William W Fotheringham v. Minister of National Revenue, [1977] CTC 2372, 77 DTC 275

Delmer E Taylor:—This is an appeal from income tax reassessments for the taxation years 1971, 1972, 1973 and 1974 by which the Minister of National Revenue increased the taxable income of the appellant personally by amounts of $6,000, $7,000, $12,000 and $12,000 respectively. These amounts were received by a company, Oil Field Services Limited (hereinafter referred to as “Oil Field’’) from another company, Riverheights Development Limited (hereinafter referred to as “Riverheights’’). The appellant relied upon the provisions of section 5 of the Income Tax Act, RSC 1952, c 148, and section 5 of the Income Tax Act, SC 1970-71-72, c 63 as amended. The respondent relied, inter alia, upon sections 3, 4, subsection 16(1) and section 23 of the Income Tax Act, RSC 1952, c 148 with respect to the 1971 taxation year, and sections 3, 4, 9 and subsections 56(2) and 56(4) of the Income Tax Act, RSC 1952, c 148 as amended by section 1 of SC 1970-71-72, c 63 with respect to the 1972, 1973 and 1974 taxation years, and upon clause 2(g), and sections 11, 15 and 28 of The Engineering Profession Act, RSM 1970, c E120 with respect to all the taxation years under appeal.

Facts

The appellant is a business executive with various commercial interests, and resides at the City of Brandon, Province of Manitoba. He is an officer of Riverheights and Oil Field, as well as several other corporations operating primarily in the prairie provinces. By profession, he is an engineer.

Contentions

The position of the appellant was that:

—both Oil Field and Riverheights have been in existence and have carried on business for a number of years;

—by virtue of a certain agreement dated December 1, 1970 (amended October 24, 1972) the corporation known as Oil Field Services Limited entered into an agreement with the corporation known as Riverheights for the purpose of Oil Field providing certain services to Riverheights; the remuneration under the said agreement is as provided therein and the said documents shall speak for themselves;

—during the years 1971, 1972, 1973 and 1974 Oil Field received from Riverheights the sums of $6,000, $7,000, $12,000 and $12,000 respectively for services rendered by Oil Field to Riverheights under the agreements;

—Oil Field entered into a bona fide agreement to provide services for a reasonable remuneration;

—Oil Field was not the alter ego or agent of the appellant;

—he did not and has not received the sums so assessed to him.

The respondent contended that:

— Oil Field had not been in business in the years immediately prior to the material period:

—until 1967 Oil Field had been engaged in the drilling business;

— in 1967 Oil Field ceased to do business and divested itself of its operating assets;

—between 1967 and December of 1970, Oil Field was inactive:

—as at September 30, 1970 Oil Field had operating losses to carry forward, for tax purposes, in the amount of $29,770.35;

—there is a document dated December 1, 1970 which purports to be an agreement providing for the provision of management engineering services by Oil Field to Riverheights in connection with a particular real estate development of Riverheights in the City of Brandon and that Oil Field would provide the purported management engineering services by providing the services of W W Fotheringham, Professional Engineer, the appellant;

—there exists a document dated October 24, 1972 which document purports to amend the purported agreement of December 1, 1970;

—the appellant, during the material period, directly or indirectly was the beneficial owner of 50% of the issued and outstanding shares of Riverheights and of 100% of the issued and outstanding shares of Oil Field;

—the appellant provided the services to Riverheights for which services the aforementioned amounts were paid to Oil Field by Riverheights;

—no bona fide business purpose existed for the interposition of Oil Field between the appellant and Riverheights;

—the transactions or agreements whereby Oil Field purported to provide management engineering services to Riverheights and whereby the appellant purported to provide the same services to Oil Field was a sham;

—the aforementioned amounts paid by Riverheights to Oil Field were income of the appellant for his 1971, 1972, 1973 and 1974 taxation years as reassessed and that the said amounts were received by Oil Field on behalf of the appellant;

—the document dated December 1, 1970 purports to have Oil Field carry on for hire the practice of professional engineering, as defined in clause 2(g) of The Engineering Profession Act, RSM 1970, c E120, and in contravention of the provisions of the said Act set forth in sections 11,15 and 28 thereof.

