M
J
Bonner:—The
appellant
appeals
from
assessments
of
income
tax
for
the
1975,
1976
and
1977
taxation
years.
The
appellant
was,
before
1975
during
most
of
that
year,
a
television
journalist
employed
by
Global
Communications
Limited
(hereinafter
“Global”).
Changes
were
then
made.
Late
in
1975
the
appellant
incorporated
a
company,
Reasoned
Communications
Limited
(hereinafter
“Reasoned”),
he
entered
into
an
employment
agreement
with
Reasoned
and
resigned
from
Global.
Reasoned
entered
into
a
contract
with
Global
whereby
Reasoned
undertook
to
“lend”
the
appellant’s
services
to
Global
for
a
period
of
nine
months,
commencing
December
1,
1975.
The
Minister
assessed
tax
on
the
basis
that
the
appellant’s
income
included
the
amounts
paid
to
Reasoned
by
Global
under
the
last-mentioned
contract
(and
renewals
thereof)
and
not
just
the
amounts
received
by
the
appellant
as
salary
from
Reasoned
under
the
contract
between
him
and
Reasoned.
The
appellant
objected.
The
assessments
were
confirmed
on
the
basis
that
the
amounts
added
to
declared
income
.
.
are
(the
appellant’s)
income
from
employment
with
Global
Communications
Limited
...
in
accordance
with
the
provisions
of
section
3
and
subsection
5(1)
of
the
Income
Tax
Act.”
The
principal
assumption
of
fact
made
on
assessment
was
that:
.
.
.
the
interposition
of
Reasoned
between
the
Appellant
and
Global
and
related
assignment
of
the
Appellant’s
services
to
Global
were
arrangements
done
for
a
fiscal
purpose,
lacked
a
bona
fide
business
purpose,
were
shams,
and
a
fiscal
scheme
whereby
amounts
which
in
fact
and
substance
were
salary,
wages
or
other
remuneration
earned
by
the
Appellant
from
Global
were
transferred
or
assigned
to
Reasoned.
The
issue
in
these
appeals
is
whether
the
Minister
was
correct
in
so
assessing.
Global
and
the
appellant
were
not
related
persons.
They
appear
to
have
dealt
with
each
other
at
arm’s
length.
It
was
common
ground
that
at
the
outset
the
appellant
was
employed
by
Global.
The
employment
agreement
was
in
writing
and
was
to
expire
December
15,
1975.
The
appellant’s
duties
were:
To
act
as
business
editor
of
Global
News
and
to
perform
such
other
journalistic
functions
as
may
be
required
from
time
to
time
.
..
Clause
5
of
the
agreement
required
the
appellant
to:
.
..
devote
his
full
time,
efforts
and
ability
to
the
performance
of
such
services
for
Global
in
accordance
with
the
requirements
hereof.
Notwithstanding
clause
5,
the
contract
did
appear
to
permit
the
appellant
to
perform
services
for
others,
provided
he
secured
Global’s
consent
in
writing
in
advance.
Much
was
made
of
tax
reduction
as
a
purpose
underlying
the
1975
restructuring.
The
appellant,
in
evidence,
said
that
his
overall
purpose
was
to
make
more
money
and
he
included
tax
reduction
as
a
component
of
this
comprehensive
description
of
his
purpose.
Another
component
of
the
appellant’s
purpose
was
the
expansion
of
his
activities
as
a
free
lance
journalist.
At
the
same
time,
he
wanted
to
continue
as
business
editor
of
Global.
The
appellant
had
joined
the
Global
organization
when
it
was
first
formed.
As
he
and
the
rest
of
the
Global
staff
gained
experience
and
became
more
efficient,
the
appellant
concluded
that,
but
for
one
problem,
he
could
find
sufficient
time
both
to
discharge
his
duties
to
Global
and
to
fulfil
his
wish
to
do
more
free
lance
work.
The
appellant
experienced
no
difficulty
securing
Global’s
permission
to
do
free
lance
work,
although
apparently
no
one
bothered
with
the
contractual
requirement
that
such
permission
be
in
writing.
Rather,
the
problem
appeared
to
be
that
the
appellant,
as
an
employee,
was
expected
to
spend
a
reasonable
amount
of
time
each
day
at
the
Global
premises.
This
requirement
inhibited
the
appellant’s
efforts
to
promote
and
perform
free
lance
work.
Another
purpose
given
by
the
appellant
for
the
creation
of
the
new
structure
was
his
desire
to
charge
his
mother
for
financial
and
economic
advice
pertaining
to
her
investments.
The
appellant
had,
in
the
past,
given
her
such
advice
for
nothing
because
he
said
he
was
not
prepared
to
charge
her
for
it
so
long
as
he
had
to
pay
tax
at
full
personal
rates
on
fees
received.
