Minister of National Revenue v. Ablan Leon (1964) Limited, [1974] CTC 610, 74 DTC 6451

Sweet, DJ:—In assessing for the respondent’s income tax in respect of its 1965, 1967, 1968 and 1969 taxation years the appellant included the income from a furniture, home furnishing and appliance business carried on under the name Ablan Leon Distributors. Those amounts so included by the appellant for those years respectively were:

The respondent appealed the assessments to the Tax Review Board which allowed the appeals. From that decision the appellant appeals to the Trial Division of this Court.

The respondent’s position was that:

(a) Ablan Leon Distributors was a limited partnership under The Limited Partnerships Act of Ontario.

(b) The respondent was the general partner and general manager and assumed sole and complete charge of the partnership.

(c) The respondent was to operate the business for the benefit of the partnership all in accordance with The Limited Partnerships Act.

(d) Its partners were seven “trusts”: the Anthony Leon Family Trust, the Edward Leon Family Trust, the Lewie Leon Family Trust, the George Leon Family Trust, the George Leon Trust, the Joseph M Leon Family Trust and the Joseph M Leon Trust which were limited partners.

(e) The profits of the partnership were to be distributed as follows:

To understand the situation with its complexities it is necessary to know something of its background and to pick one’s way through some part of a maze of corporate entities and structures and documentation.

Anthony Leon, Edward Leon, Lewie Leon, George Leon and Joseph M Leon are brothers. There appears to have been a close family relationship among them. For years they have been associated with the furniture business.

It will be sufficient for the purpose of these proceedings to commence with the incorporation of five “Leon” companies prior to the year 1964. Into them were assembled at least some of the Leon furniture enterprises. Those five corporations and the only persons having any beneficial financial interest in them respectively were:

Those corporations formed a partnership using as their partnership name Ablan Leon Distributors and under that name carried on a furniture business. That partnership will sometimes be referred to as “the corporations’ partnership”.

At that stage, the five brothers, through their respective corporations, had for all practical purposes control of the business then known as Ablan Leon Distributors.

In 1964 T G Spencer, Esq was the Leons’ general solicitor.

By letter dated March 5, 1964 Mr Mark Perlmutter, of Perlmutter, Orenstein, Giddens, Newman and Kofman, chartered accountants, wrote to Mr Spencer as follows:

Re: Re-organization of Leon Companies

Further to our meeting with you and Miss Margaret Leon in Welland on February 27, we are setting out below a general outline of our proposed plan for the re-organization of the “Leon Companies’’.

It can hardly be doubted that the new Section 138A(2) of the Canadian Income Tax Act will lead to the wholesale abandonment of the use of partnerships of corporations as a device for splitting up the Income of a business among a number of non-associated corporations. The extremely broad powers entrusted to the Minister of National Revenue to direct that corporations be deemed to be associated, if he is satisfied “(a) that the separate existence of those corporations 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 is to reduce the amount of taxes that would otherwise be payable under the Act” will almost certainly be exercised broadly in the case of partnerships of corporations.

Accordingly, if the partnership is comprised of individuals and/or trusts and not more than one corporation, the partnership will not be affected by Section 138A(2) which comes into play only where a number of corporations are involved. In this connection, it is suggested that consideration be given to the device of the limited partnership comprising a general corporate partner and several trusts as limited partners.

Aside from the tax benefits to be derived from this scheme, it is suffice to mention that the trusts provide a useful tool in the planning of the estates for the “Leon family”.

A limited partnership differs from an ordinary partnership in two ways; first, a limited partner contributes a stated amount of capital or property to the partnership and is not liable for the firm’s debts beyond that amount, unless he acts in such a way as to deprive himself of the “privileges” of a limited partner and, secondly, while a limited partner may inspect the firm’s books, and examine into the state and progress of the partnership business, and may advise as to its management, he cannot take any other part in the management of the business, nor can he bind the firm by any contractual obligations.

The number of children in each family who are to become beneficiaries of the trusts, is set out as follows:

a) Anthony	—	6
b) Edward	—	10
c) George	—	5
d) Lewie	—	5
e) Joseph	—	5

The limited partnership known as Ablan Leon Distributors would consist of the following partners:

a) A general corporate partner known as Ablan Leon Distributors Limited owned by the male parents and paying income taxes at corporate rates.

b) Five limited partners each comprising a trust and paying income taxes at personal rates. Each trust will be set up for the wife and children of the male parent.

Using as an example an annual net income of $500,000, 10% or $50,000 would be allocated to the general partner and 18% or $90,000 to each trust partner. Within each trust the $90,000 is broken up into equal parts as between the children, wife and the trust itself. The income tax exigible under this scheme is set out below:

a) Ablan Leon Distributors Limited on $50,000 income (assuming for the time being that this corporation will not be associated with other corporations presently owned by the Leon family), a tax as follows:

On $35,000 @ 23%	$8,050
On $15,000 @ 52%	$7,800
Total Tax	$15,850

b) “Anthony trust” on $90,000 income or 8 units of $11,250 each, a tax as follows:

Trust on $11,250	$2,610
Beneficiaries (wife and 6 children) on 7 units of
$11,250 each — 7 x $2,260 or	$15,820
Total Tax	$18,430

c) “Edward trust” on $90,000 income or 12 units of $7,500 each, a tax as follows:

Trust on $7,500	$1,440
Beneficiaries (wife and 10 children) on 11 units of
$7,500 each — 11 x $1,180 or	$12,980
Total Tax	$14,420

d) “George trust” on $90,000 income or 7 units of $12,857 each, a tax as follows:

Trust on $12,857	$3,210
Beneficiaries (wife and 5 children) on 6 units of
$12,857 each — 6 x $2,820	$16,920
Total Tax	$20,130
e) “Lewie trust” on $90,000 income or 7 units of
$12,857 each, a tax as computed for the
“George trust”	$20,130
f) “Joseph trust” on $90,000 income or 7 units of
$12,857 each, a tax as computed for the
“George trust”	$20,130

The aggregate tax payable by the limited partnership pursuant to this example as compared to the tax exigible if the business continued as a partnership of corporations is set out below.

