Warren Packaging Limited, Bradford-Penn Oil Inc v. Minister of National Revenue, [1983] CTC 2028, 83 DTC 1

Guy Tremblay:—These appeals were heard on common evidence on December 3, 1981, at the City of Toronto, Ontario.

1. The Point at Issue

The point at issue is whether the appellant companies for the 1974 and 1975 taxation years are or are not associated within the meaning of subsection 247(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended. The direction of the Minister is to the effect that they are associated.

2. The Burden of Proof

2.01 The burden is on the appellants to show that the respondent’s assessments are incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment the Court decided that the assumptions of fact on which the respondent based the assessments are also deemed to be correct. In the present case, in paragraph 7 of the replies to notice of appeal, the respondent described the facts on which he based his assessment:

7. In making the Direction referred to in paragraph 6 herein, the Minister of National Revenue was satisfied:

(a) that the separate existence of these corporations in the taxation years 1974 and 1975 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 years in question was to reduce the amount of taxes that would otherwise be payable under the Income Tax Act.

3. The Facts

3.01 The following facts and figures detailed in paragraph 6 of the replies to notice of appeal are not in dispute.

3.01.1 Concerning Warren Packaging Limited:

6. The Appellant was reassessed tax, notice of which was given March 30, 1979, in the sum of $13,809.42 for the 1974 taxation year and $13,932.89 for the 1975 taxation year on the basis of and pursuant to a Direction of the Minister of National Revenue, made pursuant to Subsection 247(2) of the Income Tax Act, that the Appellant was a corporation associated with Bradford-Penn Oil Inc. The amounts allocated for the purposes of a lower rate of tax to the two corporations were as follows:

1974
Warren Packaging Limited	$17,971.09
Bradford-Penn Oil Inc	82,028.91
Total	$100,000.00
1975
Warren Packaging Limited	$20,618.33
Bradford-Penn Oil Inc	79,381.67
Total	$100,000.00

3.01.2 Concerning Bradford-Penn Oil Inc:

6. The Appellant was reassessed tax, notice of which was given May 5, 1980, in the sum of $12,605.36 for the 1975 taxation year and $13,905.99 for the 1975 taxation year on the basis of and pursuant to a Direction of the Minister of National Revenue, made pursuant to Subsection 247(2) of the Income Tax Act, that the Appellant was a corporation associated with Warren Packaging Limited. The Amounts allocated for the purposes of a lower rate of tax to the two corporations were as follows:

1974
Bradford-Penn Oil Inc	82,028.91
Warren Packaging Limited	$17,971.09
Total	$100,000.00
1975
Bradford-Penn Oil Inc	79,381.67
Warren Packaging Limited	$20,618.33
Total	$100,000.00

Moreover, the appellants accepted the fact that a direction was issued by the respondent.

3.02 In his testimony, Mr Keith Joseph Warren, the sole shareholder and President of the appellant company Warren Packaging Limited, testified that:

(a) He was born in 1927 and he started working as a salesman in 1946 for the company, Bradford-Penn Oil Limited, the shares of which were owned by his father. The latter sold the said shares in 1964 to Stuart House International Limited. In 1966, he stopped working for Bradford- Penn Oil Limited.

(b) During the year of 1966, he formed his own company, Warren Packaging Limited. It was primarily incorporated for the purpose of buying, packaging and selling anti-freeze. He was the sole shareholder and the President of the said company. Mr O’Donohue, QC, was Vice-President, and Mr G Dukeshire was Director. The business of Warren Packaging was located in Toronto, Ontario; they rented half the basement premises at 245 Carlaw Avenue.

(c) The company started packaging for other companies and in addition it marketed the “Dual Duty Anti-Freeze” brand. The company was buying anti-freeze by the truck load, putting it in one gallon and one quart containers and putting the name “Dual Duty” on the containers. The product was sold through the wholesale automotive trade, which in turn sold it to garages and service stations ultimately for the consumers.

(d) It was a highly risky business for the following reasons:

— in Canada, there were only two suppliers of the ethylene glycol anti-freeze product, namely, Union Carbide Canada Limited and Dow Chemical Canada Limited.

— until 1972, it was possible to buy bulk anti-freeze from Union Carbide, but during that year the company “chose to not supply what was known as ‘bulkers’ in Canada anymore. They wanted to be able to put their total product into the end product which was Prestone Anti-Freeze.” (SN page 10).

