Minister of National Revenue v. Anthony Thomas Leon, Edward Leon, Lewie Leon, Norman Leon and Frank Ahman, [1974] CTC 588, 74 DTC 6443

Sweet, DJ:—All of these matters are appeals from decisions of the Tax Review Board which allowed the respondents’ appeals from assessments made by the appellant.

The above entitled causes will respectively be referred to as the Anthony Thomas Leon matter, the Edward Leon matter, the Lewie Leon matter, the Norman Leon matter, and the Frank Ahman matter.

Contemporaneously with the delivery of these reasons, reasons for judgment are delivered in an appeal by the Minister of National Revenue wherein Ablan Leon (1964) Limited is the respondent.* [1] That will be referred to as the Ablan Leon (1964) Limited matter.

By an order made on consent all relevant evidence adduced in the Ablan Leon (1964) Limited matter was made to apply to all of the above entitled causes. By agreement of counsel some of the evidence in the Anthony Thomas Leon matter was to be treated as evidence in the Edward Leon and Lewie Leon matters as well.

Although, factually, all of these matters are not identical there is much of similarity among them. Furthermore, there are some legal principles which are applicable to all of them.

Accordingly it is preferable that the reasons for judgments in all be in one combined statement.

It would be helpful to have in mind some of the history of the Leon furniture enterprises including Ablan Leon (1964) Limited and the business carried on under the firm name of Ablan Leon Distributors. Since that history is stated in the Ablan Leon (1964) Limited matter it need not be repeated here.

In the Anthony Thomas Leon matter the dispute is regarding the following items of assessment for income tax:

The Minister alleges that Anthony Thomas Leon, having an arrangement with Ablan Leon Distributors and he, during 1965, 1966, 1967 and 1968 taxation years, having devoted his full time to the management, supervision, overseeing and superintending of the operations of certain of the stores of Ablan Leon Distributors, became entitled to receive the above amounts and that Ablan Leon Distributors, at his request, paid those amounts to Antomel Limited.

A position of the respondent Anthony Thomas Leon is that during the 1965, 1966, 1967 and 1968 taxation years he was. employed by and received a salary from Antomel Limited and that company had an arrangement with Ablan Leon Distributors to provide management services to Ablan Leon Distributors for which services it received management fees. The respondent claims that he, as an employee of Antomel Limited, devoted time to the management, supervision, overseeing and superintending of the operation of certain stores of Ablan Leon Distributors and Antomel Limited was paid those amounts for those services.

In the Edward Leon matter the dispute arises out of the following items of assessment for income tax:

The Minister alleges that Edward Leon, having an arrangement with Ablan Leon Distributors and he, during the 1965, 1966, 1967 and 1968 taxation years having devoted his full time to the management, supervision, overseeing and superintending of the operations of certain of the stores of Ablan Leon Distributors, became entitled to receive those amounts and that Ablan Leon Distributors, at his request, paid those amounts to Timmyal Limited.

A position of the respondent Edward Leon is that during 1965, 1966, 1967 and 1968 taxation years he was employed by and received a salary from Timmyal Limited and that company had an arrangement with Ablan Leon Distributors to provide management services to Ablan Leon Distributors for which services it received management fees. The respondent, claims that he, as an employee of Timmyal Limited, devoted time to the management, supervision, overseeing and superintending of the operations of certain stores of Ablan Leon Distributors and Timmyal Limited was paid those amounts for those services.

In the Lewie Leon matter the dispute arises out of the following items of assessments for income tax:

The Minister alleges that Lewie Leon, having an arrangement with Ablan Leon Distributors and he, during the 1965, 1966, 1967 and 1968 taxation years having devoted his full time to the management, supervision, overseeing and superintending of the operations of certain of the stores of Ablan Leon Distributors, became entitled to receive those amounts and that Ablan Leon Distributors, at his request, paid those amounts to Midgemar Limited.

A position of the respondent Lewie Leon is that during the 1965, 1966, 1967 and 1968 taxation years he was employed by and received a salary from Midgemar Limited and that company had an arrangement with Ablan Leon Distributors to provide management services to Ablan Leon Distributors for which services it received management fees. The respondent claims that he, as an employee of Midgemar Limited, devoted time to the management, supervision, overseeing and superintending of the operations of certain stores of Ablan Leon Distributors and Midgemar Limited was paid those amounts for those services.