TAX

			As	Effective
		As	Limited	Tax Rate
		Associated	Partnership	of Limited
	Income Corporations		of Trusts Partnership
a) Corporation owned
by male parents $50,000		$15,850	$15,850	31.7%
b) Anthony’s family $90,000		$46,800	$18,430	20.5%
c) Edward’s family $90,000		$46,800	$14,420	16.0%
d) George’s family $90,000		$46,800	$20,130	22.4%
e) Lewie’s family	$90,000	$46,800	$20,130	22.4%
f) Joseph’s family $90,000		$46,800	$20,130	22.4%
	$500,000	$249,850	$109,090	21.8%

The overall average rate of tax using this scheme is about 22% and, of course, we have assumed, for this comparison, that the wives and children earn no other income. It is readily apparent from the above that on an annual net income of about $500,000 there can be an annual tax saving of about $140,000. This tax saving is further augmented in that there is no further tax to pay when distributions are made by the trusts to the beneficiaries as exists when distributions are made by corporations to the shareholders.

The more obvious advantages of re-organizing to a limited partnership comprising a general corporate partner and several trusts as limited partners are as follows:

a) An immediate tax saving on profits earned by the business.

b) Avoidance of double taxation except to the extent that business profits are received by the general corporate partner. Tax is paid by the corporations on the partnership profits and again by the shareholders when dividends are declared and paid by the corporations. On the other hand, the partnership profits received by the trusts are taxed in the hands of the trusts and beneficiaries and when distributed to the beneficiaries are received tax free.

c) The husbands, as shareholders of the general corporate partners, continue to control and manage the business.

d) The husbands may be further protected by an agreement drawn between the partners which would contain provisos similar to that in the usual shareholders and/or partnership agreement, i.e. delineation of managerial and administrative functions, capital requirements, survivorship and buy-sell arrangements.

e) The trust document may provide features that enable the male parent to directly or indirectly control his family trust as follows:

1) Said trusts can be discretionary as to the distribution of income in each year, i.e. The income beneficiaries and the percentage of allocation of income may be altered from year to year.

2) The male parent may replace trustees at his discretion.

3) The capital accruing to the trust may be vested to the beneficiaries of the trusts at a stated age, say thirty, or at the death of the male parent.

f) Substantial estate planning advantages may be gained through the complete or partial freezing of the estates of the male parents by allowing the business income to accrue to the trusts.

g) The re-organization which is in the main of a legal and accounting nature, will not cause an interruption in the operation of the business other than that suppliers, taxing authorities, and various others will be required to be notified of the change.

The implementation of this type of re-organization and the drafting of the trust documents requires exacting and expert judgement. In this connection, there are many pitfalls to watch for, some of which are set out below.

a) The dangers of certain sections of the Income Tax Act. Where income producing property is transferred to minors and/or wives or where rights to income are transferred in certain circumstances the transaction may fall within the ambit of Sections 16, 21, 22, and 23 and, accordingly, such income would remain taxable in the hands of the transferor. It is necessary then to effect the re-organization in such a manner that these Sections are circumvented. Where several trusts are involved, under certain circumstances, pursuant to Section 63 all of the trusts may be taxed as one trust.

b) The trust must be irrevocable and, accordingly, as it cannot be subsequently altered, it must be carefully tailored to give legal effect to the intention and requirements of the families and as well provide the male parents with the control features referred to earlier in our memo.

c) The trusts must be settled by a non-resident. If settled by a Canadian resident, we would have the problems referred to in a) arising out of transfers to minors, etc.

d) Furthermore, it is the consensus of opinion of some tax experts that the capital contributions of the partners be equal and substantial. There is often considerable difficulty to provide the trusts with the wherewithal to make the necessary capital contribution in such a manner so to avoid those sections of the Income Tax Act outlined above.

e) The name of the general corporate partner must be similar to the name of the limited partnership, ie Ablan Leon Distributors Limited.

f) The ownership of the general corporate partner must be set up such that this corporation is not associated, for tax purposes, with other Leon owned corporations.

It has been our practice, as a precautionary measure, to recommend that at the appropriate time the client engage legal tax counsel specializing in this form of re-organization to review the proposed plan and proposed related documents. We solicit your thoughts on this point.

When the form of re-organization has been adopted by the “Leon family” it is important that the effective date of the re-organization be set as early as possible in order to minimize the profits of the existing partnership of corporations which will be subject to the 52% tax rate pursuant to Section 138A(2) and, in this connection, it will be necessary to instruct the “Leon companies” to

a) Arrange to take inventory and close off the books and records of the old business as at the effective date and prepare financial statements.

b) Arrange that certain banking and possibly other transactions be effected prior to the effective date (to be discussed).

When the effective date is known we will further provide a lengthy checklist to serve as a guide to the steps to be followed to effect the re-organiza- tion.

The opinion stated herein with respect to this form of re-organization is based on the relevant sections of the Income Tax Act as it is presently constituted and, of course, the acceptability of this re-organization, which is an offspring of Section 138A(2) only recently enacted as law (December 3, 1963) has not yet been indicated by the Income Tax Department.

Copies of this letter have been furnished to the “Leon family” that they may be apprised of all current developments in this matter.

Please feel free to contact us should you require any additional information or explanations.

There appears to have been some attempt to implement a plan based on the one outlined by Mr Perlmutter. The Leon Enterprises would not, because of it, more efficiently be carried on. They would not buy or sell to better advantage. They would not make or save additional money except the hoped-for saving in taxes. It seems to me that it would not be a reorganization of which the customers of the firm were intended to know. The partnership name, Ablan Leon Distributors, would remain the same. In fact that seems to have been suggested by Mr Perlmutter as one of the advantages of the plan when in listing in his letter what he called “The more obvious advantages of re-organizing” he said:

g) The re-organization which is in the main of a legal and accounting nature, will not cause an interruption in the operation of the business other than that suppliers, taxing authorities, and various others will be required to be notified of the change.

Further correspondence and meetings followed.

Obviously it was hoped that such a plan would greatly reduce the income tax arising from the Leon furniture enterprises. That was to be accomplished by making it appear that a large part of the profits from Ablan Leon Distributors would no longer flow to the Leon brothers, albeit indirectly, through their interests in the companies forming the corporations’ partnership, but to members of the brothers’ families.

In broad outline the planning contemplated:

(a) the incorporation of a company which would be controlled by the five Leon brothers, and in which each of them would have an equal interest, namely twenty per cent;

(b) the formation of seven “primary trusts” five of which would be “family trusts”, one related to the family of each of the brothers, one in which George Leon would also benefit and one in which Joseph M Leon would also benefit;

(c) the formation of “secondary trusts” one for each of the wives and issue of the Leon brothers, the secondary trusts to be beneficiaries of the family trusts;

(d) the corporation and the primary trusts would form a limited partnership, the corporation to be the general partner and the primary trusts, limited partners;

(e) the five corporations forming the corporations’ partnership carrying on business under the name Ablan Leon Distributors would sell the assets of that partnership to the limited partnership which would also use the name Ablan Leon Distributors; and

(f) Lewie Leon Limited would sell at least part of its assets to the limited partnership.

