Les Presses JMC Ltée, L’institut De Recherches Psychologiques Inc v. Minister of National Revenue, [1981] CTC 2926, 81 DTC 872

Guy Tremblay [TRANSLATION]:—These cases were heard on common evidence on March 20, 1979 at Montreal, Quebec.

1. Point at issue

The question is whether the two appellant companies were associated during the period from February 1, 1969 to December 29, 1971, as the re- spondent assumed in a direction issued pursuant to section 138 and subsections 138A(2) and (3) of the old Income Tax Act, on the basis that one of the chief reasons for the separate existence of the two appellants is to reduce the amount of the tax that would otherwise be payable under the said Act.

2. Burden of proof

Respondent must first prove the existence of the direction in accordance with the principles laid down in Covertite Limited v MNR, [1979] CTC 2121; 79 DTC 136, and in the judgments to which reference is made.

Once this fact has been established, the burden of proof falls on the appellants, who must show that the direction is incorrect in fact and in law in accordance with the judgment in Johnson v MNR, [1948] CTC 195; 3 DTC 1182.

3. Proof of existence of the direction

The respondent filed the direction (as Exhibit 1-1), dated March 29, 1974 and signed by the Assistant Deputy Minister, C N Brennan. It was supported by an affidavit signed by Mr Arthur William Larochelle. Counsel for the appellants stated that he was satisfied with the direction as filed, and the Board declared this evidence to be concluded.

The direction reads as follows:

Having regard to the facts and recommendations set forth in the attached memorandum dated February 28, 1974 and having considered the representations contained in letters submitted by the taxpayers’ representatives dated March 15 and June 6, 1973, I hereby direct under the provisions of subsection 2 of section 138A of the Income Tax Act that the following companies be deemed to be associated with each other for the 1970 and 1971 taxation years.

Les Presses JMC Limitée

Institut de Recherches Psychologiques Incorporée

4. Facts

4.01 The two appellant companies, the institut de Recherches Psychologiques Inc (hereinafter referred to as the Institut and Les Presses JMC Ltée (hereinafter referred to as Les Presses) owe their existence to Dr J M Chevrier, a doctor of psychology. He was the chief witness in the case. Between 1942 and 1964 (the date on which the Institut was founded), Dr Chevrier worked very hard at his profession (teaching, founder and director of the bureau of psychology and rehabilitation, and so on), and this gave him many contacts in this field in Canada and in other countries, notably in the United States. On incorporation, the Institut in fact acquired the business and assets of Dr Chevrier.

A. The Institut

4.02 The Institut was incorporated in 1964. The letters patent were filed as Exhibit A-2. Among its purposes were:

(a) direct and administer an institute for psychological reasearch, vocational guidance, behavioral studies and in general any other similar scientific activity;

(b) carry on the activities of consultants and advisers in administration, and in particular, but without limiting the generality of the foregoing, in the guidance and development of individuals of all classes:

(c) undertake the training and treatment of individuals having psychological deficiencies or imbalances;

(d) print, publish, edit, distribute, sell and in general carry on a business in pamphlets, periodicals, educational textbooks and all kinds of printed matter:

(e) carry on a business in the articles and the goods necessary or useful for attaining the purposes mentioned in the preceding paragraphs.

4.03 The issued and paid-up capital of the Institut consisted of 5,062 ordinary shares, 5,000 of which were held by Dr Chevrier. The others belonged to his wife and children (Exhibit A-5).

4.04 Several catalogues were published by the Institut, and certain of these were filed as exhibits: 1960 (A-1); 1964 (A-3); and 1965 (A-4);

It is quite clear from these publications that in practice the efforts of the Institut were directed toward the preparation, translation and adaptation, publication and sale of psychological tests used in various occupations, professions and so on.

4.05 Until Les Presses was incorporated in 1968, 95% of the income of the Institut derived from the sale of psychological tests. Five per cent came from the sale of books on psychology or education for use by students.

