Guy
Tremblay:—This
case
was
heard
on
April
28,
1982,
at
the
City
of
London,
Ontario.
1.
The
Point
at
Issue
The
point
at
issue
is
whether
the
appellant,
a
former
manager
of
Crown
Life
Insurance
Company
(“Crown
Life”)
from
1972
to
1974,
is
correct
in
contending
that
despite
the
interposition
of
the
company,
J.
William
O’Kane
&
Associates
Insurance
Agency
Inc
(“the
company”)
from
1974
to
1977,
he
was
not
obliged
to
include
in
his
personal
income
the
commissions
paid
by
Crown
Life
to
the
company
during
the
said
years.
The
respondent
contends
that
the
above
arrangement
was
a
sham
on
the
basis
that
pursuant
to
subsection
56(4)
of
the
Income
Tax
Act,
it
is
forbidden
for
a
taxpayer
to
transfer
rights
to
income
to
a
person
with
whom
he
was
not
dealing
at
arm’s
length.
2.
The
Burden
of
Proof
2.01
The
burden
is
on
the
appellant
to
show
that
the
respondent’s
assessments
are
incorrect.
This
burden
of
proof
results
particularly
from
several
judicial
decisions,
including
the
judgment
of
the
Supreme
Court
of
Canada
in
Johnston
v.
v
MNR,
[1948]
CTC
195;
3
DTC
1182.
2.02
In
the
same
judgment,
the
Court
decided
that
the
assumed
facts
on
which
the
respondent
based
his
assessments
or
reassessments
are
also
deemed
to
be
correct.
In
the
present
case
the
assumed
facts
are
described
in
the
reply
to
notice
of
appeal
as
follows:
5.
In
assessing
the
appellant
for
the
1974,
1975,
1976
and
1977
taxation
years
the
Respondent
relied
upon
the
following
assumptions
of
fact:
(a)
the
appellant
caused
O’Kane
&
Associates
to
be
incorporated
under
the
Business
Corporations
Act
of
Ontario
on
January
4,
1974,
and
at
all
relevant
times
the
appellant
was
its
controlling
shareholder
and
his
wife
was
the
only
other
beneficial
shareholder;
(b)
at
all
relevant
times
the
appellant
was
an
employee
of
Crown
Life
Insurance
Company
(“Crown
Life”)
working
as
its
manager
for
a
specified
territory
and
had
performed
essentially
the
same
services
for
Crown
Life
since
May
1,1972;
(c)
the
amounts
expended
by
the
appellant
in
the
years
under
appeal
for
travelling
in
the
course
of
his
employment
did
not
exceed
the
following
amounts:
|
1974
|
$3,704.29
|
|
1975
|
$4,930.98
|
|
1976
|
$4,917.42
|
|
1977
|
$3,904.34
|
(d)
the
appellant
was
not
entitled
to
deduct
any
expenses
with
respect
to
accounting
fees
in
computing
his
income
from
employment.
3.
The
Facts
3.01
The
appellant,
the
sole
witness,
testified
that:
(a)
He
has
26
years
of
insurance
experience.
Until
1972,
he
worked
for
Metropolitan
Life.
(b)
In
May,
1972,
he
became
sales
manager
for
Crown
Life.
He
was
not
an
employee
of
Crown
Life,
but
a
self-employed
person.
His
earnings
were
calculated
only
in
accordance
with
commissions
and
were
thereby
exclusively
at
his
own
risk.
He
paid
all
his
own
Canada
Pension
Plan,
etc.
This
was
admitted
by
the
respondent’s
counsel.
(c)
On
January
4,
1974,
the
company
was
incorporated
under
the
Business
Corporations
Act
of
Ontario.
Its
main
objects
are
described
in
the
Certificate
of
Incorporation
(Exhibit
A-1)
as
follows:
(a)
To
carry
on
in
all
its
branches
the
business
of
insurance
agents,
representatives
and
managers
for
any
company,
association,
group,
club,
syndicate
or
individual
engaged
directly
or
indirectly
in
the
business
of
insurance
in
all
or
any
of
its
classifications
or
in
any
guaranty,
indemnity,
bonding
or
like
business.
(d)
This
incorporation
was
encouraged
by
Crown
Life.
(e)
When
he
incorporated,
he
did
so
for
a
number
of
reasons:
1.
He
felt
that
he
was
entitled
to
arrange
his
affairs
to
his
best
advantage;
2.