Under such a plan, if implemented, the five Leon brothers as a group would still, through their interest in the corporate general partner, have control over the Leon enterprise trading under the name Ablan Leon Distributors.

I find that if avoidance of a large amount of income tax was not the only purpose of the planning it was its chief purpose. I suppose that the Leon brothers. were not averse to obtaining whatever incidental benefits the planning might bring in its wake. However ! am satisfied that in any event that the chief motivation was the hope of substantial reduction of liability for income tax. I find that there would have been no attempt to adopt the device if they did not hope thereby greatly to reduce income tax from what it would have been without that device.

I am not at all impressed with the suggestion, even the protestations, that the brothers were making sacrifices for the benefit of their wives and children. The built-in financial benefits for themselves through indirect control of remuneration and the attempt to use the secondary trusts for payment for those things which husbands and fathers in their financial position would ordinarily supply are two circumstances sufficient to negate such a suggestion.

I have had regard for the principle so vigorously urged upon me by counsel for the respondent. that every man is entitled so far as he honestly can to order his affairs so that tax attaching is less than otherwise would be.* [1]

However as well settled as that general principle is it is not to be construed as an encouragement nor as an invitation to avoidance of taxation.

I also have in mind the comments regarding “substance” in Commissioners of Inland Revenue v The Duke of Westminster, relied on by counsel for the respondent. Still, in my view, when dealing with matters associated with attempted tax avoidance the substance of the matter is not something which may simply be disregarded. Indeed, when the reasons for their Lordships in that case are considered in their entirety it seems to me that it is not an authority for the proposition that in these cases substance as distinguished from form is irrelevant and so of no importance.

The matter of substance was dealt with by Cartwright, J (as he then was) when delivering the judgment of the majority of the Court in MNR v Atlantic Engine Rebuilders Limited, [1967] SCR 477; [1967] CTC 230 at 231 ; 67 DTC 5155, he said:

In Dominion Taxicab Association v MNR, [1954] SCR 82 at 85; [1954] CTC 34 at 37, it was said in the judgment of the majority of the Court:

“It is well settled that in considering whether a particular transaction brings a party within the terms of the Income Tax Act its substance rather than its form is to be regarded.”

The necessity for very careful appraisal of the evidence when the reason for a scheme is to achieve tax advantages was dealt with by Jackett, CJ in Amelia Rose v MNR, [1973] FC 65; [1973] CTC 74 at 77; 73 DTC 5083 at 5085, when he said:

It does not seem to be in doubt that the reason 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.

Although the facts in Kingsdale Securities Co Ltd v MNR, [1973] CTC 230; 73 DTC 5194, per Collier, J, are not the same in all respects as are the facts in this case there is ample similarity to bring it within the ambit of this cause and to give it relevancy here.

The company planned to be the general partner was incorporated under Ontario’s laws. That corporation is the respondent, Ablan Leon (1964) Limited.

Named as setilor in all of what purport to be the instruments of settlement of trusts is Eddie John Egnatios, a brother-in-law of the Leon brothers. In all of them Theodore Grenfell Spencer and Marjorie Leon are named as trustees.

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.’”

On the other hand not to be overlooked are that distinguished jurist’s comments on the effects of surrounding circumstances, motivation and in some cases in matters of taxation the necessity to go beyond the corporate entity.

Mr Egnatios’ evidence included statements to the effect that he had spoken about the matter to Anthony Leon, Marjorie Leon, Mr Spencer and Mr Perlmutter, that he was aware of the purpose of the seven trusts, that it was to form a partnership to acquire and operate the Leon furniture business and that the beneficiaries would be the wives, children and grandchildren of his brothers-in-law.

Mr Anthony Leon said that it was his personal intention to pass on, to sell his interest to his wife and children through the planning they had discussed. If that was his intention the documentation, even if it were effective, would result in a situation which would fall short of that.

Mr Anthony Leon said that he had a “couple” of meetings with Mr Egnatios when he said he “discussed” with him that there was interest on the part of his brothers to form trusts as they were going to sell their business to the children and that Egnatios would be a settlor for the purpose of forming these trusts and he was very willing to oblige. He said the purpose of the discussions was to have Egnatios the settlor.

Included among the exhibits are photocopies of what purport to be instruments of settlement of trusts. There are 43 of them. They bear date April 27, 1964.

In five of them (called family trusts) the beneficiaries named are: The wife of the Leon brother for whose family the family trust is claimed to exist, his children and grandchildren already in being or who shall be born before the vesting day as therein defined and trusts for the wife and individual children of that brother which are established prior to or contemporaneously with the settlement and which are listed in a schedule annexed to the instrument.

In the Anthony Leon family trust document the trusts listed in the schedule are the Ellen Ann Leon Trust, the Terrance Thomas Leon Trust, the Marjorie Mary Leon Trust, the Robert Simon Leon Trust, the Thomas Francis Leon Trust, the Deborah Elizabeth Leon Trust and the Cynthia Ann Leon Trust.

In the Edward Leon Family Trust document the trusts listed in the schedule are the Alice Leon Trust, the Jerome Edward Leon Trust, the Charlene Ann Leon Trust, the Alice Elizabeth Leon Trust, the Diane Patricia Leon Trust, the Michael Edward Leon Trust, the Edward Florian Leon Trust, the Timothy Todd Leon Trust, the Shawn Edward Leon Trust, the Leah Theresa Leon Trust and the Darlene Marie Leon Trust.

in the Lewie Leon Family Trust document the trusts listed in the schedule are the Margaret Ann Leon Trust, the John Ablan Michael Leon Trust, the Peter Anthony Leon Trust, the Lou Ann Margaret Leon Trust, the Mark Joseph Leon Trust and the Elizabeth Mary Leon Trust.

In the George Leon Family Trust document the trusts listed in the schedule are the Marie Genevieve Leon Trust, the George Joseph Leon Trust, the Paul Davis Leon Trust, the Richard Michael Leon Trust, the Ronald Francis Leon Trust and the Karen Marie Leon Trust.

The provisions of the George Leon Trust instrument are similar to those of the George Leon Family Trust instrument except that the schedule lists George Leon, Marie Leon, Paul Davis Leon, Ronald Francis Leon. That schedule does not list any trusts.

