Gurd’s Products Company Limited v. Her Majesty the Queen, [1981] CTC 195, 81 DTC 5153

Addy, J:—These two appeals, which were heard at the same time on common evidence, involve the taxability during taxation years 1971, 1972 and 1973 of the income of the plaintiff Gurd’s Products Company Limited (hereinafter referred to as “Products”) and the right during those years to withhold tax on dividends paid to the plaintiff Grantison Holdings Inc (hereinafter referred to as “Crush USA”). Both were part of a chain of several companies involved in the soft drink business in Canada and the USA.

The facts are somewhat complex and, in an attempt to simplify matters, the relationship of the various corporations, which formed what may be conveniently termed the Crush Group of corporations, has been detailed on a diagrammatic chart of corporate structure attached as a schedule to these reasons. Some of the companies were incorporated in Canada and some in the United States. It will be seen that most of them have changed their names, some of them even having done so since the actions were commenced. The chart represents the corporate structure of the Crush Group during the relevant taxation years, although, for the sake of convenience, the latest corporate names of their abbreviations are being used. Since 1973, some of the corporations have been disposed of to other interests. Each corporation in the diagram is wholly owned by the corporation above it. The interrupted line on the chart indicates the international boundary. The first two companies are situated in Canada in the sense that central management and control is situated wholly within this jurisdiction and their boards of directors are here. On the other hand, in the case of the other four companies, which include the two plaintiffs, the boards of directors always met in the USA and their management control was entirely situated there.

Dealing first with the companies situated in Canada, Great Pacific was, in effect, a holding company controlling a number of subsidiaries. Crush Canada, a wholly owned subsidiary of Great Pacific, owned and operated assets within Canada where it manufactured soft drink concentrates, syrups and finished drinks and engaged in the bottling and selling of soft drinks and also in the franchising of certain Canadian bottlers. At all material times, its activities and businesses were confined to Canada.

The plaintiff, Crush USA, was incorporated in Ontario. Its business operations, however, were completely managed and controlled from the USA and consisted of negotiating franchise agreements and of manufacturing concentrates and selling same to franchised soft drink manufacturers and bottlers in the USA, Europe, Africa and the Middle East. Also its board of directors always met in the USA.

The plaintiff Products was also incorporated in Ontario but operated and was managed and directed from Evanston, Illinois. Its shares were owned by the plaintiff Crush USA. Its directors and shareholders meetings for the years subsequent to 1965 were all held in Evanston, Illinois, and, until the year 1946, it had been purchasing concentrates from the Orange Crush Company of Illinois and reselling same to Orange Crush bottlers in Canada. From 1946, it became completely inactive until 1969. In conformity with subsection 14(1) of The Business Corporations Act, RSO 1970, c 53, of Ontario which requires that Ontario corporations have a head office at some place within the Province, its statutory head office was declared to be situated at 1590 O’Connor Drive, Toronto, being the same premises as those occupied by Great Pacific and Crush Canada. The management and day-to-day control of these two last-mentioned companies is and was at all material times located there.

It is of some importance to note that the nature of the operations of the Crush Group were quite different in the US than in Canada. The Canadian operations involved primarily the manufacturing and bottling of finished soft drinks for sale in Canada. They did, however also, to a limited extent, include the granting of franchises to other bottlers but only within Canada. This country was, thus, served exclusively by the Canadian operations of the Canadian based corporation “Crush Canada”.

Outside of Canada the Crush Group had no bottling plants nor did they produce finished drinks even in the USA. They merely manufactured the various concentrates which they sold to independent franchised soft drink manufacturers and bottlers. The concentrates consist of a highly concentrated blend of flavouring ingredients and essences which, when mixed in blending tanks by the soft drink manufacturers with a sugar and water syrup and a preservative, produces the soft drink which is then bottled and sold by the manufacturer pursuant to his franchise, to dealers and retailers within his particular territory. This business of selling concentrates and granting franchises was carried out in the US and in over 60 other countries throughout the world, exclusively by the US Crush Group of companies. No Canadian employees ever participated in obtaining, negotiating or carrying out the terms of any international franchise agreement. The franchising throughout the Western hemisphere, exclusive of Canada and the USA, was carried out by Inter-American. Europe, Africa and the Middle East were handled by Crush USA. None of the foreign employees or agents of the Crush Group were paid by or through either of the two Canadian corporations nor were any of their activities charged to them.

