Pay-Less Meat Market Ltd, New-West Meat Market Limited and Save-on Meat Market LTD v. Minister of National Revenue, [1973] CTC 102, 73 DTC 5102

Kerr, J:—These appeals are against income tax assessments of the three appellants for their 1964 and 1965 taxation years. They were commenced in the Exchequer Court. They were heard on common evidence at Vancouver. I will be referring to the appellants as “Pay-Less”, “New- West” and “Save-On”, respectively. They are family-owned private companies incorporated under the laws of British Columbia (Pay-Less on May 4, 1955, New-West on February 8, 1956 and Save-On on January 11, 1957) and each of them carried on a retail meat market business in the Vancouver area. At the material times the controlling shares of Pay-Less were owned by Saul Wosk, the shares of New-West by his wife, Muriel J Wosk, and the shares of Save-On by minor children of the said Saul Wosk and his wife Muriel.

The respondent made a direction pursuant to subsection 138A(2) of the Income Tax Act, enacted in 1963 and applicable to the 1964 and subsequent taxation years, that the three companies are deemed to be associated with each other in the 1964 and 1965 taxation years, and he says that in making that direction he was satisfied:

(a) that the separate existence of those corporations in the taxation years was 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 years was to reduce the amount of taxes that would otherwise be payable under the Income Tax Act.

Subsections 138A(2) and (3) read 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.

(3) On an appeal from an assessment made pursuant to a direction under this section, the Tax Appeal Board or the Exchequer Court may

(a) confirm the direction;

(b) vacate the direction if

(i) in the case of a direction under subsection (1), it determines that none of the purposes of the transaction or series of transactions referred to in subsection (1) was or is to effect a substantial reduction of, or disappearance of, the assets of a corporation in such a manner that the whole or any part of any tax that might otherwise have been or become payable under this Act in consequence of any distribution of income of a corporation has been or will be avoided; or

(ii) in the case of a direction under subsection (2), it determines that none of the main reasons for the separate existence of tne two or more corporations is to reduce the amount of tax that would otherwise be payable under this Act; or

(c) vary the direction and refer the matter back to the Minister for reassessment.

In their notices of appeal each of the appellants says inter alia that each of the companies was incorporated before section 138A was enacted, that even if they had been incorporated after 1963 the evidence did not warrant the inferences drawn by the Minister, and that he failed to make an objective judgment; that the commercial reasons for the separate existence of the companies could not be ignored by an owner seeking to direct the business in an effective and profitable manner and the sole reason for the creation of the separate companies was to safeguard the profit potentials of the business in each case, and the maintenance of the separate entities was primarily to continue that potential; and the tax position was clearly subordinate and not a main reason for the maintenance of separate entities.

As will be set forth later herein the appellants attribute the reason for the incorporation of New-West and Save-On and the maintenance of the separate companies to problems and difficulties in connection with the activities and demands of the Amalgamated Meat Cutters Union.

The parties agreed at the trial to the following facts:

1. Each of the parties referred to herein as Appellant is a corporation incorporated pursuant to the laws of the Province of British Columbia.

2. As to the first above-named Appellant (hereinafter referred to as Pay- Less):

(a) it was incorporated on the 4th day of May 1955;

(b) from the date of incorporation to the date hereof it had issued only 100 shares having a par value of $1.00 for a total consideration of $100.00;

(c) 99 of the said 100 shares at all relevant times were owned by and registered in the name of Saul Wosk;

(d) 1 of the said 100 shares at ail relevant times was registered in the name of Harold Freeman and at ail relevant times was beneficially owned by the said Saul Wosk;

(e) its name on incorporation was Front Street Meat Markets Limited and it changed its name to Pay-Less Meat Market Ltd. on or about the 7th day of March 1963.

