John J Daly v. Her Majesty the Queen, [1981] CTC 132, 81 DTC 5025

Gibson J:—John J Daly appeals from re-assessments for income tax in these two actions which were tried on common evidence. The first action (T-3435-74), an appeal from a decision of the Tax Review Board confirming the re-assessments for the income tax, relates to his taxation years 1964 to 1967 and the second action T-705-76), a direct appeal to this Court from a reassessment for income tax relates to his taxation years 1969 to 1972. John J Daly, on this appeal adduced more complete evidence than he did in action T-3435-74 before the Tax Review Board.

John J Daly in 1964 caused a management company to be incorporated called John J Daly Enterprises Limited and that company to be activated. John J Daly was a major shareholder of that company in 1964 and at all material times.

That management company was actively engaged in its business since its incorporation in 1964 and at all material times.

CKOY Limited is a radio station in Ottawa, Canada and was actively engaged in its business during all material times.

There is one issue for determination: Were the amounts of monies received by John J Daly Enterprises Limited from CKOY Limited income within the meaning of the Income Tax Act of John J Daly Enterprises Limited or income of John J Daly? To determine this issue, it is necessary to ascertain whether John J Daly, commencing in July 1964 and continuing during the material taxation years, was employed by CKOY Limited, or was employed by John J Daly Enterprises Limited.

John J Daly only caused evidence to be adduced in these actions. Her Majesty The Queen adduced no evidence.

The evidence of John J Daly consisted of certain documentary evidence and the oral evidence of himself, Gordon F Henderson, QC, Vice-President and counsel of CKOY Limited in 1964 and in subsequent years, and Glen Ross, CA, of Coopers and Lybrand, chartered accountants, accountants and auditors for CKOY Limited for the taxation year 1964 of John J Daly and for his other subsequent relevant taxation years.

The documentary evidence to prove the alleged contractual arrangements and the alleged implementation of such arrangements in this case was unsatisfactory. The documentation done for John J Daly and Hohn J Daly Enterprises Limited was done in a slipshod manner. Unfortunately this is so often usual in cases such as this where determinations have to be made involving contractual arrangements and the implementation of such arrangements by individuals with limited companies and by limited companies with other limited companies.

By oral evidence it was sought to supplement this unsatisfactory documentary evidence and complete the proof of what John J Daly submitted were the true contractual arrangements made and implemented by him and made and implemented between John J Daly Enterprises and CKOY Limited.

The oral evidence of John J Daly was that a Mr Cameron was President of CKOY Limited in 1964 when an oral contract was made between CKOY Limited and Hohn J Daly Enterprises Limited. (Mr Cameron was an elderly man and it was not practicable for him to testify at these appeals.) John J Daly said that he, acting as a duly authorized officer and agent for John J Daly Enterprises Limited, and that Mr Cameron, acting as a duly authorized officer and agent of CKOY Limited, entered into an oral contract in 1964 whereby John J Daly Enterprises Limited from July 1964 was to supply certain specified management services to CKOY Limited. John J Daly said that he was authorized to enter into this contract by John J Daly Enterprises Limited and that Mr Cameron had received the authority to do so on behalf of CKOY Limited by the then Board of Directors of CKOY Limited.

The oral evidence of Mr Ross was that he was in charge of the audit of CKOY Limited for the year 1964 and during each of the subsequent relevant years; that he personally, from time to time and during all material times, discussed with and got confirmation from the relevant officers and agents of CKOY Limited that this oral contract between CKOY Limited and John J Daly Enterprises Limited had been entered into and was in effect during the relevant taxation years of John J Daly; and that he accordingly, as independent auditor for the company, approved and certified to the shareholders of CKOY Limited that the monies paid to John J Daly Enterprises Limited for management services from 1964 and during each of the said relevant taxation years of John J Daly were properly paid John J Daly Enterprises Limited for services actually rendered.

The oral evidence of Mr Henderson was that he assisted and advised in the drafting of the contract (Exhibit 1) in 1971 which reduced to writing this Said oral contract between CKOY Limited and John J Daly Enterprises Limited. Mr Henderson said that in acting as counsel in giving such assistance and advice, he first satisfied himself by discussing with the persons who were the relevant officers and agents of CKOY Limited at the material times that in fact from 1964 and during these relevant years, John J Daly Enterprises Limited and not John J Daly personally did render management services to CKOY Limited for which John J Daly Enterprises Limited was paid. Mr Henderson said he personally did not know in 1964 that this oral contract had been entered into by CKOY Limited with John J Daly Enterprises Limited and only learned of it and the implementation of it during the years 1964 to 1971 when he was asked to assist and advise in completing the contract, Exhibit 1, in 1971.

