Leggat Leasing (Halton) Limited v. Minister of National Revenue, [1978] CTC 2030, 78 DTC 1035

A W Prociuk:—The appellant corporation appeals from the respondent’s reassessment dated March 26, 1975 of its income for the taxation year 1972 wherein it was deemed by the respondent to be associated with Leggat Pontiac Buick (Burlington) Limited, Douglas Pontiac Buick Limited and Golden Rent-A-Car Incorporated in the said taxation year pursuant to the provisions of paragraphs (a) and (b) of subsection 247(2) of the Income Tax Act, RSC 1952, chapter 148 as amended by SC 1970-71-72, chapter 63 and amendments thereto. The said subsection reads as follows:

247. (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.

The appellant states that its separate corporate existence was for good business reasons and that its status would have been maintained and will be maintained even if all the corporations were taxed at the same rate.

The appellant was incorporated under the laws of the Province of Ontario on March 19, 1956 under the name of Gaudaur Motor Co Limited. By supplementary letters patent issued on May 9, 1967 the name was changed to Robert Slessor (Burlington) Limited and again by supplementary letters patent dated October 24, 1969 the name was changed to its present name. Until September 1968 when ownership and management of'the appellant changed hands, it was a General Motors dealership and an automobile leasing firm. Since September of 1968 to the end of 1972, the principal shareholder and president of the appellant was Maryella Leggat.

Douglas Roy Leggat, the husband of Maryella Leggat, has at all times material hereto owned a controlling interest of the common shares of the three other above-named corporations which, for income tax purposes, have always been treated as associated corporations.

In October of 1973 the records of the three associated companies and the appellant were audited by the respondent’s officers. Mr R C Clayton, CA of the respondent’s Hamilton district office completed the audits and visited the premises of the said companies where the appellant’s office was also located. He stated that he reviewed the car sales records but could not specifically recall any other records he reviewed. His purpose was to scrutinize management, advertising and anything else that would indicate that the business could be operated under the umbrella of one company or one man. He concluded that Douglas Leggat was the prime force behind the entire business. His employees performed services for the appellant company and were paid by one of his companies. A cross-charge management fee was being made to the appellant. The appellant didn't have a payroll department. Its main employee, knowledgeable in leasing business, was Cornelius Enright. He was also a minority shareholder of the appellant. He was in charge of leasing automobiles and supervised maintenance. His salary was paid by Leggat Pontiac Buick (Burlington) Limited and charged to the appellant company. Mrs Leggat did not take any part in the day-to-day affairs of her company and at that time she drew no wages. On the basis of the foregoing the respondent concluded and directed that the appellant company was associated with the other three companies (supra) owned and managed by Douglas Leggat.

In his testimony Douglas Leggat stated that he had been in the automobile business since 1960. In 1968 he bought cars from Cornelius Enright who at that time was the leasing manager of Robert Slessor (Burlington) Limited. Leggat learned from Enright that the Slessor General Motors dealership was up for sale. Leggat discussed the matter with his wife, Maryella Leggat, who was interested in having an independent business of her own for estate planning purposes. She stated in evidence that she wished to have her own assets to make some money independently of her husband. Douglas Leggat further stated that initially Slessor did not want to sell the. leasing business where there were 230 cars on lease. Mrs Leggat became interested in acquiring the leasing business. After some negotiations two agreements were concluded. By agreement dated August 16, 1968 and concluded on September 23, 1968, Douglas Leggat, through his company Dundas Motors Limited (later known as Leggat Pontiac Buick (Burlington) Limited) purchased all the assets and General Motors dealership from Slessor via Motor Holdings of Canada Limited, a subsidiary of General Motors of Canada. Concurrently, Maryella Leggat purchased all the issued and outstanding shares of Slessor and thereby acquired the leasing business which was not subject to the General Motors franchise agreement.

Mrs Leggat obtained a loan in the sum of $13,050 from a bank, which loan was guaranteed by her husband and used the funds for the purchase of the said shares. She stated that she sought for and took advice from her husband principally in the operation and management of her company. She retained the services of Cornelius Enright, aforesaid, William lan Gordon and later John Kelly, all of whom acquired some shares from her in the appellant company. At the date of the hearing of this appeal, she owned 70% of the common Shares, John Kelly 15% and Albert Wilson 15%. She attended at her company’s office about twice a week on the average and signed whatever documents and/or cheques needed to be signed by her. Eventually, she paid off the bank loan from the profits of the appellant.

The financial advantages of having a separate entity for leasing, as stated by Mr Leggat, was that the appellant received approximately $100 rebate per unit for fleet cars. In 1968 it had 200 cars on lease and in 1972 it leased about 400. Similarly, there is a discount of 15% on parts to fleet cars. These advantages, in accordance with the General Motors compensation plan are not available to a dealership to the same extent. Mr Enright was the general manager for the appellant. He was assisted by John Kelly and by at least one girl in the management of the appellant’s affairs.

The appellant had its own. office within the same building, its own Stationery, telephone and advertising, though this aspect was to a limited extent only as Mr Enright was very well known in the district and did most of the solicitations personally.

Mr Hal Pringle, CA testified in his capacity as accountant adviser to the Leggats personally and to the companies, including the appellant. His opinion was that in 1968 the acquisition of the assets and the leasing business separately was the most appropriate business arrangement. For estate planning he advised the Leggats to divide the growth between them. The leasing business required a small amount of capital: it appeared to be a profitable venture and her estate would grow. His forecast was more than substantiated in subsequent years. He stated that there was also the question of contingent liabilities particularly at the outset when Slessor’s balance sheet did not truly reflect the state of affairs; and, the leasing business by itself was not as risky for Mrs Leggat. Mr Pringle further stated, both in his examination-in-chief and in his cross-examination, that he advised the Leggats on tax consequences but, overriding everything else, he would have advised them to proceed in this manner even if there were no tax advantages as he could not conceive of any other method to accomplish the same goals as efficiently.

Mr Clayton’s observation that Mr Leggat was the driving force behind the entire operation is quite correct in my humble estimation. It became readily obvious that Leggat is a man possessed of rare business acumen. His wife frankly stated that she always accepted and followed his advice and conducted the affairs of the appellant accordingly. The extent of the leasing operations doubled in the year in question and it was a profitable undertaking for Mrs Leggat. I am unable to find any evidence that would point in the direction that the separate existence of the appellant was not solely for the purpose of carrying Out the business in the most effective manner. The evidence, also, is overwhelming that none of the main reasons for the separate existence of the appellant was to reduce the amount of tax that would otherwise be payable.

Accordingly the appeal is allowed, the direction is vacated and the whole matter is referred back to the respondent for reassessment on that basis.

Appeal allowed.