In the Norman Leon matter the dispute arises out of the following items of assessment for income tax:

The Minister alleges that Norman Leon, having an arrangement with Ablan Leon Distributors and he, during the 1968 and 1969 taxation years having devoted his full time to the management, supervision, overseeing and superintending of the operations of certain stores of Ablan Leon Distributors, became entitled to receive those amounts and that Ablan Leon Distributors, at his request, paid those amounts to Nor-Mar Projects Limited.

A position of the respondent Norman Leon is that during the 1968 and 1969 taxation years he was employed by and received a salary from Nor-Mar Projects Limited and that company had an arrangement with Ablan Leon Distributors to provide management services to Ablan Leon Distributors for which services it received management fees. The respondent claims that he, as an employee of Nor-Mar Projects Limited, devoted time to the management, supervision, overseeing and superintending of the operations of certain stores of Ablan Leon Distributors and Nor-Mar Projects Limited was paid those amounts for those services.

In the Frank Ahman matter the dispute arises out of the following items of assessment for income tax:

The Minister alleges that Frank Ahman, having an arrangement with Ablan Leon Distributors and he, during the 1968 and 1969 taxation years having devoted his full time to the management, supervision, overseeing and superintending of the operations of certain of the stores of Ablan Leon Distributors, became entitled to receive those amounts and that Ablan Leon Distributors, at his request, paid those amounts to Frank Ahman Ltd.

A position of the respondent is that during the 1968 and 1969 taxation years he was employed by and received a salary from Frank Ahman Ltd and that company had an arrangement with. Ablan Leon Distributors to. provide management services to Ablan Leon Distributors for which services Frank Ahman Ltd received management fees. The respondent claims that he, as an employee of Frank Ahman Ltd, devoted time to the management, supervision, overseeing and superintending of the operations of certain stores of Ablan Leon Distributors and Frank Ahman Ltd was paid those amounts for those services.

In the Frank Ahman matter the Minister was also appealing in respect of the sum of $62 the respondent received as a dividend on shares held in The Bell Telephone Company of Canada. This item of the appeal was abandoned on behalf of the Minister.

There is no allegation of sham in the appellant’s pleadings.

Because of their similarities the Anthony Thomas Leon, Edward Leon and Lewie Leon matters may conveniently be dealt with together.

In each there is a “management agreement” dated May 1, 1964 purporting to be executed by all parties in which indicated as being employers are: Ablan Leon (1974) Limited, the George Leon Trust, the Lewie Leon Trust, the Anthony Leon Trust, the Edward Leon Trust, the Joseph M Leon Trust, the George Leon Family Trust and the Joseph M Leon Family Trust. They are also indicated as carrying on business under the name Ablan Leon Distributors.

In the Anthony Thomas Leon matter the “management company” is Antomel Limited. In the Edward Leon matter it is Timmyal Limited. In the Lewie Leon matter it is Midgemar Limited.

All three agreements have provisions to the following effect:

the employers are to employ the respective management companies to manage, supervise, oversee and superintend the operations of certain stores engaged in the retail sale of furniture, furnishing and appliances, such stores to be designated from time to time by the employer and whether or not such stores were then in existence and in actual operation or thereafter acquired and operated by the employer;

the management company is to devote its full time and effort properly to complete and fulfil all duties which are normally allocated to a manager, supervisor, superintendent and overseer and more specifically in connection with stores engaged in the business therein before referred to;

the management company is to be fully responsible for all decisions which shall be made in the said stores as to management and operation and including the matter of purchase of stock-in-trade and merchandise which shall be offered for sale in the said stores, save and except that in the event of any dispute between the employee and the employer the decision of the employer shall always prevail;

the management company is also to be responsible for and to be in charge of all advertising in connection with the said stores whether by newspaper, radio or otherwise.

Each of the agreements provides for the management company being paid for such services in-the amount set out in the documents and includes a provision for a bonus. There is variation in the amounts of remuneration.

In the Anthony Thomas Leon agreement there is an additional provision that the management company is also to be responsible for the supervision of the head office of “Ablan Leon Distributors” at 65 State Street, Welland, Ontario.

There are three employment agreements which bear date May 1, 1964. One provides for the employment of Anthony Leon by Antomel Limited, another for the employment of Edward Leon by Timmyal Limited and the third for the employment of Lewie Leon by Midgemar Limited. There is provision in each for the employer employing the employee to manage, supervise, oversee and superintend the operations of all stores entrusted to its charge by Ablan Leon Distributors. Each of the employment agreements has a provision for payment to the employee for his services. All of these agreements appear to be executed and each contains a provision for payment of a bonus.

