Wayne Dudley v. Minister of National Revenue, [1982] CTC 2141, 82 DTC 1153

John B Goetz:—This is an appeal by the appellant with respect to his assessments for the 1975, 1976 and 1977 taxation years.

Issue

The issue is whether the work performed by the appellant for R M Louson & Co Limited (hereinafter referred to as “Louson”) was done as an employee of Louson and thereby any remuneration being personal income, or whether it was solely the income of The Omemee Tanning Company Limited (hereinafter referred to as “Omemee”), of which the appellant was the sole shareholder.

Facts

Omemee has been in operation since 1918 and was a tannery. In 1951 the appellant became involved after his father purchased the business. The business of Omemee was the importing, and in particular from the United Kingdom, of leather and cotton goods to be sold to Canadian manufacturers. This was their sole business. After the death of the father, the appellant and his brother operated the business until 1971 when the brother left, taking with him all of the Canadian accounts to which United Kingdom leather goods were supplied for manufacturing. As a result, Omemee’s business suffered disastrously.

Prior to 1971 and before the departure of the appellant’s brother with most of the accounts, Omemee employed three office employees and one shipper besides his brother and himself who worked in the warehouse. The appellant was able to buy out the interest of his brother in the building in which Omemee operated and, in 1975, he sold this to a baker who was a major tenant in the building. At that time he moved his office to his home where only his wife and himself were employed. By this time they concentrated the business into the importing of cotton lining for Dominion Textiles. His expertise since his association with Omemee was in the shipping department and he knew all the facets of movement of goods coming into and out of the warehouse. The only other activity in which the appellant was active in early 1975 was with Tradeway Inc, a hardware supply company to which he gave some assistance in setting up their shipping via truck. His total remuneration for working with these people was in the neighbourhood of $500.

David Walker, president and major shareholder of Louson, operated a company whose business was graphic arts and industrial supplies which they imported. He had been an intimate personal friend of the appellant for over 35 years and obviously would be aware of the financial difficulties that the appellant faced in the operation of Omemee. It was in 1975 that Walker and Dudley discussed the position of management of the warehouse and traffic control for Louson by Dudley. Dudley stated in evidence that he told Walker that Louson could only deal through Omemee. Walker said it did not matter to him so long as Dudley assumed the duties of management of the warehouse, imports and shipping. Up to that point in time the job had been divided among six or seven employees, three of whom were in Louson’s office, three were on the sales staff and the balance of the business was operated by Walker and a partner. Dudley, the appellant, arranged at the same time that Omemee could lease space at Louson’s warehouse at $40 per month for the storage of Omemee’s goods which was totally unrelated, of course, to Louson’s business. There were no restrictions placed on the appellant’s activities by Louson, although Walker admitted the appellant spent at least seven hours a day at their offices and warehouse working on their behalf. The arrangement was an oral agreement commencing September 2, 1975, at a fixed fee which was negotiated yearly, and exhibits were filed whereby Omemee purported to invoice Louson for the work performed by the appellant on behalf of Louson.

Financial statements of Omemee were filed covering the years ending December 31, 1974 to December 31, 1977. These documents clearly stipulate the movement of Omemee from a deficit position to a surplus position as a result of “fees” earned by Omemee through the services of the appellant at the Louson warehouse. The appellant candidly stated: “I would not have worked for Louson unless I could lease space at Louson to handle my business.” He admitted that Omemee needed money derived from his fee for services to Louson and that he had not replaced any of Louson’s staff with respect to the work done by him.

In assessing the appellant, the respondent relied upon sections 3, 5, 6 and subsection 56(4) of the Income Tax Act, SC 1970-71-72, c 63, as amended, whereas the appellant maintains that Omemee, amongst other things, from time to time, acted as supervisory administrative and managerial consultants. From the evidence before me, I do not think that such a statement by the appellant is tenable. The invoicing by Omemee to Louson, in my view, was merely an interposition of Omemee between the appellant and Louson. See William W Pothering ham v MNR, [1977] CTC 2372; 77 DTC 275. In actual fact the appellant was performing warehousing duties and controlling the Louson warehouse and staff, while conducting his own warehouse business in the warehouse of Louson. There was no evidence before me of any change of operation of Omemee or that its objects had been amended or changed to include “consulting work”. Whatever services were rendered to Louson, were rendered by the appellant personally and not by Omemee whose business since 1918 has been the importation of leather and cloth goods. I quote from a decision of the Federal Court of Appeal in The Queen v John J Daly, [1981] CTC 270; 81 DTC 5197, at 279 and 5204 respectively:

In a case of this kind, where it is acknowledged that what is sought by a certain course of action is a tax advantage, it is the duty of the Court to examine all of the evidence relating to the transaction in order to satisfy itself that what was done resulted in a valid, completed transaction. In my view, the proper approach for the Court to take is concisely stated by Urie, J in the case of Atinco Paper Products v The Queen, [1978] CTC 566; 78 DTC 6387, at 577-578 and 6395 respectively, as follows:

I do not think that I should leave this appeal without expressing my views on the general question of transactions undertaken purportedly for the purpose of estate planning and tax avoidance. 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 watch-dog 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. It is for this reason that I cannot accede to the suggestion, sometimes expressed, that there can be a strict or liberal view taken of a transaction, or series of transactions which it is hoped by the taxpayer will result in minimization of tax. The only course for the Court to take is to apply the law as the Court sees it to the facts as found in the particular transaction. If the transaction can withstand that scrutiny, then it will, or course, be supported. If it cannot, it will fall. That is what happened here.

Counsel for the appellant placed great emphasis on the Supreme Court of Canada decision in MNR v James A Cameron, [1972] CTC 380; 72 DTC 6325, but the case can be clearly differentiated from the case at hand in that it related to an individual who became established with associates of a private management company which, in turn, performed services and entered into an agreement with third parties. Quite obviously, the purposes of such a management company were entirely different than a firm such as Omemee importing leather and cloth goods.

Other cases cited to me were: Sam Kligman v MNR, [1980] CTC 2085; 80 DTC 1088; Vir K Handa v MNR, [1978] CTC 2256; 78 DTC 1191; and Eugene Lagacé and Georges Lagacé v MNR, [1968] CTC 98; 68 DTC 5143.

The oral agreement discussed between Walker and Dudley served two purposes: (1) it enabled Omemee to finally earn a net income; and (2) to work such income against a loss picture of Omemee. In short, the appellant was not in the management or consulting business, but was merely an experienced warehouseman handling traffic flowing into and out of the warehouse. I do not think that this raises him to the status of a management consultant and that the so-called fees invoiced by Omemee were for services purportedly performed by Omemee through the efforts of its sole shareholder, the appellant.

For the above reasons, I dismiss the appeal.

Appeal dismissed.