Covertite Limited v. Minister of National Revenue, [1979] CTC 2121

Guy Tremblay:—The problem is to know whether the direction issued by the respondent under subsection 247(2) of the new Act is actually well founded. The notice of reassessment is based on that direction. The direction deems Covertite Limited to be associated with Covertite (Ontario) Limited in the 1971 and 1972 taxation years.

2. Burden of Proof

Concerning the proof of the issue of the direction, counsel for respondent cited the following cases: Ambassador Ventures Ltd v MNR, [1970] Tax ABC 345; 70 DTC 1233; Metropolitan Construction Limited v MNR, 1970] Tax ABC 352; 70 DTC 1237. After studying those cases and referring to Henri Champagne v MNR, [1978] CTC 2967; 78 DTC 1698, it is the Board’s opinion that the Minister has to present evidence to show that the direction had been issued and to put before the Board sufficient facts to justify the direction. However, the Minister does not have to prove those facts. As Mr RS W Fordham, Assistant Chairman of the former Tax Appeal Board wrote in “Tax Appeal Board Practice, 3rd Edition” on that specific point, accepting the decision of the King’s Bench Division of the High Court of Justice in Dixon & Gaunt Ltd and James Hare Ltd v Commissioners of Inland Revenue, [1947] 1 All ER 723; (1947), 29 Tax Cases 289, and cited in Ambassador Ventures cited above at 1234:

In short, the Crown must make out a prima facie case in first instance.

In fact, how does the Board have the mandate to confirm, vacate or vary the direction (subsection 247(3)) if it does not have it on hand, if it cannot control prima facie the relation between the direction and the assessment?

Since this evidence is given, the assessment is deemed to be well founded in fact and in law and the burden of proof from now is on the appellant’s shoulders according to the principles explained in several judicial decisions, among them a decision of the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts Concerning the Issue of The Direction

The respondent filed, under an affidavit of Mr Arthur William Larochelle, a direction signed by Mr H E Garland, Assistant Deputy Minister of National Revenue. This direction is dated March 18, 1975 and reads as follows:

Having regard to the facts and recommendations set forth in the attached memorandum dated March 5, 1975 and having considered the representation contained in a letter dated January 18, 1974 from W H J Tretiak, CA and the letters of Covertite Ltd dated October 16, 1974, October 31, 1974 and December 2, 1974, I hereby direct under the provisions of subsection 247(2) of the Income Tax Act that the following companies be deemed to be associated with each other in the 1972 taxation year.

Subsection 247(2) reads as follows:

247.(2) Associated corporations. 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.

Counsel for appellant objected to the direction because the respondent had not filed the documents to which the direction refers, especially the memorandum dated March 5, 1975.

Counsel for respondent refused to file the memorandum because it would reveal, among other things, certain basic policies of the respondent. From the bench, the Board accepted the direction with reservation. That decision was rendered and cannot be changed. In writing the present judgment, however, and after reading the direction, the Board has even more reservation about that decision.

4. Withdrawal for 1971

At the beginning of the hearing, counsel for appellant withdrew the appeal for the year 1971 on the basis that Mrs Warner, during that year, owned one share of the appellant company as it is explained hereafter in paragraph 5.04 of the Facts.

5. Facts Concerning Reassessment

5.01 The appellant, Covertite Limited, was incorporated in 1958 under the Quebec Companies Act. The business of the taxpayer is that of roofing subcontractor.

5.02 Covertite (Ontario) Limited was incorporated in 1970 under the Canada Corporation Act. The business of that company is similar to that of the appellant’s. From 1970, the sole shareholder of Covertite (Ontario) Limited was Mrs Marie Louise Warner.

