International Food Ltd, Blue Label Sales Ltd, Island Sausage Sales LTD and Henka Enterprises LTD (Formerly VFS Meat Co Ltd) v. Minister of National Revenue, [1973] CTC 2060, 73 DTC 58

The Assistant Chairman:—The appeal of International Food Ltd from an assessment of the appellant’s 1966, 1967 and 1968 taxation years was heard at Vancouver on February 26, 1973.

By agreement, the evidence adduced and the decision to be reached in the appeal of International Food Ltd would also apply to the appeals of Blue Labels Ltd, Island Sausage Sales Ltd and Henka Enterprises Ltd (formerly VFS Meat Co Ltd) concurrently before the Board.

Early in 1950 Mr Karl Wimmer bought a sausage factory which was incorporated in 1953 as Vancouver Fancy Sausage Co Ltd in which Mr Karl Wimmer was the principal shareholder. In 1958 Caromar Sales Ltd, a company which is admittedly associated with Vancouver Fancy Sausage Co Ltd, was also incorporated by Mr Wimmer.

On July 15, 1960 Blue Label Sales Ltd was incorporated, in which Mr Karl Wimmer at the pertinent time held 35 common voting shares, Almut Wimmer, Karl Wimmer’s wife, held 15 common voting shares, J Pennner held 50 common voting shares and Vancouver Fancy Sausage Co Ltd held 100 Class “A” non-voting shares. On that same day, International Food Ltd was incorporated in which the shareholders were, at the time pertinent to this appeal, those of Blue Label Sales Ltd except that Mr B Masaro held 50 common voting shares instead of Mr J Penner.

Mr. Wimmer in his testimony explained that prior to incorporation of the two above-mentioned companies, Mr Masaro was an employee principally engaged in the supervision of sales and Mr J Penner was a key man and a successful jobber or salesman for Vancouver Fancy Sausage Co Ltd.

Sales and administrative problems arose concerning the six or seven men who were employed by Vancouver Fancy Sausage Co Ltd as jobbers or salesmen precisely because the jobbers considered that they were employees of the company and, as such, should be entitled to rights and privileges of employees. Dissatisfaction among the jobbers increased because of the formation of a union among the production employees of Vancouver Fancy Sausage Co Ltd and the salesmen or jobbers were considering forming a union of the salesmen.

Mr Wimmer never wanted to have a sales force within Vancouver Fancy Sausage Co Ltd and that is why he had promoted his sales through jobbers rather than through employees of the company. Furthermore, Mr Wimmer considered that the union of salesmen was ineffective because of the nature of the salesmen’s work which defies supervision. Mr Wimmer therefore asked for suggestions from his jobbers. A proposition as a possible solution to the problem was made by Derek Salter, a jobber and leader of the labour movement in Vancouver Fancy Sausage Co Ltd but it was not accepted (Exhibit A-2). Mr Penner allegedly made a proposal which became the basis for the shareholding arrangement of International Food Ltd and Blue Label Sales Ltd described above.

In March 1961 VFS Meat Co Ltd was incorporated in which Karl Wimmer held 3 common shares and 3 preferred shares; Almut Wimmer held 2 common and 2 preferred shares; H Miderla, an employee of Vancouver Fancy Sausage Co Ltd, held 5 common and 5 preferred shares and Vancouver Fancy Sausage Co Ltd held 980 preferred shares.

VFS Meat Co Ltd was incorporated when Vancouver Fancy Sausage Co Ltd moved to larger quarters. The reasons given for incorporating this company were that VFS Meat Co Ltd bought fresh meat and sold to Vancouver Fancy Sausage Co Ltd whatever meat was required for the manufacture of sausages. It then sold fresh meat cuts and rejected sausages of Vancouver Fancy Sausage Co Ltd to restaurants and hotels. These activities were previously carried on by Vancouver Fancy Sausage Co Ltd and changes were made so as to avoid the complaints of customers of Vancouver Fancy Sausage Co Ltd.

island Sausage Sales Ltd was incorporated in September 1962. The shareholdings were based on those of International Food and Blue Label Food — Mr Guest, an employee of Vancouver Fancy Sausage Co Ltd, holding 50 common shares. The reason given for the incorporation of this company was the success achieved in International Food Ltd and Blue Label Sales Ltd. Blue Label Sales Ltd, International Food Ltd, Henka Enterprises Ltd (formerly VFS Meat Co Ltd) and Island Sausage Sales Co Ltd will hereinafter be referred to as “the little companies”. The issue to be decided here is whether the facts concerning the incorporation of the “the little companies” fall within the meaning and intent of subsection 138A(2) which reads:

Associated corporations

(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.

The consecutive incorporations and the separate existence of International Food Ltd, Blue Label Sales Ltd, island Sausage Sales Ltd and VFS Meat Co Ltd indicate, as the evidence shows, a practical solution to the salesmen’s labour problems and a more efficient method of carrying out the sales of Vancouver Fancy Sausage Co Ltd.

However, there are other facts which lead one to believe that the carrying out of the business in the most efficient manner was not the only reason for the separate existence of these companies.

