The Toronto, Hamilton & Buffalo Railway Company v. Minister of National Revenue, [1974] CTC 2270

Judge K A Flanigan (orally: July 17, 1974):—This is an appeal by the Toronto, Hamilton and Buffalo Railway Company against reassessments by the Minister of National Revenue for the taxation years 1967, 1968, 1969, 1970 and 1971. The point at issue is whether or not withholding tax of 15% should have been withheld and remitted pursuant to section 106 of the Income Tax Act, as it then applied, by the appellant, with respect to dividends paid first to New York Central Railroad Company and latterly Penn Central Transportation Company, which was a new corporation formed on the amalgamation of the two transportation Systems.

The pleadings had been based on the premise of estoppel against the Minister by virtue of certain actions or information supplied by him, his servants or his agents.

In the course of the argument today, this position has been abandoned with the tacit approval and consent of the respondent, and the real thrust of the appellant’s argument is that since Penn Central was a shareholder of the appellant company, and when I say Penn Central, I refer to either Penn Central or New York Centrai, whichever was the appropriate company in the respective years under appeal that was a shareholder of the appellant, it was carrying on business in Canada through the ownership of the shares in this company and therefore was not subject to the withholding tax.

A statement of facts has been filed as appellant’s Exhibit A-1 on consent, and it contains the usual restriction that this agreed statement of facts applies only to the hearing before this Board, and I include it now in these reasons verbatim:

AGREED STATEMENT OF FACTS

The parties hereto admit the several facts hereinafter set out provided that such facts are admitted for the purposes of this appeal only and may not be used against either party on any other occasion or by any other person. The parties hereto reserve the right to object to the relevance of any of the facts hereinafter set forth.

1. The Appellant, The Toronto, Hamilton and Buffalo Railway Company, is a body corporate incorporated by the Parliament of Canada, having its head office at the City of Hamilton, in the Province of Ontario. At all relevant times the Appellant was resident in Canada and was engaged principally in the business of operating a railway in the Province of Ontario.

2. The New York Central Railway Company (hereinafter called New York Central) was a body corporate organized and existing pursuant to the laws of the State of Delaware, one of the United States of America.

3. Pennsylvania Railroad Company was a body corporate organized and existing pursuant to the laws of the State of Pennsylvania, one of the United States of America.

4. On February 1, 1968, New York Central merged under the laws of Pennsylvania with Pennsylvania Railroad Company to form Pennsylvania New York Central Transportation Company (hereinafter called ‘Penn Central’), a body corporate now known as Penn Central Transportation Company.

5. At all relevant times prior to February 1, 1968, New York Central, and subsequent to February 1, 1968, Penn Central owned some of the issued shares of the capital of the Appellant.

6. A reference in this Agreed Statement of Facts to ‘the shareholder’ shall be taken, in respect of the period before February 1, 1968 to mean New York Central, and, in respect of the period after February 1, 1968 to mean Penn Central.

7. At all relevant times the shareholder engaged in the business of the operation of a railway in the United States of America and in Canada, in the Province of Ontario and elsewhere. In doing so in Ontario, the shareholder operated its own railroad lines and rolling stock which rolling stock made use of the railroad lines in Ontario of the shareholder, the railroad lines in Ontario of the Appellant, and the railroad lines in Ontario of other Canadian railway companies. The use of the Appellant’s railroad lines by the shareholder formed part only of the use made of such lines. The railroad lines of the shareholder were, during the relevant period, connected to the railroad lines of the Appellant at the towns of Welland and Waterford, each in Ontario, and were connected through the lines of the Appellant to the lines of other Canadian railway companies at the cities of Hamilton and Brantford.

8. The Respondent assessed the Appellant under Part III of the Income Tax Act in respect of the failure of the Appellant to deduct or withhold and remit amounts from dividends paid by the Appellant to the shareholder, as follows:

Amount

	Year of		Amount of	assessed as
Date of	Dividend	Dividends		tax payable
Assessment	Payment	Paid	Paid	by Appellant	Interest
Aug 10, 1970	1967	$812,549.23		$81,254.92	$14,159.85
Aug 10, 1970	1968		319,300.00	31,930.00	3,623.83
Aug 10, 1970	1969		319,300.00	31,930.00	1,516.58
Aug 10, 1970	1970		159,650.00	15,965.00	39.91
Apl 27, 1973	1970		159,650.00	15,965.00	957.90
Apl 27, 1973	1971		159,650.00	15,965.00	478.95

9. In so assessing, the Respondent acted on the following findings or assumptions of fact which the parties agree are correct:

(a) the shareholder was not at any relevant time resident in Canada;

(b) the Appellant paid during the years and in the amounts set forth in paragraph 8 hereof, dividends to the shareholder;

(c) the Appellant failed to deduct or withhold from any of the dividends any of the amount in respect of tax respectively payable under Part III of the Income Tax Act, by the shareholder.