— Dow Chemical then remained as sole supplier in Canada. However, it was “trying to go the same route as Union Carbide with Prestone, in other words, trying to control the end market at the higher profit. level, they were not only setting their cost price, they were setting their selling price.” (SN pages 10 and 11)

— there was a clause in the contract of purchase from Dow Chemical:

. . . that although the anti-freeze season runs from about mid-August to mid-December for our years volume, they decided that they wanted us to take one twelfth — if we didn’t take one twelfth of our volume per month rather than the traditional ninety per cent (90%) of our volume in five (5) months that we stood the risk of losing that volume that we didn’t take during that one twelfth, . . . (SN page 11).

In a particular year, it was not possible to obtain anti-freeze for three weeks during the peak season in the month of September. In fact, Dow Chemical was selling anti-freeze not only in bulk by truck load, but also in smaller packages (gallon cans, quart cans, forty- five gallon drums and five gallon pails). It was sold to businesses such as United Co-op, Canadian Tire, Zeller’s and one Best Buy Corporation who had the 60/62 brand.

— Dow Chemical was in direct competition with Warren Packaging at the level of selling the gallon and quart containers. It offered them to the customers of Warren Packaging.

(e) The risk that caused Mr Warren so much fear came to fruition in 1981. The prices of Dow Chemical in 1980 and 1981 were as follows:

As the customers of Warren Packaging had to be competitive with Dow Chemical customers, Warren Packaging had to sell them at the same prices.

(f) When Warren Packaging started the business in 1966, there were two distinctly different markets:

One was to the wholesaler whose job it was to service and supply the garage and service stations, who ultimately put it into the consumer’s car, the other market was to the retailer who sold it on a cash and carry basis and you did your own servicing with it. (SN page 16).

As the price of anti-freeze was less expensive to users who bought it from the retailers rather than service stations, the automotive wholesalers stopped selling anti-freeze around 1964 or 1965 and left the market to the mass merchandisers.

(g) In 1966:

My approach to the market at the time was that I could see an opportunity to get into the business because first of all we didn’t really in 1966 have any business, we just started in business, so if we were able to analyze which we did the Prestone marketing practices which we thought were devastating, we decided that we would go into and pick up this vacuum that had been created in the automotive wholesale trade, because there were very little of them selling it because of the marketing practice, we decided that we would approach the wholesale automotive field with a brand and the brand was Dual Duty, that we would market exclusively into that marketing field. ... To the wholesaler jobbers, . . . (SN page 18).

Union Carbide had lost the wholesale automotive market because it had “picked up the mass merchandiser market” with the gallon of “Prestone Anti-Freeze”.

(h) In 1969, a building situated at 60 Rolark Drive in Scarborough, Ontario, was purchased. It was a brick and block building of approximately sixteen thousand square feet located on an acre of land in an industrial district. The building was purchased by Rolark Sales Limited of which Mr Warren’s wife was the sole shareholder. She was that company’s President, Mr O’Donohue was Vice-President, and Steven Brennan, her brother-in-law, was Director. Warren Packaging rented part of the premises to house its business.

(i) There were two sound business reasons for his wife’s being the sole shareholder:

One, was what we have indicated is the high risk of the anti-freeze business, we could be in one year and out the other year. And the second was that I had given a personal guarantee to the bank, and in regard to Warren Packaging Limited, and it was absolutely necessary to have a limited liability there (SN page 20).

It was entirely Mr Warren’s idea to put the shares in his wife’s name.

(j) Rolark Sales Limited purchased the company name of Bradford-Penn Oil Limited, in 1973, whose business was going downhill. They also bought the trademark of the product “Viceroy” and the existing inventory. The name of Rolark Sales Limited was then changed to Bradford-Penn Oil Inc. This company was then in a position to supply the mass merchandise field with the “Viceroy” brand:

. . . if Warren Packaging had supplied Dual Duty brand to both the automotive wholesaler and the mass merchandiser, they would have had the same results that Prestone had by losing one of the other markets. So in this particular case it was necessary to have, to cover the total field, to have two (2) companies with two different brand names. (SN page 22).

. . . if we had to make a choice between the two fields, our prime interest was in the wholesale automotive field, that is where our big volume was. But we know, I know at the time if we had gone ahead and taken that brand and decided to sell it to Simpsons Sears or Eaton’s or somebody like that, that we would have had — we would absolutely have lost the business in the other field. There is no question about that in my mind.

We just wouldn't have had a business.

