Jabs Construction Ltd, Roblyn Holdings Ltd, Jabs Development LTD v. Minister of National Revenue, [1983] CTC 2668, 83 DTC 633

St-Onge, TCJ:—The appeals of these companies were heard on common evidence on June 22, 1983 in the City of Penticton, British Columbia and the issue is whether these companies were associated in the appellants’ 1975, 1976 and 1977 taxation years.

The facts in each notice of appeal at paragraphs 1 to 5 inclusive are admitted by the respondent in each of his replies to the notices of appeal which read as follows:

82-771 JABS CONSTRUCTION LTD

A Statement of Facts

1. The Appellant is incorporated under the Company Act of the Province of British Columbia.

2. Since its incorporation, the Appellant has been primarily involved in the acquisition of real estate for rental purposes and the construction of single family dwellings for resale.

3. The shares of the Appellant are beneficially owned as follows:

Eric Jabs

102 Shares

4. By Notices of Reassessment issued on the 16th day of January 1981, the Minister of National Revenue deemed that the Appellant was associated with Jabs Development Ltd and Roblyn Holdings Ltd by virtue of Section 247(2) of the Income Tax Act.

82-773 JABS DEVELOPMENT LTD

A Statement of Facts

1. The Appellant is incorporated under the Company Act of the Province of British Columbia.

2. Since its incorporation, the Appellant has been primarily involved in the ac- quisition of real estate for rental purposes and it has also participated in several real estate joint ventures.

3. The shares of the Appellant are beneficially owned as follows:

Toni Jabs	80 Shares
Robert Jabs	10 Shares
Heidi Jabs	10 Shares
Total	100 Shares

4. By Notices of Reassessment issued on the 3rd day of February 1981, the Minister of National Revenue deemed that the Appellant was associated with Jabs Construction Ltd and Roblyn Holdings Ltd by virtue of Section 247(2) of the Income Tax Act.

82-772 ROBLYN HOLDINGS LTD

A Statement of Facts

1. The Appellant is incorporated under the Company Act of the Province of British Columbia.

2. Since its incorporation, the Appellant has been primarily involved in the acquisition of real estate for rental purposes and it has also participated in several real estate joint ventures.

3. The shares of the Appellant are beneficially owned as follows:

	Common	Preferred
Toni Jabs		200
Robert Eric Jabs	3000 Shares
Heidi Jabs	3000 Shares
	6000 Shares	200

4. By Notices of Reassessment issued on the 16th day of January 1981, the Minister of National Revenue deemed that the Appellant was associated with Jabs Construction Ltd and jabs Development Ltd by virtue of Section 247(2) of the Income Tax Act.

Paragraph 5 of the notices of appeal is the same for the 3 cases and it reads as follows:

5. The Appellant(s) filed Notices of Objection to the said Reassessments on the 10th day of April, 1981 and by a Notification issued by the Minister on the 22nd day of February, 1982 the said Reassessments were confirmed.

The issue is whether the companies were incorporated for valid business reasons and that reduction of tax was not one of the main reasons for incorporation thereof.

In his written submissions, Counsel for the appellants has made a quite accurate summary of the facts which reads as follows:

A Facts

1. Eric Jabs was born in Poland and immigrated to Canada from West Germany in 1953. At the time he arrived in Canada, he was 15 years of age. After working as a labourer and helper on house construction projects in the Kelowna area, he became a skilled carpenter. In 1961 Mr Jabs formed his own business. Mr Jabs operated as a sole proprietor in the construction of homes in the Kelowna area from 1961 to 1964.

2. In 1964 Mr Jabs incorporated Jabs Construction Ltd (“Construction”) and Construction took over the business operation established by Mr Jabs. At the time of incorporation and during the years under appeal, the shares of Construction were beneficially owned as follows:

Eric Jabs

100%

(Mrs Eric Jabs owned at least one share in Construction from December, 1966 to May 26, 1969 as is evidenced by the Company’s Annual Reports.)

3. Construction increased the business operation from 7 or 8 homes per year in 1964 to 25-35 homes per year in 1967. In 1967 Construction build an apartment building in Vernon and an apartment building in Kelowna. Construction also built approximately 50 homes in 1968.