In the Joseph M Leon Family Trust document the trusts listed in the schedule are the Laurice Clare Leon Trust, the Jolene Ann Leon Trust, the Joseph Michael Leon II Trust, the Tara Marie Leon Trust, the Leslie Jane Leon Trust and the David Ablan Leon Trust.

The provisions of the Joseph Leon Trust instrument are similar to those of the Joseph Leon Family Trust instrument except that the schedule lists Joseph M Leon, Laurice Clare Leon, Jolene Ann Leon, Joseph Michael Leon II, Tara Marie Leon, Leslie Jane Leon and David Ablan Leon. That schedule does not list any trusts.

The five family trusts, the George Leon Trust and the Joseph M Leon Trust are referred to as the primary trusts. The other 36 of what purport to be instruments of settlement relate to the trusts listed in schedules attached to the family trust instruments. These are referred to as secondary trusts.

In those family trust instruments there is a provision to the effect that in the event the trustees shall at any time be unable to agree on a course of conduct or if any dispute occurs in connection with the settlement of any matter arising out of the trust agreement the settlor shall appoint a third trustee who shall be solely for the purpose of resolving the dispute and upon such dispute being resolved the third trustee shall forthwith resign. There is also a provision that the settlor or any other person may add property to the trust.

Other than the foregoing no rights or powers are reserved to the person named as settlor. On the other hand the wording of those family trust agreements purports to give wide powers to the brother for whose family the family trust is claimed to exist. The powers so provided for include retiring a trustee and substituting another and for directing the trustee to pay or apply the whole or a part of the income and/or capital of the trust estate to or for benefit of one or more of the beneficiaries as that brother shall think fit.

Counsel agreed that all secondary trust agreements, for persons in esse, except the Laurice Clare Leon Trust form, are not in form as executed by Mr Egnatios.

lt would appear that some person or persons other than Mr Egnatios substituted some pages in the secondary trust instruments for pages there when Mr Egnatios signed them.

Although there was no suggestion that the secondary trusts per se were partners of the respondent, if the trust documentation had efficacy the secondary trusts were integral parts of the trust scheme. The proposed trust device had in contemplation the passing of profits or some of them through the primary trusts into the secondary trusts. If the scheme in its overall aspect was to be implemented not only would the primary trusts have to be actual and valid but so would the secondary trusts. For the overall purpose sought to be accomplished the two categories of trusts are not separable. Accordingly substitution of pages in the secondary trusts would not only affect the secondary trusts, in my opinion it would taint the entire documentation.

I am satisfied that Mr Egnatios issued 7 cheques for $100 (US) each and 36 cheques for $25 (US) each, that they were made payable to the order of Miss Leon and Mr Spencer, that on the cheques they, as payees, were, designated trustees and that there was no indication on any of the cheques as to trusts in respect of which they respectively were to be applicable. Mr Egnatios’ evidence was to the effect that the trusts were funded by the cheques.

I am satisfied that bank accounts were opened in the Canadian Imperial Bank of Commerce in Welland in the names of the trusts and that one of the $100 cheques was deposited in each of the accounts opened in the names of the primary trusts and one of the $25 cheques was deposited in each of the accounts opened in the names of the secondary trusts.

One of the exhibits is a photocopy of what purports to be a limited agreement dated July 28, 1964 between Ablan Leon (1964) Limited therein called the General Partner and The Lewie Leon Family Trust, The George Leon Family Trust, The Anthony Leon Family Trust, The Edward Leon Family Trust, The Joseph M Leon Family Trust, The George Leon Trust, and The Joseph Leon Trust, therein called the Limited Partners.

In that document there are, inter alia, provisions to the following effect:

(a) the parties are to carry on business as a limited partnership pursuant to The Limited Partnerships Act, RSO 1969, c 215 and amendments thereto under the firm name of “Ablan Leon Distributors” commencing May 1, 1964 and continuing until the termination of the partnership on April 30, 1984 or until earlier terminated pursuant to the provisions of the agreement;

(b) the general partner is not to be required to make any contribution to the partnership.

(c) each of the limited partners is to contribute as its capital contribution the following amounts:

(d) the general partner to be entitled to receive 10% of the profits of the partnership in any fiscal year; the remaining 90% of the profits to be divided among the limited partners in the following proportions:

(e) “The profits of the partnership shall be distributed annually by the partnership to each of the partners in accordance with their respective interests, provided that the General Partner shall be entitled to require any one or more of the Limited Partners to lend to the partnership an amount not in excess of the amount of the profits distributed to that partner by the partnership for such year upon such terms as the General Partner may determine, provided that such loans shall bear interest at the rate of 6% per annum, payable yearly for a term not exceeding twenty (20) years.”

One could easily enough understand that it might very well be in the interests of a business not to draw out profits and to leave them for the purposes of financing and facilitating growth. One would expect that a decision in that regard would be based on some sort of joint agreement. One would not expect to find in a reasonable and fair partnership agreement, drawn according to generally accepted commercial practices and entered into for the normal carrying on of a business which hopefully would be for the benefit of all parties a provision whereby one of the partners could, by an expedient of unsecured loans back to the partnership, have it within its power to, in effect, withhold the use of the profits from its partners or one or more of them as it might select (and so with the accompanying power of discrimination) for as much as twenty years. Not only that but here, subiect to the 20 years limit and the 6% rate, the terms of the loans would be as that partner would determine. The bizarre nature of such a provision is the greater when, as here, the general partner, the one which is to make the decision, makes no cash contribution to the capital and does not bind itself to lend to the partnership its profits or any part of its profits. Furthermore there is no time limit fixed for the continuance of the right vested in the respondent. In my view the fact that the loans back are to bear interest at 6% per annum payable yearly does not change the situation except to point up its unlikely nature when regard is had to variations in interest rates in relatively short periods.

Then there is also the provision:

The partners shall draw such amounts from the partnership funds from time to time as the General Partner shall determine and any such amounts drawn by the partners shall be drawn as nearly as may be practical at the same time.

It is felt that such provisions would not likely be found or tolerated in a real business transaction between knowledgeable people. As I see it such provisions certainly, to say the least, do nothing to persuade that the agreement has the characteristic of commercial reality.

There might be logic in a situation where the five brothers, who had proven themselves successful in business, insisting upon the business being conducted as they see fit and the limited partners being quite content with such an arrangement. However that is something quite different from a situation where one of the partners is permitted to have such arbitrary control over the funds, including the profits, of the other partners and also with the attendant risk of those other partners being subject to the possibility of discriminatory practices during the entire term of the partnership.