4.06 In 1967, the Institut had begun the translation and publication in French of certain American textbooks in medicine, which were given the title “Initiation aux Sciences Physiques” [introduction to the physical sciences] (Exhibit A-9). The sale of these books made up 5% of the income of the Institut.

B. The book centre

4.07 Following the inquiry into publishing which began in 1965, the centre for pedagogy and psychology of the University of Montreal (CPPUM) closed down its “book centre” division. This division sold books to school commissions in Quebec. Dr Chevrier, his wife, his children and his sister-in-law held shares in the “book centre”. After the inquiry, they took out their shares.

4.08 Following the closing of the CPPUM “book centre” in early 1968, Messrs Guichard and Duhaime of the CPPUM met with Dr Chevrier and offered to form an organization for the purpose of reopening the “book centre”.

4.09 Dr Chevrier then decided on April 5, 1968 to register the “book centre agency” (Exhibit A-7). A catalogue was printed indicating that the book agency was being formed (Exhibit A-16). He was told by a senior government official, Mr Paul Desrochers, that the name could not be used because of the ambiguity it might create for the public, which might think that it was still a subsidiary of the CPPUM.

C. Les Presses

4.10 Dr Chevrier left for Europe to visit publishing houses, and met with the directors of about a dozen such firms. he attended seven or eight conventions (Exhibit A-8) and obtained information and advice at these meetings.

4.11 On returning from Europe and after a discussion with his wife and children, he decided to incorporate a bookstore to be known as Les Presses JMC Ltée — JMC Press Ltd.

The letters patent (Exhibit A-6) issued by the Deputy Registrar General of Canada and dated August 31, 1968 describe the following purposes:

(a) carry on the activities of a bookseller, a general agent for the sale of books, a publisher, printer and distributor of books, publications, pamphlets and all kinds of printed matter;

(b) carry on the business in articles, equipment and goods necessary or useful for attaining the purposes mentioned in the preceding or subsequent paragraphs;

(c) buy, produce and sell any article, material, item, apparatus or machine that may be used in educational institutions, schools, CEGEPs, institutes and universities for the purposes of education, teaching and training;

(d) buy, produce and sell any office article or accessory.

4.12 The only shareholders in Les Presses were Dr Chevrier’s wife and his children (Exhibit A-21):

4.13 Dr Chevrier stated that the reasons underlying his decision to incorporate Les Presses were the following:

(a) According to his adviser Mr Hurtibise, it was an excellent opportunity for him to undertake estate planning. When Dr Chevrier died, the Institut would sooner or later cease to exist, since Dr Chevrier was the only person involved with qualifications in psychology. This would not in any way affect Les Presses.

(b) The children were interested in investing in the new company. One daughter was a bookseller and a son was at a teacher’s college. This company would specialize exclusively in the sale of books.

(c) The wife and children would hold all the shares in Les Presses, and by transferring their shares to Dr Chevrier, could thus have their own company independent of their father’s. When the latter died, Les Presses could continue without difficulty since the shareholders of Les Presses in fact in the long run were the resource persons of the company.

(d) For all practical purposes, the institut could only be continued by Dr Chevrier himself. He was the only one of the shareholders who was qualified in psychology.

(e) As the activities of the Institut were of a professional nature, a large inventory of all kinds of books would not have been in keeping with its objectives; the sale of a varied range of texts was more of a commercial activity.

(f) In cross-examination Dr Chevrier summarized the reasons as follows:

“We wanted an organization independent of the Institut”; “We wanted the children to assume some responsability”; “They wanted something different from their father”; “We wanted better planning".

In addition, Dr Chevrier stated that when Les Presses was incorporated he had not the slightest idea of what associated companies were.

D. The activities of Les Presses and Dr Chevrier’s Institut

4.14 The financial statements of Les Presses (Exhibits A-24-1 to A-24-5) and of the Institut (Exhibits A-25-1 to A-25-4) were filed for the years 1968 to 1971. For Les Presses, assets increased from $89,606 in 1968 to $487,656 in 1971.