He
wanted
to
be
able
to
pay
his
wife
for
the
valuable
services
that
she
rendered
without
being
penalized;
3.
He
wanted
to
limit
his
liability
for
the
various
exposures
that
could
arise
during
the
course
of
carrying
on
his
business;
4.
He
was
of
a
mind
to
expand
the
operation
in
the
future
so
that
he
could
bring
in
extra
people,
especially
members
of
his
family.
(f)
On
September
16,
1974,
the
company
was
appointed
as
agent
for
Crown
Life
to
act
as
its
manager
in
the
County
of
Essex
pursuant
to
a
memorandum
of
agreement
and
amendments
(Exhibits
A-2
and
A-3,
SN
p
14).
(g)
Pursuant
to
this
agency
agreement
and
the
amendments:
1.
The
company
could
do
brokerage
business
with
others
than
Crown
Life
if
the
latter
could
not
provide
a
similar
service,
or
if
it
had
refused
to
provide
the
policy;
2.
The
agreement
would
terminate
at
the
death
of
the
appellant
or
on
December
15
of
the
year
in
which
the
manager
attains
the
age
of
65;
3.
The
agreement
was
ratified
in
the
normal
course
of
the
company’s
shareholders
meeting.
It
was
the
clear
intention
of
the
parties
(company
and
Crown
Life)
to
create
actual
enforceable
legal
rights.
If
money
were
owing
from
Crown
Life,
it
would
be
the
company
that
would
have
to
sue
Crown
Life
in
order
to
recover
it,
and
the
same
right
in
favour
of
Crown
Life
would
have
applied
if
there
were
any
sums
owing
by
the
company
to
Crown
Life.
(h)
The
financial
year
of
the
company
ended
on
June
30
of
each
year.
(i)
There
was
no
written
agreement
between
the
company
and
the
appellant
concerning
his
salary.
He
was
not
paid
out
by
the
company
on
the
basis
of
the
work
that
he
generated.
He
was
simply
paid
according
to
his
needs.
The
appellant
said
that
there
was
a
verbal
agreement.
(j)
There
are
a
number
of
relevant
factual
aspects
to
the
way
in
which
the
company
carried
on
its
insurance
business:
1.
The
company
had
its
own
letterhead
stationery
(Exhibit
A-4)
and
its
own
business
cards
(Exhibit
A-5)
which
were
used
for
carrying
on
its
insurance
business
(SN
p
17);
2.
The
company
had
its
own
licence
issued
by
the
Ontario
Ministry
of
Consumer
and
Commercial
Relations
to
perform
services
as
an
insurance
broker
(Exhibit
A-6,
SN
p
18);
3.
All
the
financial
risks
associated
with
carrying
on
the
business
were
assumed
by
the
company
and
its
revenues
were
calculated
strictly
in
terms
of
commissions
earned
as
it
appears
in
the
financial
statements
for
the
fiscal
periods
ended
June
30,
1975,
1976
and
1977
(Exhibit
A-7,
SN
p
19).
All
the
revenues
were
directed
to
the
company
itself
and
not
to
Mr.
O’Kane.
All
the
expenses
incurred
by
the
company
were
paid
by
company
cheques;
4.
The
company
had
no
involvement
in
the
office
management
of
Crown
Life
insurance
business.
The
company
was
responsible
for
marketing
strategy
and
all
aspects
of
the
business
that
were
carried
on.
Mr.
O’Kane
met
once
every
three
months
with
someone
from
Crown
Life
in
order
to
review
its
performance
to
date.
5.
The
company
had
its
own
telephone,
paid
for
by
itself,
and
which
was
answered
in
the
company
name.
A
listing
was
placed
in
the
Windsor
telephone
book
indicating
the
name
of
J
William
O’Kane
&
Assoc
Insce
Agency
(Exhibits
A-9
and
R-3,
SN
p
58);
6.
Despite
the
fact
that
the
company’s
office
was
located
on
the
same
floor
as
Crown
Life,
the
company’s
name
appeared
on
the
marquee
on
the
first
floor
of
the
building;
7.
About
10%
of
the
company’s
overall
business
was
with
companies
other
than
Crown
Life;
8.
The
company
itself
and
not
Crown
Life
paid
for
the
expansion
of
the
office
premises;
9.
The
company
had
a
bonus
arrangement
with
agents
for
extraordinary
performances
which
were
paid
directly
from
the
company;
10.