The limited partnership agreement, so-called, bears date April 28, 1964 but there is good reason to believe that it was not executed on that day. Signing on behalf of Ablan Leon (1964) Limited are Anthony Leon and Joseph M Leon. According to the minute book of Ablan Leon (1964) Limited, Anthony Leon and Joseph M Leon did not even become shareholders of that company until April 29, 1964.

On April 30, 1964 a “Certificate of Limited Partnership” was registered which referred to entry into partnership under the name of Ablan Leon Distributors. That certificate contains the following:

The partnership is to commence on the 30th day of April, 1964 and is to terminate on the 30th day of April, 1969 or on such other day as the partnership shall by agreement decide.

Accordingly if the “limited partnership agreement” is to be accepted as correctly setting out the terms of the partnership there is a contravention of clause 5(e) of The Limited Partnerships Act which provides:

5. The persons desirous of forming such a partnership shall make and each of them shall sign a certificate (Form 71) which shall contain,

(e) the time when the partnership is to commence and the time at which it is to terminate;

Another exhibit is a photocopy of what purports to be an “Agreement made this 1st day of May, A.D. 1964” Wherein Antomel Limited, Midgemar Limited, Geormar Limited, Timmyal Limited and Jomila Limited carrying on business in partnership under the name of “Ablan Leon Distributors” are called the vendors and Ablan Leon (1964) Limited and The Lewie Leon Family Trust, The George Leon Family Trust, The Anthony Leon Family Trust, The Edward Leon Family Trust, The Joseph M Leon Family Trust, The George Leon Trust and The Joseph Leon Trust said to be “carrying on business as a Limited Partnership under the name of ‘Ablan Leon Distributors’ are called the purchasers.

The following are extracts from it:

That the Purchasers shall purchase and the Vendors shall sell the whole business and undertaking presently carried on by the Vendors, including but without restricting the generality of the foregoing:

As part of the consideration for the said sale, the Purchasers shall assume, undertake, pay, satisfy, discharge, perform and fulfill all debts, liabilities, contracts and engagements of the Vendors in connection with the said business, save and except the Vendors’ accrued management salaries, as shown in the annexed Financial Statement, . . . The liabilities hereby assumed shall not exceed the aggregate of the sum shown on the attached Balance Sheet, namely $905,178.95.

The Purchasers shall pay the Vendors, or their nominees, the balance of the purchase price, namely $954,280.11 in the manner shown on the state- ment hereto annexed and marked Schedule “A” In addition the Purchasers shall assume and be responsible for the payment of notes now payable to Ablan Leon Limited and David’s Electric Limited in their respective amounts $426,393.12 and $77,454.09, all as are shown on the said annexed Schedule marked “A”.

Miss Marjorie Leon, a sister of the Leon brothers and a person long and closely associated in an executive capacity with the Leon enterprises was a witness. She stated that the agreement for sale was not signed on May 1, 1964 and not until the statement came out which she said she thought was July or August.

Another exhibit is a photocopy of what purports to be an “agreement made in duplicate the 1st day of May, 1964” wherein Lewie Leon Limited is called the Vendor and Ablan Leon (1964) Limited and The Lewie Leon Family Trust, The George Leon Family Trust, The Anthony Leon Family Trust, The Edward Leon Family Trust, The Joseph M Leon Family Trust, The George Leon Trust and The Joseph M Leon Trust said to be “carrying on business as a limited partnership under the name of ‘Ablan Leon Distributors’” are called the Purchasers.

The following are extracts from it:

That the Purchasers shall purchase and the Vendor shall sell the whole business and undertaking presently carried on by the vendor, including but without restricting the generality of the foregoing;

As part of the consideration for the said sale, the Purchasers shall assume, undertake, pay, satisfy, discharge, perform and fulfill all debts, liabilities, contracts, and engagements of the Vendors in connection with the said business, save and except the Vendor’s accrued management salary if any. . . . The liabilities hereby assumed shall not exceed the aggregate of the sum shown upon the attached balance sheet, namely $826,583.14.

The deficit between the assets and the liabilities in the amount of $70,845.22 shall be satisfied by means of a promissory note signed by the Vendor in favour of the Purchasers in the total amount of $70,845.22 which note shall be repayable on demand without Interest. At the option of the Vendor a series of promissory notes instead of one note shall be executed and delivered to the Vendor, likewise payable on demand, without interest.

The strange and unusual character of the plan is emphasized by the purchasers acquiring a business where the liabilities exceeded the assets by $70,845.22, assuming those liabilities to the extent indicated and taking an unsecured note or notes for the amount of the deficit and that without interest.

Although the Lewie Leon Limited sale agreement provides for the “limited partnership” purchasing “the whole business and undertaking presently carried on by the Vendors”, the evidence of Marjorie Leon was that Lewie Leon Limited did not sell to the limited partnership a 50% interest in Time Furniture Interiors, a retail store. Thus, if her evidence is correct, the Lewie Leon Limited document is wrong.

Marjorie Leon undertook to find the $50,000, which, according to the limited partnership agreement, the primary trusts were, in the aggregate, to make as a cash capital contribution to the partnership. She said that she called the bank manager and told him that Mr Spencer and she wanted to borrow $50,000, that she told him that the money was to be deposited to the credit of the seven trusts and how it was to be deposited. Her evidence was also that a life insurance policy of hers was to be deposited as security. She signed a demand note to the order of Canadian Imperial Bank of Commerce for $50,000. She was the only signatory. She did not indicate on the note that she was signing as trustee. On the back of the note there is: “I hereby waive presentment, protest and notice of dishonour and I guarantee payment of the within note.” Beneath are typed the words: “The Anthony Leon Family Trust”, “The Lewie Leon Family Trust”, “The Edward Leon Family Trust”, “The George Leon Family Trust”, “The Joseph M Leon Family Trust”, “The George Leon Trust”, and “The Joseph M Leon Trust”. Mr Spencer and Miss Leon signed as trustees in respect of each of them. According to Miss Leon, the $50,000 was ultimately paid by the trusts to the bank.

I am satisfied that $5,000 of the $50,000 went into each of the accounts in the Canadian Imperial Bank of Commerce in the names of M Leon and T G Spencer, trustees for the George Leon Family Trust, the Joseph M Leon Family Trust, the George Leon Trust, and the Joseph M Leon Trust and that $10,000 went into each of accounts in that bank in their names, trustees for the Edward Leon Family Trust, the Anthony Leon Family Trust, and the Lewie Leon Family Trust.