During the 1965, 1967, 1968 and 1969 taxation years:

(a) Anthony Thomas Leon had control in and over Añtomel Limited. I do not consider that any. interest his wife had in that company would in any practical sense affect that control.

(b) Edward Leon had control in and over Timmyal Limited.

(c) Lewie Leon had control in and over Midgemar Limited.

Thus there is a situation where Thomas Anthony Leon, Edward Leon and Lewie Leon, who together having the controlling interest in Ablan Leon (1964) Limited would be in a position to exert influence in the important matter of the bonuses to be paid to the management companies. They respectively would, for all practical purposes, be in a position to control the salaries paid by their management companies to themselves.

In every case the management companies had no employee or none of any significance other than the respondent who controlled it. All of them were without some of the common and usual facilities of a business,—such as a telephone or an office of its own.

All the services the management companies were to supply under the management agreements were performed by the respondents. That which was important to the business of Ablan Leon Distributors was the services of the respondents as distinguished from the management companies. I am satisfied that the respondents would have insisted on performing the services they did because of their financial interests in Ablan Leon Distributors and because of the remuneration to be received for those services.

I find that the sole purpose of the interposition of the management companies was to reduce the respondents’ liabilities for income tax. I find, too, that the utilization of the management companies for that purpose was accomplished through the respondents’ control of Ablan Leon Distributors along with the cooperation of George Leon and Joseph Leon who also had financial interests in it.

Some of the legal principles applicable to these cases are dealt with in the reasons for judgment in the Ablan Leon (1964) Limited matter. However, it may be of advantage to refer again to two statements which in my opinion mark out the course to be followed here.

There is what Noël, J (as he then was) said in Foreign. Power Securities Corporation Ltd v MNR, [1966] Ex CR 358; [1966] CTC 23 at 92; 66 DTC 5012 at 5027: ..

There is indeed no provision in the Income Tax Act which provides that, where it appears that the main purpose or one of the purposes for which any transaction or transactions was or were effected was the avoidance or reduction of liability to income tax, the Court may, if it sees fit, direct that such adjustments shall be made as respects liability to income tax as it considers appropriate so as to counteract the avoidance or reduction of liability to income tax which would otherwise be effected by the transaction or transactions.

Then there is the following statement of Jackett, CJ in Amelia Rose v MNR, [1973] FC 65; [1973] CTC 74 at 77; 73 DTC 5083 at 5085;

It does not seem to be in doubt that the reasons for the scheme under which the corporations in question would be constituted a partnership to undertake management services for Central Park Estates Limited was to achieve tax advantages for the individuals owning the shares of some or all of those corporations. While this does not affect the result actually achieved by what was done, it does, in my view, warrant a very careful appraisal of the evidence when considering whether what was projected with that end in view was actually carried out.

In these cases, too, a very careful appraisal of the evidence is warranted to ascertain whether the plan in mind was actually implemented.

The reasons for judgment of Cattanach, J in Sazio v MNR, [1969] 1 Ex CR 373; [1968] CTC 579; 69 DTC 5001, and J A Cameron v MNR, [1971] CTC 97; 71 DTC 5068, are instructive.

In the Ablan Leon (1964) Limited matter it was claimed that the business carried on under the firm name Ablan Leon Distributors was a limited partnership. I found that no partnership existed. These respondents were not parties to that action. In my view that finding is irrelevant to this action. There was a furniture business carried on under the name Ablan Leon Distributors and whatever contracts were made were made with the operator or operators of that business.

Each of Antomel Limited, Timmyal Limited and Midgemar Limited were separate, distinct and existing corporate entities. It is a commonplace that notwithstanding a shareholder may be in control of a corporation of which he is a shareholder, the shareholder and the corporation are also separate and distinct entities.

I find:

(a) that Ablan Leon Distributors entered into an agreement with each of the three corporations namely Antomel Limited, Timmyal Limited and Midgemar Limited whereby those corporations respectively were to provide management services to Ablan Leon Distributors;

(b) that those corporations did supply the services they respectively undertook to provide for Ablan Leon Distributors; and

(c) that those corporations were entitled to be paid and were paid for those services.

It seems to me to be irrelevant under the circumstances of these three matters that it was intended that the services which the corporations were to provide would be and were performed by the respondents.

It is my view that the plans involving the management corporations in the Anthony Thomas Leon, the Edward Leon and the Lewie Leon matters were implemented and what was projected was actually carried out.

I am satisfied that the onus which rests upon each of Anthony Thomas Leon, Edward Leon and Lewie Leon, heavy as it is under the circumstances here, has been met.