It
is
quite
plain
that
the
appellant’s
desire
to
expand
his
free
lance
business
led
to
the
decision
to
change
the
relationship
with
Global
from
a
contract
of
service
to
a
contract
for
services.
It
is
equally
plain
that
the
form
of
the
remainder
of
the
new
structure
was
dictated
by
the
appellant’s
desire
to
reduce
his
tax
burden.
The
first
step
in
the
1975
restructuring
was
the
incorporation,
on
October
20,
1975,
of
Reasoned.
The
Minister’s
counsel
did
not
suggest
that
this
corporation
was
not
properly
formed
or
that
there
was
any
failure
to
pass
the
necessary
resolutions
or
otherwise
observe
the
niceties
of
corporate
behaviour.
The
next
step
in
the
reorganization
was
the
appellant’s
resignation
from
his
position
as
an
employee
of
Global.
The
employment
agreement
between
the
appellant
and
Global
was
for
a
term
expiring
December
15,
1975.
It
provided
for
early
termination
by
notice
in
writing.
The
appellant
resigned
on
November
30,
1975.
The
appellant
had
entered
into
an
agreement
in
writing
with
Reasoned
dated
October
27,
1975.
By
that
agreement,
Reasoned
engaged
the
appellant
to
render
his
services
as
a
broadcaster
and
writer
solely
and
exclusively
to
it.
The
term
of
the
employment
was,
according
to
that
agreement,
to
commence
October
27,
1975,
and
to
run
for
a
period
of
three
years.
Reasoned
entered
into
a
contract
with
Global
in
writing
dated
November
19,
1975.
By
that
contract
Reasoned
agreed
to
lend
the
services
of
the
appellant
to
Global
for
a
period
of
nine
months
to
commence
December
1,
1975.
Under
the
agreement
the
appellant
was
to:
.
.
.
act
as
the
business
editor
of
Global
News
and
.
.
.
perform
such
other
journalistic
functions
in
connection
therewith
as
may
reasonably
be
required
from
time
to
time.
The
latter
agreement
contained
two
further
provisions
which
are
of
some
relevance:
1.
Reasoned
agrees
that
Raoul
Engel
shall
be
subject
to
the
absolute
direction
and
control
of
Global
at
all
times
with
respect
to
the
manner
and
method
of
performance
of
the
function
of
business
editor
as
aforesaid:
Reasoned
hereby
undertakes
that
Raoul
Engel
will
abide
by
the
policies,
instructions,
and
directions
of
Global
from
time
to
time.
2.
Reasoned
further
undertakes
to
make
Raoul
Engel
available
at
such
time
or
times
as
will
enable
him
to
devote
his
full
time,
effort
and
ability
to
the
performance
of
the
services
herein
contracted
for.
The
term
of
the
agreement
was
extended
from
time
to
time
so
that
it
governed
the
relationship
between
Reasoned
and
Global
throughout
the
period
under
consideration
in
these
appeals.
It
may
be
convenient
to
note
at
this
point
that
the
last
quoted
provision
of
the
agreement
between
Reasoned
and
Global
did
have
the
effect
of
requiring
the
appellant,
indirectly,
to
spend
only
so
much
time
in
working
for
Global
as
was
necessary
to
do
the
work
of
the
business
editor
and
other
connected
journalistic
functions.
In
short,
the
appellant
was
free
to
arrange
his
working
hours
as
he
wished,
provided
he
produced
the
results
required
by
Global.
It
was
contended
by
counsel
for
the
respondent
that
the
provisions
as
to
direction
and
control
effectively
made
the
appellant
the
employee
of
Global.
I
cannot
accept
that
contention.
Employment
is
a
relationship
which
is
founded
in
contarct.
In
The
Queen
v
Gerald
J
Burns,
[1973]
CTC
264;
73
DTC
5219,
Sheppard,
DJ
said
at
265
[5220]:
The
question
of
who
was
the
employee
of
GWG
must
depend
upon
who
had
privity
of
contract
with
GWG
so
as
to
permit
action
for
the
salary
or
commission,
and
so
as
to
establish
the
relation
of
employee
and
employer.
Following
the
appellant’s
resignation,
privity
of
contract
no
longer
existed
between
the
appellant
and
Global.
It
was
further
contended
that
the
appellant
did
not
resign
from
Global
prior
to
December
15,
1975.
The
argument
was
based
on
the
fact
that
no
copy
of
a
written
resignation
was
produced
in
evidence.
The
appellant
testified
that
his
copy
had
been
lost.
I
am
satisfied
that
the
appellant
was
correct
in
stating
that
he
did
resign
effective
November
30,
1975,
both
because
of
the
recital
in
Exhibit
A-1,
Tab
2,
and
because
the
appellant
and
Global
conducted
themselves
in
a
manner
consistent
with
the
termination
of
the
master-servant
relationship
at
that
time.