3. As to the second above-named Appellant (hereinafter referred to as New- West):

(a) it was incorporated on the 8th day of February 1956;

(b) from the date of incorporation to the date hereof it had issued only 100 shares having a par value of $1.00 each for a total consideration of $100.00;

(c) 99 of the said 100 shares were at all relevant times owned and registered in the name of Muriel J. Wosk;

(d) 1 of the said 100 shares at all relevant times was registered in the name of Morley Koffman and at all relevant times was owned beneficially by the said Muriel J. Wosk;

(e) its name on incorporation was Front Street Meat Market (N.W.) Limited and it changed its name to New-West Meat Market Limited on September 2, 1966.

4. As to the third above-named Appellant (hereinafter referred to as Save-On):

(a) it was incorporated on the 11th day of January 1957;

(b) from the date of incorporation to the date hereof it had issued only 300 shares having a par value of $1.00 each for a total consideration of $300.00;

(c) 100 of the said 300 shares were at all relevant times owned by and registered in the name of Simon L. Wosk, a son of the said Saul and Muriel J. Wosk;

(d) another 100 of the said 300 shares were at all relevant times owned by and registered in the name of Karen S. Wosk, a child of the said Saul and Muriel J. Wosk; and

(e) another 100 of the said 300 shares were at all relevant times owned by and registered in the name of Colin R. Wosk, a child of the said Saul and Muriel J. Wosk;

(f) from incorporation to date its name has not changed.

5. Saul Wosk was at all relevant times a resident of the City of Vancouver in the Province of British Columbia whose wife at all materia! times was the said Muriel J. Wosk.

6. The three children of the Saul and Muriel J. Wosk referred to in paragraph 4 hereof were born in the following years:

Simon L. — 1951

Karen S. — 1953

Colin R. — 1954

7. The Harold Freeman referred to herein and possibly in the evidence at all material times since 1952 has been and is a practicing barrister and solicitor who carried on his profession in the City of Vancouver in the Province of British Columbia and was a partner in the law firm known as Freeman, Freeman, Silver and Kauffman.

8. The Morely Kauffman referred to herein and possibly in the evidence at all material times since 1952 has been and is a practicing barrister and solicitor practicing his profession in the City of Vancouver in the Province of British Columbia and a partner in the law firm of Freeman, Freeman, Silver and Kauffman.

9. Ben Wosk who might be referred to in the evidence at all relevant times was a second cousin of the said Saul Wosk that is a child of a child of Saul Wosk’s father’s brother.

10. The said Muriel J. Wosk while never a shareholder of Pay-Less was a director of Pay-Less from the date of incorporation until the 7th day of February 1956.

11. While not a shareholder the said Saul Wosk and Muriel J. Wosk since incorporation have each been a director of Save-On.

12. All the Appellants herein, namely, Pay-Less, New-West and Save-On have carried on business in the Province of British Columbia in the retail meat market trade.

13. It is expected that in the evidence certain premises will be referred to and for identification they are:

714 Columbia Street is in the Town of New Westminster

716 Columbia Street is in the Town of New Westminster

43 West Hastings Street is in the City of Vancouver

46 West Hastings Street is in the City of Vancouver

(43 West Hastings Street is across the street from 46 West Hastings Street) 469 Powell Street is in the City of Vancouver

1250 West 54th Street is in the City of Vancouver.

14. 716 Columbia Street was purchased by the said Saul Wosk in the 1954 calendar year and sold by him to Save-On in the 1965 calendar year.

15. 43 West Hastings Street was purchased by Pay-Less in the 1956 calendar year and subsequent thereto it owned the premises for all relevant times.

16. 469 Powell Street was purchased by New-West in the 1962 calendar year and subsequent thereto it owned the premises for all relevant times.

17. 1250 West 54th Street was purchased by the said Saul and Muriel J. Wosk in the 1959 calendar year in trust for Save-On and subsequent thereto the premises were so held for all relevant times.

18. Pay-Less in its 1956 fiscal year carried on business at the following addresses:* [1]

716 Columbia Street

714 Columbia Street

46 West Hastings Street

Glen-dale

In the 1957 to 1961 fiscal years it carried on business at 46 West Hastings Street.