For the Institut, assets increased from $408,696 in 1969 to $441,227 in 1971.

4.15 The activities of the Institut and Les Presses were both carried on at 34 Fleury Street West, Montreal. Both appellants had the same telephone number. American editions were translated and printed by the Institut and sold to Les Presses, which resold them to retailers, the majority of which were school commissions (Exhibit A-11).

4.16 Although he was not a shareholder of Les Presses, Dr Chevrier acted as executive director. From the time Les Presses was formed until 1979, he stated that he spent about 5 per cent of his time on this organization; he supervised its activities, signed purchase orders and cheques (for salaries and to its suppliers), checked accounts receivable and so on. The minutes of Les Presses for December 19, 1968 (Exhibit 1-3) indicate that Dr Chevrier was appointed manager. He in fact held this position in 1969, 1970 and 1971. Dr Chevrier loaned Les Presses $5,000.

E. Laboratory equipment

4.17 Dr Chevrier’s duties also included signing on behalf of Les Presses contracts with laboratory equipment suppliers. This equipment, according to the witness, was in practice to be sold exclusively by Les Presses.

4.18 At the outset, however, some of it was purchased by the Institut, which hoped to bring the equipment through customs based on the purposes of the Institut, which were in the field of psychology. These claims were rejected by the customs officers.

4.19 In addition, for a bookstore to be able to sell laboratory equipment to school commissions in Quebec, it had to be an accredited bookstore, which the Institut was. An application was made in 1972 to transfer the accreditation to Les Presses. This was rejected because Les Presses was incorporated under the federal, not the provincial statute.

4.20 Following this rejection of the transfer, the inventory of equipment was transferred to the institut so that it could continue to be sold.

F. Administration

4.21 Mrs Chevrier and her two daughters Marie-Paule and Madeleine worked at Les Presses, running the office, taking care of customs matters, advertising, packing and so on. In addition, between March and late October, Les Presses hired from ten to twelve students.

Administratively, sales were recorded by a single accounting machine, and this also produced invoices for both companies. However, codes were used to distinguish documents pertaining to Les Presses from those relating to the Institut.

4.23 As until January 1, 1971, most employees who worked for Les Presses also worked for the Institut, pay cheques were issued by the Institut. Most common expenses were paid by the Institut. The portion relating to Les Presses was debited to the account “Advances to Les Presses”. At the end of each financial year, these accounts read as follows:

Correcting entries (Exhibit 1-9) were subsequently made to the accounts to distribute expenses and calculate the income of each company correctly.

4.24 Accordingly, the gross sales of the two companies were as follows at the end of each financial year:

4.25 According to the evidence, the taxable income of the Institut and the bonuses paid to Dr Chevrier were as follows:

4.26 According to Exhibit A-24, the taxable income of Les Presses and the bonuses paid to Dr Chevrier were as follows:

4.27 On July 25, 1974 the respondent issued notices of reassessment against the two appellants, relating to the taxation years 1970 and 1971 (the Institut) and 1971 (Les Presses), on the basis that he regarded them as associated under subsection 138A(2) of the old Act. The respondent accordingly applied the lower rate (18%) on the first $35,000 of common income to both appellants once in accordance with subsections 39(2) and (3).

5. Act — case law — comments

5.1 Act

The chief legal provisions concerned in the case at bar are those contained in subsection 138A(2) and paragraph (3)(a), subparagraph (b)(ii) and paragraph (c) of the old Income Tax Act, RSC 1952, c 148.

138A. (2) Where, in the case of two or more corporations, the Minister is satisfied

(a) that the separate existence of those corporations in a taxation year is not solely for the purpose of carrying out the business of those corporations in the

most effective manner, and

(b) that one of the main reasons for such separate existence in the year is to

reduce the amount of taxes that would otherwise be payable under this Act

the two or more corporations shall, if the Minister so directs, be deemed to be associated with each other in the year.