I could not jeopardize what we already had for what I thought we could gain. It was necessary to go that route. (SN page 24).

(k) The net profits of Warren Packaging varied between $500,000 to $700,000 a year due to its good marketing practices. However, because of the high risk of the business:

we could be in business today and out tomorrow and because we have one supplier, I could not see the risk of leaving surplus capital in the business. (SN page 25).

Therefore, they would set up a form of bonus which had to be taken out prior to the end of the calendar year. The bonus was in the range of $300,000 — $400,000 in a typical year. In one year, when there was exceptional profit, the bonus amounted to close to $1,000,000.

(I) In 1980, at the age of 52, Mr Warren sold the shares of Warren Packaging:

I sold the business, again I think not because I wanted to, but because it was a good business judgment because it was too risky, and I could see the tightening up of the market, I could see that with one supplier, and his desire to control both ends of the business and to control my profits, by selling me and also telling me what I had to sell my line for, I just wasn’t willing to take any more chances because I feared the value of my business being worth less in 1983 than it was in 1980, and I just thought that I had no choice but to protect what I already had. (SN page 27).

3.03 In cross-examination, Mr Warren testified that:

(a) He never was a director or an officer of Rolark Sales Limited despite the fact that in the agreement (Exhibit R-1) dated July 4, 1973, by which the company purchased among other things the trademark “Viceroy”, one can see that he signed as Vice-President of Rolark Sales Limited (SN page 33).

(b) To purchase the land and building, Rolark Sales borrowed $100,000 which was guaranteed by Warren Packaging. Moreover, Warren Packaging lent $69,000 to Rolark Sales Limited to assist in the construction of the building (SN page 34).

(c) The two reasons for incorporating Rolark Sales were:

. . . I wasn’t prepared to take the risk of losing the land and so on when I had a personal guarantee to the bank on Warren, that is number one. Secondly, we were at that time we wanted to expand our volume into [sic] another field, namely the mass merchandiser field so it was necessary then to have another company name and to have another company brand. (SN page 35).

(d) His personal guarantee on Warren Packaging was to the Toronto- Dominion Bank for a loan ($1,000,000) plus a $3,000,000 line of credit. The guarantee was in effect until the day he sold the business (SN page 37).

(e) Warren Packaging could not easily market to the mass merchandisers:

Because if you have, even if there are two different brand names and they have the same company name on the can, it is very difficult for our customer selling one brand from one company and another brand from the same company if they are going to be sold at such different price levels it is still an embarrassing situation, and our customers would definitely not have approved of that and that would have meant, we would have lost their business. (SN page 38)

(f) The appellant companies operated from the same premises and had the same supplier, Dow Chemical.

(g) The anti-freeze was purchased in bulk, placed in three different storage tanks in the yard outside the factory and packaged in various containers, “Dual Duty” brand and “Viceroy” brand.

(h) The essential of having a brand exclusive for the automotive trade is where it is essential. The mass merchandiser didn’t care what we were in or what brands we were in or what markets we were in because he was already carrying the Prestone brand that he had taken from the automotive trade; it didn’t work from the mass merchandiser down. The mass merchandiser didn’t care what the automotive trade did, so it only worked the one way.

That’s what I am trying to explain. It only worked the one way. We didn't care what the mass merchandiser thought, because he didn’t care, we did care what the wholesaler thought. (SN pages 42 and 43)

(i) The wholesaler cared for the following reasons:

Q Why would the wholesaler care, I mean what he wants surely is anti-freeze at the lowest price.

A That’s true, but he can’t sell anti-freeze from a company when that same company will put it into a mass merchandiser like Honest Ed’s who would sell it for less than his cost as a loss leader. It is not a case even perhaps of the profit they make, it is the embarrassment they get from their customer who thinks that the wholesaler is gypping him with excess profit.

Q But the point is really that you have got to have your automotive wholesaler having a different brand.

A Absolutely.

Q That is the key isn't it?

A That’s the key.

(SN page 43)

Physically, it was possible to have two to ten brands, but pursuant to good financial administration, it was not feasible.

(j) He admits the fact that the “Dual Duty” advertisement (Exhibit R-3) and the “Viceroy” advertisement (Exhibit R-4) are identical, including the address and the phone number, except for the company’s name.

(k) He does not remember his counsellors’ discussing taxation with him when he decided to separately incorporate Rolark Sales Limited, which became Bradford-Penn Oil Inc in 1973.

(l) Both companies had the same year end, March 31st.