When
the
appellant
was
personally
on
vacation,
he
was
not
replaced
in
any
way
by
Crown
Life;
11.
The
company
made
all
Canada
Pension
Plan
payments
and
withheld
taxes
for
its
employees.
12.
He
had
formally
rescinded
his
arrangement
signed
in
May
of
1972
with
Crown
Life
before
the
company
entered
into
a
new
contractual
arrangement
with
Crown
Life.
3.02
By
notices
of
reassessment
dated
August
16,
1979,
the
Minister
of
National
Revenue
issued
reassessments
to
the
taxpayer
which:
(i)
included
in
the
appellant’s
income
the
commissions
received
by
the
company
from
Crown
Life
in
the
years
1974
through
1977:
$14,924.40
in
1974,
$37,684.69
in
1975,
$14,333.86
in
1976
and
$29,193.67
in
1977;
(ii)
disallowed
25%
of
the
automobile
expenses
deducted
by
the
company
in
its
tax
returns
for
the
years
1974
through
1977
on
the
basis
that
these
were
expenses
personal
to
the
appellant;
and
(iii)
disallowed
as
expenses
the
accounting
fees
paid
by
the
company
for
the
years
1974
through
1977.
3.03
The
appellant
said
he
had
a
car
which
was
used
for
family
needs.
The
company
had
another
one
for
company
needs.
There
were
.
.
32
or
33
contracts
and
they
were
spread
all
over
Essex
and
Kent
and
Lambton
Counties
.
.
.”
(SN
p
30)
.
.
that
had
to
be
done
on
an
eyeball
to
eyeball
basis.”
(SN
p
31
).
The
company
car
was
rarely
used
for
family
needs,
that
is,
only
in
exceptional
circumstances.
The
company
claimed
90%
of
the
expenses.
3.04
Concerning
the
accounting
fees,
the
appellant
testified
they
were
paid
in
connection
with
the
preparation
of
financial
statements
and
the
basic
accountancy
services
performed
for
the
company
(SN
p
31).
4.
Law
—
Cases
at
Law
—
Analysis
4.01
Law
The
main
provisions
of
the
Income
Tax
Act
involved
in
the
present
case
are
subsections
(2)
and
(4)
of
section
56,
which
read
as
follows:
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
be
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
(whether
before
or
after
the
end
of
1971),
transferred
or
assigned
to
a
person
with
whom
he
was
not
dealing
at
arm’s
length
the
right
to
an
amount
that
would,
if
the
right
thereto
had
not
been
so
transferred
or
assigned,
be
included
in
computing
his
income
for
the
taxation
year
because
the
amount
would
have
been
received
or
receivable
by
him
in
or
in
respect
of
the
year,
the
amount
shall
be
included
in
computing
the
taxpayer’s
income
for
the
taxation
year
unless
the
income
is
from
property
and
the
taxpayer
has
also
transferred
or
assigned
the
property.
4.02
Cases
at
Law
Counsel
for
both
parties
referred
to
the
Board
to
the
following
cases
at
law:
1.
MNR
v
Anthony
Thomas
Leon
et
al,
[1976]
CTC
532;
76
DTC
6299.
2.
Massey-Ferguson
Limited
v
The
Queen,
[1977]
CTC
6;
77
DTC
5013.
3.
Eugene
Lagace
et
al.
v
MNR,
[1968]
CTC
98;
68
DTC
5143.
4.
The
Queen
v
Dr
H
Hoyle
Campbell,
[1980]
CTC
319;
80
DTC
6239.
5.
Laverne
Clifford
Kindree
v
MNR,
[1964]
CTC
386;
64
DTC
5248.
6.
No
594
v
MNR,
21
Tax
ABC
212;
59
DTC
78.
7.
Ralph
J
Sazio
v
MNR,
[1968]
CTC
579;
69
DTC
5001.
8.
The
Queen
v
John
J
Daly,
[1981]
CTC
270;
81
DTC
5197.
9.
Arthur
Agar
v
The
Queen,
[1980]
CTC
397;
80
DTC
6311.
10.
Sam
Kligman
v
MNR,
[1980]
CTC
2085;
80
DTC
1088.
11.
Saul
Bookspan
v
MNR,
[1978]
CTC
2128;
78
DTC
1092.
12.
Desmond
M
Connor
v
MNR,
[1975]
CTC
2132;
75
DTC
85.