Evidence

Through the appellant, counsel introduced on behalf of his client the following documents:

A-1 Letters patent of Oil Field Services Limited dated December 21, 1954;

A-2 Minutes of a special meeting of the directors of Oil Field Services

Limited held on May 22, 1962;

A-3 Financial statements of Oil Field from 1955 to 1974 (except for 1969);

A-4 Minutes of a meeting of the directors of Oil Field held on April 23, 1974;

A-5 Certificate for shares of capital stock bearing numbers 100P, 103, 102,

101, 100, dated April 23, 1974;

A-6 Agreement dated December 1, 1970 between Riverheights and Oil Field;

A-7 Letters patent issued by the Province of Manitoba for Riverheights,

dated September 11, 1969;

A-8 Minutes of a meeting of the directors of Riverheights held December

1, 1969;

Agreement dated 1971, between W W Fotheringham, F O Meighen, Homestead Properties Limited, Parties of the First Part, and Headway Corporation Limited, Robert D Keenan and J M Kauzlarick, Parties of the Second Part, and Lakehead Developers Limited, Party of the Third Part;

A-9 Agreement between Assiniboine Investments Limited, of the First Part,

Headway Corporation Limited, of the Second Part, and Riverheights Development Limited, of the Third Part;

A-10 Financial statements of Riverheights Development Limited for the years

ended August 31, 1970, 1971, 1972, 1973 and 1974;

A-11 Voucher of Riverheights Development Limited with memorandum in

handwriting;

A-12 Agreement dated October 24, 1972 amending agreement dated December

1, 1970 (Exhibit A-6);

A-13 Letter dated March 9, 1976 to Department of National Revenue from

J D Donald, CA;

Letter dated February 18, 1976 from the Department of National Revenue to William W Fotheringham.

The appellant gave a record of his business involvements and it indicated several related and interrelated corporations through which he conducted business or in which he held assets (sometimes shares of other related companies). The appellant had, during the years immediately subsequent to its incorporation, exercised control of Oil Field through another company, Canadian Brown Steel Tank Company Limited (hereinafter referred to as “Brown”), but during the years involved in this appeal he had used another holding company, Homestead Properties Ltd (hereinafter referred to as “Homestead”)—which itself had at least two subsidiary corporations, Products Development Co Ltd (hereinafter referred to as “Products”) and Assiniboine Investments and Land Holdings Limited (hereinafter referred to as “Assiniboine”). Oil Field was a wholly-owned subsidiary of Products and therefore controlled by the appellant. Oil Field had been active in the early 1960’s but mainly as the result of an unprofitable contract it had reduced operations drastically about 1963. In the last year or so before such reduction in operations, the appellant had taken an active role in the management of Oil Field, which was engaged in construction work associated with the drilling and oil exploration industry. From 1964 through 1970 the appellant asserted that the company had remained active, and that the opportunity for it to provide the experience and expertise accumulated in earlier years had arisen under the agreement with Riverheights. This opportunity came as a result of the appellant’s ownership, through Assiniboine, of certain land near the City of Brandon, in which other parties from Port Arthur, Ontario expressed a development interest. Riverheights was formed and Assiniboine accepted a 50% shareholding interest in that new company, the remaining 50% held by a company named Headway Corporation Limited (hereinafter referred to as “Headway”). Headway represented the Port Arthur principals whose interest was later transferred to another corporation controlled by the same principals called Lakehead Developers Limited (hereinafter referred to as “Lakehead”).

Through the appellant, counsel for the respondent introduced the following:

R-1 Balance sheet of Homestead Properties Limited as at December 31,

1974, with comparative figures for 1973;

R-2 Corporation income tax return of Oil Field Services Limited for fiscal

period ended September 30, 1971.

For record purposes, the Board quotes in their entirety Exhibits A-1, A-6 and A-13.

