Cattanach, J:—These are appeals from the appellant’s assessments to income tax by the Minister for its 1964, 1965 and 1966 taxation years. The assessments were made following directions by the Minister dated August 16, 1968 pursuant to the provisions of subsection 138A(2) of the Income Tax Act that the following companies are deemed to be associated with each other in their 1965 and 1966 taxation years:
(1) Loewen Holdings Ltd
(2) C T Loewen & Sons (1957) Ltd
(3) Build-A-Home Co, Ltd
(4) Loewen Millwork (Canada) Ltd
(5) Edward J Loewen Enterprises Ltd
(6) George F Loewen Enterprises Ltd and
(7) the appellant herein, C P Loewen Enterprises Ltd
With respect to the 1964 taxation year Loewen Millwork (Canada) Ltd, the fourth company enumerated above, was not included in the Minister’s direction because that company was not incorporated until 1965.
It is admitted that the first three enumerated companies were associated with each other in the 1964 taxation year by virtue of subsection 39(4) of the Income Tax Act and similarly that the first four mentioned companies were associated with each other in the 1965 and 1966 taxation years.
lt was also admitted that the last three enumerated companies, that is, Edward J Loewen Enterprises Ltd, George F Loewen Enterprises Lid and the appellant herein, C P Loewen Enterprises Ltd were associated with each other under the provisions of subsection 39(4).
Subsection 39(1) of the Income Tax Act provides that the tax payable by a corporation under Part I thereof is 18% of the first $35,000 of taxable income and 47% of the amount by which the income subject to tax exceeds $35,000. However, subsections (2) and (3) of section 39 provide that when two or more corporations are associated with each other the aggregate of the amount of their incomes taxable at 18% is not to exceed $35,000.
Basically the position of the appellant is that since the first four corporations are associated by reason of subsection 39(4) of the Aci, those four corporations are entitled to the benefit of the lesser rate of tax of 18% on income in the amount of $35,000 and since the remaining three corporations are also associated (but not with the first four corporations other than by the Minister’s direction) those latter three corporations are also entitled to the benefit of the lesser rate of tax of 18% on income to the extent of $35,000.
In short the appellant contends that there should be two bases of $35,000, one for the first four corporations and the other for the three remaining corporations whereas it is contended on behalf of the Minister that there should be but one base of $35,000 applicable to all seven corporations.
It is also admitted and the appeals were argued on the basis that but for the direction of the Minister under section 138A while the first four enumerated corporations, (1) Loewen Holdings Ltd, (2) C T Loewen & Sons (1957) Ltd, (3) Build-A-Home Co, Ltd, and (4) Loewen Millwork (Canada) Ltd, are associated with each other under subsection 39(4) of the Act and the three remaining corporations, (1) Edward J Loewen Enterprises Ltd, (2) George F Loewen Enterprises Ltd, and (3) the appellant, C P Loewen Enterprises Ltd, are also associated with each other under subsection 39(4) the first group of four corporations would not be associated with the second group of three corporations.
The direction of the Minister under section 138A with respect to the 1964 taxation year deemed all six corporations then existing to be associated with each other and with respect to the 1965 and 1966 taxation years that all seven corporations are deemed to be associated with each other.
As I understood the position taken by counsel for the appellant it was that since the first group of four corporations were associated under subsection 39(4) as were the second group of three corporations, resort cannot be had to section 138A to deem corporations associated which are already associated by virtue of another section of the statute.
On the other hand the position taken on behalf of the Minister was, as I understood it, that since the three corporations of the second group which are associated under section 39(4) are deemed to be associated by the Minister under subsection 138A(2) with one of the corporations of the first group, and since the four companies in the first group are associated under subsection 39(4) it follows that the three corporations of the second group are associated with the four corporations of the first group by reason of subsection 39(5) which provides that where two corporations are associated, “or are deemed by this subsection to be associated” with the same corporation at the same time they are deemed to be associated with each other. This being so the blanket direction of the Minister deeming all seven corporations to be associated with each other is merely a convenient means to express on the overall fact. Those which are associated by virtue of subsection 39(4) remain so associated in any event and the Minister’s direction under subsection 138A(2) is surplusage, those which are not associated otherwise are deemed to be associated by virtue of the Minister’s direction.