13.
Paul
F
White
et
al
v
MNR,
[1979]
CTC
2065;
79
DTC
99.
14.
W
T
Ramsay
v
IRC
and
Eilbeck
v
Rawling,
(1981)
1
AER
865.
15.
Newstead
v
Frost,
(1980)
1
AER
363.
16.
MNR
v
James
A
Cameron,
[1972]
CTC
380;
72
DTC
6325.
17.
Dominion
Bridge
Company
Limited
v
The
Queen,
[1975]
CTC
263;
75
DTC
5150.
18.
William
W
Fotheringham
v
MNR,
[1977]
CTC
2372;
77
DTC
275.
19.
Stubart
Investments
Limited
v
The
Queen,
[1981]
CTC
168;
81
DTC
5120.
20.
The
Queen
v
Gerald
J
Burns,
[1973]
CTC
264;
73
DTC
5219.
21.
Atinco
Paper
Products
Limited
v
The
Queen,
[1978]
CTC
566;
78
DTC
6387.
22.
Melvin
Dueck
v
MNR,
[1981]
CTC
2111;
81
DTC
177.
23.
Michael
Petritz
v
MNR,
[1973]
CTC
299;
73
DTC
5243.
24.
Salomon
v
Salomon
Co,
[1897]
2
AC
22.
25.
Snook
v
London
&
West
Riding
Investments
Limited,
(1967)
1
AER
518.
26.
Foreign
Powers
Securities
Corporation
Limited
v
MNR,
[1966]
CTC
23;
66
DTC
5012.
27.
IRC
v
Fishers
Executors,
[1926]
AC
395.
28.
Raoul
Engel
v
MNR,
[1982]
CTC
2422;
82
DTC
1403.
4.03
Analysis
4.03.1
Concerning
the
points
of
automobile
expenses
and
accounting
fees,
the
Board
is
satisfied
with
the
uncontradicted
adduced
evidence
to
conclude
that
these
two
points
must
be
allowed.
4.03.2
When
one
considers
the
evidence
as
a
whole
it
seems,
at
first
glance,
that
the
incorporation
of
J
William
O’Kane
&
Associates
Insurance
Agency
Inc
was
normal
business,
and
that
its
agreement
with
Crown
Life
in
1974
for
providing
managerial
services
was
a
normal
business
transaction.
Indeed:
1.
The
company
was
a
legitimate
legal
entity
separate
and
apart
from
the
appellant
in
his
personal
capacity
(para
3.01(c));
2.
The
reasons
given
for
the
incorporation
(para
3.01(e)
)
of
the
company
sound
reasonable
for
a
normal
businessman
and
a
normal
taxpayer;
3.
Pursuant
to
the
memorandum
of
agreement
between
Crown
Life
and
the
company,
it
was
a
clear
intention
to
create
enforceable
legal
rights
(para
3.01(g)(3));
4.
The
company
set
up
a
bonus
system
with
agents
which
was
paid
directly
from
the
company
(para
3.01
(j)(9)
);
5.
The
company
could
do
brokerage
business
with
others
than
Crown
Life,
under
certain
circumstances
(para
3.01(g)(1)),
and
in
fact,
about
10%
of
the
company’s
overall
business
was
with
companies
other
than
Crown
Life
(para
3.01
(j)(7)
);
6.
Moreover,
the
company
seems
to
have
a
dot
on
all
the
“i’s”
and
a
cross
on
all
the
“t’s”
for
a
business
of
this
nature:
letterhead
stationery,
separate
telephone,
etc,
all
described
in
paragraph
3.01
(j).
However,
some
facts
adduced
as
evidence
must
be
looked
at
more
attentively.
The
counsel
for
the
respondent
insisted
on
the
fact
that
there
was
no
written
agreement
between
the
appellant
and
the
company,
and
‘this
is
a
missing
link”
he
said
in
his
argumentation:
In
order
to
complete
this
bypass
there
would
have
been
a
resignation,
then
a
contract
between
his
company
and
Crown
and
then
there
would
have
been
also
an
agreement
between
himself
and
his
own
company
and
because
his
position
is
that
he
is
an
employee
of
his
own
company.
If
there
is
no
agreement
then
there
is
no
employment.
(SN
p
98)
From
the
moment
the
appellant,
the
main
shareholder
and
president
of
the
company,
said
that
there
was
a
verbal
agreement,
the
Board
is
inclined
to
accept
the
evidence.
