McEwen Brothers Limited v. Her Majesty the Queen, [1994] 1 CTC 317, 94 DTC 6133

Joyal, J.:—This is an appeal by way of a statement of claim from a decision of the Tax Court of Canada dated June 3, 1985, dismissing the plaintiff's appeal from a tax reassessment pertaining to the 1976 and 1977 taxation years of the plaintiff.

The appeal before this Court was heard pursuant to a consent order under Rule 473, allowing the issue between the parties to be determined on the basis of the transcript of tne oral and documentary evidence before the Tax Court of Canada.

The issue:

The issue is with respect to two partnership ventures created in 1976 to perform two contracts in Churchill, Manitoba. The first of these contracts was with Manitoba Hydro and provided for the construction of a five-mile access road to a new pumping station. The second of these contracts was with Public Works Canada (Marine Division) and it called for the building of a six-acre dyke and for the installation of a plastic membrane liner covered with one foot of sand.

Profits from these two contracts was allocated to the members of each partnership venture in accordance with their partnership interests. Some of the partners were paid an aliquot share totalling $262,500 on account of the first contract and $21,308 on account of the second contract. By notice of reassessment dated September 15, 1981, the plaintiff was assessed these amounts on the grounds that they were properly earned by the plaintiff and not by the named partners. Specifically, the Crown alleged that in a true interpretation of the role of the plaintiff with respect to each venture, the foregoing amounts were properly taxable income in the hands of the plaintiff pursuant to section 3 and subsections 9(1), 56(2) and 56(4) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

The facts

The facts of the case may be summarized from an agreed partial statement of facts filed by the parties prior to. the hearing. The plaintiff is a Manitoba corporation located in Winnipeg. For a number of years, its business generally was landscape gardening. Over a period of time, it had evolved a fairly complex shares arrangement so that by 1976, most of the individual shareholdings, owned by employees of the company, had been transferred to individually-owned corporations, each of them contractually bound to the plaintiff to provide management services through a concurrent agreement between each corporation and its individual shareholder. The result was that although all the shares of the plaintiff were owned by these individual corporations, their individual owners were, technically speaking, once removed from being employed by the plaintiff.

At the time the road building project in Churchill came up, the shareholdings were as follows:

* Chipik Investment Ltd. and Allard Ventures Ltd. became shareholders in July 1976.

On April 14, 1976, a joint venture partnership was formed for the particular and specific purpose of fulfilling the five-mile access road construction contract with Manitoba Hydro near Churchill. It was named Bruce Brothers Churchill Venture. Its members and individual interests were as follows:

Templeton Gardens Ltd. was incorporated in 1970. Its sole shareholder was Ellen J. McEwen, wife of Melvin McEwen. This corporation owned no shares in McEwen Bros. Ltd.

The partnership agreement of April 14, 1976 is reproduced in full as Appendix A of these reasons. In that agreement, the following provisions might be noted, namely:

1. The plaintiff McEwen Brothers Ltd. is named covenantor and agrees to guarantee any and all liabilities of the parties of the second part, namely the management companies;

2. The banking authority to draw cheques and other instruments on behalf of the partnership are Marcel Bruce or Adrien Bruce on the one hand and Melvin McEwen or Russell Graham on the other;

3. Capital to the partnership (up to an estimated $300,000) is to be contributed according to the individual partnership interests;

4. Equipment rentals shall be procured firstly from Bruce Brothers and secondly from McEwen Brothers Ltd.;

5. Off-site management of the venture is to be performed by Adrien Bruce and Melvin McEwen;

6. The hiring and discharge of any employee will require the consent of the onsite management team made up of Marcel Bruce and Russell Graham.

Following a successful bid, Manitoba Hydro executed a purchase order to Bruce Brothers Ltd. The contract was on a unit price basis and eventually turned out to have a contract price of $1.8 million. The profit from the venture was $525,000 which was split between Bruce Brothers at $262,500 on the one hand and the six remaining partners at $262,500 on the other.

Later in the year, namely July 20, 1976, when the Manitoba Hydro contract was nearing completion, another partnership agreement was executed. This one was in respect of a ob for Public Works Canada near Churchill for the works I have already described. The venture was to be carried out under the name of McEwen Brothers Churchill Venture No. 1. The full text of that agreement is reproduced in Appendix B to these reasons.