4. In 1969 Mr Jabs became very concerned about his financial situation in view of the fact that he had been obliged to personally guarantee bank loans, mortgages and other agreements having a value in excess of $3 million. These loans and mortgages were required by Construction in the course of carrying on its business operation. Mr Jabs was concerned that if he were killed (or severely injured on the job as had occurred in 1967), he would leave his family in a very precarious financial situation. He was also concerned that some of the loans might be called by the banks or other lenders and he would be required to honour the personal guarantees.

5. In addition to the real estate activities of Construction Mr Jabs had formed several real estate joint ventures with Mr Lloyd Callahan and these joint ventures had developed apartment buildings, office buildings and small shopping centres. These joint ventures were first formed by Mr Jabs and Mr Callahan in 1968 and they were continued for several years thereafter. In order to obtain financing for these joint ventures, Mr Jabs was again required to personally guarantee bank loans, mortgages, and provide other cross guarantees. Mr Jabs also became involved in several other business ventures (eg Spall Lumber, Okanagan Land Development Ltd) and he was also required to provide personal guarantees on these investments. These guarantees further increased his financial exposure.

6. Mr Jabs did not wish to buy large amounts of life insurance because he knew that insurance would not protect the family in case of bankruptcy or receivership. After discussing his financial concern with his accountant, Mr Frank Milan, CA, Mr Jabs was advised by Mr Milan that the best method of providing financial security for his family would be to incorporate a new company. The shares of this new company would be owned by his wife and children and this new company would develop real estate assets that were free of the bank loans and mortgages that Mr Jabs had guaranteed. Mr Jabs also discussed Mr Milan’s recommendation with his lawyer.

7. Mr Jabs decided to follow the advice of Mr Milan and his lawyer, and Jabs Development Ltd (“Development”) was incorporated in 1969. The business of Jabs Development Ltd was entirely different from the business that was being carried on by Construction. Development became involved in rental property, and low risk and short term real estate investments that would not require a great deal of management expertise, whereas Construction had been involved in higher risk and longer term real estate investments and developments which were frequently management intensive. Construction was also an active participant in various real estate developments rather than an inactive investor.

The shares of Development were owned as follows:

Tony Jabs	80%
Heidi Jabs	10%
Robert Jabs	10%

8. In 1974, Roblyn Holdings Ltd (“Roblyn”) was incorporated. Roblyn was subsequently established to become an investor in several real estate projects and therefore its business was similar to the business of Development.

The shares of Roblyn were owned as follows:

		Voting
	Common	Preference
	Shares	Shares
Heidi Jabs	3000
Robert Jabs	3000
Tony Jabs		200

9. Development and Roblyn which file as associated companies were specifically established to invest in relatively management free assets rather than active real estate developments such as Construction so that they could be operated by Mrs Jabs with the assistance of Mr Milan and Mr Don Pratt. After the incorporation of Development and Roblyn, Mr Don Pratt acted as the General Manager of each company. Mr Pratt would seek out investments for Development and Roblyn and Mr Milan would decide if the investments should be made and by which company. Mr Milan testified during the hearing that in reaching his conclusion, he would first of all determine if Development or Roblyn had sufficient cash or borrowing capacity. He would then carefully examine the investment to ensure that it was a low risk or short term investment that would be suitable for the company.

10. Mr Jabs testified that the decision to establish a company that was separate from and unconnected with his personal guarantees has proven to be correct because a number of real estate developers in British Columbia have been forced into bankruptcy during the recent recession. Mr Jabs stated that if he and Mr Callahan had not made a sale of some assets in order to reduce their financing requirements, they could have encountered serious financial problems and may have jeopardized some or all of the assets of their Joint Ventures and the assets of Construction.

11. Mr Jabs and Mr Milan testified that the sole reason for the separate existence of Development and subsequently Roblyn was to ensure the financial security of Mrs Jabs and the Jabs’ children and that tax was not the motivating reason for the separate existence of the companies. Mr Milan stated that if the saving of tax had been the predominant reason behind the reorganization, there would have been other alternatives that they could have adopted.

12. Mr Jabs also testified that if Canada had a tax system where all companies were taxed at a 50% rate Development (and later Roblyn) would still have been incorporated.

