Les Installations De L’est Inc, Les Entreprises Savino Inc v. Minister of National Revenue, [1985] 2 CTC 2446, 85 DTC 660

Taylor, TCJ:—These are appeals heard on common evidence in Montreal, Quebec, on April 17, 1985, against income tax assessments, for the years 1978, 1979 and 1980 for Les Entreprises Savino Inc, (“Savino’’), and for the years 1978 and 1979 for Les Installations de I'Est Inc, ("Installations"). At the commencement of the hearing counsel for the appellants withdrew the Savino appeal for the year 1980. The appeals arose out of assessments by the Minister of National Revenue under subsection 247(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended which reads:

247 (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.

For the record it is noted that all the documentation preceding the hearing was in French, and the trial itself was conducted in that language. Due to the complexity of the case and the necessity of referring to considerable case law, both counsel requested the privilege of providing written arguments in English. It is for that reason this judgment is written in English.

The critical factors brought out either in the pleadings or in testimony were:

(1) Savino was the corporate form of operation established in 1974, which continued a pre-existing business dealing in selling and installing fences. It was controlled by Savino Cantatore.

(2) It was the position of the appellants that Savino had not engaged in the activity of "fence installation”, confining its operations to sales, and sub-contracting out the installation, both before and after the incorporation of Savino.

(3) In 1976 Installations was incorporated, allegedly for the purpose of permitting Guiseppe Cantatore Jr, (son of Savino Cantatore) and Anna- Marie Cantatore (daughter of Savino Cantatore) to operate their own business — the installation of fences.

(4) It was the assertion of Savino Cantatore that supervising the subcontractors' installation of fences had been very stressful for him, particularly after he had certain health problems, and he gladly agreed to incorporate Installations, and turn over that responsibility to his son Guiseppe Cantatore Jr.

(5) Both Guiseppe Cantatore Jr, and Anna-Marie Cantatore had worked in Savino before the incorporation of Installations, and had continued and completed their education after 1976. Guiseppe Cantatore Jr, had taken university studies in business and commerce.

(6) In essence, according to the appellants, the incorporation of Installations was for family and business reasons only. Income Tax implications

— if known at all — had little or no effect on the decision to incorporate, nor to operate Installations.

(7) After the incorporation of Installations, the practice of Savino selling the fences installed continued, and there was no indication in the office documentation that the customer had any direct connection with Installations. That company (Installations) acted as the sub-contractor for Savino in the installation work.

(8) Mr Raymond Brosseau, chartered accountant, and Judge Yvon Ma- cerola (formerly a lawyer assisting the Cantatore family in business matters), testified that the subject of income taxes was not a prominent one, perhaps not even discussed, in connection with the incorporation of Installations.

(9) Dr Nick Petrella, testified regarding the poor health condition of Savino Cantatore about the time of the incorporation of Installations.

Before proceeding to review the arguments submitted by the parties, I would simply note that little reference will be made to the demarcation line (between “selling” — Savino, and “installations” — Installations) asserted by the appellants to be of crucial importance. In my view it is simply a fiction, and nothing at all for purposes of this appeal rests on such a distinction. As a basis for the formation of a separate corporation, it could not pass any realistic test. As for the other reasons advanced for the formation of Installations — the health of Savino Cantatore, and the personal business ambitions of Guiseppe, Cantatore Jr, they probably were taken into account, but neither of them was of sufficient importance to merit the formation of Installations on its own. These assertions and the general conduct of the case by the appellants, was to stress the proposition that “reduction of income taxes” was not the reason (indeed even a reason) for the incorporation because there were other reasons — those which I have rather summarily rejected above. We shall return to that later, but that rejection eliminates the need for the Court to review in detail the arguments proposed by counsel for the appellants dealing with that point. I would also note that some portions of the submission of the appellants were to minimize any application which the Court might see under section 256 of the Act — also referenced by the Minister as support. For the reasons which follow, I fail to see that section 256 has any necessary bearing on a determination of this matter.

Having said that about the submissions of the appellants, I would note that the ultimate proposition put forward by their counsel was:

It is well established that in order to succeed in their appeal, the appellants must establish that the assumptions of fact of the Minister were wrong or that they do not of themselves reasonably justify the conclusions drawn by the Minister.

On this basic point, the thrust of the presentation by the appellants was two-fold: (a) to show that some of the assumptions listed by the Minister regarding the respective operations of Savino and Installations were questionable; and (b) that the principals, Savino Cantatore and Guiseppe Cantatore Jr, as well as their advisors Mr Brosseau and Mr (now Judge) Macerola did not deal with the reduction of taxes as a main reason for the incorporation of installations. I agree that to some degree there was evidence contradicting some of the Minister's minor assumptions regarding separate telephones, bookkeeping services etc, for the two companies; and that indeed the testimony of the witnesses shows little evidence of direct consideration of income taxes at incorporation. But I do not agree that this has resulted in the onus of proof which rested on the appellants’ shoulders being removed. Neither does invocation of that famous quotation from Alpine Furniture Company Limited v MNR, [1968] CTC 532 at 542; 68 DTC 5338 at 5345 serve that purpose alone:

The fact that there may be two ways to carry a bona fide commercial transaction, one of which would result in the imposition of a maximum tax and the other would result in the imposition of much less tax, does not make it a necessary consequence to draw the inference that in adopting the latter course one of the main objects is the avoidance of tax.