The parties are substantially the same as in the Bruce Brothers Churchill venture agreement, except that Adrien Allard and Ronald Graham have been replaced by their respective management companies, namely Allard Ventures Ltd. and Chipik Investments Ltd. Otherwise, the provisions are substantially the same, namely:

1. McEwen Brothers is again named covenantor and is again a guarantor of any and all liabilities on behalf of the parties of the second part, namely the management companies;

2. Signing authority is in the hands of Adrien Bruce or Patrick Bruce on the one hand and Melvin McEwen or Royal Hadaller on the other;

3. Capital in the partnership (up to an estimated $100,000) is to be contributed according to the individual partnership interests;

4. Equipment rentals are to be procured firstly from Bruce Brothers Ltd. and secondly from McEwen Brothers Ltd.;

5. Off-site management of the venture is to be performed by Melvin McEwen and Adrien Bruce;

6. The hiring and discharge of any employee will require the consent of the onsite management team made up of Royal Hadaller and Patrick Bruce.

On August 9, 1976, Public Works Canada informed McEwen Brothers Ltd. that its bid of $499,830 had been accepted and the contract awarded to it. Upon completion, the profit from that venture was $42,616 of which $21,308 was allocated to Bruce Brothers Ltd. and the balance split among the remaining parties in accordance with their individual interests.

The amounts of $262,500 on the first venture and $21,308 on the second venture are the amounts which the respondent Crown alleges are properly attributable to the plaintiff McEwen Brothers Ltd. for the taxation years 1976 and 1977 respectively.

Respondent's assumptions

The Crown based its reassessment in the above amounts on the following:

1. On the realities of the case, the Bruce Brothers Churchill Venture partnership, as well as the McEwen Brothers Churchill Venture No. 1 partnership, were each a business partnership between these two corporations, with their respective interest in the venture fixed at 50 per cent each;

2. With the exception of Templeton Gardens Ltd., owned by the wife of Melvin F. McEwen, the remaining parties are management companies wholly-owned by the five key employees of the plaintiff and to whom William McEwen had sold his shares back in 1973;

3. In fact, the contracts were performed by Bruce Brothers Ltd. and the plaintiff McEwen Brothers Ltd., whose ongoing business it was to enter into and perform the contracts they entered into;

4. The inter-positioning of the management companies to provide venture partnership interests in the profits, as well as the interrelated and interconnected arrangements between the two partnership agreements, were created for a fiscal purpose, lacked a bona fide business purpose and constituted a sham to divert the plaintiff's profits from these operations to the management companies, to the ultimate benefit of their individual owners;

5. A true construction of both operations leads one to conclude that if profits were actually allocated to the management companies, the latter received them as mere agents, nominees or trustees of the plaintiff;

6. If it should be found that the management companies were legally entitled to the profits, such was merely by direction or concurrence of the plaintiff, for the plaintiff's benefit or as a benefit the plaintiff desired to have conferred upon the management companies, and these were attributable to the plaintiff pursuant to subsection 56(2) of the Income Tax Act;

7. Alternately, the whole transaction involved transfers or assignments to nonarm's length corporations of rights to amounts that would otherwise be included in the plaintiff’s income within the meaning of subsection 56(4) of the Income Tax Act.

Plaintiff's rebuttal

The thrust of the plaintiff’s plea is that on a proper construction of the two partnership agreements, McEwen Brothers Ltd. was not a partner, it did not participate in the performance of the contracts and it was not entitled to any benefits therefrom. In particular, and in respect of the first venture with Manitoba Hydro, the plaintiff says that:

1. When first approached by Bruce Brothers Ltd. to become a partner, the plaintiff could not agree to it. It would have put it in competition with many other bidding contractors on whom the plaintiff traditionally depended for subcontracting and landscape gardening.

2. There was another inhibiting factor facing the plaintiff. By reason of current work orders, it was approaching its limits on securing performance bonds with its surety company. The situation would have been even more embarrassing if it purported to enter into a road building venture, an area where it had no track record at all.

3. The plaintiff did not participate in the road building contract. It was understood between the parties that the bid was to be submitted by Bruce Brothers on behalf of the partnership known as Bruce Brothers Churchill Venture.

4. Except for Russell Graham, who was actually employed by Blain-Lynn Farms Ltd., which held a management contract with the plaintiff, none of the employees on the job were the plaintiff's employees. Furthermore, the contractor ad to comply with the Allied Hydro Council Agreement, under which employment preference was to be given to local people in Churchill, to people living north of the 53rd parallel, to union members and to others, all in that order. The plaintiff's employees were not union members and it would have required a tremendous labour shortage to qualify them for employment.