International Food Ltd and Blue Label Sales Ltd were incorporated in July 1960. In 1960 the declared profits of Vancouver Fancy Sausage Co Ltd was $24,690 and the basis for the low rate of the amount taxable at that time was $25,000. In 1961 the low-rate basis was raised to $35,000. Vancouver Fancy Sausage Co Ltd had in that year a declared profit of $22,245; Blue Label Sales Ltd had a declared profit of $32,732; International Food Ltd had a declared profit of $22,253 and VFS Meat Co Ltd, which was incorporated in March of that year, had a declared profit of $30,798.

Island Sausage Sales Ltd was incorporated in September of 1962 but broke even in its operation in that year. From the above figures it would appear that a new company was incorporated as the existing company or companies came close to the low-rate basis.

Furthermore, when International Food Ltd and Blue Label Sales Ltd were first incorporated, the division of the shares was 69% to Mr and Mrs Karl Wimmer and 31% to the respective employee shareholders. These shareholdings were subsequently changed to 50% to Mr and Mrs Wimmer and 50% to the employee shareholders. These changes were made just prior to the pertinent amendment to the Income Tax Act.

In his testimony, Mr Wimmer claimed he did not know. that the division of the shares in these companies was on a 69%-31% basis. He thought it was on a 70%-30% basis. In explaining why the employees’ shareholdings were raised to 50%, Mr Wimmer stated that the employee shareholders were not satisfied with the amount of shares they held in the light of the heavy responsibilities they had in administering their companies.

There is evidence to the effect that none of “the little companies” had any assets, none had a telephone, and all operated out of rooms situated in the building in which Vancouver Fancy Sausage Co Ltd was located and that the building was owned by Caromar Sales Ltd. All of the invoices of “the little companies” contained an indication of their relationship with Vancouver Fancy Sausage Co Ltd. The delivery trucks all belonged to Vancouver Fancy Sausage Co Ltd and were rented to “the little companies”. The financial reports and the income tax returns were prepared, and the bookkeeping of “the little companies” was done, by Vancouver Fancy Sausage Co Ltd. Mr Wimmer looked after the overall administration of “the little companies”.

Mr Masaro, an employee of Vancouver Fancy Sausage Co Ltd, and holder of 50% of the common shares of International Food Ltd, was brought in as a witness. On cross-examination, Mr Masaro stated that he did not know why his shares in International Food Ltd had been raised from 31% to 50% and added that he had very little to do with the financial aspect of the business. On being questioned as to how the dividends on common shares were arrived at, Mr Masaro was not quite sure and, although the minutes of the meetings relative to the declaration of dividends were signed by Mr Masaro, the decision as to the amount of dividends declared was evidently made by Mr and Mrs Wimmer.

Two letters are on record dated December 5, 1961, addressed to Mr Penner and Mr Masaro in which an option to buy 50 Class “A” nonvoting shares at $1 a share from Vancouver Fancy Sausage Co Ltd, in their respective companies, was confirmed. None of these options was taken up even though for the price of $50 Messrs Penner and Masaro could have realized a considerable amount of money over the years. On being asked why he did not take up the option, Mr Masaro stated that he had forgotten about it and that, in any event, he was satisfied with his salary as an employee of Vancouver Fancy Sausage Co Ltd which was his principal employer and in addition he received dividends for looking after International Food Ltd.

In 1968 VFS Meat Co Ltd paid dividends of $2,558.40 to Mr and Mrs Karl Wimmer and Mr Miderla whereas the dividends paid to Vancouver Fancy Sausage Co Ltd in that year were $103,341. Blue Label Sales Ltd paid dividends of $23,680 to Mr and Mrs Karl Wimmer and Mr Penner and $78,600 to Vancouver Fancy Sausage Co Ltd. International Food Ltd paid dividends of $17,600 to Mr and Mrs Karl Wimmer and Mr Masaro and $102,000 to Vancouver Fancy Sausage Co Ltd.

It is somewhat difficult for me to conceive that such elaborate and efficient financial structures of “the little companies” originate exclusively from Mr Penner’s suggestion to solve the problem of the salesmen in Vancouver Fancy Sausage Co Ltd.

In a statement from McIntosh, McVicar, Dinsley & Co, chartered accountants, addressed to Vancouver Fancy Sausage Co Ltd, dated January 15, 1962 (Exhibit R-2) the following item appears:

Professional services with respect to the reorganization of the company’s operations in view of the 1960 amendments to the Income Tax Act with respect to the association of companies.

In my opinion, even though the separate existence of “the little companies” may have contributed to a more effective manner in carrying out the business of Vancouver Fancy Sausage Co Ltd, one of the main reasons for the incorporation of “the little companies” was to reduce the amount of taxes that would otherwise be payable by Vancouver Fancy Sausage Co Ltd. Although Mr Wimmer testified that he. himself, was too preoccupied with administrative problems to think about income tax, in my opinion someone in the company was very much concerned with that aspect of the problem when incorporating “the little companies”.

I hold that the facts in this case support the Minister’s contention that International Food Ltd, Blue Label Sales Ltd, Island Sausage Sales Lid, and Henka Enterprises Ltd (formerly VFS Meat Co Ltd) are associated with Vancouver Fancy Sausage Co Ltd within the meaning of Subsection 138A(2) of the Income Tax Act and the appeals are therefore dismissed.

Appeals dismissed.