Kitchener News Leaseholds Limited and Kitchener News Company Limited v. Minister of National Revenue, [1974] CTC 2305, 74 DTC 1226

The Assistant Chairman:—These are the appeals of Kitchener News Leaseholds Limited and Kitchener News Company Limited from income tax assessments in respect of the 1970 and 1971 taxation years.

By notices of reassessment dated November 1, 1972, and upon the direction of the Assistant Deputy Minister, Taxation, the appellant Kitchener News Leaseholds Limited was deemed, for purposes of section 39 of the Income Tax Act, to be associated with Kitchener News Company Limited for the 1970 and 1971 taxation years. It was agreed that the appeals of Kitchener News Leaseholds Limited and Kitchener News Company Limited would be heard simultaneously on common evidence.

At the outset of the hearing counsel for the appellants, in a somewhat unusual submission, questioned the legal validity of the Minister’s direction associating the above-named companies and sought a clarification of the Board on that point.

The appellants challenged the legality of the Minister’s direction on the grounds that the direction was never shown to the taxpayers; that the appellants had no way of knowing on what grounds the Minister had based his direction and could therefore not prepare an adequate defence; that the appellants had a right to know on what grounds the Minister was legally satisfied that both conditions of subsection 138A(2) were, in fact, met.

Counsel for the respondent maintained that the Minister of National Revenue, in the exercise of his power to assess taxes, acted within the administrative authority given him by statute which, according to the provisions of the Income Tax Act, is not only very wide but can be delegated to the Deputy Minister of National Revenue. Counsel cited subsections 46(6) and (7), 116(1) and 136(12) of the Income Tax Act and Income Tax Regulation 900. Although no one can quarrel with the respondent’s submission, I do not believe that counsel for the respondent really answered the point raised by the appellants which, as I understand it, is a challenge to the validity of the Minister’s direction because of procedural irregularities and omissions in the Minister’s application of subsection 138A(2).

The Board, wishing to consider more deeply the point raised by the appellants, made no ruling at the hearing as to the validity of the Minister’s direction, but reserved its decision on that point with the understanding that in its reasons for judgment the Board would dea-l with, and dispose of, that point before going into the merits of the appeals—should that prove to be necessary.

The irregularities which counsel for the appellants contends invalidate the Minister’s direction occurred prior to the assessments of November 1, 1972. The appellants submit that before the hearing of the appeals they had not seen the direction on which the assessments and appeals were based and could not know whether, in fact, the Minister was satisfied, and on what grounds he was legally satisfied, that the two conditions of subsection 138A(2) were met. To substantiate this point, the appellants refer to a letter dated February 25, 1970 concerning the two companies in which the Department of National Revenue advised the taxpayers that consideration was being given at that time to the application of subsection 138A(2) of the Act for the years 1967 and 1969 (Exhibit A-2). The appellants pointed out that by a verbal reply it was indicated that the Department would not proceed with the association of the companies for the years in question and the companies were, in fact, not associated nor deemed to be associated, for those years. On May 11, 1972 the Department of National Revenue advised the above taxpayers by letter (Exhibit A-3) that consideration was again being given to associating them pursuant to subsection 138A(2) in the 1971 taxation year. From the notices of assessment of November 1, 1972 it is apparent that the two companies in question were deemed to be associated for both 1970 and 1971.

Counsel for the appellants pointed out, first, that having been given notice of the Minister’s intention of associating the two appellants in 1967 and 1969, and having noticed that the Minister had not given further effect to that intention, the appellants had every reason to believe that the Minister was not satisfied that the two conditions of subsection 138A(2) had been met and, secondly, that the Minister, not having at any time considered associating the companies in 1968, they concluded that the Minister was satisfied that the companies were not associated in that year. The appellants claim that additional uncertainty as to the Minister’s grounds for issuing the direction was caused by being advised that the companies would be deemed associated in the 1971 taxation year while the Minister, subsequently, not only gave his direction for the said year but also for 1970 as well. For the appellants this was particularly confusing since no organizational changes have been made in Kitchener News Leaseholds Limited since its incorporation in 1966.

There does, in fact, appear to be some hesitation and confusion in the procedure followed by the Minister which eventually led to the deemed association of the companies in the 1970 and 1971 taxation years.

I believe, however, that whatever reason the Minister may have had for not associating the companies in 1967 and 1969, contrary to the notices given that he was considering doing so, it can legally have no bearing on his decision to associate them in 1970 and 1971. None of the events to which the appellants refer as contradictions in the Minister’s behaviour in giving the directions could be effective as estoppel to the Minister’s rights to deem the corporations associated for the years 1970 and 1971 pursuant to subsection 138A(2).