5. The on-site office of the partnership was in fact administered by two employees, A. Gagnon and his son, on a duration-of-contract basis. These people looked after accounting, payroll, preparation of cheques and preparation of monthly progress claims submitted to Hydro.

6. Whatever the extent of the participation of Marcel Bruce and Russell Graham as the on-site management team to perform the contract, their salaries were paid by Bruce Brothers Churchill Venture. With respect to off-site management, most of this was performed by Adrien Bruce, his co-manager Melvin McEwen having to devote his time to the McEwen Brothers operations in and around Winnipeg.

7. The road building equipment was all rented. The plaintiff in fact earned rental income from the partnership. This amounted to $240,000 for that contract. Bruce Brothers also earned equipment rental income in the amount of $443,000 and third parties earned further rental income of $533,000. Renting equipment does not constitute partnership participation in the venture.

8. A further intrusion by the plaintiff was that it had stepped into the shoes of the management companies, and to a lesser extent those of Bruce Brothers, in advancing the necessary working capital for the venture. The management companies did not have established lines of credit and by reason of time constraints, it had become expedient for the plaintiff to advance $195,000 as loan to the partnership with suitable endorsement from these companies. The plaintiff earned interest on this sum, at the plaintiff's current bank rate plus one per cent, and altogether received $8,000 on that account. Again, as in its rental arrangements, lending money to a partnership does not constitute the plaintiff a partner.

The second venture, in respect of the Public Works Canada contract and involving the McEwen Brothers Churchill Venture No. 1, was undertaken under somewhat analogous circumstances. These are put forward by the plaintiff as follows:

1. By July 1976, the parties to the first agreement already had their equipment at the Churchill location, which fitted in nicely with performing the contract within the six-week completion date imposed by the owner.

2. À performance bond for the value of the $500,000 contract had to be posted and none of the original parties could provide it. On the other hand, the plaintiff, many of whose contracts had by then been performed since earlier that year, had gained additional margins from its bonding company and could thus satisfy contract requirements in that respect.

3. Certain changes had to be made to fit the new requirements. As earlier indicated, Allard Ventures Ltd., as one of the partners, was substituted for its owner Adrien Allard; working capital requirements were estimated at $100,000 and the individual partnership contributions were set at the level of partnership interests; the provisions for rental of equipment remained the same; the off-site management team of Adrien Bruce and Melvin McEwen remained the same: the on-site team of Marcel Bruce and Russell Graham was replaced by Royal Hadaller and Patrick Bruce; the plaintiff was again the guarantor of all the partnership liabilities.

4. Unlike the first venture, the plaintiff did not risk offending other contractors who were customers of the plaintiff.

5. Although the contract was awarded to the plaintiff, the role of the plaintiff was simply to provide a performance bond. It had no other involvement in the performance of the contract.

6. Separate bank accounts and administrative procedures were set up as in the first contract.

7. Although the plaintiff provided 50 per cent of the $100,000 working capital requirements, this is not sufficient to constitute a partnership interest.

The plaintiff then argues that with respect to both ventures, the following is to be noted:

1. Of all the management partners involved in the two ventures, only two could be said to have a non-arm's length relationship with the plaintiff: Templeton Gardens Ltd., owned by Mrs. McEwen, and Spin Investments Ltd., owned by her husband, Mervin McEwen. The other corporations are not controlled by nor related to each other.

2. The whole scheme had an obvious business purpose. The plaintiff was not in the construction business, but rather in landscape gardening, and therefore it could not be said that the venture was merely part of its business.

3. The partnerships were duly created, the contracts duly performed by their members, and the plaintiff was only an accommodation party whose interest was merely as lessor of its equipment.

4, The obvious conclusion was that the partnership deals were not a sham, that the parties were at liberty to organize their affairs in a manner to suit their needs and purposes, and the profits from the ventures were properly attributed to all the named partners.

Analysis of the evidence

There is no doubt that counsel for the plaintiff has advanced for the Court's consideration some pretty persuasive arguments in support of its case, most of them based on the evidence adduced before the Tax Court of Canada as well as on the agreed partial statement of facts signed by the parties. Indeed, it might be said that many of the more objective facts are not seriously in dispute or are not materially controverted. On the other hand, the case does reflect many features of a subjective nature as to the parties’ intentions, motives, purposes and designs, which we recognize from experience as having, to some degree at least, a selfserving character to them.