The management and day-to-day control of Crush USA and of all of its Subsidiaries was at all material times located in Evanston, Illinois, USA. The evidence also establishes that, at all material times, the management personnel of Great Pacific and of Crush Canada were separate and distinct from that of the other corporations. The boards of directors were also different. There were thirteen directors on the board of Great Pacific. The remaining US Crush corporation each had either three or four directors, a majority of whom were at all times resident in the USA. Products had three directors only one of whom was a Canadian resident. The entire export operation of the Crush Group was controlled and directed from Evanston.

Canada became involved in external trade due to the deterioration of relations between the USA and Iraq. Coca-Cola originally supplied concentrate to various distributors in Iraq as well as in Israel. Because of the Arab-Israeli confict, Coca-Cola, in order to retain its franchise agreements with Israel, was forced to abandon its Iraqui operations, thus, opening that market for the Crush Group. A franchise agreement with the Iraqi firm, Eastern Industries Co representing the Iraq Government the purchaser of the concentrate, was eventually negotiated and signed.Because of the political situation, the Government of Iraq, at that time, would not do business with American corporations or permit importation of US products. In order to camouflage or conceal US involvement, and because the plaintiff, Products, had a statutory head office in Toronto, it was decided to reactivate that company which, as previously stated, had been inactive since 1946. There was the additional advantage that the company had no assets and in the eventuality of it becoming involved in a lawsuit with the Iraqi bottlers, no Crush Group assets would be at risk. The reactivated company was operated by the board of directors and a management situated in Evanston, Illinois.

Representatives of Crush USA carried out all the necessary negotiations and obtained the franchise agreement with the Iraqi firm, Eastern Industries Company, who would be purchasing the concentrate. The agreement was negotiated by Crush USA, originally on behalf of its subsidiary Crush International Inc, which owned the Crush trade marks in Iraq, but, for the previously stated reasons, the Iraqi trade mark was transferred to Products and the final agreement was entered into with that corporation rather than with Crush International Inc.

According to the terms of the franchise agreement, Products was to sell to Eastern Industries Co, Crush Cola, Orange Crush and Gini concentrates for the soft drinks to be sold in Iraq under those names. The concentrate was Similar to that manufactured in Canada except that it was more highly concentrated in order to reduce freight, handling costs, insurance and other charges.

Products, which operated from Evanston, acted strictly as a sales corporation. Because of its Toronto statutory address it was fairly easy to induce the Iraqis into believing that they were dealing with a corporation operating from Canada. All mail was directed to the Toronto address and forwarded from there to Evanston, although most communication and negotiations as well as orders were handled locally through the representatives of Crush USA in Lebanon. The Iraqis were led to believe that these representatives were actually employed by a Canadian-based company. They were, in fact, always paid and employed by the United States Crush Group and received all their instructions from Evanston.

What mail was sent by the Iraqi bottlers was addressed to Toronto and forwarded from there to Evanston by the Toronto office. The replies to the Iraqi were mailed from Canada and bore a Canadian address. The replies, however, all originated from Evanston in the sense that they actually emanated from Evanston or their contents were fully authorized by Evanston. No person in Canada, including Mr Dees, was authorized to initiate or reply to any correspondence with iraq without specific and detailed instructions from Evanston as to what was to be stated in each case. Mr Dees was forbidden to initiate correspondence or reply to correspondence from Iraq without Specific instructions from Evanston. The evidence clearly establishes that Evanston exercised immediate, direct and detailed control over all correspondence and communications with Iraq and that the Toronto address was but a sham, decoy or camouflage to induce the Iraqi into believing that matters were under Canadian control. In point of fact, little correspondence took place between the Iraqui firms and Products as most details pertaining to the administration and performance of the franchise agreement, as well as the supplying of concentrate, was handled by agents of the US Group stationed in Lebanon.

In order to meet the Iraqi ban on American imports, the concentrate for Iraq was purchased by Products from Crush Canada who sold same to Products at cost plus 20%; it was shipped from Canada to Iraq through New York. The mark-up between Products and the Iraqi purchasers was in the neighbourhood of 500%. Products, however, had to furnish certain services provided for in the franchise agreement.