Exhibit A-1

COAT OF ARMS PROVINCE OF MANITOBA

BY THE HONOURABLE

EDMOND PREFONTAINE

Provincial Secretary

To all to whom these presents shall come—GREETING:

WHEREAS, under and by virtue of “The Companies Act”, the Provincial Secretary may by Letters Patent, under the Seal of his office, grant a Charter of Incorporation to any number of persons, not less than three, who shall apply therefor, constituting such persons and others who become shareholders in the Company, a Body Corporate and Politic for any purpose or object to which the legislative authority of the Legislature extends, except the construction and working of railways and the business of a trust company or loan company;

AND WHEREAS, by their application in that behalf, the persons herein mentioned have applied for a Charter, constituting them a Body Corporate and Politic for the due carrying out of the undertaking herein set forth;

AND WHEREAS, it has been made to appear to the satisfaction of the Provincial Secretary that the said persons have complied with the conditions precedent to the grant of the desired Charter, and that the said undertaking is within the scope of the Act;

NOW THEREFORE KNOW YE that I, Edmond Prefontaine, Provincial Secretary of the Province of Manitoba, by and under the authority of “The Companies Act’’, do by these Letters Patent constitute the persons hereinafter named, that is to say:

JOHN COCHRANE KERR, Barrister-at-law;

JOSEPH HADDAD, Barrister-at-law; and

GORDON ELLIOTT SCOTT, Accountant;

all of the City of Brandon, in the Province of Manitoba;

and all other persons who become shareholders in the said Company, under the provisions of the said Act and of the by-laws of the said Company made under the authority thereof, and their successors, a Body Corporate and Politic, with perpetual succession and a common seal, by and under the name of

OIL FIELD SERVICES LTD.

and capable forthwith of exercising all the functions of an incorporated company, with the powers and privileges, and subject to the provisions and restrictions applicable thereto, set forth in the said Act, for the purposes and objects following, that is to say:

To act as manufacturers, servicemen, jobbers, wholesalers, retailers or agents of ferrous and non-ferrous metals and plastics;

To buy, sell, fabricate, work on and deal in articles produced therefrom;

To carry on any of the business whether as manufacturers, merchants, jobbers or otherwise, which may seem to the Company as being conveniently carried on in connection with the above or calculated directly or indirectly to enhance the value of the company’s rights or profits;

To purchase or otherwise acquire any business, properties or goodwill of any existing partnerships or companies, which may carry on any of the businesses of this company or be connected therewith and to pay for the same in paid up shares of the company.

PROVIDED that nothing herein contained shall be deemed to confer upon the company any powers within the Province to which the jurisdiction of the Legislature of the Province of Manitoba does not extend and particularly shall not be deemed to authorize the company to issue any promissory note payable to the bearer thereof or any promissory note intended to be circulated as money or as the note of a bank or to engage in the business of banking; and all the powers herein contained shall be exercisable subject to the provisions of the laws in force in Manitoba, and regulations made thereunder in respect to the matters therein referred to, and especially with regard to the construction and working of railways and the business of a trust company or loan company, and any other business with respect to which special laws and regulations now are or may hereafter be put into force.

I direct that the capital stock of the said company shall be Thirty Thousand ($30,000.00) Dollars divided into three hundred (300) shares of One Hundred ($100.00) Dollars each, one hundred and fifty (150) shares of which may be issued as redeemable preferred stock with such conditions attached thereto as the directors may by by-law fix,

of which the said

applicants have taken or subscribed the amounts, and have paid thereon the sums set forth hereunder, in the manner set forth hereunder, for which shares are hereby allotted to said respective applicants that is to say:

	AMOUNTS	AMOUNTS
	OF STOCK	PAID	HOW
NAMES	SUBSCRIBED	THEREON	PAID
JOHN COCHRANE KERR	1 common share	nil
JOSEPH HADDAD	1 common share	nil
GORDON ELLIOTT SCOTT	1 common share	nil

That the head office of the said company within Manitoba shall be at the City of Brandon, and that the Provisional Directors of the said company shall be John Cochrane Kerr, Joseph Haddad and Gordon Elliott Scott, hereinbefore mentioned.

(SEAL) GIVEN Under My Hand and Seal of Office at the City of (Initials) Winnipeg, in Manitoba, this Twenty-first day of December in

the year of our Lord one thousand nine hundred and fifty-four.

“E. Prefontaine”

Provincial Secretary

COAT OF ARMS PROVINCE OF MANITOBA

BY THE HONOURABLE

EDMOND PREFONTAINE

PROVINCIAL SECRETARY.