It follows that Antomel Limited, Timmyal Limited and Midgemar Limited were carrying on active commercial businesses and that the provisions of the Income Tax Act regarding “personal corporations” would not apply.

The appeals in the Anthony Thomas Leon, Edward Leon and Lewie Leon matters are dismissed with costs.

There are similarities between the situations in the Norman Leon and Frank Ahman matters and the situations in the other three matters.

Norman Leon controlled Nor-Mar Projects Limited. Frank Ahman controlled Frank Ahman Ltd. Neither Nor-Mar Projects Limited nor Frank Ahman Ltd had any employee or any employee of significance other than the respondent who controlled it. In each case the corporation was without some of the common and usual facilities of a business. The persons actively performing services for Ablan Leon Distributors were Norman Leon and Frank Ahman. That which was important to the business of Ablan Leon Distributors was the services of the respondents Norman Leon and Frank Ahman as distinguished from Nor-Mar Projects Limited and Frank Ahman Ltd.

One difference between the Norman Leon and Frank Ahman matters and the others was that neither Norman Leon nor Frank Ahman were shareholders of Ablan Leon (1964) Limited.

I find that sole purpose of interposition of Nor-Mar Projects Limited and Frank Ahman Ltd was to reduce the liability for income tax of Norman Leon and Frank Ahman. I am satisfied that those in control of Ablan Leon (1964) Limited were willing to cooperate with the respondents Norman Leon and Frank Ahman to that end.

Applicable also in these two appeals are the principles enunciated by Jackett, CJ and Noël, J (as he then was) in Amelia Rose v MNR (supra) and Foreign Power Securities Corporation Ltd v MNR (supra).

Nor-Mar Projects Limited entered into an employment agreement dated May 1, 1964 in which the named employers were the same as in the Anthony Thomas Leon, the Edward Leon and Lewie Leon matters. The Nor-Mar Projects Limited agreement is not the same as the agreement in those three other matters.

The services to be rendered by Nor-Mar Projects Limited as set out in its employment agreement are:

1. Leon shall employ Nor-Mar to take charge of and be responsible for all promotion and public relation work which may be required in connection with the operation of any stores owned by Leon whether these stores may be owned at this date or may be hereafter acquired.

2. Nor-Mar shall devote its full time and effort to properly complete and fulfill all duties which are normally allocated to a person or corporations charged with promotion or public relations work and specifically in connection with stores engaged in the business herein above referred to.

3. Nor-Mar shall be fully responsible for all decisions which shall be made as to any promotion or public relation activities but in the event there may be a conflict between Leon and Nor-Mar as to a particular course of conduct or operation in connection with any of the stores, the decision of Leon shall always prevail.

Accordingly the total responsibility of Nor-Mar Projects Limited had to do with promotion and public relations and nothing else.

I find that the services which were performed by Norman Leon went far beyond the services (promotion and public relations) which Nor- Mar Projects was to supply pursuant to its agreement. I find that Norman Leon also managed, supervised, oversaw and superintended the operations of some stores.

It might also be pointed out that the respondents’ pleading indicates that the services actually performed by Norman Leon were more than matters relating to promotion: and public relations.

Paragraph 4 of the reply to notice of appeal in the Norman Leon matter is:

With respect to paragraphs 3 and 4 of the Notice of Appeal, the Respondent says that he, as an employee of Nor-Mar Projects Limited devoted time to the management, supervision, overseeing and superintending of the operations of certain stores of Ablan Leon Distributors and Nor-Mar Projects Limited was paid for those services the sum of

1968 — $ 8,000.00

1969 — $39,000.00

Of course the Nor-Mar Projects Limited agreement did not provide for supply of services for “the management, supervision, overseeing and superintending of the operations of certain stores’’.

The provision for remuneration of Nor-Mar Projects Limited in accordance with its agreement was:

Nor-Mar shall be paid for the above services the sum of twelve hundred and fifty dollars ($1,250.00) per month and it shall in addition be paid a bonus based on the volume of sales achieved in the said stores or any of them, such bonus to be worked out and completed in accordance with a subsequent agreement between the parties hereto. . .

The “above services” referred to in the remuneration provision would, of course, be the promotion and public relations work which Nor-Mar Projects Limited was to supply. It would not be for managing, supervising, overseeing and superintending the operations of stores.

It is not to be assumed that the services rendered by Norman Leon in managing, supervising, overseeing and superintending operations were done or intended to be done gratuitously. One is impelled to the conclusion that the items of payment by Ablan Leon Distributors which are in issue, namely $8,000 in the taxation year 1968 and $39,000 in the taxation year 1969, were for all services performed by Norman Leon including those which were managerial.