After that the situation in connection with that $50,000 becomes confused.

The “Bank Wholesale” account in the ledger of Ablan Leon Distributors (presumably the corporations’ partnership) as at April 30/64 shows a credit balance of $8,257.97. Then written as a debit, under date April 30/64 there is a $50,000 debit which results in a debit balance of $41,742.03. It would seem that that $50,000 is associated with the $50,000 borrowed by Miss Leon from the Canadian Imperial Bank of Commerce.

Under date May 1/64 there is written in $41,742.03 under the credit column resulting in a nil balance.

A statement of Canadian Imperial Bank of Commerce in the name of Ablan Leon Distributors, the corporations’ partnership, shows a credit balance as of April 30, 1964 of $388.88. Then it shows a cheque for $388.88 resulting in a nil balance. There the printed portion of the statement ended. Below it there is written:

What seems to be the $50,000 borrowed by Miss Leon appears as a deferred loan payable in the statement of Ablan Leon Distributors, the corporations’ partnership, as at April 30, 1964, which statement appears to bear a certificate of its chartered accountants.

What seems to be the same $50,000 appears as a liability of the corporations’ partnership in a statement headed “Sale of net assets of Ablan Leon Distributors as at May 1, 1964” which shows how the sale price of $954,280.11 for its business is arrived at.

Miss Leon dismissed this confused situation by saying that the statement was wrong and that the auditor told her to make an adjusting entry. I would think that Miss Leon is correct when she says that the statement is wrong. On the other hand I do not feel the matter can so easily be dismissed. It does not explain how what appears to be the $50,000, which according to the limited partnership agreement the trusts were to contribute as capital to the partnership, could have been made to appear a liability of the corporations’ partnership, the vendor, ostensibly selling its assets to that so-called partnership.

The matter becomes still more irrational as a result of the evidence of E H Taylor, an assistant accountant of the Canadian Bank of Commerce at Welland. He referred to the loan in the name of Marjorie Leon in the amount of $50,000 obtained April 30, 1964. He said the interest accrued on the loan was charged to the account of Ablan Leon Distributors. He also said he did not know who paid the interest. Miss Leon said that if the interest was charged to Ablan Leon Distributors she believed it was charged back to the trusts. One wonders why these experienced business people and their auditors would permit such a situation to exist.

lt may be that no one treated the exercise surrounding the “cash contribution” of $50,000 with seriousness. It would seem that it would not be beyond possibility that the $50,000 cash contribution to capital said to have been made by the limited partners was merely brought into the picture in the hope of meeting the problem posed by Mr Perlmutter in his letter dated March 5, 1964 to Mr Spencer when he wrote:

Furthermore, it is the consensus of opinion of some tax experts that the capital contributions of the partners be equal and substantial. There is often considerable difficulty to provide the trusts with the wherewithal to make the necessary capital contribution in such a manner so as to avoid those sections of the Income Tax Act outlined above.

lt does seem that much which surrounds the $50,000 takes the plan further away from reality. It is difficult to imagine such a a situation in a real business transaction.

The “profit” flow and its intricacies is not without relevant interest. According to Miss Leon it was something to the following effect:

1. Each primary trust received its percentage of the profits of the partnership which it was decided to distribute.

2. A direction would be given to distribute nearly all of the share of the profits paid into a primary trust among the secondary trusts.

3. Some of the money paid into the secondary trusts would be used for the requirements of the respective beneficiaries of the secondary trusts and income taxes attributable to it.

4. Nearly all the money in the secondary trusts not used for those requirements of the beneficiaries of the secondary trusts and such taxes would be lent to the respective primary trust whence it came. The primary trust, would give the secondary trust two promissory notes for it payable in twenty years with interest at 6% per annum. The sum of the amounts of the two notes would be the amount lent. One note would be endorsed over to the beneficiary of the secondary trust which had lent the money represented by it to the primary trust.

5. The primary trust would lend nearly all the money it received from its secondary trusts to the partnership retaining something for possible needs of the beneficiaries of the secondary trusts. There would be a note from the partnership to the primary trust payable in twenty years at 6% per annum.

As I understand it, it is the position of the respondent that the change over from the corporations’ partnership to what the respondent submits was the limited partnership was on May 1, 1964. In any event that is how i construe the following, an extract from paragraph 13 of the respondent’s reply to notice of appeal:

From May 1, 1964, the date upon which the Partnership purchased the business “Ablan Leon Distributors” until February 28, 1969, the Partnership carried on the wholesale and retail furniture, home furnishing and appliance business under the name “Ablan Leon Distributors”.

Accordingly one essential matter to be decided is whether there were any primary trusts in existence on May 1, 1964. If those trusts did not exist on May 1, 1964 they could not then have been partners.

It is common ground that the trust instruments of settlement were not executed by May 1, 1964. There is not agreement as to when they were executed.

Mr Egnatios said that there were no documents. evidencing the trusts signed by him at the time he sent the cheques, that he did not know the date when they were in existence and that he did not remember when he signed them.

At one time Miss Leon testified that the trust agreements were signed sometime in the fall of 1964. At another time she said that she thought it was July or August. On cross-examination she said that to the best of her memory she was asked before the Tax Review Board the following questions and gave the following answers.

Q. Do you have a memory as to when the trust indentures were actually Signed? A. I was about ready to say I am almost sure. It seems to me on the Thanksgiving weekend.

Q. Of what year? A. Of 1964.

Q. That would be in October sometime? A. That's right.

There is evidence which would indicate that the trust instruments were signed sometime later than October 1964 and I am inclined to the view that they were.

I am of the opinion that it is immaterial whether the primary trust documents were signed as early as July 1964 or, as I think they were, much later. What is of importance is that they were not signed until a considerable and significant period of time after May 1, 1964 and after the registration of what purports to be the certificate of limited partnership, after the cessation of business by the corporations partnership and after the commencement of business by the corporations’ successor organization however that successor organization may have been constituted or whatever it may have been.

In connection with the documentation purporting to relate to the trusts, and in so far as that documentation is concerned, I find that on May 1, 1964, and at least for a significant period thereafter:

(a) no trusts were established;

(b) no trustees were appointed;

(c) Miss Leon and Mr Spencer were without authority and they did not have competence to execute what purport to be the limited partnership agreement and the certificate of limited partnership for registration; and

(d) the purported acts of Marjorie Leon and T G Spencer as trustees in connection with entry into partnership with the respondent, including execution of a limited partnership agreement, a certificate of limited partnership and agreements for sale with the corporations’ partnership and Lewie Leon Limited were all nullities.