5.03 Until 1971, the shareholders of the appellant company were:

5.04 In 1971, Mr Tretiak, the new accountant of the appellant company, after checking the records of the company, made the recommendation to transfer the share owned by Mrs Marie Louise Warner to another person. He explained to the Board that because Mrs Marie Louise Warner was also at the same time owner of the shares of Covertite (Ontario) Limited, under subsection 39(4) of the old Act, the two companies were technically associated with the fiscal consequences of such an association. The share was transferred to another person who is not related to Mrs Warner. At the beginning of the hearing, the appellant company withdrew its appeal concerning the 1971 taxation year because of the share owned by Mrs Warner in 1971.

5.05 Mrs Marie Louise Warner, in her testimony, said that when Mr W H J Tretiak made the said recommendation, she did not know she was a shareholder of the appellant company.

5.06 Mr Tretiak, in his testimony, affirmed that in February 1970 when Covertite (Ontario) Limited was incorporated, he did not know Mr and Mrs Warner.

5.07 In her testimony, Mrs Marie Louise Warner explained that her father and two of her uncles were in the roofing business. Her husband was in the same kind of business associated with her brother. Mrs Warner worked for her father in the office. She never negotiated contracts, nor evaluated jobs, nor operated a truck, but she said that when she was younger she had gone on the roofs during the jobs and she knows what it means. Everybody spoke about roofing in the family.

5.08 In the fall of 1969, the chief estimator of the appellant company, Mr W McKissock, decided to leave Montreal and take up residence in Ottawa, Ontario. That decision was based on personal considerations, especially because he wished his children to be educated in Ontario.

5.09 In 1969, because of the social climate in Quebec, Mrs Marie Louise Warner also wished to live in Ontario, particularly in Toronto, if I am not mistaken. Her husband, Mr Warner, objected. At that time, three of their five children had been born. In fact, she sent her children to study in Ontario.

5.10 According to Mrs Warner’s testimony, her decision to incorporate Covertite (Ontario) Limited arose through her concern about the political Situation in Quebec, school problems and consequently her determination to invest her own funds outside Quebec.

5.11 The presence of Mr W McKissock in Ottawa was an essential item to incorporate a business in Ontario. In a letter dated October 31,1974 (Exhibit R-4) to Revenue Canada, Mr Warner says:

We did do a limited number of jobs in that province (Ontario) at the request of Montreal based general contractors and I believe one other large job in Brockville for a Toronto builder at the request of the owners who were a subsidiary of one of our large Quebec suppliers.

When Mr McKissock left for Ottawa preparatory to setting up a roofing company with my wife, I asked him to clean up a couple of these jobs which were in progress at the time, and retained him on my payroll for a few months. We also did one other small contract he picked up which Covertite (Ontario) Ltd could not do, not yet being legally incorporated.

5.12 In 1970, Mrs Warner went to Ottawa and met counsel accountant and bank manager.

5.13 Covertite (Ontario) Limited and the appellant maintained separate and different accounting systems, employed different employees and officers, maintained separate bank accounts with different banks, used different auditors and lawyers and had separate head offices. Mr Warner never made decisions concerning Covertite (Ontario) Limited.

5.14 Mrs Warner’s investment in Covertite (Ontario) Limited consisted of $100 in share capital and a loan of $29,406.

5.15 Mrs Warner acquired the money loaned to Covertite (Ontario) Limited by selling property to Mr Albert Warner, her husband, for $20,500. According to Mr Warner, his wife lost $9,500 in that sale.

5.16 Mr Albert Warner acquired the $9,006 from the appellant and lent it to his wife for that purpose. It appears in the balance sheet of the appellant at January 1971 “Advance to a director $22,008 (Exhibit R-3).

5.17 The appellant, during the year ending January 31, 1971

(a) sold used machinery and equipment to Covertite (Ontario) Limited for the price of $11,509. It appears in the balance sheet of Covertite (Ontario) Limited of January 31, 1971 that the cost of equipment is $16,869 and the cost of machinery $21,978;

(b) advanced $35,000 in cash to Covertite (Ontario) Limited. This sum was reimbursed before the end of the fiscal year;

(c) paid for material, supplies and rent on Covertite (Ontario) Limited’s behalf in the amount of $6,500.