To all to whom these presents shall come—GREETING:

WHEREAS Oil Field Services Ltd., a company incorporated on the 21st day of December, 1954, by letters patent under the provisions of The Companies Act, has applied to me the Provincial Secretary of the Province of Manitoba, for the issue of supplementary letters patent under The Companies Act, being chapter 43 of the Revised Statutes of Manitoba 1954, confirming by-law No. 42 of the corporation;

AND WHEREAS with the said petition the directors of the corporation have produced by-law No. 42 of the corporation passed on the 21st day of November, 1956, and have by requisite evidence in writing established that the said by-law was sanctioned by special resolution on the 21st day of November, 1956, and have satisfactorily established the sufficiency of all proceedings by The Companies Act required to be established previous to the granting of such supplementary letters patent:

NOW THEREFORE KNOW YE THAT I, Edmond Prefontaine, Provincial Secretary of the Province of Manitoba, by virtue of the power vested in me by The Companies Act and of any other power or authority whatever in me vested in this behalf, do by these my supplementary letters patent confirm by-law No. 42 of Oil Field Services Ltd., providing as follows:

BY-LAW No. 42.

Being a by-law authorizing an application for supplementary letters patent.

Be it enacted and it is hereby enacted as by-law No. 42 of Oil Field Services Ltd. (hereinafter called the company) that

1. Subject to confirmation by supplementary letters patent the capital of the company be and the same is hereby increased from the present authorized capital of Thirty Thousand ($30,000.00) Dollars divided into three hundred (300) shares of One Hundred ($100.00) Dollars each, one hundred and fifty (150) shares of which may be issued as redeemable preferred stock with such conditions attached thereto as the directors may by by-law fix to the sum of One Hundred Thousand ($100,000.00) Dollars divided into one thousand (1,000) shares of One Hundred (100.00) Dollars each, which said shares may be issued as common shares or as redeemable preferred stock with such conditions attached thereto as the directors may by by-law fix;

2. The company be and is hereby authorized to make application to the Provincial Secretary of the Province of Manitoba for supplementary Letters patent confirming this by-law;

3. The directors and officers be and are hereby authorized and directed to do, sign and execute all things, deeds and documents necessary or desirable for the due carrying out of the foregoing;

so that the capital stock of the company shall be One Hundred Thousand ($100,000.00) Dollars divided into one thousand (1,000) shares of One Hundred ($100.00) Dollars each.

GIVEN Under My Hand and Seal of Office at the City of Winnipeg, in Manitoba, this thirteenth day of March in the year of our Lord one thousand nine hundred and fifty-seven.

(SEAL) “E. Prefontaine”

(initials) Provincial Secretary

Exhibit A-6

THIS AGREEMENT made this 1st day of December, A.D. 1970.

BETWEEN:

RIVERHEIGHTS DEVELOPMENT LIMITED, Hereinafter called

‘‘Riverheights” of the First Part,

—and—

OIL FIELD SERVICES LIMITED,

Hereinafter called

‘‘Oil Field” of the Second Part

WITNESSETH THAT WHEREAS Riverheights is proceeding with a real estate development in the City of Brandon and requires management for the operation and development thereof;

AND WHEREAS Oil Field has some experience in the installation of underground work and construction and represents that it will have available for management the services of W. W. Fotheringham, P.Eng.

NOW THEREFORE in consideration of the premises it is agreed as follows:—

1. Oil Field will provide the services of W. W. Fotheringham in the management and development of the Riverheights development in Brandon subject to such directions as may be given by the Board of Directors of Riverheights.

2. The fee to be payable to Oil Field for such services shall be the sum of Six Thousand ($6,000.00) Dollars per annum or Five Hundred ($500.00) Dollars per month for any period of time which may be less than one year or more than one year in which aforesaid services are provided. The parties hereto covenant and agree that as the work load increases the remuneration and terms of employment will be reviewed by and between the parties hereto.

3. Either party hereto may terminate this agreement by thirty (30) days notice in writing delivered to the other party. In the event of termination of this agreement, remuneration shall be calculated from the 1st day of December, 1970, up to and including the last day of the month that Oil Field has provided management services as set out herein.