In this connection four speculations might arise namely:

(1) Could subsequent execution of the documents create the trusts and Leon and Spencer trustees nunc pro tunc?

(2) Could a partnership have commenced from the time the trust instruments were signed?

(3) Could the respondent by treating the situation as though the trusts had been created and become its partners be tantamount to a situation where such circumstances actually did exist?

(4) If there were no trusts could the execution by Leon and Spencer constitute them partners personally?

As to the first of these speculations, if the acts of Leon and Spencer were nullities (as I find they were) those nullities, in my opinion, cannot be converted into. actualities by a subsequent circumstance. This would not be a. situation where there is modification of something already in existence. It would be an attempt to create something out of nothing.

One reason for the second speculation not having validity is because the position of the respondent is predicated upon the existence of a limited partnership as of a date not later than May 1, 1964. In my view there is nothing in the evidence indicating any contemplation by the respondent that a partnership did commence or might have commenced subsequent to May 1, 1964. Confirmatory is the extract from paragraph 13 of the reply to notice of appeal quoted above.

Furthermore, even it could be said that the partnership commenced when the documents were signed there was no definite evidence as to when such signing took place and the onus of proof in this connection is on. the respondent. Here, on the evidence, there could not be any prima facie presumption that the date of execution is the date of the documents.

Regarding the third speculation, though the respondent may have been and appears to have been content to treat the situation as though the trusts had actually been created, that could not be binding upon a third party such as the respondent and could not change the tax liability.

There were a number of acts and matters consistent with the existence of a limited partnership. There were the certificate of limited partnership, the banking documents, the opening of bank accounts, the deposits made in them and the opening of books of accounts. Although such things might well be expected if there were the trusts and if those trusts were partners of the respondent they do not of themselves create trusts. If the trusts were not constituted such matters were at best mere futilities.

One reason why the fourth speculation would be untenable would be because there would be an absence of consensus for such a result. The evidence does not disclose any intention on the part of anyone that Miss Leon and Mr Spencer would under any circumstances be contracting in their personal capacities. If they were not contracting in their representative capacities they were not contracting at all.

Furthermore, as I see it, they could not be considered to have created liability on themselves by holding out because all of the interested persons associated with the respondent, were or should have been as informed about the situation as were Miss Leon and Mr Spencer themselves.

However the position taken on behalf of the respondent at the trial was that, even if no trust had been created, by the documentation trusts were otherwise created and had been so created prior to May 1, 1964 and that Miss Leon and Mr Spencer were trustees under those trusts.

I do not agree with that submission.

It might be sufficient to point out how, in paragraph 4 of the respondent’s reply to notice of appeal, it pleads the manner of the trusts’ establishment namely:

By deeds of Settlement dated April 27, 1964 between Eddie John Egnatios, as settlor, and Theodore Grenfell Spencer and Marjorie Leon, as trustees, the following trusts were established:

(i) The Lewie Leon Family Trust, the beneficiaries of which are the wife and children of Lewie Leon and trusts for the benefit of such wife and children;

(ii) The George Leon Family Trust, the beneficiaries of which are the wife and children of George Leon and trusts for the benefit of such wife and children;

(iii) The Anthony Leon Family Trust, the beneficiaries of which are the wife and children of Anthony Leon and trusts for the benefit of such wife and children:

(iv) The Edward Leon Family, Trust, the beneficiaries of which are the wife and children of Edward Leon and trusts for the benefit of such wife and children;

(v) The Joseph M Leon Family Trust, the beneficiaries of which are the wife and children of Joseph M Leon and trusts for the benefit of such wife and children;

(vi) The George Leon Trust, the beneficiaries of which are George Leon, his wife and children;

(vii) The Joseph M Leon Trust, the beneficiaries of which are Joseph M Leon and his wife and children;—(all of which trusts are hereinafter sometimes collectively referred to as the “Trusts”).

Thus as I construe it the respondent’s pleading indicates a position of reliance upon documentation, and nothing else for the establishment of the trusts.

In any event and regardless of the respondent’s pleading if the documentation is inadequate (as I find it is) there is nothing else in the evidence to support the existence of the trusts under the circumstances here.

As I construe the effect of Mr Egnatios’ evidence it is that formation of a partnership to acquire the Leon furniture business would be expected to have been a relatively simple, uncomplicated and normal matter, notwithstanding the size of the business. It would have been no more than the formation of a partnership in the usual manner with accompanying documents containing expected provisions when business people join forces and resources in a common effort for their common good. However the operation claimed to be in existence here is quite different from that.

The operation claimed to exist here is complex, sophisticated and not what would be expected in normal business transactions. Profit of the limited partners would flow one way and then back by an expedient termed loans. All partners except one would be in a situation where matters affecting their capital and profits would be under the control of that one. There was the acquisition of a business from Lewie Leon Limited in which liabilities exceeded assets by $77,454.09.

Inconsistent, too, with the establishment of trusts by anything except written instruments is the designing of an elaborate set of documents which their planners must have hoped would so mesh that their purpose in reducing liability to income tax would prevail. Those instruments and the design and planning of them negative an intention on the part of anyone to establish trusts by anything except instruments in writing.

In my finding, the conversations which were had with Mr Egnatios were inadequate to establish trusts such as the respondent submits existed during the relevant periods.

Relevant is the role of Mr Egnatios, the nominal settlor of the trusts. Here the situation was not one where the beneficiaries of what are claimed to be the trusts were in any real sense the objects of the settlor’s bounty. The totality of his gifting was never meant to be more than the 7 token payments of $100 (US) and 36 token payments of $25 (US). If any real benefits might have accrued to the beneficiaries under the scheme they would have come from the Leon brothers.

I find that it was only by or on behalf of his brothers-in-law, the five Leon brothers, that his participation was brought about and that he participated only to oblige them.

It seems to me that participation was sought and obtained to meet one of the observations of Mr Perlmutter in his letter dated March 5, 1964 to Mr Spencer when he said:

The trusts must be settled by a non-resident. If settled by a Canadian resident, we would have the problems referred to in a) arising out of transfers to minors, etc.

Mr Egnatios was a resident of the United States.