5.18 The taxable income of the appellant is as follows in the taxation years ending on the indicated dates:

5.19 The salaries and bonuses paid by the appellant to Mr Albert Warner have totalled the following in the taxation years ending on the indicated dates:

5.20 The combined taxable incomes of the appellant and Covertite (Ontario) Limited were as follows for the taxation years terminating on the indicated dates:

5.21 The appellant’s opinion concerning incidence of tax is expressed in Exhibit R-4, page 4:

Also an analysis of the tax position of the two companies would readily indicate that there was never any attempt to minimize the taxes payable by the use of the two corporate entities, but just the reverse.

Since its inception, Covertite Ontario has utilized less than 1/3 of the total amount of income subject to taxation at the low corporate rate of tax. During the same period Covertite Ltd has not utilized this excess of some $120,000 which could have been done through inter company transactions, but has paid taxes at either the high corporate rate or at personal rates of tax which were even higher.

In addition, if tax considerations were a major reason for the creation of the second company, I certainly would not be paying tax personally on $65,000 to $145,000 while my wife receives only $5,000 to 7,000 in the same period. Surely this is proof that evading taxes if not the reason for the two companies. Sound business practice is the only reason.

6. Law—Jurisprudence—Comments

6.1 Law

The subsections of the new Act concerned in the present case are 247(2) and 247(3). Subsection 247(2) is quoted above and subsection 247(3) reads as follows:

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

(a) confirm the direction;

(b) vacate the direction if

(ii) 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.

6.2 Jurisprudence

A long list of jurisprudence was cited by the parties. The Board studied all these cases and others. The list is as follows:

Doris Trucking Company Limited v MNR, [1968] CTC 303; 68 DTC 5204; Jordans Rugs Ltd et al v MNR, [1969] CTC 445; 69 DTC 5290; Holt Metal Sales of Manitoba Limited and Industrial Metals Processing Limited v MNR, [1970] CTC 144; 70 DTC 6108; MNR v Howson & Howson Limited and Howson & Howson Company (Cargill) Limited, [1970] CTC 36; 70 DTC 6055; C P Loewen Enterprises Ltd v MNR, [1972] CTC 396; 72 DTC 6298; Classic’s Little Books Inc v Her Majesty the Queen, [1973] CTC 94; 73 DTC 5096; Her Majesty the Queen v Bobbie Brooks (Canada) Limited, [1973] CTC 431; 73 DTC 5357; Capital Garment Co Inc v MNR, [1974] CTC 2199; 74 DTC 1164; Miss Sun Valley Limited v MNR, [1974] CTC 2274; 74 DTC 1217; Kitchener News Leaseholds Limited and Kitchener News Company Limited v MNR, [1974] CTC 2305; 74 DTC 1226; Industrial Trailer Rentals Limited v Her Majesty the Queen, [1974] CTC 775; 74 DTC 6577; ABC Diaper Service Inc v MNR, [1975] CTC 2087; 75 DTC 66; Jordan Holdings Ltd et alv MNR, [1975] CTC 2287; 75 DTC 216; Her Majesty the Queen v Arthill Enterprises Limited, [1975] CTC 594; 75 DTC 5419; Sandell Developments Ltd and Grid Holdings Ltd v MNR, [1976] CTC 2393; 76 DTC 1293; Her Majesty the Queen v Ball Brothers Limited, [1976] CTC 793; 77 DTC 5004.

6.3 Comments

6.3.1 Points pro & contra

After studying the law and the jurisprudence, the Board thinks that it is best to draw up the points which prima facie are pro and con the appellant according to the evidence adduced.

6.3.2 The points in favour of the appellant

The following facts support the appellant’s thesis:

1) Mrs Warner’s decision to invest outside Quebec in 1969 (paragraphs 5.09 and 5.10 of the Facts) whatever her opinion, is well founded or not concerning the political situation of the Province of Quebec and school problems;

2) The fact that the new corporation was located in Ontario and consequently not in the same working territory as the appellant company (the fact that sometimes one works in the territory of the other is immaterial), (see paragraph 5.11 of the Facts);

3) The fact of the complete separated business (paragraph 5.13 of the Facts);

4) The fact of the presence in Ontario of the experienced Mr McKissock (paragraphs 5.08 and 5.11 of the Facts).

