Jutan Importers Limited v. Minister of National Revenue, [1976] CTC 2378, 76 DTC 1289

The Assistant Chairman:—By letter dated October 9, 1973 the Minister of National Revenue, pursuant to the provisions of subsection 138A(2) of the Income Tax Act, RSC 1952, c 148 as amended (hereinafter referred to as the “Act”) directed that Jutan Importers Limited (hereinafter called “Jutan”) and Crown Radio Corporation Limited (hereinafter called “Crown Canada”) be associated for the years 1969 and 1970. As a result of the said direction a Notice of Assessment for each of the said years was sent to each of Jutan and Crown Canada and the tax payable by each was computed on the basis that the lower rate of tax, pursuant to section 39 of the said Act, only apply to $17,500 of the taxable income of each of Jutan and Crown Canada in each of the said years. The balance of the taxable income of each of the above companies would be assessed at the higher rate as provided in section 39. Following Notices of Objection by each of the companies to the assessments, and confirmation thereof, each of the said companies appealed to this Board. Each of the Said companies, by its appeal, contends that its separate existence for each of the years 1969 and 1970 was solely for the purpose of carrying out the businesses of the said corporations in the most efficient manner and that none of the main reasons for the separate existence of the two companies was to reduce the amount of taxes which would otherwise be payable under the Act presumably by the two companies. The respondent contended the reverse to that submitted by the appellant, namely, that one of the main reasons for the separate existence of the two corporations was to reduce the (income) taxes which would otherwise be payable by the two companies.

The submissions by both counsel in part were the same. The issue in the appeals is whether or not one of the main reasons for the separate existence of the two companies was to reduce the amount of tax which would otherwise be payable under the Act. Many decisions of this Board and the Exchequer or Federal Court were referred to as guidance in these appeals. Two cases were mentioned especially and l conclude both parties agree to the statements I shall quote. Mr Justice Cattanach in the appeal MNR v Howson & Howson Limited et al, [1970] CTC 36 at 51; 70 DTC 6055 at 6063 stated:

However, the fact that the four foregoing reasons may well have been reasons that entered into the decision to create separate entities does not dispose of the critical issue upon which the present appeals turn which is whether one of the main reasons for doing so was the consequent tax reduction.

This question is one of fact to be decided upon the evidence adduced and the proper inferences to be drawn from that evidence.

Mr Justice Mahoney in the appeal of First Pioneer Petroleums Limited v MNR, [1974] CTC 108; 74 DTC 6109 at page 115 [6114] stated:

What emerges from all of them [the cases he referred to] is that the question of fact to be determined is not whether the tax advantage is the main reason but rather whether it it is a main reason for the separate existence of the corporations during the particular period in question.

Assuming the issue in this matter should be decided on the basis of a question of fact, counsel for the appellant took the position which was stated in the decision of Mr Justice Dumoulin in Doris Trucking Company Limited v MNR, [1968] 2 Ex CR 501; [1968] CTC 303; 68 DTC 5204, that, were there no Income Tax Act, would the second or other company have been incorporated. Counsel for the appellant referred to several cases which confirmed this position, namely, C P Loewen Enterprises Ltd v MNR, [1972] FC 773; [1972] CTC 396; 72 DIC 6298; Jordans Rugs Ltd et al v MNR, [1969] CTC 445; 69 DTC 5290; Miss Sun Valiey Limited v MNR, [1974] CTC 2274; 74 DTC 1217, and The Queen v Arthill Enterprises Limited, [1975] CTC 594; 75 DTC 5419.

Counsel for the respondent did not submit that the position taken by the appellant was in law wrong but stated rather that, notwithstanding the oral evidence of the witnesses called by the appellant, l should infer that one of the main reasons for the separate existence of the two companies was the reduction of income tax. The bases on which this conclusion should be drawn were that the main witness, Mr Singer, was a successful businessman who should always be not only conscious of but acutely aware of income tax; he and his equal shareholder in Jutan effectively did all the negotiating which resulted in Crown Canada receiving the exclusive distributorship of Crown Japan’s electronic products in Canada: neither one had a share in Crown Canada while their wives did have equal ownership subject to a “4% interest to Crown Japan”; the day-to-day operations of both Jutan and Crown Canada were virtually from the same building, the same telephone, the same staff; and, in addition, neither wife really did any substantial work. Further reasons for the inference that one of the main reasons for the separate existence of the two companies was tax were that Crown Japan really did not require that there be a separate company to market its products in Canada nor really did T Eaton Co Limited (hereinafter called “Eaton’s”) have a policy of not buying products of Jutan. In addition, Mr Singer (being an officer of Jutan) would not cause another company to be incorporated unless he knew

(a) why Eaton’s would not buy from Jutan (and he did not), and (b) Eaton’s would buy from another company whose name was not Jutan but who had shareholders who were the same persons as those who were sharehloders of Jutan or their wives (and he did not). Of course in its 1968 taxation year, Jutan had first passed a taxable income of $35,000, the maximum amount at the lower rate.