If there were services solely within the category of promotional and public relations along with the managerial services so as to indicate what might be the appropriateness of an apportionment between them no attempt was made at such apportionment. In my opinion the onus for establishing both a right to apportionment and what the apportionment should be would rest on the respondent. He has not met that onus.

In any event I would think that the obligations of Antomel Limited, Timmyal Limited and Midgemar Limited regarding advertising as set out in their employment agreements would substantially reduce the amount of work in connection with promotion and public relations undertaken by Nor-Mar Projects Limited in its agreement.

The respondent Norman Leon says in his pleading “that the appellant, by not issuing notices of re-assessment to Nor-Mar Projects Limited is, in effect, confirming the fact that Nor-Mar Projects Limited is properly taxable on the income which it received. To permit the Appellant to re-assess the Respondent and not Nor-Mar Projects Limited would be to sanction double taxation”.

There is a similar pleading in the Frank Ahman matter with a reference to Frank Ahman Ltd.

These positions are rejected in both cases. In the Ablan Leon (1964) Limited matter I dealt with the effect of assessment by the Minister of a person not a party to the cause before the Court.

I find that the respondent Norman Leon has not discharged the onus which is on him to establish that the position of the appellant in connection with the assessments in the Norman Leon matter, the basis for making them or the appellant’s relevant assumptions were wrong.

The appeal of the Minister of National Revenue in the Norman Leon matter is allowed. The assessments by the appellant in that matter are restored. The appellant will have his costs in that matter here and below.

Frank Ahman Ltd was incorporated in 1963. From then to the present Mr Frank Ahman was the only person really interested in it. In 1964 he transferred to that corporation a store he had been operating in Niagara Falls. In 1968 that business was sold to Leon interests. Mr Ahman said that he sold it because “Tom Leon” asked him if he would go to Welland and manage their store which was having problems, that his company would look after the Welland store and that he was to get $20,000 a year and a percentage of the profits. He said he still went around to the Niagara Falls store to check items and supply them with merchandise.

Mr Ahman’s evidence was that there was no written agreement between Frank Ahman Ltd and the Leons regarding the management of the Welland Store. He said the Leons paid the $20,000 and bonus to Frank Ahman Ltd and the arrangement still continues, that the arrangement between himself and Frank Ahman Ltd from 1968 forward was the same arrangement—Leons paid Frank Ahman Ltd and he drew his salary from Frank Ahman Ltd. He said he was not aware which company owned the Welland Store.

On cross-examination Mr Ahman was shown a photocopy of a statement of Frank Ahman Ltd for the year ended May 31, 1969. It shows, as part of the income, management fees of $22,100. Mr Ahman said that it was paid by a Leon enterprise but that he did not know which one.

When Mr Ahman was asked on cross-examination if there was any particular business reason for Frank Ahman Ltd entering into a management arrangement with Ablan Leon Distributors as opposed to himself his answer was that he did not know if there was a difference.

No written management agreement was produced. No resolution of Frank Ahman Ltd regarding a management agreement was produced.

I 'dp not find that the absence of a written management agreement or of a resolution of the corporation regarding a management agreement would necessarily be fatal to the respondent’s position. However it would be expected, under the circumstances here, that if there were a valid management agreement, as the respondent claims, some supporting written evidence of it would have been available. The absence of such supporting evidence is, in my view, of significance.

The payments to Frank Ahman Ltd are consistent with the allegation of the appellant that Ablan Leon Distributors made them at the request of the respondent.

I find that the respondent has not met the onus upon him in this matter.

I find that the respondent Frank Ahman was entitled to receive from Ablan Leon Distributors the sum of $13,600 in respect of the taxation year 1968 and the sum of $18,700 in respect of the taxation year 1969 and to receive it for services which he rendered to Ablan Leon Distributors.

The appeal of the Minister of National Revenue in the Frank Ahman matter is dismissed in respect of, but only in respect of, the abandoned item of $62 received as a dividend on shares of The Bell Telephone Company of Canada. In all other respects the appeal of the Minister of National Revenue in the Frank Ahman matter is allowed. The assessments by the appellant in that matter are restored except in respect of the item of $62. Appropriate adjustment in the assessment necessitated because of the abandoned item of $62 are to be made.

Having regard to the size of the $62 item compared with the other items in issue and the time occupied at the trial by the $62 item compared with the other items I do not consider that the appellant should be deprived of his costs. The appellant will have his costs in the Frank Ahman matter.