138A. (3) On an appeal from an assessment made pursuant to a direction under this section, the Tax Appeal Board or the Exchequer Court may

(a) confirm the direction;

(b) vacate the direction if

(i) in the case of a direction under subsection (2), it determines that none of the main reasons for the separate existence of the two or more corporations is to reduce the amount of tax that would otherwise be payable under this Act; or

(c) vary the direction and refer the matter back to the Minister for reassessment.

5.2 Case law

The chief law cited was:

A. By the appellants:

1. Jordans Bugs Ltd v MNR, [1969] CTC 445; 69 DTC 5290;

2. Heath & Sherwood Drilling Limited v MNR, [1971] Tax ABC 518; 71 DTC 338;

3. CP Loewen Enterprises Ltd v MNR, [1972] CTC 396; 72 DTC 6298;

4. HMQ v Bobbie Brooks (Canada) Limited, [1973] CTC 431; 73 DTC 5357;

5. MNR v Furnasman Ltd, [1973] CTC 830; 73 DTC 5599;

6. Leggat Leasing (Halton) Limited v MNR, [1978] CTC 2030; 78 DTC 1035;

7. Doris Trucking Company Limited v MNR, [1968] CTC 303; 68 DTC 5204;

B. By the respondent:

8. Decker Contracting Limited v HMQ, [1978] CTC 838; 79 DTC 5001;

9. Les Magasins Continental Ltée v HMQ, [1978] CTC 688; 78 DTC 6557;

10. Debruth Investments Ltd v MNR, [1975] CTC 55; 75 DTC 5012;

11. Industrial Trailer Rentals Limited v HMQ, [1974] CTC 775; 74 DTC 6577;

12. Classic’s Little Books Inc v HMQ, [1973] CTC 94; 73 DTC 5096;

13. Levitt-Safety (Eastern) Ltd et al v MNR, [1973] CTC 483; 73 DTC 5374;

14. Pay-Less Meat Market Ltd et al v MNR, [1973] CTC 102; 73 DTC 5102;

15. Dominion Freehold Limited v MNR, [1971] CTC 523; 71 DTC 5261;

16. Holt Metal Sales of Manitoba Ltd et al v MNR, [1970] CTC 144; 70 DTC 6108;

17. MNR v Howson & Howson Ltd et al, [1970] CTC 36; 70 DTC 6055;

18. Alpine Furniture Company Limited et al v MNR, [1968] CTC 532; 68 DTC 5338;

19. Doris Trucking Company Limited v MNR, [1968] CTC 303; 68 DTC 5204.

5.3 Comments

5.3.1 As proof of the direction was admitted by the appellants (para 3), the burden of proof remained with the latter in accordance with the principles stated in para 2.

5.3.2 Argument of the appellants

The appellants maintained that, on the evidence, none of the chief reasons for the existence of Les Presses was to reduce the amount of tax that would otherwise be payable under the Act. The facts established in support of this argument are as follows.

5.3.2.1 Before the Les Presses bookstore was incorporated, the Institut had only 5% of its income from the sale of various educational books. The sale of psychological tests represented 95% of income.

5.3.2.2 All the points mentioned by Dr Chevrier and described in para 4.13 clearly support the appellants’ argument.

5.3.2.3 The credibility of the witness, Dr Chevrier, was not in question. Counsel for the respondent himself recognized this in his argument.

5.3.2.4 In 1969 the taxable income of Les Presses ($20,379) and of the Institut ($11,318.99 — paras 4.25 and 4.26) did not total the amount of $35,000 stated in s 39 as being taxable at the lower rate of 18%. In 1968, the evidence did not give the income for the Institut, only for Les Presses, that is, a loss of $10,348 (para 4.26).

5.3.2.5 If the parties concerned had planned to evade taxes, they would certainly have planned as well to avoid the administrative overlapping of the two companies. However, such overlapping is not in itself evidence which can be held against the appellants. This principle also applied to the fact that the appellants have the same address and the same telephone number. This has been held in several earlier cases, including HMQ v Bobbie Brooks (Canada) Limited and Heath & Sherwood Drilling Limited v MNR, referred to above.