The role of the Court in such an issue as the one before me is to look at all the circumstances and determine to what extent the two partnerships, for purposes of the two projects, have the required degree of substance as alleged by the plaintiff; or if, taken as a whole, they may be said to be mere camouflage for what was essentially a tax-driven scheme for the purpose of redirecting income which would otherwise have accrued to the plaintiff.

The analysis which this requires would deal with some pretty sophisticated arrangements between the plaintiff and its shareholders. The original owners, apart from Melvin McEwen and Mervin McEwen, were all key people in the plaintiff company and had acquired their shares from William McEwen. There were six of them in all, and they in turn transferred their shares to their individual management companies. The companies in turn contracted their exclusive services to the plaintiff and for this purpose, entered into employment contracts with their individual owner to provide these services.

The implications of such an arrangement are that the management companies are entities distinct from the plaintiff and that the plaintiff no longer has any employees among its shareholders. Immediately, one wonders to what extent these relationships were actually carried out in accordance with legal obligations or whether the conduct of the plaintiff’s business was carried out pretty much as before.

The same complex structure is evident in the partnership agreements. Apart from Templeton Gardens Ltd., an unknown entity as far as the plaintiff was concerned, each of the four or five management companies had as its sole operating asset the service contract with the plaintiff and to which the management company owner is contractually bound. If these kept companies enter into a partnership agreement to make money on their individual behalf, and their services may only be performed by their owner, one might wonder whether the companies are not in breach of their undertaking towards the plaintiff and thereby earning income from services being rendered to others.

A similar observation might be made with respect to the decision of the plaintiff not to participate in the first venture by reason of its customers also bidding for the job and by reason of its inability to obtain a performance bond. On the first count, any arrangement with Bruce Brothers Ltd. would have ostensibly been a private unregistered one, as indeed the actual arrangement was. On the second count, assuming that the plaintiff wished to play fair ball with its surety company, its guarantee of all liabilities of its shareholding companies together with Templeton Gardens Ltd., as well as its loan of $195,000, are commitments which would either affect its banking limits or otherwise lead one to believe that its financial position was sufficiently healthy and liquid that there was no impediment to its entering into a straight partnership venture with Bruce Brothers Ltd. After all, the bid price on the Hydro contract was roughly $600,000, but was on a unit basis, which reduces a contractor's risk. In any event, as it turned out, the usual performance bond was waived on that project.

Further, if the plaintiff had been wary of participating in a road building contract because its know-how was limited to landscape gardening, it is remarkable how the personal corporations, essentially paper companies, could develop such instant expertise as to establish their legitimate participation. One might think the realities were otherwise.

On the second venture, it is noted that the contract was bid by the plaintiff and awarded to the plaintiff. The plaintiff was in fact the only one which could get the contract, because its bonding requirements were in place. It obviously agreed that it would not join the partnership, yet it readily acquiesced to the participation of the six personal corporations, one of whom is totally owned by the spouse of Melvin McEwen, and all the others by each of the company's key personnel. In effect, it can be said that these key people are the “beneficial” owners of the plaintiff’s shares.

The other point which might be raised is to what extent the legal relationship as found in the two partnership agreements is one merely of form and not of substance. It is alleged throughout that the plaintiff was not a partner and that it took no part in performing the contracts. If such be true, one might ask what purpose was served by the personal corporations in the ventures. Is a personal corporation of the nature I have described able to perform anything? What contribution did any of them bring to the ventures to justify a 50 per cent participation in the profits. Neither working capital, nor equipment, nor manpower were provided. If the true test be performance, which partner in fact performed, and if not, why would Bruce Brothers Ltd. have been so charitable and generous as to give half of the profits away?

The plaintiff stresses the fact that none of its employees were involved in the ventures. By reason of the Allied Hydro Council Agreement mentioned earlier, the labour force had to be drawn from other sources. Of the 70-person work force in that venture, only those persons I have named, i.e., the on-site and off-site managers had a relationship with the plaintiff. The argument that in law they were twice removed from the plaintiff does not detract very much from the realities of their involvement.

Furthermore, there is no evidence before me that apart from its office staff and the key people I have mentioned, the plaintiff itself had any pool of permanent or regular employees. In any event, the argument that no employees of the plaintiff were involved in the projects is not determinative per se. The argument may be said to simply beg the question before the Court.