Products received a total of nine orders for concentrate pursuant to the Iraq franchise agreement.These were shipped from Canada in accordance with the above described arrangements. All of these orders were in fact shipped prior to the taxation years in issue and no goods emanating from Canada were sold during those years nor was there, during that period, any Canadian activity whatsoever with regard to business with Iraq.

Orders were placed through Evanston’s representative in Lebanon who would be in contact with the bottlers in Iraq. A pro-forma invoice would be prepared either by Crush personnel in Evanston or by Evanston’s agent in Lebanon and given to the Iraqi bottlers. An importation permit from the government authorities in Iraq would be obtained by the bottlers to cover the shipment. The permit would then be taken to the Iraqi bank where a letter of credit would be obtained. On receipt of advice of that fact, the agent in Lebanon would cable Evanston, advising of the order. No order was ever sent to Canada from Iraq. On notification of the Iraq order, Evanston would issue a purchase order to Crush Canada for the concentrate. Upon the letters of credit being confirmed at a bank in Canada, the concentrate was manufactured and packaged in Canada by Crush Canada.

The export documentation was generally prepared in Toronto because it had to accompany the trucks leaving Toronto for New York and had to contain such details as quantity, weight, number of packages, etc, which was only available at the point of shipping. At first, Evanston would prepare these documents and forward them to Toronto, levaing in blank the details of weight, number of packages, etc. Subsequently, they were prepared in Toronto as a routine matter from the details of shipment outlined in each letter of credit.

The export documents consisted of the invoices, the bank draft, the truck bill of lading for shipment from Toronto to New York, a packaging list, a certificate of origin and a medical health certificate. These were standard export documents. The goods travelled in bond from Toronto to New York City. Arrangements for shipment from New York to Iraq via Beirut, Lebanon, were made by the personnel of Crush in Evanston.

Mr Dees, who had occupied various positions as an employee and as a senior officer of Great Pacific and of Crush Canada and who, at the relevant time, was the Vice-President and Secretary of Crush Canada, was used as the contact man in Toronto. In order to maintain the fiction that no US corporations were involved and to comply with the Iraqis’ requirements that an agent be appointed attorney for the suppliers, Mr Dees, who had no experience whatsoever in export transactions, was, by resolution of the board of directors of Products, appointed agent of that corporation for “the sole purpose of executing documents pertaining to shipment of merchandise to the Country of Iraq”. He had no authority to participate in negotiations with Iraq and in fact never did so. He had no authority to quote prices, nor did any other person in Canada. He was forbidden from communicating with Iraq except on specific instructions from Evanston. No orders for concentrate came to Mr Dees from Iraq. The orders would be forwarded from Evanston to Mr Dees who would place them with Crush Canada and arrange for shipment in bond to New York for shipment overseas to Lebanon.

Mr Dees received no remuneration whatsoever from Products. He spent approximately 80% of his time on the Canadian operations of Crush Canada with the balance of his time working for the other Canadian company, Great Pacific, in various capacities, including that of secretary of the company. His only other responsibilities, in any way related to the business of the United States companies, was to consolidate the various financial statements of the entire Crush Group of corporations.

All technical assistance and analysis of samples, etc were provided for and carried out by Evanston personnel either in Evanston or, later on, through an expert technician in Lebanon as a service for the Middle East bottlers; all training of employees of bottling plants in the Middle East was also handled by Evanston.

When the freight forwarder in New York received the export documents he would add the inland freight and ocean freight to the invoices and, after legalization and certification of same, would send the export documents with the on-board-bill of lading back to Mr Dees in Toronto who would present them to the Imperial Bank of Commerce there with the draft. The bank would, thereupon, notify Mr Dees that payment would be made to Products on a letter of credit. The bank would be instructed to wire a transfer of the funds to the American National Bank and Trust in Chicago to the account of Products. Mr Dees notified the bank in Toronto only on instructions from the vice-president, the secretary or the treasurer of Products in Evanston. Mr Dees did not have any signing authority on behalf of Products on any bank account.

All payments were in US dollars. No funds were ever converted into Canadian dollars nor were any funds ever deposited in a Canadian bank. Products paid Crush Canada through an inter-company account at the end of each fiscal year.