However counsel for the appellant submits that subsection 39(5) does not operate as contended by counsel for the Minister for to do so (1) two corporations must be associated or (2) deemed by subsection 39(5) to be associated, with the same corporation to be deemed to be associated with each other. He predicates this argument upon the assumption that no corporation in the second group is associated with any corporation in the first group (and from this he excludes the association by virtue of the Minister’s direction under subsection 138A(2) because that is a deemed association and not an association without deeming nor are the corporations deemed to be associated by virtue of subsection (5) of section 39.
Therefore as I view the matter, two issues evolve.
The first issue for determination is whether one of the main reasons for the separate existence of the corporations here in question was to reduce the amount of taxes that otherwise would have been payable.
Subsection 138A(2) which is applicable to the 1964 and subsequent taxation years reads as follows:
(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.
An appeal from an assessment made pursuant to a direction by the Minister under subsection 138A(2) is provided in subsection (3) which reads in the relevant part thereof as follows:
(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
(ii) in the case of a direction under subsection (2), it determines that none of the main reasons for the separate existence of the 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.
Under this subsection 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.
Under subsection 138A(2) the justification required for the exercise of the Minister’s direction is that (1) the separate existence of the corporations herein is not solely for the purpose of carrying on the business of those corporations in the most effective manner and (2) one of the main reasons for their separate existence is the reduction of taxes. This would appear to presuppose two conditions precedent to the exercise of the discretion by the Minister.
However under subparagraph 138A(3)(b)(ii) this Court may vacate the direction made by the Minister under subsection (2) if it determines that “none of the main reasons” for the separate existence of two or more corporations [is to reduce the amount of tax that would otherwise be payable] and this Court is not authorized by subsection 138A(3) to substitute its finding that the separate existence of two or more corporations is not solely for carrying on business in the most effective manner, It seems to me that the findings of the Minister under paragraphs (a) and (b) of subsection 138A(2) are, in reality, only one finding to the effect that the separate existence of two or more corporations is not solely for business purposes and is to reduce taxes for which reason reference is made to paragraph 138A(2)(b) in subparagraph 138A(3)(b)(ii) and no reference is made therein to paragraph 138A(2)(a).
If I should decide this first issue in favour of the appellant, that is, that a reduction in the amount of taxes payable was not one of the main reasons for the separate existence of the corporation, then that decision would resolve the appeals.
However should I resolve this issue in favour of the Minister, that is, that one of the main reasons for separate existence of the corporations was a reduction in the amount of taxes that otherwise would have been payable, then I must consider the second issue which is the applicability of subsection 39(5).
To resolve these issues it is necessary to consider the facts peculiar to these appeals in detail.
In 1908 Cornelius T Loewen began a lumber business at Steinback, Manitoba which he operated in his individual capacity until 1943 in which year the business was taken over by a corporation under the name of C T Loewen & Sons Ltd.
Steinback, Manitoba is a small town some 40 miles or so from the city of Winnipeg and is a most unlikely place in which a business that was begun to serve the needs of the immediate community would expand to one of substantial proportions marketing its products throughout the prairie provinces, British Columbia and Western Ontario, but this is what happened despite disadvantage of location. The town was not located on the main line of a railroad and is not on a main highway. It is the centre of an almost exclusively Mennonite population.
At the beginning Mr Loewen turned his hand to any business that would engender a profit, but over the years concentrated mainly on a retail lumber and hardware business.
In this business he was joined by his three sons when they came of age, the oldest of whom was Edward J, followed by George F and Cornelius T Junior.
Undoubtedly one of the principal reasons for the success of the business was the industry of the father and his willingness to turn back to the business most of the profits derived therefrom. He apparently lived comfortably but frugally and devoted his life fully to the development of the business. It was his ambition to provide a substantial business to be carried on by his sons. His example was followed by his three sons when they took over.