In assessing the taxpayers for 1970 and 1971 the Minister was within the 4-year limit stipulated in subsection 46(4) of the Act and was, in my opinion, within his rights to so reassess. The Minister’s omission to explain his reasons for the direction could only have affected the onus of evidence. However, this problem has been disposed of in several judgments of the former Exchequer Court. Examples: Doris Trucking Company Limited v MNR, [1968] 2 Ex CR 501; [1968] CTC 303; 68 DTC 5204; MNR v Howson & Howson Company Ltd, [1970] CTC 36; 70 DTC 6055; Alpine Furniture Company Limited v MNR, [1969] 1 Ex CR 307; [1968] CTC 532; 68 DTC 5338.

The matter is also extensively discussed by the learned Member of the former Tax Appeal Board, W O Davis, Esq in his judgment Ambassador Ventures Ltd v MNR, [1970] Tax ABC 345; 70 DTC 1233.

The conclusion to which the Exchequer Court came in the three first cases mentioned above is that the onus of evidence would be on the appellant.

As Mr Justice Cattanach stated in the Alpine Furniture Company Limited case at page 317 [541, 5344]:

Notwithstanding the difference in language an appeal under Section 138A(3) is made in the same manner as an appeal under Section 100(5) and is subject to the same principles paramount among which is that the onus is on the taxpayer ‘‘to demolish the basic fact on which the taxation rested”.

In my opinion the appellants cannot claim that they were taken by surprise because not only did they receive notification that the Minister, on the basis of the 1971 income tax returns, considered associating the companies under the provisions of subsection 138A(2) but by letters dated March 3, 1970 and June 9, 1972 (Exhibits A-2 and A-4) respectively, the appellants, in answer to the Minister’s contention, made lengthy submissions as to why they should not be considered as coming within the purview of subsection 138A(2) and why they should not be associated. The appellants, therefore, must have known at the time on what grounds the Minister was considering associating them and if they did not know they had every opportunity of finding out before the assessments were made.

In my view there is no justification in law, natural or otherwise, for the appellants to consider the Minister’s direction as invalid. If prior to the assessment the Minister had the onus of establishing the grounds on which he proposed to deem the corporations associated I am, in reviewing the facts, of the opinion that he did carry out that onus and the appellants having, in fact, submitted their defence by letter of June 9, 1972 cannot now claim that they were taken by surprise or that they did not know on what grounds the Minister was legally satisfied that they came within the purview of subsection 138A(2) of the Income Tax Act.

The Minister, notwithstanding the appellants’ submissions, decided— as was his right—to assess the appellants as associated companies for 1970 and 1971. The appellants’ submissions evidently did not convince the Minister that the corporations should not be associated but this, of course, can in no way be construed as indicating that irregularities in the procedure followed by the Minister caused him to make a direction which was invalid.

I conclude, therefore, that the direction made by the Minister on which the assessments are based in respect of the appellants* 1970 and 1971 taxation years is legally valid and that the appeals are properly before the Board.

In dealing with the merits of the case, the Board must either confirm the Minister’s direction or vacate the direction if it determines that none of the main reasons for the separate existence of the two corporations is to reduce the amount of tax otherwise payable. At the appeal stage the burden of proving that the Minister’s assessments are wrong rests, as in all appeals from tax assessments, on the taxpayer. In this instance, since the assessments are based on the Minister’s direction, the appellants have the onus of proving that none of the main reasons for the separate existence of the two appellants is to reduce the amount of tax otherwise payable.

The facts are as follows:

Kitchener News Company Limited was incorporated August 4, 1953 basically to engage in the business of buying and selling newspaper articles and acting as wholesale news distributors. The company’s business having grown substantially over the years, it was felt that the quarters then occupied were no longer adequate and larger quarters were necessary. In order to acquire adequate premises, Kitchener News Leaseholds Limited was incorporated on September 23, 1966 for the purpose of buying, selling and holding real estate and other chattels for lease and it, in fact, purchased the property at 110 Hanson Avenue, Kitchener at the end of 1966 which it leased to Kitchener News Company Limited. Kitchener News Leaseholds Limited owned motor vehicles and machinery which were also leased to Kitchener News Company Limited. It had been decided that the wives and children of the shareholders of Kitchener News Company Limited would be the shareholders of Kitchener News Leaseholds Limited and to that end Flora Irene Hill, Dolores and Douglas Schmidt and Norma Schumaker were each issued one share of common stock of Kitchener News Leaseholds Limited.