Indeed,
it
is
a
common
practice
in
business
to
have
a
verbal
agreement,
especially
between
persons
who
deal
regularly.
Many
times
the
courts
have
upheld
that
state
of
facts.
Moreover,
the
facts
that
the
verbal
agreement
did
not
stipulate
a
fixed
remuneration
and
that
the
amounts
paid
by
the
company
to
the
appellant
were
not
regular
payments,
are
not
material
in
the
circumstances.
4.03.3
Another
point
must
also
be
considered
and
it
is
that
the
agreement
shall
terminate
at
the
death
of
the
appellant
or
at
the
age
of
65
years
(para
3.01(g)(2)).
This
seems
to
confirm
the
respondent’s
thesis
that
Crown
Life
has
dealt,
in
fact,
with
the
appellant
and
not
the
company.
The
fact
that
in
the
agreement
with
the
company,
Crown
Life
refers
to
the
appellant
(death
or
the
age
of
65
years)
to
fix
the
automatic
termination
of
the
said
agreement,
certainly
means
that
Crown
Life
was
interested
in
the
person
of
the
appellant
to
manage
the
said
insurance
corporation.
However,
it
is
adduced
evidence
that
the
appellant
had
formally
rescinded
his
former
arrangement
with
Crown
Life
before
the
company
signed
the
agreement
(para
3.01
(j)(12)
).
Moreover,
Crown
Life
and
the
company
were
dealing
at
arm’s
length.
The
respondent
referred,
among
others,
to
the
Stubart
Investments
Ltd.
(supra),
Massey
Ferguson
Ltd.
(supra)
and
Leon
et
al
(supra)
cases
to
conclude
that
the
agreement
between
the
company
and
the
appellant
had
no
valid
business
purposes
and
should,
therefore,
be
ignored.
He
submitted
that
I
have
to
look
at
the
end
result:
the
receipt
by
the
appellant
of
the
commissions
paid
by
Crown
Life
to
the
company.
As
I
see
it
the
money
received
by
the
company
is
its
own
property.
The
decision
in
the
Sazio
case
(supra)
has
never
been
overruled.
This
case
is
not
substantially
different
from
the
Sazio
case.
I
share
the
opinion
of
my
brother
Bonner
in
Raoul
Engel
v
MNR
(supra),
at
2427
[1407]:
It
might
not
be
amiss
to
observe
that
the
Income
Tax
Act
imposes
an
obligation
to
pay
tax
on
taxable
income.
It
does
not
impose
any
obligation
to
earn
income
or
to
continue
to
earn
income
in
the
same
way
as
in
the
past.
Thus
the
appellant
was
entirely
at
liberty
to
decide
to
work
for
his
company,
reasoned,
and
to
cease
to
work
directly
for
Global.
In
Atinco
Paper
Products
Limited
v
Her
Majesty
the
Queen,
78
DTC
6387,
Urie,
J
stated
at
page
6395:
“It
is
trite
law
to
say
that
every
taxpayer
is
entitled
to
so
arrange
his
affairs
as
to
minimize
his
tax
liability.
No
one
has
ever
suggested
that
this
is
contrary
to
public
policy.
It
is
equally
true
that
this
Court
is
not
the
watchdog
of
the
Minister
of
National
Revenue.
Nonetheless,
it
is
the
duty
of
the
Court
to
carefully
scrutinize
everything
that
a
taxpayer
has
done
to
ensure
that
everything
which
appears
to
have
been
done,
in
fact,
has
been
done
in
accordance
with
applicable
law.
It
is
not
sufficient
to
employ
devices
to
achieve
a
desired
result
without
ensuring
that
those
devices
are
not
simply
cosmetically
correct,
that
is
correct
in
form,
but,
in
fact,
are
in
all
respects
legally
correct,
real
transactions.
If
this
Court,
or
any
other
Court,
were
to
fail
to
carry
out
its
elementary
duty
to
examine
with
care
all
aspects
of
the
transactions
in
issue,
it
would
not
only
be
derelict
in
carrying
out
its
judicial
duties,
but
in
its
duty
to
the
public
at
large.”
5.
Conclusion
The
appeal
is
allowed,
and
the
matter
referred
back
to
the
respondent
for
reassessment
in
accordance
with
the
above
reasons
for
judgment.
Appeal
allowed.
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