4. It is understood and agreed that the said W. W. Fotheringham will not be required to contribute his whole time and attention to the management of the project but will provide a reasonable portion of his time thereto so that Riverheights will have adequate supervision of its project.

IN WITNESS WHEREOF the parties hereto have hereunto affixed their corporate seals attested by the hands of their proper officers in that behalf.* [1]

Exhibit A-13

9th March 1976.

Department of National Revenue,

District Taxation Office,

391 York Avenue,

Winnipeg, Manitoba,

RSC 0P5

Attention: Mr. P. Fenez

Dear Sir:

Re: Mr. W.W. Fotheringham and Oilfield Services Ltd.

Further to your letter of February 18th and to our telephone conversation of February 26th we have the following comments on your proposed adjustment of Mr. Fotheringham’s income for the years 1971 through 1974.

1. Active Business Income

In your letter you question whether or not Oilfield was carrying on an active business. We are of the opinion that it was. Oilfield was incorporated a number of years prior to the period in question. Mr. Fotheringham, as President of the company, was under contract to it. To manage its real estate development, Riverheights Development Limited, which was owned 50% by a public company whose head office was in Ontario, wanted a company which had an established office in Brandon and which had at its disposal the services of an individual who was qualified in real estate development and who had knowledge of the Brandon market. Oilfield met the requirements of Riverheights and the two companies entered into a management agreement. This agreement was, therefore, entered into at arms length and was in the best interests of Riverheights and its public affiliate.

Because of the seasonal nature of the development it was not necessary for Oilfield to provide full time services to Riverheights. However, during the time in which management services were provided the company was carrying on an active business in the same manner as any firm which employs a professional engineer to consult on real estate development.

2. Reallocation of Income

As mentioned above, your letter questions whether or not Oilfield was carrying on an active business. Can we therefore assume that, in your opinion, Oilfield is carrying on a business and that you are only questioning whether or not that business is active. If this is the case there can be no justification in attributing the management fees directly to Mr. Fotheringham. Mr. Fotheringham is under no obligation to take a salary from the company as is the case with many small businesses. In fact, because he had sufficient other income to meet his needs, it was in Mr. Fotheringham’s best interest not to take a salary from Oilfield.

You will note that as at September 30, 1974 Oilfield had approximately $39,222 in current assets. This is for the most part made up of the retained earnings for the years 1971-1974 when the company was providing the management services to Riverheights. These funds have now been paid to Oilfield’s parent company, Products Development Co. Ltd. to reduce the liability and will be taxable to Mr. Fotheringham when they are paid out to him in the form of salary from the parent company.

We would appreciate any further comments which you may have concerning this matter.

	Yours very truly,
	Dunwoody & Company
	Per (Signature)
JDD/hb	J. D. Donald, C.A.
Revenue Canada
Taxation
Mr. William W. Fotheringham,
522- 16th Street,
Brandon, Manitoba	Our file
R7A 4Y3	P. Fenez
	Telephone: 985-5303
February 18, 1976
Dear Sir:

Re: 1971, 1972, 1973 and 1974 Income Tax Returns

Following a review of management fees paid by Riverheights Development Ltd., it is our opinion that these fees should be reported by you personally rather than by Oil Field Services Ltd. Oil Field Services Ltd.’s financial statements for the four years 1971 to 1974 indicate that it was not carrying on an active business and could not conceivably provide the services described in the management agreement submitted.

In this respect, the following amounts will be added to your income:

1971 — $ 6,000.00

1972 — $ 7,000.00

1973 — $12,000.00

1974 — $12,000.00

Any further action will be held in abeyance for fifteen (15) days in order to allow you time to submit any information which you would like to have considered.

Yours truly,

(Signature)

for Chief of Audit

PF:hf

In addition, the following information has been extracted by the Board from the financial statements of Oil Field which have been made available in the exhibits:

Other Income consisted mainly of interest earned and discounts received.