The evidence before the Court is that the initiative with respect to joining with Bruce Brothers Ltd. for both projects was taken by the plaintiff; that it acted through the beneficial owners of its shares; that these owners were also the plaintiff's key players; that the plaintiff held itself out as guarantor of its shareholders' liabilities on both contracts; that it advanced $195,000 of working capital on the one project and $5,000 on the other; that the profits from the two ventures were distributed to management personnel or companies (except Templeton Gardens Ltd.) as shareholders, and these shareholders are beneficial owners of the company.

Finally, the performance of any contract might not necessarily involve a quantitative analysis of the purported contribution by any member of the venture, but might rather be a compound of the direction, know-how, experience and acumen of the parties who have in effect done all the thinking.

The law

The statutory provisions of the Income Tax Act which would generally apply to any business undertaking may be listed as follows:

3 The income of a taxpayer for purposes of this Part is his income for the year determined by the following rules . . .

4(1) For the purpose of this Act,

(a) a taxpayer's income or loss for a taxation year from . . . business . . . to the

taxpayer’s income or loss . . . computed in accordance with this Act. . .

9(1) Subject to this Part, a taxpayer's income for a taxation year from a business . . is his profit therefor for the year.

The Income Tax Act contains other provisions as well:

56(2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would if the payment or transfer had been made to him.

(4) Where a taxpayer has, at any time before the end of a taxation year . . . transferred or assigned to a person with whom he was not dealing at arm's length, the right to an amount. . .that would. . . be included in computing his income. . .the amount shall be included in computing the taxpayer's income for the taxation year. . .

245(2) Where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and, whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending upon the circumstances, be

(a) included in computing the taxpayer’s income for the purpose of Part I,

(b) deemed to be a payment to a non-resident person to which Part XIII applies, or

(c) deemed to be a disposition by way of gift.

251(1) For the purposes of this Act,

(a) related persons shall be deemed not to deal with each other at arm's length; and

(b) it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length.

(2) For the purpose of this Act “related persons”, or persons related to each other, are

(a) individuals connected by blood relationship, marriage or adoption;

(b) a corporation and

(i) a person who controls the corporation, if it is controlled by one person,

(ii) a person who is a member of a related group that controls the corporation, or

(iii) any person related to a person described by subparagraphs (i) and (ii);

(c) any two corporations

(i) if they are controlled by the same person or group of persons,

(ii) if each of the corporations is controlled by one person and the person controls the other corporation,

(iii) if one of the corporations is controlled by one person and that person is related to any member of a related group that controls the other corporation,

(iv) if one of the corporations is controlled by one person and that person is related to each member of an unrelated group that controls the other corporation,

(v) if any member of a related group that controls one of the corporations is related to each member of an unrelated group that controls the other corporation, or

(vi) if each member of an unrelated group that controls one of the corporations is related to at least one member of an unrelated group that controls the other corporation.

96(1) Where a taxpayer is a member of a partnership . . . his taxable income earned in Canada for a taxation year. . . shall be computed as if

(a) the partnership was a separate person resident in Canada . . .

(c) each partnership activity were carried on by the partnership as a separate person

(d) the amount of income of the partnership . . . were the income of the taxpayer. . . to the extent of the taxpayer’s share thereof.

Reference should also be made to the provisions of the Partnership Act, R.S.M. 1987, c. P-30, where in section 4, rules for determining the existence of a partnership may be found:

4. In determining whether a partnership does or does not exist, regard shall be had to the following rules:

(a) joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof;

(b) the sharing of gross returns does not of itself create a partnership, whether the persons sharing the returns have or have not a joint or common right or interest in any property from which, or from the use of which, the returns are derived;

(c) the receipt by a person of a share of the profits of a business is prima facie proof that he is a partner in the business; but the receipt of such a share, or of a payment contingent on, or varying with, the profits of the business, does not of itself make him a partner in the business, and, in particular

(i) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make him a partner in the business or liable as such,

(ii) a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such,

(iii) a person being the surviving spouse or a child of a deceased partner, and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of that receipt a partner in the business or liable as such,

(iv) the advance of money by way of loan to a person engaged, or about to engage, in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits arising from carrying on the business does not of itself make the lender a partner with the person or persons carrying on the business or liable as such, if the contract is in writing, and signed by or on behalf of all the parties thereto;

(v) a person receiving by way of annuity, or otherwise, a portion of the profits of a business in consideration of the sale by him of the goodwill of the business is not by reason only of such receipt a partner in the business or liable as such.