In its 1962 and subsequent years it carried on business at 469 Powell Street.

19. New-West at all material times carried on its business at 716 Columbia Street.

20. Save-On at all material times carried on its business at 43 West Hastings Street.

21. At all relevant times Pay-Less had a fiscal year ending on April 30th and its first fiscal year was April 30, 1956.

22. At all relevant times Save-On had a fiscal year ending on August 31st and its first fiscal year was August 31, 1958.

23. At all relevant times New-West had a fiscal year ending at the end of February and its first fiscal year was February 28, 1957.

I will also refer to portions of the evidence given at the trial.

Saul Wosk gave evidence at the trial, inter alia, to the following effect. In 1953 he bought an operating meat market at 705 Front Street in New Westminster. The store had 8 to 10 employees and was not unionized, but an Amalgamated Meat Cutters’ officer came and presented a contract and said that informational pickets would picket the store if the contract was not signed, which would have destroyed the business, so Wosk and the employees entered into the union contract. In July 1954 the building next to his store burned down and ruined his store, and he purchased a store at 716 Columbia Street, New Westminster in his own name. Next door, at 714 Columbia Street, there was a competing Hy-Grade meat market, and another meat store across the street, so to protect his investment he bought the Hy-Grade store and operated it for a few months, but it was not successful and he rented it out and then closed it. In May 1955 he also rented a fully equipped meat market in the Glendale centre in New Westminster, and after operating it for a couple of months he sublet it. In April 1955 he opened a meat market in Vancouver at 46 West Hastings Street, some 13 to 15 miles from his New Westminster store. On May 4, 1955 he incorporated his business under the name Front Street Meat Markets Limited (whose name was changed on March 7, 1963 to Pay-Less Meat Market Ltd— see paragraph 2 of agreement as to facts).

The appellants attribute the reason for the incorporation of New- West and Save-On to problems in respect of the activities and demands of the Amalgamated Meat Cutters Union, and Mr Wosk testified in that connection. He said that the 1953 contract, which had been signed, was expiring in 1955 and the union presented a new contract to the industry, which consisted mostly at that time of independent family- owned butcher shops giving full service vis-a-vis self-service stores in which the meat is pre-cut and put on display and consequently requiring fewer employees. The supermarkets were converting to the self- serve type of meat store and the 1955 contract called for increases in wages and other conditions which the independents considered to be designed more particularly for the self-serve stores than for the family stores. Efforts to negotiate a separate contract with the union for the family stores were not successful. The union could in that period place informative pickets in front of stores and when the efforts to obtain a separate contract failed Pay-Less signed the 1955 union contract early in 1956. At that time also it was possible for the union to call a vote of its members as a whole in all stores under common ownership, rather than a vote by each store for itself alone. Mr Wosk said that he realized the time would come when he would have to protect himself against the union by having a separate contract for each store, which would avoid the employees being grouped all together in a vote affecting all stores that he might be operating. At that time he had two stores, at 716 Columbia Street, New Westminster and 46 West Hastings, Vancouver under one company ownership, and he instructed his accountant and lawyer that he wanted separate contracts with the union and separate ownership of each store, one to be owned by himself, the other by his wife. They advised against a family division, and there was discussion respecting separate tax bases, but he said that he insisted and accordingly Front Street Meat Market (NW) Limited, subsequently called New-West, was incorporated on February 8, 1956 in order, according to Mr Wosk, to give strength against the union and not for any other reason. He said that he caused New-West to be incorporated and decided who would be the shareholders. His wife, who had been a director of the existing company, ceased to be such director in order not to be associated with it in its relations with the union. He was aware of possible income tax advantages in having two companies, and of the lower rate of tax on the first $20,000 of a company’s taxable income and that the rate might be higher if the companies were associated, but he said these were not considerations influencing his decision to in- corporate New-West. He also knew that New-West would have to sign the 1955 union contract, but he was looking to the future in which union demands might become too severe. New-West signed 1955, 1957 and 1959 union contracts, as did Pay-Less. Save-On signed the 1957 and 1959 contracts. The 1959 contracts ran out in 1961 and none of the companies signed a union contract thereafter. The union was bargaining agent for the employees and in 1970 or 1971 it called a strike vote at the Save-On store, which had the largest number of employees, but there was not a majority vote in favour of a strike and no strike was called.