I find that none of the planning of the terms and conditions of the instruments of settlement was done by Mr Egnatios and I find that all of them were developed either by the Leon brothers or their advisers. Other than furnishing the token cheques totalling $1,600 all Mr Egnatios did, in my finding, was acquiesce except in connection with the alteration of some of the secondary trust documents, after he had signed them. It would seem that not even his acquiescence was sought for that.

Mr Egnatios was, in my finding, merely a selection of the Leon brothers as a convenient instrument in what they hoped would be a tax avoidance scheme. In my view his function would more aptly be described as a nominee than as a settlor.

On behalf of the respondent, the issuing of the cheques by Mr Egnatios and his evidence in connection with an intention to form a partnership to acquire and operate the Leon furniture business were stressed in connection with the submission that the trusts were created even if the instruments of settlement were invalid. It seems to me that when these are considered together it becomes apparent that instead of supporting that theory, they are factors in its contradiction.

The statement of assets of Ablan Leon Distributors as at May 1, 1964, associated with the sale by Antomel Limited, Midgemar Limited, Geormar Limited, Timmyal Limited and Jo-mila Limited carrying on business as Ablan Leon Distributors shows gross assets of $1,859,459.06 and what is called a “‘net sale price” of $954,280.11. The concept of settlements of a total of $700 in trusts to join as partners (having a 90% interest in profits) in the purchase of a business of that magnitude takes the matter beyond reality and into fantasy.

In my opinion to establish a trust, which has for its purpose entering into a partnership, which in turn is to acquire a large and successful business, more is required than have someone make a token payment, call it a settlement, borrow other money, open a bank account and make a deposit in it.

I think that the attitude of the respondent toward the concept of a partnership might be indicated by two of its acts.

Two of the firm names used by Ablan Leon Distributors for businesses claimed to be assets of that firm were “Regal” and “Leon’s Furniture Market”.

In 1964 a declaration of business was signed on behalf of the respondent to the effect that it had carried on and intended to carry on the business as furniture manufacturers under the name Regal, that the said business had subsisted since June 30, 1964 and “that no other person is associated with me in partnership in the said business”.

On July 21, 1966 there was filed by Ablan Leon (1964) Limited a declaration that it carried on business under the name, style and firm of “Leon Furniture Market” and that the date of commencement of business was June 1, 1966.

If these declarations could be considered alone it might be that they would be attributed merely to inadvertence or mistake, but they must be considered in conjunction with all of the other relevant factors. Regard must be had to their cumulative effect.

The documentation is not such as to inspire confidence in the respondent’s position. Furthermore I do not consider that Miss Leon, Mr Egnatios or Mr Anthony Leon were impressive witnesses.

I find that none of the so-called trusts ever came into existence and that the respondent did not have any partners in the Ablan Leon Distributors operation.

Counsel for the respondent submitted also that if there was no partnership then there was no sale and that if anyone should be taxed it should be the vendors named in the agreements for sale.

That submission must be rejected.

Whatever may have happened to the assets, undertakings and businesses agreed to be sold by the corporations’ partnership and Lewie Leon Limited those vendors divested themselves of them. They discontinued doing business with them. As I see it they have no claim to the subject matter of the sales.

Another submission by the counsel for the respondent was that if there were valid sales all the respondent had was a 10% interest in the profits and accordingly could only be assessable in respect of 10% of the profits.

This submission must also be rejected. It implies that what was sold to the respondent was only a 10% interest in the assets. According to the sale agreements that is not so. The agreements for sale do not effect a division in interests allocating 10% only to the respondent. A relevant provision in the corporations’ partnership sale agreement is “That the Purchasers shall purchase and the Vendors shall sell the whole business and undertaking carried on by the Vendors”. There was an agreement for sale of the entire assets to the named purchasers as a group. There was not a sale of percentages of the business to the named “purchasers” individually.

The Lewie Leon Limited sale agreement was to the same effect.

It is in the “limited partnership agreement” that there is a reference to the respondent being entitled to 10% of the profits. The vendors in the agreements for sale were not parties to the limited partnership agreement. They did not participate in any division as between the named purchasers. Whatever the effect may be as between the parties to the limited partnership agreement it does not change or affect the agreements for sale. Furthermore it is my finding that the signing of the limited partnership agreement by Marjorie Leon and Mr Egnatios were nullities.

On the basis of my finding of non-existence of trusts the trusts could not have been recipients of the property sold or of any interest in it. The only entity in existence was the respondent. Accordingly it is my opinion that that property having passed from the vendors it could only have passed to the respondent and in its entirety.

I find that all of the assets and property dealt with in the agreement for sale passed to the respondent and that the respondent and it alone was carrying on the business known as Ablan Leon Distributors during the taxation years in respect of which the assessments were made.

The respondent has also: pleaded that “the Trusts were individuals and taxpayers within the meaning of the Act and as such paid income tax on the profits allocated to them under the terms of the Limited Partnership Agreement and on the interest paid them by the Partnership on loans made to the Partnership all in accordance with the provisions of the Act and therefore the Minister was wrong in including such profits and interest payments in the income of the respondent in its 1965, 1967, 1968 and 1969 taxation years”. (Paragraph 16 of reply to notice of appeal.)

In my opinion if that be so it still does not affect the result.

So far as these proceedings are concerned that is not to be construed as an admission by the Minister that either the trusts or the partnership did exist nor that the income in respect of which the tax was paid was the income of the trusts.

What is to be done in this cause is to deal with the question of liability for tax of the respondent—not the trusts. The trusts are not parties to these proceedings.

Procedures for collection of income taxes include, in the first instance self-assessment. If a taxpayer or a person claiming to be a taxpayer indicates in his return, even in error, that he should be assessed in respect of stated items and if the Minister is unaware of the error it would be no more than logical that the Minister would accept the return as being correct. Otherwise the procedure involving such selfassessment could not adequately work in practice. Of course if the Minister knows or learns of error against the taxpayer’s interest it would be just that proper adjustments be made at the appropriate time.

In this matter there was an extensive investigation by the Minister which led him to taking the action which he did. Even so he is not estopped from adopting the position he now does even if taxes based on an assessment against the trusts have been paid and retained.

Obviously the issues here are strenuously in contest. I think that the Minister is entitled to adopt the position he now does and maintain it at least until final decision without returning any tax paid by or on behalf of what are claimed to be trusts.

In any event if such taxes were paid by or on behalf of what are claimed to be trusts that is a matter between the payer and the Crown. What I am to decide here is the situation as between the parties to these proceedings.

The appeal is allowed. All the assessments of the respondent in dispute are restored. The appellant will have his costs.