In terms of jurisprudence, the anchor to windward of many taxpayers, whose transactions or arrangements reflecting complex corporate and contractual structures are challenged by the Crown, is the case of Duke of Westminster v. C.LR., [1936] A.C. 1, where Lord Tomlin stated, at page 19, that

. . . every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it would otherwise be.

In Snook v. London and West Riding Investments Ltd., [1967] Q.B. 786 at 802, the U.K. Court of Appeal expressed certain views of what might constitute "sham" transactions:

Acts which are intended to give to third parties or to the Court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.

In Lagacé v. M.N.R., [1968] C.T.C. 98, 68 D.T.C. 5143, President Jackett of the Exchequer Court stated at pages 107-08 (D.T.C. 5149):

The most significant feature of the appellant’s contention in this Court, as it strikes me, is that it is inherent in the contention that profits that would otherwise have accrued to the appellants have ended up in the name of a company controlled by them, not because of bona fide business transactions between the appellants and such company, but because of transactions that have been arranged between them to implement a contract between the appellants and a third person to accomplish objects desired by the third person. In other words, the contention is based on the assumption that profits of the appellants’ business operations were put into the hands of the company by a device and that the profits were not the result of the company having embarked on business transactions. In my view, therefore, the short answer to the contention, even assuming the facts to have been established, is that, for purposes of Part I of the Income Tax Act, profits from a business are income of the person who carries on the business and are not, as such, income of a third person into whose hands they may come. This to me is the obvious import of sections 3 and 4 of the Income Tax Act and is in accord with my understanding of the relevant judicial decisions.

The Exchequer Court decision in Richardson Terminals Ltd. v. M.N.R., [1971] C.T.C. 42, 71 D.T.C. 5028 [[1972] C.T.C. 528, 72 D.T.C. 6431], may also be cited as an example of the substance of a relationship between parties overcoming the form of it. In that case, the taxpayer had leased a grain terminal elevator to Marine Pipeline and Dredging Ltd. ("Marine") which had accumulated losses. The profits from the elevator operations were thus directed to Marine. On the facts of the case, the Court found that the taxpayer had continued to operate the elevator, had posted the required security under the Canada Grains Act, R.S.C. 1985, c. G-10, and had looked after all of the paperwork involved. The Court applied the reasoning in the Lagacé, supra, case and found that the profits were properly attributable to the taxpayer.

I should now jump to the seminal judgment of Estey, J. of the Supreme Court of Canada in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305. His Lordship makes a lengthy review of all case law involving sham transactions, artificial transactions, incomplete transactions, the business purpose test, the effect of non-arm’s length transactions, and concludes with his observations on the proper interpretation of taxing statutes which are so well-known they need not be repeated here. His Lordship, in particular, at C.T.C. pages 316-17 (D.T.C. 6322), rejects the proposition that a transaction may be disregarded for tax purposes solely on the basis that it was entered into by a taxpayer without an independent or bona fide business purpose. He then sets out some interpretative guidelines in tax matters as follows:

1. Where the facts reveal no bona fide business purpose for the transaction, section 137 may be found applicable depending upon all the circumstances of the case. It has no application here.

2. In those circumstances where section 137 does not apply, the older rule of strict construction of a taxation statute, as modified by the courts in recent years, supra, prevails but will not assist the taxpayer where:

(a) the transaction is legally ineffective or incomplete; or,

(b) the transaction is a sham within the classical definition.

3. Moreover, the formal validity of the transaction may also be insufficient where:

(a) the setting in the Act of the allowance, deduction or benefit sought to be gained clearly indicates a legislative intent to restrict such benefits to rights accrued prior to the establishment of the arrangement adopted by a taxpayer purely for tax purposes;

(b) the provisions of the Act necessarily relate to an identified business function. This idea has been expressed in articles on the subject in the United States:

The business purpose doctrine is an appropriate tool for testing the tax effectiveness of a transaction, where the language, nature and purposes of the provision of the tax law under construction indicate a function, pattern and design characteristic solely of business transactions.

(Jerome R. Hellerstein, Judicial Approaches to Tax Avoidance, 1964 Conference Report, page 66)

(c) the “object and spirit" of the allowance or benefit provision is defeated by the procedures blatantly adopted by the taxpayer to synthesize a loss, delay or other tax saving device, although these actions may not attain the height of “artificiality” in section 137. This may be illustrated where the taxpayer, in order to qualify for an “allowance” or a "benefit", takes steps which the terms of the allowance provisions of the Act may, when taken in isolation and read narrowly, be stretched to support. However, when the allowance provision is read in the context of the whole statute, and with the “object and spirit"and purpose of the allowance provision in mind, the accounting result produced by the taxpayer's actions would not, by itself, avail him of the benefit of the allowance.

