time with any other corporation that is controlled, directly or indirectly in any manner whatever, by a parent of the child or by a group of persons of which the parent is a member, the shares shall be deemed to be owned at that time by the parent unless, having regard to all the circumstances, it can reasonably be considered that the child manages the business and affairs of the corporation and does so without a significant degree of influence by the parent.

(emphasis added)

[6] Assumptions (m), (n), (o), (p), (q) and (r) were not refuted.

[7] This is an appeal of the Appellant's taxation year which ends September 30, 1993. Issue 7(a) is a legal question based upon the facts found by the Court. If it is found to be in the Respondent's favour, issue 7(b) need not be dealt with.

[8] Edmonton Elevator and J & N admitted that they were associated when they filed their 1993 income tax returns as stated in assumption (j). After the reorganization Dennis Barnes owned all of the Class A common voting shares of the Appellant. The Trust owned all of the Class B common non-voting shares (assumption (g)). The Trust was "fully discretionary" (paragraph 8 Partial Agreed Statement of Facts). Thus the Class B common non-voting shares are deemed by subparagraph 256(1.2)(f)(ii) to be owned by the beneficiaries, the Barnes children. Thereupon subsection 256(1.3) deems that the Class B common non-voting shares are owned by Janet Barnes since there is no evidence that either Barnes child managed the business and affairs of the Appellant. As a result, Janet is deemed to own 100% of the issued Class B common non-voting shares of the Appellant and Dennis owns 100% of its Class A common voting shares. Therefore the Appellant, Edmonton Elevator and J & N are associated pursuant to paragraph 256(1)(c) of the Income Tax Act.

[9] For this reason the appeal is dismissed. The Respondent is awarded party and party costs.

Signed at London, Ontario this 2^nd day of November 1999.

"D.W. Beaubier"

J.T.C.C.