Industrial Trailer Rentals Limited v. Her Majesty the Queen, [1974] CTC 775, 74 DTC 6577

Kerr, J:—This is an appeal in respect of a reassessment of income tax made by the Minister of National Revenue, dated December 29, 1972, for the plaintiff’s 1967 taxation year, and in particular from a direction made pursuant to subsection 138A(2) of the Income Tax Act

O

that the plaintiff was deemed to be associated with W J Miller Limited and Active Trailers Limited for its 1967, 1968 and 1969 taxation years.

Similar appeals were taken by the plaintiff in respect of reassessments for its 1968 and 1969 taxation years.

The appeals were taken by filing notices of objection, dated February 16, 1973, in which the plaintiff indicated that it wished to appeal immediately to the Federal Court of Canada and waived reconsideration of the said reassessments. By virtue of subsection 175(3) the appeals are deemed to be actions in this Court and the notices of objection are deemed to be statements of claim. The three appeals were heard together on common evidence. These reasons will serve for each of the appeals.

Subsection 138A(2), as it was prior to the amendment effected by SC 1970-71-72, c 63, section 1, reads as follows:

138A. (2) Where, in the case of two or more corporations, the Minister is satisfied

(a) that the separate existence of those corporations in a taxation year is not solely for the purpose of carrying out the business of those corporations in the most effective manner, and

(b) that one of the main reasons for such separate existence in the year is to reduce the amount of taxes that would otherwise be payable under this Act

the two or more corporations shall, if the Minister so directs, be deemed to be associated with each other in the year.

In its notices of objection the plaintiff states, inter alia, as follows:

1. Industrial objects to the re-assessment dated December 29th, 1972, and in particular, to the Minister issuing a direction under Section 138A(2) of

the Act.

<, 2. None of the main reasons for the separate existence of Industrial, Miller

Ltd. and Active Trailers Limited was to reduce the amount of income tax that would otherwise be payable under the Act.

3. The Minister did not have sufficient grounds on which to be satisfied of the facts required under Section 138A(2) as a condition of the exercise of his power to direct under that Section and the grounds on which the Minister actually based the exercise of such power were insufficient to entitle him to so exercise the same.

The statement of defence includes the following paragraphs:

10. The Deputy Attorney General of Canada submits that one of the main reasons for the separate existence of the Plaintiff and W. J. Miller Limited and Active Trailers Limited in the taxation years 1967, 1968 and 1969, was to reduce the amount of taxes that would otherwise be payable under the Income Tax Act.

11. The Deputy Attorney General of Canada submits, with reference to paragraph 2 of the Statement of Reasons of the Statement of Claim, that on an appeal, from an assessment made pursuant to a direction under subsection (2) of section 138A of the Income Tax Act, this Honourable Court does not have jurisdiction to investigate whether the Minister had sufficient grounds to exercise the power conferred on him by subsection

(2) of section 138A of the Act, but rather the Courts jurisdiction is, by virtue of subparagraph (ii) of section 138A(3)(b) of the Act restricted to the determination as to whether on the evidence adduced before it, it can be Said that none of the main reasons for the separate existence of the three corporations was to reduce the amount of the tax that would otherwise be payable under the Income Tax Act.

12. In the alternative, if the Court has jurisdiction to investigate whether the Minister had sufficient grounds to exercise the power conferred on him. by subsection (2) of section 138A of the Act, which is not admitted but denied, the Deputy Attorney General of Canada submits that the Minister has suf-

ficient grounds to exercise the power conferred on him by subsection (2) of section 138A of the Act.

Leave was given at the trial to the plaintiff to amend its statement of reasons in each appeal by adding paragraph 3A as follows:

3A. Even if the Minister properly directed under the provisions of Section 138A(2) of the Income Tax Act that the plaintiff was deemed to be associated with W. J. Miller Limited and Active Trailers Limited for the purposes of that Act for its taxation years 1967, 1968 and 1969, the Minister erred in assessing interest on taxes unpaid for the taxation years 1967, 1968 and 1969 in respect of periods prior to the date or dates on which the Minister so directed.