(m) Both companies were sold in 1980, Warren Packaging Limited for $1,000,000 and Bradford-Penn Oil Inc for $500,000.

3.04 The appellants’ second witness was Mr Jack Campbell, manager of Modern Sales Limited. In examination-in-chief he testified that:

He has been in the anti-freeze industry since 1936.

(b) He met Mr Keith Warren in the 1950s when Mr Warren was a salesman for Bradford-Penn Oil Limited. At that time, he was an agent for Peterborough Automotive Supply located in Peterborough. He became President of that business in 1968, and sold it during that year.

(c) After staying out of business until 1975, he joined Modern Sales Limited as General Manager.

(d) Peterborough Automotive Supply (PAS) in or about 1967 purchased anti-freeze from Warren Packaging Limited, and sold it to garages and service stations. However, after the war and before 1967, PAS purchased “Prestone Anti-Freeze” from National Carbon Company. PAS bought the anti-freeze in cans and sold them to service stations. Later, National Carbon Company began selling the product to mass marketers: “Canadian Tire, Woolco, any of the cut-rate stores, war surplus stores, even grocery stores”. (SN page 58). As a result of this, gas station operators became uncompetitive. It was disastrous for PAS’s business, .. we lost our business”. (SN page 57).

(e) In 1967, PAS made arrangements with Mr Warren:

His marketing policy was to sell Dual Duty to the automotive jobber wholesaler. And I am sure, he appealed to us because you see, he knew as we knew, we had lost our market, so this was just great, because he wasn’t going to, he was coming into us, going into, his whole line of distribution was going to be through the automotive jobber, and it wasn’t going to fall into the pitfall that the last fellow had fallen into. Because, as I say, we didn’t throw out Prestone, but I can name companies that absolutely to this day do not buy Prestone, they threw out even their batteries. Because they also produced batteries, they were so bitter at the fact that it had fallen into the mass marketer and the business just disappeared. (SN pages 59 and 60).

(f) If Warren Packaging Limited had been selling “Dual Duty” to mass merchandisers in 1967:

. . . we wouldn’t have wanted to do business with him. The appeal was that his method of marketing his product was to the automotive jobber, that’s what we wanted. We weren’t going to find the same product and have to sell against it in the mass marketers. (SN page 60).

(g) Warren Packaging continues in 1981 to sell, pursuant to the same method (through Modern Sales Limited). When a salesman comes to sell a new product:

. . . we want to know if it is to the automotive wholesaler, or if he is strong on the mass marketer, or selling to the garage trade, we have got to know at what levels he is putting his emphasis.

Some go through the mass marketer, and you know, we just have to turn away because that would destroy our business. (SN page 61).

(h) If Warren Packaging started today to sell “Dual Duty” to the mass merchandisers:

. we would be very bitter, and we would certainly, well we would do everything we could to discourage him from taking that market approach, short of probably discontinuing the line. Whether we would really get down to that I don’t know, but we would exert as much pressure as we could that that is not the way to go again. (SN pages 61 and 62).

(i) He knew the existence of the “Viceroy” brand, but the product never posed a real problem.

3.05 In cross-examination and in re-examination, Mr Campbell confirmed, in substance, what he had said in examination-in-chief.

3.06 The appellants’ third witness, Mr Wilbur Moore, Manager of Motive Parts and Equipment Limited, testified in examination-in-chief that:

(a) His employer is in the automotive wholesalers’ business. “Automotive wholesalers. Parts wholesalers for the after market.” (SN page 68). He has been in this industry since 1931.

(b) In the early years he was involved in the marketing of anti-freeze with the “Prestone” brand.

(c) The business was .. very healthy until they started selling direct to the mass merchandisers”. “. .. the mass merchandiser uses it as a loss leader, and we quit handling anti-freeze completely.” (SN page 68).

(d) He met Mr Keith Warren in 1967 and despite the fact that they were very dissatisfied with the anti-freeze marketing in general, they were interested in Mr Warren’s marketing method.

Well his approach, he apparently knew the reaction from the wholesalers over the years previous to this, and he assured us that he understood this, and that he was offering a product to be handled through the wholesalers jobbers organizations, so that we could get back in the business again. (SN page 69).