The facts of this case were submitted by Mr Singer, a 50% shareholder of Jutan whose wife was a 48% shareholder of Crown Canada; by Mr Wilson who at the time of the hearing was the manager of Eaton’s store at Oshawa, Ontario and who, until about five years ago, was the chief buyer for Eaton’s, both for their catalogue and store sales of electronic goods (includina the type sold by Jutan); and by Mr Fujii of Japan who was, from 1962 to 1972, a a chief officer and director of Crown Japan. I should mention, Mr Wilson has had no business dealings with Mr Singer, Crown Canada, or Jutan since about 1970. Mr Fujii has had no dealings with any of those parties since 1972.

In May of 1962 Jutan Importers Limited was incorporated pursuant to the laws of the Province of Ontario. It had two equal beneficial shareholders, namely, Louis Tannenbaum and Ernest Singer. These gentlemen had known each other previously in Czechoslovakia. Apparently Mr Tannenbaum came to Canada, Ontario and Toronto earlier than Mr Singer who only reached Toronto in 1961 after having been in business alone, as well as with his brother and possibly with his wife, in Venezuela in South America. Because of the political climate in that country in the early 1960’s he and his wife sold out to his brother who, after the sale, was indebted to his wife in excess of $50,000. Apparently Mr Tannenbaum carried on Jutan’s business as a proprietorship until he sold that business to the limited company, Jutan. At this time Mr Singer became an equal shareholder of Jutan. Apparently, while a proprietorship and for a few years after its incorporation until about 1966, Jutan was in the catalogue business. Each year it produced a catalogue illustrating its articles for sale, a description, their cost, etc. It apparently became known to the selling trade as a Catalogue business. The products it sold were radios, cassettes, tape recorders, etc, generally known as electronic equipment. It had lines of “name” products it sold over the years; they were brand products, Candle, Strauss, Concerto and Maxell.

After 1966 Jutan stopped printing the catalogue and went strictly into the wholesale business. Because of the catalogue, orders were, for a few years, still received based on the catalogue, so that it did not in 1966 immediately lose its trade designation as a ‘‘catalogue business”. The main sources of the merchandise sold by Jutan were Hong Kong, Japan and Korea and to acquire such products, on occasion, Mr Singer and his wife and, on other occasions, Mr Tannenbaum and his wife went to Japan. In due course they met Mr Fujii. Mr Singer suggested he started to negotiate with Mr Fujii with respect to Crown Japan products in 1965, which negotiations continued until 1968. Mr Fujii suggested he first met Mr Singer in 1968 and later in that same year concluded negotiations re Crown Japan products.

In any event Mr Fujii was employed by Crown Radio Corporation Japan, a Japanese company (hereinbefore and hereinafter referred to as “Crown Japan”) from 1961 to 1972. He was the general manager of Crown Japan for a period and a director when he left in 1972. After 1972 he remained with Crown Japan in an advising capacity with respect to business (including Crown Canada) with which he had been involved. He had set up and was responsible for a subsidiary of Crown Japan in Panama as well as Düsseldorf, Germany. It should be noted that in some countries subsidiaries were used while in other countries sales were made to agents to do as they pleased. If I recall, Crown Japan sold merchandise to about 55 countries and, while a large number of companies in those countries to which it sold had the name “Crown” in their corporate appellation, the majority did not.

Crown Canada was incorporated pursuant to the laws of the Province of Ontario in 1968, its first fiscal year ending October 31, 1969. Its registered shareholders were Mrs Tannenbaum and Mrs Singer equally although Crown Japan had a “4% interest” which was apparently held in trust for it. Mr Singer stated Jutan could not sell its products to Eaton’s but he never asked Eaton’s why. Mr Wilson stated that as a matter of policy Eaton’s would not buy from a competitor whether the sale was in the name of the competitor or a division of the competitor. Mr Wilson was, in 1969 and 1970, Eaton’s electronics purchaser and, while he agreed a good product was a good product and profit was important, he would not buy from Jutan. Mr Singer wanted the distributorship for Crown Japan products in Canada but Crown Japan insisted on the conditions that there must be (a) a company using in its name “Crown”, and (b) a 4% interest must be held for Crown Japan.

Based on the evidence of Mr Wilson and Mr Fujii I am satisfied that (a) Jutan could not sell its products to Eaton’s, and (b) Crown Japan would not give an exclusive distributorship for Canada to a company whose corporate name was not similar to that of Crown Japan. For this reason Crown Canada was incorporated. Mr Singer wanted the distributorship and was going to get it and accordingly instructed the company lawyer to cause a company to be incorporated so that the company would have the distributorship. As I view the matter, the second company was caused to be incorporated so that the distributorship would be obtained and also it could sell its products to Eaton's as well as to other persons. The saving on taxes was not only not one of the main reasons for its incorporation, it was not a reason. The obtaining of the distributorship was the prime motivation for Crown Canada and, in addition, sales to Eaton’s was in itself a substantial reason.

I am satisfied that for the reasons above recited a “second” or “another” company was necessary to get the exclusive rights from Crown Japan; that there is no reason to use the other tests, namely, the day-to-day management, use of employees, nearby premises, telephone answering services, etc, to determine the issue. As I view the problem, if the reason for the separate existence of the two or more companies does not convince the person hearing the appeals, these other matters should be considered to test the reason. Here, however, the “reason” is clearly substantiated and corroborated by two strangers and I believe a decision should be made on a basis of substance facts rather than a basis of inference. I would allow the appeals and vacate the directive. The result is both Jutan and Crown Canada will be assessed on the basis they are not associated with each other.

Appeal allowed.