The only witnesses giving evidence at the trial were Mrs Catherine Miller (wife of Walter J Miller) and their eldest son David Miller.

W J Miller Limited, hereinafter called “the Miller company”, was incorporated in 1958. Walter J Miller was the beneficial owner of six- elevenths of the issued and outstanding common shares and his wife Catherine Miller was the beneficial owner of the remaining five- elevenths of the said shares. The company’s business was mainly selling mobile homes, and in later years, including the year 1964, it was also engaged in the business of renting out mobile homes and mobile office trailers. The practice in selling homes was to sell them to purchasers, who would make a down-payment of at least 20% and finance the remainder of the purchase price through a finance company, with the Miller company being obligated to repay the finance company if the purchaser failed to pay; in the case of the office trailers the Miller company retained title to the trailers and collected rent for them, and had a right to repossess any trailer if default was made in payment of its rent.

In 1965 Mrs Miller sold all her shares in the Miller company to her husband and thereupon caused the plaintiff company to be incorporated to engage in the business of acquiring and renting to others mobile homes, offices and bunkhouses. She and her three children, David, Sue and James, then respectively about 15, 11 and 6 years of age, now 24, 20 and 15, were the only shareholders. During the years concerned the Miller company provided office and management services to the plaintiff on a fee basis, and the Miller company’s salesmen received commissions on rentals.

Mrs Miller testified concerning her background and family life and circumstances, and the business history of herself and her husband. She was born in 1915, one of a family of eight; her father died when she was 15 years old, leaving little in the way of assets, and she had an insecure childhood; she became a hairdresser and was successful in that activity; she got married at age 30 to Mr Miller, and by that time had saved about $10,000, as I recall. Mr Miller had been a teacher who went into the automobile business about 1947, and made a success of it, and sold that business about 5 years later; he went into the mobile home business soon afterwards, and after a few years sold his interest in it to his partner, and then in 1958 he and his wife established the Miller company. He was in charge of that business; she was an officer and director. The business was mainly selling mobile homes, but in 1964 the company also had 50 to 100 office trailers for rent. She and her husband travelled a lot, and on a visit to California in 1964 they saw a large field full of office trailers for rent and discussed them with the people who were operating that business. She felt that this would be a good business to get into for the future, and as she wanted a business of her own she told her husband her wishes; she also discussed the matter with the company’s chartered accountant, Edmund Cachia, and with Montreal Trust Company. She testified that she wanted security for herself and the children and a business that would give them an incentive to be responsible and industrious and a sense of sharing in a worthwhile venture. She and her husband agreed that she would sell him her interest in the Miller company and she would form a new company for herself and the children. She said the Trust Company had advised that there would be advantages in respect of estate planning and succession duties if the children would have share ownership. In cross-examination she said she had not considered putting any of the shares in the Miller company in the names of the children. She thereupon sold her Miller company shares to her husband for $19,000 and received a dividend of $10,000, and she caused the plaintiff company to be incorporated. She said she did not remember how the price of her shares or the amount of the dividend was arrived at, but she and her husband had talked to the accountant. She put $10,000 of her own money into the new company, and $20,000 was borrowed from her sister and $10,000 from a bank. A lot of land was then purchased on which to store trailers owned by the company.

Mrs Miller said she could not remember discussing income tax possibilities or implications with the accountant; she said she thought the new company would be like any other company in that respect, and that she would have established the new company even if there would have been no resulting income tax advantages. The Miller company had been progressively successful, but she said she felt there was the contingency that it might be called upon to repay the finance company for amounts owed by purchasers of mobile homes who would fail to meet their payments of the purchase price, and she knew of three mobile home sales businesses that had gone bankrupt.

Mrs Miller also said that their family was a closely knit family; she had gone to the Miller premises and helped there at nights and when her family affairs allowed her to do so, and the children even in their young years had helped by cleaning up the premises and the homes and in other ways. Now the children are very much interested in the new company and help as much as they can; David became manager of the company last year. Sue is studying interior designing at Ryerson, which can be useful in respect of the trailers for rent. Mrs Miller is satisfied that her plan has lived up to her hopes for it and that the new business, in ownership of herself and the children, has provided a basis of financial security and has given the children an incentive and an identity with the business that augurs well for their future.