The facts as they appear on the balance sheets of the two corporations in question (Exhibits R-1 and R-2) are that the shareholders of Kitchener News Leaseholds Limited invested only $1 each for the shares and made a shareholders’ loan to the company of $996.

The property at 110 Hanson Avenue acquired by Kitchener News Leaseholds Limited was financed principally by means of a 10% mortgage of $27,500; a bank loan of $27,000 guaranteed by Kitchener News Company Limited and a loan of $34,000 from Kitchener News Company Limited. Kitchener News Leaseholds Limited had no other tenants than Kitchener News Company Limited and the trucks and automobiles were rented exclusively to Kitchener News Company Limited so that all the revenue of Kitchener News Leaseholds Limited was derived exclusively from Kitchener News Company Limited. Kitchener News Leaseholds Limited had no office on the premises, it had no staff and no employees and the only salaries appearing in the books of the company were paid to the directors as employees. Kitchener News Leaseholds Limited’s current expenses were handled by employees of Kitchener News Company Limited.

The reasons given by the appellants for so incorporating Kitchener News Leaseholds Limited were—(1) as an investment as part of estate planning for the wives and children of the shareholders of Kitchener News Company Limited; (2) to keep the business of the operating company, Kitchener News Company Limited, distinct from the normal leaseholds business carried on by Kitchener News Leaseholds Limited, as they were two different types of businesses; (3) the usual limitation of liability inherent in incorporated companies.

Counsel for the respondent pointed out, and I believe rightly so, that all the evidence to substantiate the appellants’ contention was adduced through the testimony of Mr John Dipple, a chartered accountant, who audited the appellants’ books. Though we may be dealing here with a corporate entity, as pointed out by counsel for the appellants, I believe that the testimony of the directors or the shareholders of either corporation would have had greater probative value than that of the accountant as a basis for determining reasons or the intention behind the incorporation of Kitchener News Leaseholds Limited.

However, from the facts, at least two of the reasons advanced by the appellants for incorporating Kitchener News Leaseholds Limited are credible and indeed compelling. In fact, as a result of the sale of Kitchener News Leaseholds Limited in 1971, the shareholders of Kitchener News Company Limited and their wives and children did in fact receive the sum of $118,000. Without going into the question of whether or not the news distributing industry is riskier than any other business, the appellants’ contention that it was a prudent and sound business decision to separate the two corporations—one being the owner of the building and the other carrying on the business of a news distributor—is in my opinion acceptable. The other reason given by the appellants for incorporating Kitchener News Leaseholds Limited, that is, to keep the business separate from that of Kitchener News Company Limited because they carried on two different types of businesses, loses in my view much of its credibility because the facts indicate clearly that the activities of both businesses were carried on by Kitchener News Company Limited alone.

In these appeals, however, and in spite of the many facts which were presented, the Board is called upon to determine only that none of the main reasons for the separate existence of the two corporations is to reduce the amount of tax otherwise payable.

How Kitchener News Leaseholds Limited was financed, or how many tenants it had, or even how it operated is, in the circumstances of the appeals and in my opinion, immaterial in the determination of the question as to whether one of the main reasons for its incorporation was to pay less taxes.

From 1967 to 1970 inclusive the sales figures of Kitchener News Company Limited were $898,810, $965,658, $1,071,663 and $1,183,940 respectively. From these figures we can, I believe, classify Kitchener News Company Limited as a sizeable corporation. Counsel for the appellants placed on record evidence, which was not contradicted by the respondent, to the effect that the tax saving realized by the appellants because of the incorporation of Kitchener News Leaseholds Limited from its first year of operation to the year ending April 31, 1971 amounted to $5,604 in all, or, roughly, an average of $1,100 a year.

I cannot conceive that a tax saving of $1,100 a year can reasonably be considered as being one of the main reasons for the incorporation of Kitchener News Leaseholds Limited, particularly when there is also on record uncontradicted evidence that the costs of incorporating Kitchener News Leaseholds Limited plus other related costs amounted to more than the tax savings realized.

I hold, therefore that none of the main reasons for the separate existence of the two above-named corporations for the relevant years of-the appeals was to reduce tax otherwise payable under the Income Tax Act and, pursuant to subsection 138A(3), the Minister’s direction made pursuant to subsection 138A(2) is hereby vacated and the appellants’ appeals from assessments for the 1970 and 1971 taxation years are therefore allowed.

lon Appeals allowed.