The onus on the appellants in this matter, as I understand the respondent's basic position, is not merely to show that they chose one method of operating (incorporating Installations) rather than another method, and that there may have been some minor desirable reasons for so doing, but — rather to show that none of the reasons for so doing, but — rather to show that none of the reasons for the existence of Installations, was “the reduction of income taxes”. Counsel for the respondent summed up the Minister's position in the written submission as:

It is respectfully submitted that Savino Cantatore and Guiseppe Cantatore, without forgetting Anna-Marie Cantatore, are persons with business experience and acumen sufficient to be aware of the incidence of tax.

The position of the Minister should be read in the light of the judgment of the Supreme Court of Canada, in Stubart Investments Limited v The Queen, [1984] CTC 294; 84 DTC 6305 — cited by counsel for the appellants, and I would add the subsequent Federal Court of Appeal judgment in The Queen v Rex T Parsons, [1984] CTC 354; 84 DTC 6447. As I understand it, Stubart (supra) stands for the proposition that the reduction of income taxes as the sole purpose for a transaction, does not necessarily invalidate that transaction as a deductible expense. Parsons (supra) relying on Stubart (supra) applies that principle to the formation of a corporation, treating that act as a “transaction" again accomplishing its purpose in tax reduction. Therefore in the instant case, even if Installations were incorporated for only the purpose of income tax reduction — (a purpose disavowed by the appellants, but adopted by the respondent) the appellants could succeed to whatever degree Stubart (supra) and Parsons (supra) are applicable. However, we face a small contradiction, since, while the Minister may “deem" under subsection 247(2) (where he contends that “one of the main reasons" was to reduce tax), the Court may vacate that direction from the Minister if “none of the main reasons" was such. I am not persuaded that great significance should be allocated to the word “main" in “none of the main reasons" (subsection 247(3)) since, except under the most unusual circumstances, (which do not exist in this appeal), I would suggest that whenever the reduction of income tax is one of the reasons for incorporation or for continued existence, it would be a main reason. In my opinion, the circumstances and events recounted in the testimony would support a conclusion that the appellants (or their principals) were, or should have been, or had every reasonable opportunity to be familiar, in an adequate way, with the beneficial income tax results which might flow from the formation of Incorporation. I gather from a review of Alpine Furniture Company Limited (supra) and Industrial Trailer Rentals Limited v The Queen, [1974] CTC 775; 74 DTC 6577, among other case law, that it is open to the Court barring clear evidence pointing in the other direction, to conclude that modern businessmen with professional advisers familiar with the role and function of corporations, should have an adequate knowledge of income tax matters, and would take into account that factor in making a business decision, comparable to the incorporation of a second company or maintaining its existence — the issue before the Court in this matter. It may also be asserted from Stubart (supra) that a competent and prudent businessman should always take into account the effects of income tax on business deci- sions, an even more positive view. It is difficult for me to see how a second corporation, (Installations), carved out of the basic operations of an original corporation, (Savino), the two operating in a manner only marginally distinguishable from that of the original corporation on its own, can escape the taxation net, set by subsection 247(2) of the Income Tax Act, when the principals involved were familiar with corporations, business practice, income tax, and income tax advice. I do not consider it a prerequisite that there be proof of a direct and conclusive attachment to the “income tax” reason. That to me is key to an understanding of the application of section 247 of the Act. The Minister on prima facie grounds, was in good order to make the determination of “association” which forms the basis of the assessments before the Court — “Installations” as an operating corporation was certainly carved out of Savino, brought into, and kept in existence by the principal of Savino, Mr Savino Cantatore.

It may well be as the legislation and jurisprudence now stand, that the one certain way shareholders of a corporation could prove (in order to warrant “vacating” the Minister’s direction under subsection 247(2)) that “the separate existence ... of the corporation was not to reduce taxes”, would be to wind up the corporation and thereby eliminate that benefit alleged by the Minister. That would be a drastic step indeed, and obviously would only be warranted if any other reasons (non-tax) for the separate existence were for the corporation's operating purposes. In the instant case, it is undoubtedly convenient to have the two corporations; and they may have some limited purposes — providing to Guiseppe Cantatore Jr, and Anna-Marie Cantatore, the sense of operating independently of Savino Cantatore, and to allow Guiseppe Cantatore Jr, to deal more directly with the installation crews, thereby relieving Savino Cantatore of this task which he found stressful. However, it cannot be said that it was impossible, impractical or even difficult, to accomplish all of these things within the original corporation Savino, or for that matter even without any corporation. No reason therefore has been advanced which could possibly be a viable rationale for the continued existence of Installations other than the Minister's assumption of the “reduction of taxes”, and the parties to the transactions involved were sufficiently familiar with business practice to instinctively avail themselves of such an opportunity. Indeed, a detailed review of the testimony and evidence, could lead to the conclusion that the only reason for the separate existence of Installations, was the reduction of taxes — a specific finding however that is not necessary for purposes of this hearing, because of the wording of section 247(3) of the Act.

The appellants have not shown that none of the main reasons for the separate existence of the corporations Les Entreprises Savino Inc, and the Les Installations de I'Est Inc, was to reduce the amount of taxes otherwise payable.

The appeals are dismissed.

Appeals dismissed.