All legal problems, credit arrangements, trade mark matters, sales records under the franchise agreements and the accounting therefor were handled exclusively from Evanston. When title to the concentrate produced by Crush Canada passed to Products it was a finished product. Crush Canada, when it packaged the concentrate, would label it and the packages with the name of Products. Products itself did nothing whatsoever to the packages of concentrate and merely purchased the finished matter from Crush Canada in a form ready and packaged for export shipment.

The basic issue turns on whether the plaintiff, Products, was carrying on business in Canada during any of the taxation years in question or at any time previous thereto since April 1965. If so, then that company would be taxable. In 1965, the law [subsection 139(4a)]* was amended in so far as companies incorporated in Canada after the 26th of April of that year were concerned, rendering all such corporations taxable as residents of Canada regardless of where they were operating from. Canadian residency would, of course, by reason of section 3[3] render the plaintiffs taxable on their worldwide income. The two plaintiffs, however, were incorporated previous to 1965 and the place of incorporation is, therefore, not determinative of the issue of residency. The question of residence of the plaintiff Products is governed by paragraph 250(4)(c) [139(4a)(b)] which provides as follows:

250. (4) For the purpose of this Act, a corporation shall be deemed to have been resident in Canada throughout a taxation year if

(c) in the case of a corporation incorporated before April 27, 1965 (other than a corporation to which subparagraphs (b)(i) to (iv) apply), it was incorporated in Canada and, at any time in the taxation year or at any time in any preceding taxation year of the corporation ending after April 26, 1965, it was resident in Canada or carried on business in Canada.

The provisions of paragraph (b) referred to in paragraph (c) do not apply to the cases at bar.

From the facts which I have outlined previously, it is obvious that the operating company was Products: Crush USA was not involved in any actual business with Iraq or with Crush Canada. However, Crush USA received dividends from Products as the latter was its wholly owned subsidiary. If Products were to be considered as a Canadian resident, then, by reason of paragraph [106(1 a)(a)] Of the 1952 Act, aplicable to the 1971 taxation year, and of subsection 212(2) of the 1972 Act (as varied by subsection 10(2) of the Income Tax Application Rules), Crush USA would have been taxable on

NOTE: All sections in square brackets refer to the Income Tax Act, RSC 1952, c 148 as amended, which is applicable to the 1971 taxation year.All other section references relate to SC 1970-71-72, c 63, which applies to the 1972 and 1973 taxation years.

dividends paid to it by Products. If, however, Products were not at that time a Canadian resident, then Crush USA would not be taxable. Thus, the residency of Products would be determinative of the Appeal of Crush USA.

At common law, a corporation is deemed to reside where its central management and control are situated. This principle has been used to determine residence for taxation purposes. (See De Beers Consolidated Mines Limited v Howe (1906), TC 198.)

If the directors actually make the decisions, then, the management and control is deemed to be carried out from that place. (See The American Thread Company v Joyce (1911-1915), 6 TC 163 and also British Columbia Electric Railway Co Ltd v The King [1946] CTC 224; 2 DTC 824.

The mere maintenance of a statutory address for head office, within an incorporating jurisdiction in order to conform to a legal requirement to that effect imposed by that jurisdiction, does not of itself constitute residence there for any reason other than those provided for in the legislation pursuant to which it was incorporated or for such other limited purposes such as service of documents, nor does it constitute carrying on business there. It follows that this does not of itself render the corporation subject to income tax. (Refer to Tara Exploration and Development Company Limited v MNR [1970] CTC 557; 70 DTC 6370 affirmed by SCC [1972] CTC 328; 72 DTC 6288.)

It is abundantly clear from the facts of the case that the central control and management of Products was not exercised in Canada and the defendant did not contest this issue. Since central control and management is not really in issue, the question of whether business was actually carried on in Canada by Products, at any time since 1965, remains paramount. Section 253 [139(7)] extends the accepted common law meaning of “carrying on business” as follows:

253. Where, in a taxation year, a non-resident person

(a) produced, grew, mined, created, manufactured, fabricated, improved, packed, preserved or constructed, in whole or in part, anything in Canada whether or not he exported that thing whithout selling it prior to exportation, or

(b) solicited orders or offered anything for sale in Canada through an agent or servant whether the contract or transaction was to be completed inside or outside Canada or partly in and partly outside Canada,

he shall be deemed, for the purposes of this Act, to have been carrying on business in Canada in the year.