6.3.3 The points against the appellant

The following facts support the respondent’s thesis:

1) The ownership by Mrs Warner (the only shareholder of Covertite (On- tario( Limited) of one share of the appellant company from 1958 to 1971;

2) Mrs Warner borrowing $9,006 from her husband (the main shareholder of the appellant company). The lender had himself borrowed this amount from the appellant company;

3) Mrs Warner had limited practical experience in the field of roofing (paragraph 5.07 of the Facts);

4) The fact that the main and only shareholder of Covertite (Ontario) Limited is the spouse of the main shareholder of the appellant company;

5) The fact that the appellant company during the years preceding 1971 consistently adjusted its salaries and bonuses so that the net profit remained just below the $35,000 at which a higher tax rate would have been payable showed the importance of tax considerations in the appellant’s activities (paragraphs 5.18 and 5.19 of the Facts). Mrs Warner or her counsellor could not ignore the fiscal consequences of the creation of the new corporation;

6) The fact the new corporation used the same name.

6.3.4 Principle to be considered

First Test

Is the separate existence of the two corporations solely for the purpose of carrying on the business of those corporations in the most effective manner?

Second Test

Is the tax advantage one of the main reasons of the incorporation of Covertite (Ontario) Limited?

6.3.5 In the present case as in every case before a Court, the evidence adduced reveals the important facts which must generate the final decision and the less important facts which must stay on a secondary plane. The difficulty often comes in trying to distinguish between the two (or to make the distinction between the first and the second facts). A similar fact in one case very often has not the same importance as in another case. Each case must be studied on its merits. All the facts in the present case can be found in the cases cited above. It does not follow that the conclusions must be the same.

In the Board’s opinion, the basic facts which stated the reason for the decision to incorporate and to establish a roofing enterprise in Ontario are on one hand the presence in Ontario of the experienced Mr McKissock, and on the other hand, the political climate of Quebec and the school problems (paragraphs 5.09 and 5.10 of the Facts). Well founded or not, those latter facts also motivated Mr McKissock to leave Quebec for Ontario.

Another important fact is that the new corporation was located in a territory far from the appellant’s territory. The main part of the work done by the new company would not have been done by the appellant corporation so that the taxation consequences would seem minor.

Let us add the complete separate business (paragraph 5.13 of the Facts) and the Board must conclude prima facie that subsection 247(2) has no application.

From another point of view, the fact that Mrs Warner is the wife of the main shareholder of the appellant company and the manner in which she borrowed money are considered as secondary facts by the Board when compared with the others above.

It also considers as immaterial the fact that Mrs Warner owned a share in the appellant corporation from 1958 to 1971. She did not even know she owned that share. If Mrs Warner and her counsellor had known that she owned that share, and if their intention had been to avoid paying taxes, they would have settled that legal problem before the incorporation.

The figures given in paragraphs 5.18, 5.19 and 5.20 of the Facts seem prima facie very conclusive against the appellant’s thesis.On one hand, however, Mr Warner paid taxes as individual on the salaries and bonuses received (paragraph 5.19 of the Facts). It was his choice and his right.

On the other hand, the combined taxable incomes (paragraph 5.20 of the Facts) would be actually conclusive if the new company had its territory in the same area as the appellant company. As stated before, because the majority of the work done by the new company would not have been done by the appellant company during the same year and consequently would not have been in the revenue of the new company, the Board considers the combined taxable incomes as an immaterial fact.

The Board’s conclusion is to vacate the direction concerning the 1972 taxation year.

7. Conclusion

The Board confirms the direction concerning the 1971 taxation year and vacates the direction concerning the 1972 taxation year.

Appeal allowed.