I should also quote from Dickson, C.J. in Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059, at page 52 (C.T.C. 128; D.T.C. 5066-67):

I acknowledge, however, that as there has been a recent trend away from strict construction of taxation statutes . . . so too has the recent trend in tax cases been towards attempting to ascertain the true commercial and practical nature of the taxpayer's transactions. There has been, in this country and elsewhere, a movement away from tests based on the form of transactions and towards tests based on. . .a common sense appreciation of all the guiding features of the events in question

This is, I believe, a laudable trend provided it is consistent with the text and purposes of the taxation statute. Assessment of taxpayers’ transactions with an eye to commercial and economic realities, rather than juristic classification of form, may help to avoid the inequity of tax liability being dependent upon the taxpayer's sophistication in manipulating a sequence of events to achieve a patina of compliance with the apparent prerequisites for a tax deduction.

I can humbly suggest that all case law dealing with the grey areas of sham, business purpose, commercial realities and other characteristics of any arrangements or transactions offer limited guidance, except as to their particular facts. As all of the cases I have reviewed, and there are many others as well, provide the judicial answer to one individual set of facts, it is not surprising that such a set of facts would not find its way before the courts again. As is obvious, the losing set will not be repeated and the winning set will no longer invite a reassessment.

Findings

One thrust of the argument by plaintiff’s counsel suggests a legalistic approach to a partnership of which one major contractor, namely Bruce Brothers Ltd., takes 50 per cent of the partnership profits, with the balance being distributed to some six other partners. Such a partnership, argues counsel, is a true partnership and reflects the business realities of the ventures in which the partnership became engaged. The partnership agreements have all the requisites of a valid partnership freely entered into and by which the ventures were fully performed. That, says counsel, is the whole set of facts and law on which the Court should rely, and the tax liability on the realized profits should be given the same treatment as in the case of any other joint partnership venture.

To adopt counsel's approach would, in my view, compress the partnerships’ legal existence into a kind of cocoon completely separated and isolated from all the circumstances of their creation and of their eventual contract performance. It would abstract the paper on which it is written from the human dynamics and relationships of the persons, legal or physical, who initiated and entered into the joint ventures.

The other thrust in the argument of plaintiff’s counsel is that the plaintiff did not participate in the partnerships. At most, the plaintiff was a lessor of heavy equipment, for which it received substantial income, and banker for the partnerships, from which it gained interest income. This involvement, argues counsel, does not constitute the plaintiff a partner, nor can there be implied from it any participation in the performance of the contracts. As a consequence, the profit distribution formulae in the partnerships are legally enforceable and should be respected. As a further consequence, the reassessments should be vacated.

To adopt counsel’s argument on that approach would, in my respectful view, submerge many other factual elements of the case to which I have already referred at length and on which I have alrady made some quizzical observations.

First of all, I should conclude that the plaintiff's top-heavy surety accommodation existing at the time of the first venture was no bar to its participation. In other words, I attach little weight to the business purpose described by the plaintiff in its decision to proceed as it did. If the plaintiff enjoyed sufficient liquidity to finance other people's ventures, it should all the more so have been able to finance its own.

Nor do I attach much weight to the plaintiff’s reluctance to participate on a bid in competition with its current customers. At first blush, that factor sounds plausible, but, as a self-serving assertion, it lacks any objective evidence to corroborate it. Indeed, it is in evidence that the partnership agreements were not registered and their contents not made public. Further, if the second contract could be awarded to the plaintiff with Bruce Brothers Ltd. participating, I should find no cogent reason why the plaintiff could not have similarly participated in the first contract awarded to Bruce Brothers Ltd.

Other elements of the case also raise grave issues as to the tax legitimacy of the partnership participation. Although it may be easily stated that a lessor of equipment or lender of money does not necessarily constitute the lessor or lender a partner in the venture, the fact is that the plaintiff did participate in the partnerships as covenantor to guarantee all liabilities of the companies and/or individuals in the partnership, five of whom were beneficially or otherwise shareholders of the plaintiff, and the remaining partner, Templeton Gardens Ltd., was owned b the spouse of Melvin McEwen, another beneficial shareholder in the plaintiff company. The plaintiff further participated as a named supplier of the equipment for the ventures.