As a consequence, I am satisfied on the evidence of Messrs Henderson, Ross and Daly that, as between CKOY Limited and John J Daly Enterprises Limited, there is proof (which apparently there was not before the Tax Review Board) that the necessary respective corporate acts of John J Daly Enterprises and CKOY Limited were authorized to be done and were done to cause the said contract in 1964 to be entered into and to be legally binding upon these parties to it; that this contract was reduced to writing in 1971 (see Exhibit 1); and that this contract was tn full force and effect during all the said taxation years of John J Daly (cf Coleman C Abrahams (No 2) v MNR, [1966] CTC 690; 66 DTC 5455, Jackett, P (as he then was)):

.. . While, as against third parties, the intent of a closely held company is to be judged by the acts of those who are in charge of its affairs and the Court is bound to assume that the owner of all the shares of a company who purports to act on its behalf has taken the necessary steps to give himself the authority he purports to have, when it is a question of establishing, as between such a person and third parties, that he has entered into a contract with a company all of whose shares belong to him, in my view, evidence is required to establish that there was in fact been a formulation and expression of the intent of the company, which is not, after all, a person of flesh and blood having a mind of its own, in one of the modes contemplated by the law, namely a resolution of the Board of Directors or an act of an officer, servant or agent of the company acting in the course of employment or the agency.

The legal rights and obligations which this contract created were those that the parties intended. (See MNR v Cameron, [1974] SCR 1062; [1972] CTC 380; 72 DTC 6325.) This contract therefore was not a "sham”, a much used and nonfelicitous word. (See Diplock, LJ in the Snook case [1967] 1 All ER 518, wherein referring to the word "sham” was not impressed with its indiscriminate use and called it "this popular and pejorative word”.)

One other matter was raised on these appeals and is referred to. It was pleaded and submitted that there was no valid business purpose "for the procedure whereby income earned by . . . (John J Daly) was channelled off through John J Daly Enterprises Ltd by the inter-position of that company between . . . (John J Daly) and CKOY Limited”. As to this, it should be noted that there is no statutory basis for the proposition that John J Daly had the onus of establishing that the incorporation of a management company and the causing of that management company to enter into a contract for management services with a third party was to achieve a bona fide business purpose to the exclusion of any substantial motivation to reduce income or, putting it another way, that John J Daly had the onus of establishing that a business advantage or purpose was the motivation for causing the said incorporation of the company and the entering into this Said contract by it with CKOY Limited and that the saving of the income was only incidental to that business purpose. And therefore, in the absence of a charging provision in the Income Tax Act importing this business purpose requirement, in my view, there is no such onus. As to this, further, the dichotomy of opinion in respect to this so-called "business purpose test” in the cases in this Court perhaps may be resolved by confining the decisions to the facts of these cases. (Cf MNR v A T Leon et al, [1976] CTC 532; 76 DTC 6299; N Leon v MNR, [1979] CTC 541; 76 DTC 6303; Produits LDG Inc v The Queen, [1976] CTC 591; 76 DTC 6344; Massey Ferguson Limited v The Queen, [1977] CTC 6; 77 DTC 5013; Feinstein v The Queen, [1979] CTC 329; 79 DTC 5236; Agar v The Queen, [1980] CTC 397; 80 DTC 6311 ; and Sazio v MNR, [1968] CTC 579; 69 DTC 5001.)

In any event however in this case there are many obvious business purposes which motivated John J Daly to have caused John J Daly Enterprises Limited to have been incorporated and to have caused it to enter into the said contract with CKOY Limited and to implement that contract. And the salient material evidentiary matters that should be considered in cases of this type have been considered and the applicable legal principles have been applied. (Cf the Sazio case (supra).)

Accordingly, the finding is that commencing in July 1964, and continuing during the material taxation years, John J Daly was employed by John J Daly Enterprises Limited and was not employed by CKOY Limited and that the monies paid by CKOY Limited to John J Daly Enterprises Limited were income of John J Daly Enterprises Limited and not income of John J Daly.

The appeals therefore are allowed with costs and the re-assessments are referred back for further reassessments not consistent with these reasons.