The financial statements of the Miller company for its years ending July 31, 1959 to 1964, inclusive, were put in evidence. These were its years prior to the incorporation of the plaintiff company in July 1965. Mrs Miller was not familiar with the contents of the financial statements ,and no one else was called to give information in respect of them. The following dollar figures taken from them speak for themselves as to the volume of business and profits of the company and the fairly substantial increases therein in the years 1962, 1963 and 1964:

The figures for trailer rentals include rentals for home trailers and office trailers. If there were actual losses due to failure by purchasers of trailers to pay the purchase price, such losses are not expressly shown in the statements.

For its part, the plaintiff company had net profits, before income tax, of $31,591.87 for the year ended August 31, 1967, $27,862.80 for 1968, and $34,283 for 1969.

For the plaintiff company it was argued that none of the main reasons for the separate existence of the companies was to reduce the amount of income tax that would otherwise be payable; that the main reasons are those given by Mrs Miller, which may be summarized briefly as being her desires:

(a) to have a business independent of her husband;

(b) to avoid having “all eggs in one basket”, ie the Miller company, with its contingent liability to recoup the finance company in the event that purchasers of trailer homes defaulted in paying the purchase price; and

(c) to provide a basis of financial security for herself and her children through a sound business that would give them an interest and activity and make them feel they had something worth working for.

Counsel for the plaintiff repeated the submission set forth in paragraph 3 of the statement of reasons, above recited, that the Minister did not have grounds upon which he could be satisfied to make the direction deeming the companies to be associated; in the absence of such grounds he had no power to make the direction; the Crown has not satisfied the onus of showing that the Minister had sufficient grounds to make the direction, and for that reason alone the plaintiff should succeed; and, in any event, that the plaintiff has met the onus of showing that one of the main reasons for the separate existence of the plaintiff company was to reduce the amount of taxes that would otherwise be payable.

On behalf of the Crown it was argued that in fact one of the main reasons for the incorporation of the plaintiff company in 1965 was to reduce the amount of taxes, even if there were other reasons also; the profits of the Miller company had been increasing extensively in the years 1962 to 1965; part of the business of that company was the rental of office trailers; the business of selling and renting trailers continued to be a family affair and appeared to be a single business, with the Miller company, owned by Mr Miller; managing the entire business, and with Mrs Miller depending upon the advice of her husband and the accountant, neither of whom was called as a witness; Mr and Mrs Miller were successful and knowledgeable business people and they had the benefit of expert advice from the accountant and Montreal Trust, and it is reasonable to infer that the potential tax advantages were known to them. In addition, counsel for the Crown repeated the submissions set forth in paragraphs 11 and 12 of the defence, above recited.

In my opinion the evidence before this Court leads me to conclude that one of the main reasons for the incorporation of the plaintiff company and for the separate existence of the companies in the years concerned was to reduce the amount of taxes that would otherwise be payable. The financial statements of the Miller company show a substantial increase in the volume of its sales in 1964 and a net profit, before provision for income tax, of $33,053 in that year, which was coming close to $35,000 and a higher rate of tax on anything above that amount. The incorporation of the plaintiff company followed in 1965. Mrs Miller sold all her shares Jn the Miller company to her husband. The business of the newly formed company was renting office trailers, and this was a business that the Miller company had been conducting along with its business of selling mobile homes. The Miller company provided office and management services for the new company.

Mr and Mrs Miller were the owners and officers of the Miller. company, and they were experienced in business and had the services of a chartered accountant, and it would be strange, in my view, if they were not cognizant of potential increases in the rate of tax that would be payable by the Miller company if its trend of increasing business and profit continued beyond 1964. Mrs Miller could not remember whether she discussed income tax implications with her husband and with' the accountant when the formation of the plaintiff company was under consideration. In a case such as this appeal, where the Crown has claimed that reduction of taxes was’one of the main reasons for the separate existence of the companies, I would think that Mrs Miller would: have tried to refresh her memory before the trial by checking with her husband and with the accountant in that respect, but whether she did or did not do so her memory on the point was still poor, and neither her husband nor the accountant was called to testify.