I further conclude that it effectively directed the selection of the partners and the allocation of the different partnership interests to them. Of note, in this respect, is the participation of Templeton Gardens Ltd., at 25 per cent of the group's 50 per cent. This participation is equal to the percentage shareholdings of Gel Holdings Ltd., owned by Melvin McEwen, and which is not a named partner in the two ventures. Also to be noted is that the partnership interests of the remaining partners are identical to their respective interests in the plaintiff company.

I find that it is not realistic to categorize the working capital advance of $195,000 as a simple creditor-debtor relationship, and on which the plaintiff earned a net one per cent interest. This, in my respectful view, is the dichotomy of the plaintiff's position. It cannot urge sound business and financial reasons for not participating in the venture and, at the same time, enter into what might be termed an unconscionable business risk as a provider of working capital and as a guarantor of liabilities of the partnership group, without any rights whatsoever to participate in the profits.

Additional inferences may be drawn from other facts as well: an acknowledgement, unfortunate as it may be, of the partnership position of the plaintiff with Bruce Brothers Ltd. in the latter’s letter of instructions to its solicitors on August 19, 1976; the appointment of Melvin McEwen as one of the off-site managers and as one of the signing officers; the absence of any experience or participation of the management corporation, which in any event, have all the appearance of corporations to serve merely as conduits for the income earned by their individual owners from work performed on behalf of the plaintiff.

Conclusions

In the process of applying current jurisprudential principles to the foregoing findings, I can do no better than to quote from the reasons of the late Honourable Judge Cardin of the Tax Court of Canada (Court No. 82-1277, judgment dated June 3, 1985). His Honour said as follows at page 11:

One of the legal effects of the Supreme Court decision in Stubart, supra, as I see it, is to include in the general concept of "bona fide business purposes" objectives aimed solely at reducing tax liabilities or exempting a taxpayer from tax otherwise payable. However, the learned Justice made it abundantly clear that before the basic principle expressed in the Duke of Westminster decision, supra, can properly be invoked, not only must the Act clearly provide for the reduction or exemption of the tax sought, but the measures employed to achieve those ends must be real, legal, effectual and free of any form of misleading artificiality.

In the instant appeal the profits of the partnerships are clearly taxable by virtue of section 3 and subsection 9(1) of the Act. Bruce Brothers Ltd. as one of the parties in the partnerships was properly taxed for one-half of the profits realized from the business ventures. The question is, who earned the taxable income represented by the partnerships' other 50 per cent profits?

Later in his judgment, after finding that the arrangements had no bona fide business purposes as set out in the Stubart case, His Honour went on to enquire into the other guideline set out by Mr. Justice Estey as to whether or not the transactions were legally ineffective or incomplete or whether or not they constituted a sham in the classical sense. At page 13, he stated:

Bruce Brothers Ltd. and the six corporations were bound by the terms of the partnership agreements to supply the capital required for both contracts. The six corporations did not comply with those terms of the contracts. The appellant provided the majority of the required capital. The six corporations failed to provide even $5,000 as their share of the capital required for the second contract. In my opinion the participation of the six corporations in the partnerships were legally ineffective and incompletely carried out.

I should further subscribe to Judge Cardin’s conclusions that the arrangements fall within the classical definition of "sham" as stated in Snook, supra.

I do not arrive at these conclusions without any difficulty. Intricate intercorporate and personal relationships are a way of life these days, and it would be naive to suggest that the tax implications of these relationships are not considered whenever they are created. As a consequence, it is a thin line which often separates a bona fide transaction from one where the more obvious purpose is found to be otherwise. I might further observe that in the process of planning one’s affairs to meet a reduced tax liability or to eliminate it altogether, as in the Stubart case, supra, there is never any assurance that the plan might not be challenged by the tax authorities. It is a constant in the application of the Income Tax Act which, as recognized by Mr. Justice Estey, has not only revenue components but increasingly, economic purposes as well, that loopholes will be found by ingenious and imaginative tax consultants and that the form of the transaction will prima facie appear to be so legitimate that it will not invite any scrutiny. As a consequence, some taxpayers will appear to get away with it.

Unfortunately for the plaintiff, the case before me is not one of them. More fortunately, I am assured by counsel for the parties that income tax adjustments will be made in respect of those taxpayers to whom the profits of the ventures were originally allocated.

Otherwise, the plaintiff’s appeal is dismissed with costs.

Appeal dismissed.