Payment
made
by
Global
for
work
done
by
the
appellant
after
November
30th
was
made
to
Reasoned.*
It
was
argued
that
the
new
structure,
and
in
particular
the
agreement
between
the
appellant
and
Reasoned,
was
a
sham.
Counsel
for
the
respondent
pointed
to
the
overlap
period
between
October
27,
1975,
when
the
exclusive
services
agreement
between
the
appellant
and
Reasoned
came
into
effect,
and
November
30,
1975,
when
the
old
employment
contract
between
the
appellant
and
Global
was
terminated.
This
overlap
arose,
according
to
the
appellant’s
evidence,
because
Global’s
lawyers
delayed
in
approving
the
new
Reasoned-Global
contract
which
was
originally
intended
to
come
in
force
November
1st.
In
my
view,
the
failure
of
the
appellant
and
Reasoned
to
amend
their
agreement
is
not,
when
considered
in
relation
to
the
other
evidence,
indicative
of
sham,
that
is
to
say,
a
document
not
intended
by
the
appellant
and
Reasoned
to
govern
their
relationship.
The
failure
to
amend
the
agreement
between
the
appellant
and
Reasoned
appears
to
indicate
nothing
more
than
a
minor
oversight
in
giving
written
expression
to
a
common
intention
to
defer
the
date
of
commencement
of
the
agreement.
Following
November
30,
1975,
all
payments
made
by
Global
were
not
only
made
to
Reasoned;
all
were
deposited
in
the
Reasoned
bank
account.
All
payments
made
by
others
for
whom
the
appellant
did
free
lance
work
during
that
subsequent
period
were
similarly
deposited
in
the
Reasoned
account.
The
appellant,
who
apparently
had
been
well
warned
to
exercise
great
care
in
giving
effect
to
the
legal
relationships
flowing
from
the
new
structure,
made
every
possible
effort
to
ensure
that
Global
and
all
persons
who
sought
his
free
lance
services
were
informed
from
the
very
beginning
that
it
was
Reasoned
which
supplied
such
services.
Further,
all
invoices
sent
were
clearly
prepared
as
invoices
from
Reasoned.
In
summary,
the
agreement
between
the
appellant
and
Reasoned
was
intended
to
create
a
relationship
between
them
of
master
and
servant,
whereby
the
appellant,
as
servant
would
perform
the
journalistic
services
sold
by
Reasoned,
whether
to
Global
or
to
others.
I
can
see
no
basis
for
any
suggestion
that
the
relationship
which
the
contract
purported
to
create
was
not
intended
to
be
created
or
was
not
adhered
to.
There
is
no
sham
here.
Furthermore,
the
agreement
between
Global
and
Reasoned
was
not
treated
by
either
party
as
a
sham.
This
is
evident
from:
(a)
Global’s
action
in
paying
Reasoned
after
November
30,
1975;
(b)
Global’s
action
in
terminating
employee
benefits
after
November
30,
1975;
and
(c)
the
freedom
accorded
to
the
appellant
to
come
and
go
as
he
pleased
after
November
30,
1975.
The
Minister
contended
that
the
transaction
between
the
appellant
and
Reasoned
had
no
valid
business
purpose
and
should
therefore
be
ignored.
In
this
regard
he
relied
on
the
decision
of
the
Federal
Court
of
Appeal
in
MNR
v
Anthony
Leon,
Edward
Leon
and
Lewie
Leon,
[1976]
CTC
532;
76
DTC
6299,
and
on
an
unreported
decision
of
the
House
of
Lords
in
CIR
v
Burmah
Oil
Company
Limited.
He
pointed
out
that
all
money
paid
by
Global
for
December
1975,
for
1976
and
for
1977,
was
paid
for
the
services
of
the
appellant.
On
the
basis
of
the
authorities
mentioned,
he
submitted
that
I
should
ignore
the
non-arm’s
length
transaction
between
the
appellant
and
Reasoned
and
look
at
the
end
result.
That
end
result
was,
he
contended,
the
receipt
by
the
appellant
of
the
money
which
was
paid
by
Global.
I
do
not
quite
look
at
it
that
way.
The
end
result
that
I
see
is
that
the
money
paid
by
Global
was
paid
to,
received
by,
and
the
property
of
Reasoned.
I
cannot
conclude
that
either
of
the
authorities
referred
to
has
application
here.
In
the
Burmah
case,
Lord
Diplock,
in
speaking
of
the
approach
recently
adopted
by
the
House
of
Lords
in
certain
tax
avoidance
cases,
suggests
that
the
approach
is
limited
in
its
application
to
transactions
between
artificial
persons,
all
directed
by
a
single
mastermind.