(e) If Warren Packaging had been selling the “Dual Duty Anti-Freeze” brand into both markets back in 1967, “we wouldn’t have gone back into the anti-freeze business”. (SN page 68)

3.07 In cross-examination, Mr Moore confirmed, in substance what he had said in examination-in-chief.

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the present case are subsections 246(1), 246(3), and 247(2); paragraphs 247(3)(a) and (c); and subparagraph 247(3)(b)(ii). They read as follows:

Sec 246 Tax avoidance

(1) Where the Treasury Board has decided that one of the main purposes for a transaction or transactions effected before or after the coming into force of this Act was improper avoidance or reduction of taxes that might otherwise have become payable under this Act, the Income War Tax Act, or The Excess Profits Tax Act, 1940, the Treasury Board may give such directions as it considers appropriate to counteract the avoidance or reduction.

Subsec 246(3)

(3) Idem. Where a direction has been given under this section, tax shall be collected, or assessed or reassessed and collected, notwithstanding any other provision of this or any other Act, in accordance therewith.

Subsec 247(2)

(2) Associated corporations. Where, in the case of two or more corporations, the Minister is satisfied

(a) that the separate existence of those corporations in a taxation year is not solely for the purpose of carrying out the business of those corporations in the most effective manner, and

(b) that one of the main reasons for such separate existence in the year is to

reduce the amount of taxes that would otherwise be payable under this Act

the two or more corporations shall, if the Minister so directs, be deemed to be associated with each other in the year.

Subsec 247(3)

(3) Appeal. 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.

4.02 Cases at Law

The cases at law which were referred to the Board are as follows:

1. Honeywood Limited et al v The Queen, [1981] CTC 38; 81 DTC 5066;

2. Continental Stores Ltd v The Queen, 79 DTC 5213;

3. Alpine Furniture Company Limited et al v MNR, [1968] CTC 532; 68 DTC 5338;

4. Doris Trucking Company Limited v MNR, [1968] CTC 303; 68 DTC 5204;

5. The Queen v Decker Contracting Limited, [1976] CTC 731; 76 DTC 6477;

6. The Queen v Decker Contracting Limited, [1978] CTC 838; 79 DTC 5001.

4.02.1 The appellants had to prove 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 under the Act. Justice Gibson in the Honeywood Limited et al case, (supra), discussed this aspect of evidence on page 5069 (quoted in subparagraph 4.03.3 below).

4.03 Analysis

4.03.1 The preponderance of the evidence given by the testimonies of the three witnesses, Messrs K J Warren (paragraphs 3.02 and 3.03), Jack Campbell (paragraphs 3.04 and 3.05) and W Moore (paragraphs 3.06 and 3.07), is to the effect that:

(a) Both appellants were incorporated for the purpose of buying and selling anti-freeze products. However, Warren Packaging Limited sold its product (“Dual Duty”) to wholesalers who serviced and supplied garages and service stations (paragraphs 3.02(c) and (f) ), and Bradford-Penn Oil Inc sold its product (“Viceroy”) to retailers who sold it on a cash and carry basis to its clients (paragraph 3.02(f)).

(b) It was too risky and dangerous a business to have the same company distribute the anti-freeze product to both the wholesalers and the retailers. Until 1972, there were only two anti-freeze product suppliers, namely, Union Carbide Canada and Dow Chemical Canada. In 1972, Union Carbide Canada decided not to supply what was known as “bulkers” in Canada any more. They sold only to retailers such as Canadian Tire, Zellers, etc. Dow Chemical then remained as sole supplier in Canada and it tried “to go the same route as Union Carbide with Prestone, .. . trying to control the end market at the higher profit level . ..” (paragraphs 3.02(d), 3.03(e) and 3.03(i) ).

(c) Peterborough Automotive Supply (PAS), and Motive Parts and Equipment Limited lost their business for a similar reason. In or about 1950, when the supplier National Carbon Company decided to sell its product to mass marketers (Canadian Tire, Woolco, etc), PAS lost its business. When PAS made arrangements with Warren packaging in 1967, it was because it did not sell to mass merchandisers (paragraphs 3.04(d), 3.04(f) and 3.06(c).

(d) Because it was a risky business, Warren Packaging distributed the surplus capital every year. The bonus was in the range of $300,000 to $400,000 in a typical year (paragraph 3.02(k)).

4.03.2 The Board thinks it is not material in the present case that both companies are directed by the same person, in the same premises, and that the product comes from the same supplier. The preponderance of the evidence within the meaning of paragraph 247(2)(a) of the Act is that the separate existence in 1974 and 1975 was solely for the purpose of carrying out the business of those corporations in the most effective manner.