It is uncontested that, during the years under appeal, Products engaged in no business whatsoever in Canada and the question under section 253 narrows down to a consideration of its activities between April 26, 1965 and the year 1973. Factually, since Products was inactive between 1946 and 1969, the matter narrows down still further to the period since 1969 when Products was reactivated as an operating corporation for the purposes which I have already outlined.

Under paragraph 253(a), it is required that the non-resident must have produced, manufactured, fabricated, etc in whole or in part in Canada. It was clearly Crush Canada and not Products which carried out this activity of manufacturing the concentrate. Paragraph (b) requires the soliciting of orders or offering for sale in Canada. Again, Products engaged in no such activities. Thus, section 253 creates no statutory liability for Products.

The only other possible remaining business activities would be the purchase of the concentrate, the shipment of same, the negotiations with Iraq and the obtaining and filling of orders from Iraq pursuant to the franchise agreement.

At common law, the mere purchase of goods for export, coupled with the preparation of the required export documents, does not constitute the “carrying on of business” in the Country from which the goods are purchased. (See Sulley v The Attorney General (1860), 5 H & N 711.) That case was decided on the very sound principle that, as every country stands to gain by the expansion of its foreign trade, it would be patently against public interest to discourage foreign purchasers from buying goods manufactured in that country by taxing them on the basis that they were carrying on business there. As stated by Cockburn, CJ at 717 of the report: “It would be most impolitic thus to tax those who come here as customers”. This decision was approved by the Privy Council in Lovell & Christmas, Limited v Commissioner of Taxes, [1908] AC 46. There is a clear distinction between trading with a country and carrying on a trade within a country as Lord Herschell so aplty put in Grainger and Son v Gough (1896), 3 TC 462 at 467. Products bought the concentrate from Crush Canada who manufactured the goods and sold them to Products and undoubtedly paid Canadian income tax on the profit of 20% realized on the sale. Products obviously should not be taxed merely because it purchased the concentrate in Canada for the purpose of resale by it in Iraq. Title passed to Products at the time of delivery for shipment from Canada, FOB Toronto.

In so far as the preparation of export documents is concerned, there is certainly nothing extraordinary about a Canadian manufacturer, on instructions from a foreign purchaser, shipping the goods to a third country and, for that purpose, preparing the necessary documentation for shipment and export to the designated consignee as part of the conditions of purchase. Even if the performance of these services might somehow be considered as establishing a form of agency relationship with the purchaser, the latter would never be considered as carrying on business in the country of purchase on the sole basis of those incidental services. When considering the particular facts before me, Mr Dees, in preparing the required documents for exportation and in packing, labelling and shipping the goods, was, in my view, acting as a servant of the vendor Crush Canada by whom he was employed and paid. On the other hand, even if he were to be considered acting as an agent for Products, he was doing so gratuitously and, by reason of these services being performed by Mr Dees, Products could not be considered as doing business in Canada in any event.

There is really no crucial or definitive test as to what constitutes carrying on business. As Lord Radclife stated in Firestone Tyre & Rubber Co, Ltd v Lewelling et al (1957), 37 TC 111 at 142 of the report:

It follows, then, that the place of sale will not be the determining factor if there are other circumstances present that outweigh its importance or unless there are no other circumstances that can. Since the Courts have not attempted to lay down what those other circumstances are or may be, singly or in combination, and it would be, I believe, neither right nor possible to try to do so, I think it true to say that, within wide limits which determine what is a permissible conclusion, the question whether a trade is exercised within the United Kingdom remains, as it began, a question of fact for the Special Commissioners. In my opinion, therefore, Harman, J, in the High Court and Lord Evershed, MR, in the Court of Appeal were well founded in laying stress on the observation of Atkin, LJ, in FL Smidth & Co v Greenwood, 8 TC 193, at 203-4:

The contracts in this case were made abroad.But I am not prepared to hold that this test is decisive. I can imagine cases where the contract of re-sale is made abroad, and yet the manufacture of the goods, some negotiation of the terms, and complete execution of the contract take place here under such circumstances that the trade was in truth exercised here. I think that the question is, where do the operations take place from which the profits in substance arise?