His
Lordship
said:
It
does
not
necessitate
the
over-ruling
of
any
earlier
decisions
of
this
House;
but
it
does
involve
recognising
that
Lord
Tomlim’s
oft-quoted
dictum
in
/RC
v
Duke
of
Westminster
[1936]
AC
1,
19,
“every
man
is
entitled
if
he
can
‘to
order
his
affairs
so
as
that
the
tax
attaching
under
the
appropriate’
Acts
is
less
than
it
otherwise
would
be”,
tells
us
little
or
nothing
as
to
what
methods
of
ordering
one’s
affairs
will
be
recognised
by
the
courts
as
effective
to
lessen
the
tax
that
would
attach
to
them
if
business
transactions
were
conducted
in
a
straight-forward
way.
The
Duke
of
Westminster’s
case
was
about
a
simple
transaction
entered
into
between
two
real
persons
each
with
a
mind
of
his
own,
the
Duke
and
his
gardener
—
even
though
in
the
nineteen-thirties
and
at
a
time
of
high
unemployment
there
might
be
reason
to
expect
that
the
mind
of
the
gardener
would
manifest
some
degree
of
subservience
to
that
of
the
Duke.
The
kinds
of
tax-avoidance
schemes
that
have
occupied
the
attention
of
the
courts
in
recent
years,
however,
involve
inter-connected
transactions
between
artificial
persons,
limited
companies,
without
minds
of
their
own
but
directed
by
a
single
master-mind.
In
Ramsay
the
master-mind
was
the
deviser
and
vendor
of
the
tax-avoidance
scheme;
in
the
instant
case
it
was
Burmah,
the
parent
company
of
the
wholly-owned
subsidiary
companies
between
which
the
preordained
series
of
transactions
took
place.
Similarly,
in
Leon,
the
persons
who
carried
on
the
business
of
Ablan
Leon
Distributors,
to
whom
the
services
were
provided
supposedly
by
management
companies
each
controlled
by
one
of
the
three
appellant
brothers,
did
not
deal
at
arm’s
length
with
the
management
companies
or
with
the
broth-
ers.
The
principle
which
the
Respondent’s
counsel
suggested
should
be
adopted
from
the
Leon
case
is
one
which
the
same
Court,
differently
constituted,
suggested
.
.
should
perhaps
be
confined
to
the
facts
of
that
case.”
*
The
present
case
is
rather
different.
Here,
Global
dealt
with
Reasoned
following
the
restructuring.
Those
dealings
were
at
arm’s
length.
Those
cases
do
not
warrant
a
conclusion
here
that
it
was
the
Appellant,
not
Reasoned,
which
earned
the
fees
paid
by
Global.
The
appellant
adopted
a
method
of
ordering
his
affairs
which,
to
use
Lord
Diplock’s
words,
has
been
..
recognised
by
the
courts
as
effective
to
lessen
the
tax
that
would
attach
to
them
if
business
transactions
were
conducted
in
a
straight-forward
way.”
The
decision
of
the
Exchequer
Court
in
Ralph
J
Sazio
v
MNR,
[1968]
CTC
579;
69
DTC
5001,
has
never
been
overruled.
I
can
find
in
the
present
case
no
greater
degree
of
artificiality
than
existed
in
the
situation
considered
in
Sazio.
There,
Cattanach,
J,
stated
at
587
[5006]:
A
company,
from
its
very
nature,
must
act
through
natural
persons
and
there
are
numerous
examples,
particularly
in
the
entertainment
field,
where
well
known
persons
have
incorporated
limited
companies
to
exploit
their
talents.
In
Sazio
it
was
apparently
not
admitted
that
tax
reduction
was
a
motive
underlying
the
restructuring
as
was
the
case
here.
That
difference
between
the
two
cases
does
not,
as
i
see
it,
warrant
a
refusal
to
follow
Sazio
and
to
regard
the
amounts
paid
by
Global
as
the
revenues
of
the
appellant
and
not
the
revenues
of
Reasoned.
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
The
Queen,
[1978]
CTC
566;
78
DTC
6387,
Urie,
J,
stated
at
577
[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
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
carryig
out
its
judicial
duties,
but
in
its
duty
to
the
public
at
large.
I
can
only
find
that
the
scheme
in
question
here
stands
up
under
the
requisite
scrutiny.
For
the
foregoing
reasons
the
appeals
will
be
allowed.
The
assessments
in
question
will
be
referred
back
to
the
respondent
for
variation
on
the
basis
that
the
amounts
paid
by
Global
to
Reasoned
were
the
revenues
of
Reasoned
and
not
the
income
of
the
appellant.
Appeal
allowed.