Miss Sun Valley Limited v. Minister of National Revenue, [1974] CTC 2274

Judge K A Flanigan (orally: May 7, 1974):—This is an appeal by Miss Sun Valley Limited, a company originally incorporated under the laws of the Province of Ontario under the name of Joseph Gould & Sons (Ladies’ Division) Limited in 1951, the name being subsequently changed to the name of the appellant in this case in 1952.

The only evidence in this case has been provided by Morris Adams who, up until the end of the 1968 fiscal year, was the chartered accountant in charge of the auditing and preparation of financial statements of the appellant company and Malvern Sportswear Limited and Billie Burke Sportswear Limited. He is a man of tremendous knowledge pertaining to the garment industry and has very cleverly outlined what took place in the operation of the appellant company and the subsequent acquisitions by members of the families involved which, al- though coming close to being associated under section 39, were not associated companies within the meaning of the Income Tax Act, and the issue is whether or not the Minister is correct in deeming them to be associated under subsection 138A(2).

As has been pointed out, the onus is extremely heavy on an appellant in such a case as this and the jurisdiction of the Board and/or the Federal Court is very limited, in that the appellant can only succeed if it can be found that none of the main reasons for the separate existence, in this case, of. the three companies was the reduction of tax.

As I have said, and I don’t propose to go into the evidence in detail, Mr Adams has explained why in the garment industry the separate existence of these three companies when they were all operating in their particular field was necessary. As he says, the supplying of female garments is a very volatile business. One must not only guess the styles and the materials that will be “in” in a given period, but there are four separate seasons that must be catered to and delivery must be of prime importance in fulfilling or maintaining the market.

Miss Sun Valley Limited was engaged primarily. in the sportwear business, which is not to be taken, according to Mr Adams’ evidence, as clothing that would be used in the playing of sports, but rather something less than high fashion: a more casual type of garment, but something more than sports participants’ garments.

Malvern was engaged in the making of rainwear, and subsequently of maternity wear, and still later, in the years in question, was in what is known as “the petite wear business”, which is a very exclusive type of business, manufacturing garments for ladies who are very small in both height and figure generally.

Billie Burke Sportswear was primarily, as I recall it, engaged in the making of blouses and dresses, and all three businesses, according to Mr Adams, were separate and distinct branches of the garment industry.

The question is whether or not in the relevant years there was any justification, within the meaning of the Income Tax Act, for the continued separate existence of these companies.

The evidence is that Malvern’s and Billie Burke’s business was so specialized that they, with the loss of some of their experienced help, could no longer compete. They therefore, in effect, became contractors of their space, machinery and workers to the appellant in this case. The evidence of Mr Adams is that it is quite common for a manufacturer to contract out the sewing or seaming or even buttonholing of its garments to pieceworkers rather than to complete the entire manufacturing process under one roof.

Appellant’s Exhibit 1 shows a list of many contractors that the appellant used over the years, and the evidence here from Mr Adams, whose evidence I find most acceptable and most learned in the field, is that it was much cheaper to acquire companies who could contract the business than it was to start up a separate company, put in new equipment and lay out a great deal of capital to achieve the same result.

When Billie Burke and Malvern were no longer able to compete n the markets in which they were originally established, they had the necessary equipment and there was a good use for it to be put to > by the appellant company.

It is true that the appellant’s officers did not plan in the years in question to really make any money in these two companies but it was contemplated that it would keep the cost factor to the appellant company as low as possible and this of course would increase its profit.

Any funds that were earned by the two contracting companies were loaned back to the appellant company and interest was paid on these loans. In one of the years, I think, Malvern did make a profit on its business ventures in the “petite” field, and perhaps even in both years, but the profit in the second year was very slight. However, it is conceded that their income in the years in question was mainly from the interest received on the moneys loaned to the appellant company.

As has been pointed out, this is not the usual type of 138A(2) case that one finds. It is very similar to the one ! decided last month in Calgary, which is not yet reported, which was a car business and which had carried on two separate operations for many years, one company being the owner of the land, the other being the owner of the dealership, and it was explained in that case that there were good sound business reasons for such. separate existence, just as has been explained in this case.

I find the evidence of Mr Adams most convincing and much in line with the case of R v Bobbie Brooks (Canada) Limited, [1973] CTC 431; 73 DTC 5357.

I am also aware of the tests enumerated or set out by Dumoulin, J in the case of Doris Trucking Company Limited v MNR, [1968] 2 Ex CR 501; [1968] CTC 303; 68 DTC 5204, and which have been adopted in various fashions by other judges since that time, the basic principle there being: if all companies were taxed at the same rate, would the appellant have maintained the separate existence of the other company or companies involved? In other words, if there could be no tax savings to a taxpayer by the separate existence of the other companies, would whose other companies exist or would they be brought back in as departments of the main company?

In this case I accept the evidence of Mr Adams that none of the main reasons for the separate existence of these three companies was the reduction of tax. It may well be that, as an incident thereto, there was some tax savings in the years in question, but stringent though the onus is, the evidence need only go so far as to prove that none of the main reasons was the reduction of tax.

On all the evidence in this case I accept that the appellant has satisfied that onus and the appeal will be allowed and referred back to the Minister for reassessment accordingly.

MR NATHANSON: Excuse me, Mr Chairman. I wonder if in your judgment you could refer to the loss carry-back? THE CHAIRMAN: Yes.

MR NATHANSON: From 1969 to 1968. THE CHAIRMAN: And loss carried back from 1969 to 1968 in the amount of $18,552, this latter amount being on consent.

Appeal allowed.