As at September 30, 1974 the balance sheet of Oil Field was as follows:

ASSETS

	1974
CURRENT ASSETS	$
Cash	5,444.77
Short term note	6,000.00
Share of mortgage fund	8,500.00
Deposit	461.98
Accrued interest receivable	443.49
	20,850.24
ADVANCE TO ASSOCIATED CORPORATIONS
Homestead Properties Ltd.	18,371.88
ORGANIZATION COSTS	209.45
	39,431.57
LIABILITIES
CURRENT LIABILITIES
Accounts payable	150.00
Provision for income taxes	3,788.18
	3,938.18
OTHER LIABILITIES
Advance—Assiniboine Investments Ltd.	515.90
Advances—Products Development Co. Ltd.	115,193.40
	115,709.30

SHAREHOLDERS’ EQUITY

CAPITAL STOCK

AUTHORIZED

500 common shares—par value $100.00 each

500 5% preferred shares, non-cumulative, redeemable,

par value $100.00 each

ISSUED AND FULLY PAID

315 common shares	31,500.00
305 preferred shares	30,500.00
	62,000.00
DEFICIT	142,215.91
	39,431.57

Argument

The point of contention as stated in argument by counsel for the appellant was:

The question that arises in this appeal quite simply is whether or not Mr Fotheringham, on the realization that a certain business transaction—of a continuing nature—could be consummated, is entitled, as an individual in Canada, to either create a company for this purpose or to make use of an existing one.

and further:

What we are trying to determine here is whether or not Oil Field Services Ltd., has a valid existence for taxation purposes or if it is to be ignored and you only look to the shareholder and prime mover behind the company, namely Mr Fotheringham. . . .

and:

If there is a genuine reason that can exist for why he would want to use a particular cover, either by way of creating and incorporation or using an existing company, if there is a valid reason that exists for wanting and desiring to do so, then albeit although there may be certain income tax benefits that would flow therefrom, then the arrangement I suggest, should stand . . .

Counsel pointed out two reasons for the acceptability of the action of the appellant in using Oil Field in this situation:

(1) Mr Fotheringham has testified, and I urge that his testimony be accepted, and he has testified in the following way: that in all of the years of his business life he has never done anything, in terms of business activity, that was not operated in a fashion through a corporation.

(2) The other reason that he gave for using Oil Field was that it had had— albeit through him and other personnel—engaged in this kind of business in the past, and that is to say not unlike this kind of business as it relates to underground work—and to some extent I think it can be said that Mr Fotheringham acquired, by wearing the hat of an Executive Officer of Oil Fields, he acquired some expertise from that position.

He summarized his position in the following way:

Now, it is going to be true, as the respondent will point out, that Oil Field had some tax losses in earlier years and not the 1963 loss—that is long gone. There were some later losses of a business nature which can be used by Oil Field in offsetting current tax on its income by its agreement. I would consider that, Mr Chairman, as an incidental benefit, the decision that he made, and I ask you to believe that his reason for doing what he did was based on—not exclusively the reasons that he gave you—he may have very well been advised and may very well have been aware of the fact that there were some tax benefits by using Oil Field Services. But, if there are other benefits and other reasons for also using that company, which he has given you, then it is not sufficient to deprive him and the company of the benefits of the transaction.

Cases cited by counsel both as support for the appellant’s claim and by way of making distinctions with the matter at issue in this hearing were: MNR v Leon et al, [1976] CTC 532; 76 DTC 6299; OK Trust, Ltd v Rees (HM Inspector of Taxes), 23 TC 217; MNR v J A Cameron, [1972] CTC 380; 72 DTC 6325; Salomon v Salomon, [1897] AC 22.

Counsel for the respondent made three basic points:

(1) . . . the arrangements for the provision of management services were in fact made between Mr Fotheringham and his partners, wearing the other hats, and representatives of the Corporation, and that subsequent to the arrangements being made, in fact the deal or transaction was carried through the corporation.

(2) I would suggest that the reference in the contract to the experience of Oil Field is in fact slightly misleading, and that the only experience that Oil Field had was the fact, it is submitted, was the experience that Mr Fotheringham had as an experienced business man and perhaps manager. And that Oil Field was not in the business of providing Mr Fotheringham’s services in the past, but in fact Oil Field was in the business of providing lines to oil fields and building roads or whatever.

I think that we all have to go a step further and realize that in connection with these developments in Brandon, that Oil Field did not build roads, did not put in a sewer line, and did not do that type of thing. In fact the only service that was provided, was in fact the services of Mr Fotheringham.