Upon its incorporation New-West took over the operation of the store in New Westminster. Wosk put Roy Greenwood (who had been with him as an employee from the time he started in business in New Westminster) in charge of the store as manager. Wosk continued to buy meat for both that store and the store at 46 West Hastings Street, either directly or by finding out what meat was available and passing on the information to Greenwood, who would buy what his store needed, on invoice io that store.

There was a centralized bookkeeping system for both stores, which was kept at the Vancouver store until Save-On was incorporated and thereafter the accounts of all three stores were kept at the Save-On premises 43 West Hastings by one Save-On employee. Mrs Wosk was the signing authority for New-West. Mr Wosk gave reasons for the adoption of the Pay-Less name in March 1963, including the fact that its store was on West Hastings, it handled a lower grade of meat than the New Westminster store did, and the public might have an impression that the New Westminster store also had the lower grade of meat.

Moving now to Save-On. Mr Wosk said that he was advised by his cousin, Ben Wosk, that the premises at 43 West Hastings Street, across from his store at 46 West Hastings, was for sale and would be a good investment, so it was purchased in October 1956 in the name of Pay- Less for $100,000, and continued to be so owned at all material times. Wosk said that he decided to establish a meat store in the premises to attract other tenants who wanted a farmer’s market type of building; and in order to keep the new meat store separate in ownership from Pay-Less for protection in dealings with the union he gave instructions to have Save-On incorporated with share ownership in the names of his children, who were minors. Save-On thereupon established a meat store in the newly acquired premises, paying rent therefor to Pay-Less, and Save-On also took a lease of other parts of the premises and sublet them down to other tenants. Wosk determined the rents payable. He was manager of Save-On (see Exhibit 7 Agreement).

There was evidence that in September 1963 Pay-Less and Save-On entered into an agreement providing, inter alia, that Save-On, which was the largest of the three businesses and had more equipment and storage space, would supply meat to Pay-Less at cost. As I recall Mr Wosk’s evidence he thought there was a similar agreement as to supplying of meat to New-West. Sometimes there was a temporary transfer of employees from one store to another, in which the employee remained on the payroll of the company supplying his services to the other store.

There were transactions by each of the companies with the Bank of Montreal and sometimes borrowings and overdrafts involving crisscrossed guarantees. Save-On set up an executive pension plan covering only Wosk.

Mr Wosk also testified as to the difficulties service stores were having in meeting union demands, and said that many of them had gone out of business for that reason.

Harold Freeman, a barrister whose firm incorporated the companies, testified that he recalls Mr Wosk consulting him and an auditor, Cherk- tow, and while he could not recall the specific advice given to Wosk his recollection was that Wosk had labour problems, something to do with organization and certification, and that Cherktow advised in respect of family ownership problems.

Cyril Vickers, a chartered accountant, testified that he joined the Cherktow firm after Mr Cherktow died, and he was accountant for the three companies since 1967. He prepared Exhibit 8, a schedule designed to show wage costs that Save-On would have had if paying union wage rates for the week beginning May 1, 1972, which would have meant about $110,000 in additional wage costs for that year, according to the calculation made by Vickers.

Answers given by Mr W S Dempsey, an auditor in the Department of National Revenue, on his examination for discovery were put in evidence. They relate to the reasoning and process involved in making the assessment of tax.