In giving reasons for the incorporation of the plaintiff company, Mrs Miller spoke of her insecure childhood after the death of her father when she was 15 years old, in fact she exhibited considerable emotion when referring to his death, even although it occurred over 40 years ago when she was a child. In any event, it is quite understandable that she would want to avoid a recurrence of insecurity for herself, and would also want to take steps to ensure that her children would not be insecure. This was coupled by her with her desire for a business of her own independent of her husband, and with her fear about the contingent obligations of the Miller company in connection with the sales of mobile homes. Yet in fact her husband’s company provided office and management services for the plaintiff company. The Miller company had become increasingly prosperous by 1965 and there was no evidence that the contingent obligations of the company in respect of any bad sales were not being taken in stride. Mrs Miller’s desire to have a solid foundation for herself and her children was no doubt genuine and commendable, but the Miller company itself provided a substantial foundation for the closely knit family. I accept that the reasons given by Mrs Miller for having separate companies were in her mind and played some part in the decision in 1965 to incorporate the plaintiff company. However, I think that the importance of those reasons has never been as great as she would have the Court believe, no matter how sincere she may now be in her testimony after the passing of the years since 1965 and the success of the companies thereafter. Whatever part those reasons have played, I do not find persuasive evidence that they were or are the only main reasons, and on the whole I have reached a conclusion that one of the main reasons for the separate existence of the companies in the years concerned is to reduce the taxes that would otherwise be payable under the Income Tax Act.

I think that in these appeals this Court has power to make an independent determination of the question whether one of the main reasons for the separate existence of the companies is to reduce the amount of taxes that would otherwise be payable; and if the Court determines that one of the main reasons is to reduce the amount of such taxes, the Court should not vacate a direction of the Minister made under subsection 138A(2) deeming the companies to be associated. I see no reason to vary the direction made by the Minister.

There remains the question of the assessment of interest on taxes unpaid in respect of periods prior to the date on which the Minister made the direction under subsection 138A(2).

Subsection 54(1) of the Income Tax Act, RSC 1952, reads as follows:* [1]

54. (1) Where the amount paid on account of tax payable by a taxpayer under this Part for a taxation year before the expiration of the time allowed for filing the return of the taxpayer’s income is less than the amount of tax payable for the year under this Part, the person liable to pay the tax shall pay interest on the difference between those two amounts from the expiration of the time for filing the return of income to the day of payment at the rate of 6% per annum.

A direction made by the Minister under subsection 138A(2) applies to the taxation year in respect of which it was made, and it may affect the amount of tax payable for that year. Section 44 provides that a return of the income tax shall be filed within a prescribed time after the end of the taxation year. Section 45 provides that the person required to file a return shall in the return estimate the amount of tax payable. Section 46 provides that the Minister shall examine the return and assess the tax for the taxation year and the interest and penalties, if any, payable.

Counsel for the appellant argued that a taxpayer cannot look into the mind of the Minister to know whether he will make a direction under subsection 138A(2) ; that any amount of tax payable by virtue of such a direction does not become payable prior to the making of such direction; that interest being a return on money owed, there cannot be interest until there is an amount owing; and that the context of section 54 is Part I, including rules that determine what a taxpayer owes by operation of law, and that the amount of tax a taxpayer can pay is what he then. owes, not what he may owe if and when the Minister exercises the discretion to make a direction under subsection 138A(2), which is in Part VI of the Act.

I think that subsection 138A(2) must be read along with sections 39(2) and 54 of Part I of the Act, and that section 54 is clear that interest runs from the expiration of the time for filing the return of income.

I therefore confirm the direction of the Minister, and the appeal will be dismissed, with costs to be taxed. A similar result will follow in the plaintiff’s appeals in respect of its 1968 and 1969 taxation years, and a separate judgment will go in each appeal.