5.3.2.6 The argument that the Institut sells laboratory equipment cannot be held against the appellants because of the circumstances described in paras 4.17 to 4.20.

5.3.2.7 Although when Les Presses was incorporated, it was apparent that there would be tax consequences beneficial to the appellants, this does not necessarily mean that the chief purpose was to evade taxes. When in business two courses of action are open, one of which will make it possible to pay less tax, the sensible businessman will choose that alternative.

5.3.3 Argument of the respondent

The argument of the respondent is that the existence of the two corporations was not solely for the purpose of carrying on the business of those corporations in the most effective manner, and that one of the main reasons for their existence was to reduce the amount of the taxes that would other wise be payable under subsection 138A(2). The facts established in evidence which support this argument are as follows:

5.3.3.1 Even after Les Presses was incorporated, Dr Chevrier remained the guiding spirit of both companies. His role as manager, described in para 4.16, is quite clear, though he stated that he only devoted 5% of his time to Les Presses. His trips to the United States should also be regarded as on behalf of Les Presses, since he went there to buy books to be translated, printed and resold to Les Presses. In addition, during the years at issue he received no dividends from Les Presses. Furthermore, he even loaned Les Presses $5,000, which is twice what all the shareholders in the company invested as a whole.

5.3.3.2 The purposes described in the letters patent of Les Presses, the sale of books, were already contained in the letters patent of the Institut, in paragraphs (d) and (e) of the said letters (para. 4.02). The Institut could quite easily have continued the same work without incorporating Les Presses, especially as before and after Les Presses was incorporated the same employees continued to work for the Institut as worked for Les Presses.

5.3.3.3 It was readily foreseeable that, with the closing down of the CPPUM “book centre”, there would be in the future a considerable market. The main customers were the school commissions of Quebec. The taxable income of Les Presses in 1970 ($33,996.61) and 1971 ($34,373.86 — para 4.26) confirms this statement.

5.3.3.4 It is somewhat difficult to believe that one of the main reasons for the incorporation was estate planning, as suggested by Mr Hurtibise, without some consideration also being given to tax planning because of the prospective increase in income resulting from sales to the school commissions.

5.3.3.5 Would it not have been possible to provide estate planning by the acquisition of voting and redeemable preferred shares by Dr Chevrier, leaving the ordinary shares for the children?

5.3.3.6 The witness’ credibility does not change the facts. Further, the statement by Dr Chevrier under oath that he did not even know of the consequences of an associated company does not mean that his adviser Mr Hurtibise did not know of them.

5.3.3.7 It is true that when there are not many points, such as the same address and the same telephone number, for both companies, this may not suffice to make subsection 138A(2) applicable. However, when there are too many such points present at the same time, this is sufficient to make the said section applicable, regardless of the gratuitous testimony by the principal interested party as to his ignorance of associated companies and the “purity” of his fiscal or rather non-fiscal, intentions. Thus, in the case at bar there are the same addresses, telephone number, employees, and the same resource person for the two years under appeal, and the latter is president of one company and husband and father of the shareholders of the other. Moveover, it is thanks to him that the second company carries on its financial activities, activities which in practice could have been carried on by the other.

5.3.4 A decision in a case of this kind is rarely easy to make. This is readily apparent from a review of the cases listed above.

The most recent judgment in this area, in 1979 (Decker Contracting Limited), was handed down by the Federal Court of Appeal. Two judges dismissed the appeal and one allowed it.

Reviewing all aspects of the case at bar, the Board comes to the conclusion that the appeal should be dismissed, primarily on the basis of the number of points conflicting with the appellants’ argument, and the fact that they had the burden of proof.

6. Conclusion

The appeals are dismissed in accordance with the foregoing reasons for judgment.

Appeals dismissed.