Other exhibits put in evidence include Exhibit 4, a schedule of taxable income of the three companies for the years 1954 to 1971, submitted by the appellants; Exhibit 2, a schedule of gross profit, taxable income reported, taxable income assessed, salary of Saul Wosk and Muriel Wosk, and certain rents paid, of the three companies for their fiscal years 1956 to 1965, inclusive, prepared by the respondent; and Exhibit 3, a copy of corporate income tax returns of the companies. Mr Wosk received salary from Save-On and Pay-Less, which was adjusted in some of the years, primarily to maximize benefits of a low tax ra^e base. There also were rent adjustments, for example, New-West’s rent payable to Wosk was $15,000 in each of the years until 1964, when it was reduced to $6,000; and Save-On’s rent payable to Pay-Less drooped from $36,000 in the years prior to 1964 to $24,000 in 1964 and 1965. Wosk says the reason for the reduction was that some tenants had left the 43 West Hastings Building. The exhibits also show, in relation to the time (February 8, 1956) when Mr Wosk caused New-West to be incorporated, that the taxable income of the existing company (which later became Pay-Less) was $17,174.88 for its taxation year ending April 30, 1956.

The taxable income of the companies as shown in Exhibit 4 includes the following figures:

By virtue of section 138A of the Income Tax Act this Court is given the power to make an independent determination of the main reasons for the separate creation and existence of the corporations which the Minister has deemed to be associated, and for the appellants to succeed they must discharge the onus of establishing that none of the main reasons for the separate existence of the corporations was to reduce taxes.” [2]

Mr Wosk was the directing mind of the companies. His evidence as to his subjective intentions in creating and maintaining them must be considered in the circumstances that existed and along with all other relevant evidence.

When Mr Wosk caused New-West to be incorporated to take over the New Westminster store business it was at a time when the existing company that was operating that store and the store at 46 West Hastings Street was having a taxable income of close to $20,000 and I am satisfied that there was a probability, known to Wosk, that income tax advantages would result at that time or very soon thereafter from separate incorporations of the businesses of the two stores. Any probability of strike action or picketing of the stores by the union was more remote. Wosk intended that both companies would sign the 1955 union contract, and, as events proved, the companies continued to sign union contracts in 1955, 1957 and 1959. Wosk was not a single-store operator, he had more than one store, and he was aware of possible tax advantages that might result from the arrangements that were adopted and pursued. What happened after the companies came into existence, so far as taxable income is concerned, is shown in Exhibits 2 and 4, from which some figures have been set forth hereinbefore. He had professional advice also. It is understandable that his solicitor, Mr Freeman, does not recall the specific advice given. I did not get an impression from Mr Freeman that he or Mr Chertkow had advised against the incorporation of New-West and that Wosk insisted irrespective of income tax implications and because only of the union situation. The union situation was, I am satisfied, one of the considerations in Wosk’s mind and he was aware of advantages that might result in that respect from separate ownerships of the stores.

The appellants pointed to union wage rates and activities as a major cause of the decline in the number of service meat stores in the area concerned. But shopping patterns are changing for other reasons also, including the growth of chain stores and packaging of food, and it may be that the decline in the number of service stores would have been substantial for such reasons in any event.

On my appreciation of the evidence I cannot accept that the union situation was the sole main reason for creating and maintaining the companies or that possible income tax advantages were of little or no significance, and it is my conclusion that prospective income tax savings was in fact one of the main factors that influenced Wosk to incorporate New-West and Save-On and to adopt and pursue the arrangements for the separate existence of the companies in the relevant years. Looking at all of the evidence, in my view it does not establish that none of the main reasons for the separate existence of the companies was to reduce the amount of tax that would otherwise be payable under the Income Tax Act, and I think that a proper inference to be drawn from the evidence is that one of the main reasons for the separate existence of the companies was to reduce the amount of taxes thai would otherwise be payable.

Accordingly, the direction of the Minister made under subsection 138A(2) is confirmed and the appeals are dismissed with costs, to be taxed.