Dated at Toronto, this 11th day of July, 1972

For the purposes of these oral reasons I can summarize the facts, which are really very brief.

The appellant is a Canadian corporation having its head office in the City of Hamilton, in the Province of Ontario, and was at all material times a resident of Canada, and its principal business was the operation of a railway.

The New York Central Railway Company was a Delaware company duly incorporated, as admitted and as shown by the exhibits, and the Pennsylvania Railway Company was a duly organized corporate body under the laws of the State of Pennsylvania, one of the States of the United States of America.

On February 1, 1968 the New York Central and Pennsylvania railway companies merged into the Pennsylvania New York Central Transportation Company which is referred to hereafter as Penn Central.

At all material times the Penn Central and the New York Central, I need not confuse the matter by referring to New York Central any further, owned shares in the appellant company. It is admitted that dividends were paid in the amounts specified in the reassessments, that no deductions were made by the appellant, and that consequently no remittance was made to the Minister of National Revenue, and the respondent says that under subsection 106(1 a) of the old Act a deduc- tion should have been made, and that under section 109, the follow-up section, the appellant did not remit and is therefore liable to the extent of 15% of the dividends paid.

The appellant has cited the case of Commissioner of Income Tax v Hanover Agencies Limited, [1967] AC 681, a decision of the Privy Council, and he cites this case for the proposition that is outlined at page 687 of the report that the word “business” is of wide import and must be given its ordinary meaning unless the context otherwise requires.

To sum up the appellant’s whole argument is to say that, since Penn Central was a shareholder in the appellant company, it was carrying on business in Canada, and therefore it was not liable to the provisions of section 106, and consequently section 109 does not apply to the appellant company.

The respondent, on the other hand, has cited two cases: one very old case, Stanley v The Gramophone and Typewriter, Limited, [1908] 2 KB 89, and Canada Safeway Limited v MNR, [1957] SCR 717; [1957] CTC 335; 57 DTC 1239.

The purport of those casés can be summed up by saying that they, that is, the Court of Appeal in England, and the Supreme Court of Canada, have both held that the business of the shareholders is not the business of the corporation merely by reason of the holding of shares in the corporation.

I think the basic principle underlying this case goes way back to the decision in Salomon v Salomon, [1897] AC 22, that a corporate entity is a separate legal entity, and although it is a favoured, if not favourite, practice in income tax cases to peer through the corporate veil to see who, really, may be behind the activity of the company, such a practice, although accepted by the courts in this country, does not change the basic elementary principle of law that a limited company is a separate legal entity.

As I held in Bendix Automotive of Canada Ltd v MNR, [1974] CTC 2080; 74 DTC 1072, one cannot simply ignore the existence of a corporate body to avoid the consequences of the Income Tax Act.

In my view, in this-case Penn Central was a shareholder in a separate legal entity that carried on its own business. Whether or not that business could have been influenced by Penn Central’s shareholdings does not, in my view, make Penn Central active in this particular railway business in this country.

From the ordinary dictionary definition of “business”, setting aside legal subtleties, the shareholder in a corporate entity cannot be said to be carrying on the business of that company. It is true that corporate entities can only carry on their business through such of their directors and shareholders as may guide them and make their decisions, but this is all done in the name of the corporate entity and the business carried on in this case is the business of the appellant company and not the business of its shareholders.

Therefore, on all of the evidence and the cases referred to, I can come to no other conclusion than that the dividends paid to Penn Central were clearly dividends of the nature envisaged by section 106 of the Income Tax Act, that Penn Central was clearly a legal entity taxable upon the receipt of those dividends as a non-resident person, and, therefore, section 109 comes into play and the appellant is liable for the amount of the withholding tax set out in the reassessments.

Since there has been no dispute as to the figures involved, the appeal will be dismissed.

Appeal dismissed.