(3) . . . if this Corporation is to be recognized as a bona fide commercial entity, it must in fact do something. It is true that a corporation can only act through an individual, but at the same time if it really is a viable and commercial—existing commercial entity, it is suggested that a third party dealing with it must be cognizant of that fact. It is not to suggest that by the time the formal agreement was concluded, the third party did not recognize the document said Oil Field Services Limited. It is suggested, Mr Chairman, that when the actual business negotiations were going on they were clearly negotiations between Mr Fotheringham and the representatives of Headway. By the time this agreement came on the scene, it is suggested that everything was more or less concluded and in agreement.

In summary, counsel’s position was:

I suggest that clearly Riverheights had no real interest in the services of Oil Fields Services Ltd. They were only interested in the services of Mr Fotheringham.

Counsel cited for the Board’s consideration the following: MNR v Leon et al (supra); Lagacé v MNR, [1968] CTC 98: 68 DTC 5143; Pallant v MNR, [1972] CTC 2378; 72 DTC 1321.

Findings

First, it should be noted that arising from the points made by the respondent in the reply to notice of appeal, counsel for the respondent did comment on the alleged contravention of The Engineering Profession Act but the Board does not consider this as the principal issue and will make no further remarks on it.

The situation before this Board, therefore, is that Homestead, controlled by the appellant, in turn controlled both Oil Field and Assini- boine, the last named (Assiniboine) holding the appellant’s 50% interest in Riverheights, which company in turn entered into a management agreement with Oil Field for the use of the services of the president of Oil Field (the appellant) in the development of Riverheights.

Dealing with this issue as seen by counsel for the appellant and quoted earlier, the Board is of the opinion that the question is not “whether or not Mr Fotheringham . . . is entitled to either create a company for this purpose or to make use of an existing one’’. It is Clearly the right of any individual to create or use a corporate structure for business purposes. That question, more appropriately phrased, would be whether or not such a corporate structure, its purpose and the conduct of its affairs related to activities for which the company could be, should be and, in reality, was responsible. A corporation, for purposes of the Income Tax Act, is a person, although artificially created through legislation, separate and distinct from the persons (both corporate and individual) who may form its participating and controlling body as shareholders or directors. For various reasons the legislators in Canada have provided a format for the taxing of the financial results of the operations of a corporation, distinct from the schedules applicable to most other persons. Utilization of this separate taxing structure should require evidence supporting the establishment, in fact as well as in law, of a corporation having the separate identity indicated above. Without such characteristics the corporation might be viewed as only a repository, the private enclave of other personal activity or business operations. The difficulties in determining and maintaining well defined parameters are measurably heightened when the corporation is dealing not only through, but with one or more of its major shareholders—potentially a non-arm’s length transaction.

It is my opinion that there was during the times material a bona fide corporation (Oil Field Services Limited) engaged in a process of investment of funds, the evidence indicating that operational activity had virtually ceased after 1965. By the year 1971 there were apparently no employees, no equipment and no inventory. The Board finds therefore no basis upon which to accept the assertion of the appellant that the reason the company Oil Field was selected as the organizational vehicle to deal with Riverheights was its expertise in areas related to the real estate construction industry. The corporation by the year 1971 does not appear to have had any accumulated expertise which remained from its operational days—whether or not such expertise might have been valuable in the field of real estate construction. Oil Field did, however, have as its president the appellant in this matter who, through the other corporations, controlled Oil Field. Some evidence indicated the appellant had considerable management experience and, as a professional engineer, some technical expertise. There is, however, no evidence available to me that would give support to the choice of Oil Field specifically as the organizational vehicle in the arrangement, even accepting that some corporate structure was to be used.