4.03.3 The only matter left for decision is whether or not, within the meaning of paragraph 274(2)(b) of the Act “. . . one of the main reasons for such separate existence” in the 1974 and 1975 taxation years was to “reduce the amount of taxes that would otherwise be payable under this Act”. The appellants, who have the burden of proof, must prove the negative. On that point Justice Gibbon in the Honeywood Limited et al case, (supra), made the folowing comments at 5069:

By reason of the wording of section 138A(2)(b) of the Act, the plaintiff corporations are required to prove a negative. (cf (a) Lefeunteum v Beaudoin ((1897) 28 SCR 89 per Taschereau J at 93-4); J W Windsor Limited v Maritime Fish Corporation Ltd ((1926) Ex CR 31 per Audette J at 32); Vaillancourt v His Majesty The King ( (1927) Ex CR 21 per Audette J at 23); Brownstein v Barnett and Others ( (1939) 77 CS 23 per McDougall J at 26); Beaudin v Choquette ((1949) SCR 348 per Rinfret J at 355-56); and (b) Joseph Constantine Steamship Line, Ltd v Imperial Smelting Corporation, Ltd ((1941) 2 All ER 165 (HL)). In their appeals, however, the plaintiffs do not have to overcome the rule of presumption vis, that in the estimation of the value of evidence of equal credibility, in ordinary cases, the testimony of a credible witness who swears positively to a fact should receive credit in preference to that of one who testifies to a negative, because in these appeals the defendant adduced no evidence.

Mr Justice Marceau in Continental Stores v The Queen (79 DTC 5213 at 5217- 18) in discussing the test that should be employed in determining cases such as this said:

Counsel for the appellants raised a final argument. This multi-company system of growth was not only adopted by the group before any tax advantage resulted from it, but it continued to be used after this advantage has been rendered uncertain as a result of the Minister’s directions. He stated that it is established law that the most suitable test to determine the validity of a direction under s 139A is whether, without any tax benefit, the system of separate companies would have been adopted and maintained as such. In this regard, he cited the reasons of Dumoulin J, in Doria Trucking Company Limited v MNR, 72 DTC 6298, Jordans Rugs Ltd et al v MNR, 69 DTC 5290 and MNR v Furnas- man Ltd and Furnasman (Metal) Ltd, 73 DTC 5599.

I made a careful study of these decisions on which the argument was based. In my opinion, the reasoning of the judges is much less clear cut than counsel for the plaintiffs suggests for the purposes of his argument, and the test which they formulate must be seen in the context from which it arose and in terms of the conclusion the merits of which were being examined. In any case I think it is clear that such a test, taken out of context as it was by counsel, cannot in itself be decisive. The Act requires that the tax advantage be only one of the main reasons: if this were to disappear, it does not necessarily follow that the others would not suffice as a basis for continuing the system. (See, further, Alpine Furniture Company Limited and Monte Carlos Company Limited v MNR, 68 DTC 5338; MNR v Howson and Howson Limited and Howson Company (Cargill) Limited, 70 DTC 6055; Doris Trucking Company Limited v MNR, 68 DTC 5204; Industrial Trailer Rentals Limited v Her Majesty the Queen, 74 DTC 6577; Classic’s Littlebooks Inc, 73 DTC 5102.)

Justice Gibson continued:

With respect, it would appear to me that the test adopted by Mr Justice Marceau is the applicable one to apply in cases under this subsection of the Act. As a consequence, the plaintiffs here had the onus of proving that none of the main reasons for the separate existence of the corporations was to reduce income tax that would otherwise be payable under the Income Tax Act.

“Main” is the key word in this subsection of the Act. The Shorter Oxford Dictionary records as some of its meanings as follows: “of pre-eminent importance; principal, chief, leading”.

The oral evidence given by Mr Keith Warren in cross-examination is that the reduction of income taxes was not one of the main reasons. This is confirmed by the amounts of bonuses paid from $300,000 to $1,000,000 (paragraph 3.02(k)).

The Board shares the opinion of the appellant’s counsel.

. . . now if he wanted to minimize his tax position obviously there are ways of doing it, but he completely disregarded the tax consequences taking out those huge bonuses, and it is my respectful submission that it corroborates his position that he had two companies only for business reasons. Regardless of the tax consequences, he wanted two companies, regardless of the tax consequences, he wanted to get, .. . that cash out, because he thought it was in jeopardy. (SN page 79).

5. Conclusion

The appeals are allowed and the matters referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeals allowed.