In his argument counsel for the appellants referred the Court, among others, to the following cases:

(1) Alpine Furniture Company Limited and Monte Carlos Furniture Company Limited v MNR, [1968] CTC 532; 68 DTC 5338. To say that subsection 247(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended, amounts only to find that the separate existence of the corporations is not solely for business purposes but to reduce taxes otherwise payable under the Income Tax Act. If, in the present appeal, the Court is to accept the testimonies of Mr Jabs and Mr Milan, the appeals should be allowed.

(2) Grimshaw Planing Mills Ltd v MNR, [1969] Tax ABC 257; 69 DTC 207. In this case, the two companies were involved in different types of operations. One very risky while the other much less. In the present appeal, Construction was a high risk active business whereas the business of Development was less risky.

(3) Jordans Rugs Ltd, et al v MNR, [1969] CTC 445; 69 DTC 5290. To improve profitability the local managers were given the opportunity to buy 50 per cent control in a company that was incorporated for each of the nine sales offices throughout Canada. The existence of these several corporations was solely for business purposes.

(4) Doris Trucking Co Ltd v MNR, [1969] CTC 303; 68 DTC 5204. If one supposed that all corporations were subject to tax at a flat rate of 50 per cent as recommended by the Royal Commission on Taxation, would it be expected that their particular operations would have been carried on by separate corporations? This question was asked of Mr Jabs and the answer was “the existence of the companies was not to reduce taxes but to provide financial security for his family”.

Counsel for the appellants concluded his argument by saying that it was a fallacy to reason back from the existence of tax advantage and to assume that the separate corporations were formed to save taxes.

Counsel for the respondent argued that:

(1) It was not clear whether any other methods of providing financial security for Mr Jabs’ family were considered.

(2) Mr Jabs testified that tax consequences were not considered by him although Mr Milan, his accountant, made it clear that the tax implications of whatever steps Mr Jabs took would naturally have been discussed.

(3) While Mr Jabs is not a director or officer of Development or Roblyn there is still a marked involvement of him and his staff of Construction in the management and affairs of these two companies.

(4) Development was a joint venture development company with which all three companies were connected.

(5) Mr Milan had admitted that Eric Jabs had a big part in the decisionmaking process of Development and Roblyn although he was not always consulted.

(6) Although Mr Jabs had stated that the intention was to keep Development debt-free this was not what actually happened.

(7) Mr Jabs was the directing mind between the three companies.

(8) A lease agreement was signed by Mr Pratt on behalf of Construction while the registered owner of the property was Development.

(9) From the documents evidence showed that Mr Pratt approached Mr Jabs for his decision on each of the companies which was to be involved in each project.

(10) Eric Jabs signed for Development when it applied for a loan to the Royal Bank of Canada.

The Court does not find any convincing evidence to rule that Mr Jabs and Mr Milan did not speak the truth when they testified that the two companies were incorporated for the main reason of providing financial security for the family of Mr Jabs.

It is a well established principle in income tax matters that a taxpayer can arrange his affairs to pay less taxes when it is done legally.

In the case at bar, the taxpayer was free to choose one method namely incorporation of accompany to provide financial security for his family and the Minister should not go so far as to tell a taxpayer which method to adopt with the result that he would have to pay more taxes.

It is obvious that tax implications were discussed but it is less obvious that these were the main reasons for the incorporation of the two companies.

Construction was involved in higher risks and larger projects whereas Development and Roblyn were to invest in less risky projects when cash flow was available. Development and Roblyn did not assume or guarantee any of the debt of Mr Jabs and Construction whereas Mr Jabs did guarantee some of the mortgages of Development and Roblyn.

As may be seen, from this evidence, Mr Jabs was taking all the necessary precautions to ensure the financial security for his family. The fact that Development and Roblyn invested in real estate ventures is not an indication that they were in the same business as Construction. The evidence has shown that Eric Jabs was in a very risky business and life insurance was not a solution to guarantee his family financial security.

There is nothing illegal for Mr Jabs to be aware of what was going on in Development or Roblyn or to help Messrs Pratt and Milan to take some decisions, or to guarantee loans for Development or Roblyn. On the contrary this evidence shows that Mr Jabs’ main intention was to ensure the financial security for his wife and children. Indeed, the bulk of the evidence shows that Mr Jabs took all the necessary steps to ensure the financial security for the family.

For these reasons the appeals are allowed.

Appeals allowed.