Turning then to that point—the use of a corporate structure for the transaction—and keeping in mind the comments made above regarding the distinctions in responsibility which should be apparent between a corporation and its shareholders as other persons, it would appear advisable to refer to the portions of Exhibit A-6, reproduced earlier, which have been shown in italics. There would seem to be no question that this is a “management agreement’’ and only that. Although there is passing reference made to the “underground work and construction’’ experience of Oil Field, the agreement itself deals solely with the provision of management and supervision. It has been stated earlier that Oil Field itself did not have available any technical expertise in the construction field, and there was no evidence presented that Oil Field had management expertise as a corporation. The obligation assumed by Oil Field in this agreement is for the provision of the services of W W Fotheringham. The question then is whether Oil Field was in any position to guarantee delivery of such services. It is my view that Oil Field could not do so—it had no contract or arrangement with the appellant and, while W W Fotheringham, by virtue of his controlling position in the company, could enter into any agreement in the name of Oil Field, that company conversely could not commit or guarantee delivery of the specific services of the appellant. The company could not be, should not be and, in fact, was not the responsible party under this agreement. That responsible party was the appellant himself.

Counsel for the appellant fairly well summarized what I believe to have been a main motivation of the appellant in his course of action, and although counsel’s conclusions would not be my own, the full quotation is given:

He could have considered Homestead Properties, which I will refer to again, or he could perhaps have used Product Builders. But he chose Oil Field Services, as he said, because of the earlier experience that he had in respect of the deficit that arose out of earlier losses, and he believed that it would not be an inappropriate procedure to attempt to recoup that deficit out of that company, if at all possible, and reactivate it. It is true that it hadn’t been an active company at the time in question, but he was now thinking of re-activating it in this area. I see nothing wrong with that.

In allowing the appeals under somewhat similar circumstances in the matter of Ralph J Sazio v MNR, [1968] CTC 579; 69 DTC 5001, the learned judge commented as follows at page 588 [5006]:

Accordingly I conclude that, with respect to the football coaching activities, the Company was fully competent to engage in those activities in the manner it did and that the agreements entered into between the appellant and the Company and the Club were bona fide commercial transactions all in furtherance of the Company’s legitimate objects and that they govern and determine the relationship between the parties.

Here the appellant and his Company are two separate entities. In my view this is not a matter of form but rather a matter of substance and reality. Both the appellant and the Company could sue and be sued in its own right and indeed there is nothing to prevent the one from suing the other if need arose.

Ever since the Salomon case, [1897] AC 22, it has been a well settled principle, which has been jealously maintained, that a company is an entirely different entity from its shareholders. Its assets are not their assets, and its debts are not their debts. It is only upon evidence forbidding any other conclusion can it be held that acts done in the name of the company are not its acts or that profits shown in its accounts do not belong to it. The fact that a company may have been formed to serve the interests of a particular person is not sufficient to establish the relationship of principal and agent between that person and the company. In order to hold otherwise it must be found that the company is a “mere sham, simulacrum or cloak’’.

It is my view that the evidence in the present appeals is conclusive that such is not the case. It must also be borne in mind that the Company engaged in a variety of activities other than supplying the football coaching services of the appellant and I can see no logical reason for segregating the football coaching services from those other activities.

In dismissing the appeal in MNR v Leon et al (supra), again where there were certain resemblances to the instant case, the learned judge made the following remarks at page 539 [6302]:

However, it is one thing to concede a bona fide business purpose for incorporation and quite another thing to concede a bona fide business purpose for the interposition of the management companies in the transaction of providing management services. In my view, for the respondents to be successful in this appeal they must establish a bona fide business purpose in the transaction, which on the evidence in these cases, they have failed to do. It is the agreement or transaction in question to which the Court must look. If the agreement or transaction lacks a bona fide business purpose, it is a sham. It is, in my view, possible to have a company, the incorporation of which is not a sham, because of the existence of a bona fide business purpose for the incorporation, engaging in a transaction which is a sham, because of the absence of a bona fide business purpose for said transaction. The cases at bar are, in my opinion, examples of such a situation. The judgment of the Supreme Court in the Cameron case (supra) makes it clear that the Court was directing itself to the question as to whether or not the agreement was a sham. In the Cameron case (supra) there was a bona fide reason for the agreement or transaction, and the savings in income tax were incidental. In the case at bar, there is no bona fide business reason for the agreements and the sole purpose of the agreements is the savings in income tax.

It is my view that the facts of this matter have left with the appellant the responsibilities outlined in Leon (supra) rather than prima facie establishing the agreement between the appellant, Oil Field and Riverheights as forming the basis of a bona fide transaction.

Decision

The appeal is dismissed.

Appeal dismissed.