This principle of there being no single conclusive test is also found in Crookston Bros v Furtado [1910], 5 TC 602. The Lord Justice Clerk stated at 628 of this report:

The case of Grainger seems to point to this, that when it appears in any case to be laid down that the matter is to be determined by considering whether the contract is made in England it is not necessarily to be taken as conclusive, without such other elements as occur in the cases respectively. The place of delivery, and the mode in which payment is carried out are both important elements in the matter. In Grainger’s case delivery was not made in England but abroad, and it was held that the employment of an agent to collect debts was not necessarily to be regarded as exercise of trade in this country, the agent having to remit the moneys to his principals abroad.

As to the banking services performed by Mr Dees, on behalf of Products, they were strictly limited to preparing export documents and sending them to the bank, ordering the bank in Toronto to forward the funds to Products’ banker in the USA, on instructions from Products in Evanston and, finally, receiving notification from the bank that this had been done. These were simple clerical activities and no more. Mr Dees was not authorized to make, nor did he in fact make, any decisions involving the exercise of business judgment. Even if he had in fact been acting in some capacity as a collection agent within Canada, which he obviously was not, this would not of itself have been sufficient to constitute Products a company doing business in Canada, if one is to follow the reasoning of Lord Watson in Grainger and Son v Gough case, supra, where he stated at 472 of the above-mentioned report:

The fact that some payments were made in cash to the Appellants and that they also received and forwarded drafts endorsed to Louis Roederer by buyers of his champagne, although it might have been of importance if he had exercised his trade in this country, does not appear to me to have a material bearing upon the question already discussed: When a trade is carried on in a foreign country, and British customers not only purchase but take delivery there, I do not think that the employment of an English agent to collect and remit the debts due to him by these purchasers can be regarded as an exercise of his trade in this country by the foreign merchant.

In the case at bar, none of the orders for the sale of concentrate to the Iraqi bottlers were either made or accepted in Canada. All such orders were negotiatied, taken and forwarded to Evanston by the resident agent in Lebanon employed and paid by Evanston and were accepted in Evanston. The only orders delivered to Canada were from Products to Crush Canada.

Counsel for the respondent relies on the Firestone case, supra, to argue that Crush Canada or Mr Dees was acting as the agent of Products in Canada and that Products was, therefore, doing business in Canada through its agent. The original agreement in the Firestone case was very similar to the franchise agreement which is presently before the Court. The English firm (Brentford) was to ship to a company in Sweden, Firestone tires ordered from Brentford by the US company (Akron). However, because of the war conditions, the terms of the agreement were not followed: the orders were in fact sent directly from Sweden to the English firm (Brentford) and were accepted by the latter who, thereupon, shipped the tires to Sweden. There was no intermediary purchase by Akron and resale by it as contemplated in the agreement. Furthermore, all funds were retained in the UK by the English firm (Brentford for the UK firm (Akron)). Brentford, in other words, acted ostensibly as principal in dealing directly with the Swedish firm, yet, Akron ultimately received the profits of the tires which were manufactured by Brentford and sold by it. It was on the basis of these distinct facts that it was held that Brentford was acting as agent for Akron and that the latter was, therefore, to be considered as carrying on business in England through its agent.

It seems clear in reading the reasons of the Court of Appeal and also the speeches in the House of Lords in the Firestone decision, that, had the terms of the original agreement been followed, the opposite conclusion would have been reached by both courts.

Unlike the Firestone case, in the case at bar no negotiations were entered into with the third party by or on behalf of any Canadian firm or person, Canada had no dealings with the Iraqis, there was no acceptance of Iraqi orders in Canada, no funds were deposited here, there was no manufacturing here by the company making the sales to the third party and, finally, there was an actual transfer of title of the concentrate to Products in Canada: title passed to it FOB Toronto.

For the above reasons I conclude that Products did not carry on business in Canada. The assessments will therefore be referred back to the Minister of National Revenue and the two plaintiffs will be reassessed on the basis that Products did not at any time, since April 1965 up to and including 1973, carry on business in Canada nor was it resident in Canada.

The plaintiffs will be entitled to their costs.