Another factor which contributed to the success of the business was that the Loewen family were also Mennonites and as such enjoyed the good will of the community as well as a stable labour relationship. These advantages would not avail a prospective purchaser from outside the community.
In 1951 Cornelius T Loewen suffered a stroke and became completely paralysed. He was bedridden until his death in 1960.
The three sons therefore bought their father’s share of the business for $225,000 payable over a period of 15 years and became the three equal shareholders of the corporation. Because the sons wanted to expand the business and needed the capital to do so, it took them the full 15 years to discharge their obligation to their father.
In 1955 Edward, the oldest son, who had become the manager of the corporation, suffered a severe heart attack. The brothers had an agreement amongst themselves that the surviving brother would buy the shares of a deceased brother supplemented by life insurance policies to achieve that end. The business had prospered under the management of the three brothers to such an extent that the insurance was not sufficient to purchase the share of a deceased brother and because of the policy of devoting all profits to the expansion of the business as working capital to that end, the money required to purchase a deceased brother’s share would have to come from the business and deplete the working capital essential to the policy of expansion. Because of Edward’s health no further insurance on his life could be obtained.
Based upon their experience in paying their father the three brothers decided that the structure of the business should be reorganized to simplify the buying out of a deceased brother or any possible sale to outsiders.
Accordingly C T Loewen & Sons (1957) Ltd was incorporated to operate the business. This company purchased the business from C T Loewen & Sons Ltd and acquired the inventory. C T Loewen & Sons Ltd changed its corporate name to Loewen Holdings Ltd and, as indicated by its name, became a holding company. It retained the land, buildings and machinery and rented these assets to C T Loewen & Sons (1957) Ltd, the operating company, for an annual rent of 10% of the capital cost of the assets leased to the operating company. This annual rental began at approximately $40,000 and increased to $100,000 over the years.
The three brothers became the equal shareholders of C T Loewen & Sons (1957) Ltd, the operating company, and in Loewen Holdings Ltd.
The three brothers entered into a new buy and sell arrangement whereby a surviving brother or brothers could buy the shares of a deceased brother or brothers held in C T Loewen & Sons (1957) Ltd, the operating company. The estate of the deceased brother would continue to hold the shares in Loewen Holdings Ltd and derive rent and interest therefrom. This arrangement provided a source of income to the estate of a deceased brother and because the investment in the operating company had been greatly reduced, the amount required to purchase the shares of a deceased brother was correspondingly reduced.
The brothers entered the business of prefabricated homes and to facilitate the financing of the purchase of such homes by purchasers, incorporated a company under the name of Build-A-Home Co, Ltd in which they were the three equal shareholders.
The business originally begun by the father now consisted of the main business, that of retail lumber and a woodworking shop.
In 1959 it was deemed advisable to expand the millwork part of the business. In order to do so a loan of $350,000 was obtained from the Manitoba Development Fund, a government agency. The amount of the loan was increased by a further $50,000 in 1962. Security was provided by issues of debentures both by C T Loewen & Sons (1957) Ltd, the operating company, and Loewen Holdings Ltd, the holding company, and the personal covenants of the three brothers and their wives.
A large plant was built and occupied in 1960. With the further loan obtained in 1962 an addition to the plant was constructed.
At this point in time Edward’s health had further deteriorated to the extent that Cornelius T took over as general manager of the enterprise.
The millwork portion of the business prospered immediately. Curiously the lumber was purchased in British Columbia, shipped to Stein- back, Manitoba, wrought there and some of the finished products were shipped back to British Columbia and sold there. A branch was established in Edmonton, Alberta.
It was considered expedient, because of the inter-provincial scope of the millwork business, to incorporate Loewen Millwork (Canada) Ltd to handle this business in which company the three brothers became equal shareholders.
At all times these four corporations, Loewen Holdings Ltd, C T Loewen & Sons (1957) Ltd, Build-A-Home Co, Ltd, and Loewen Millwork (Canada) Ltd recognized that they were associated corporations within the meaning of subsection 39(4) of the Income Tax Act, filed income tax returns on that basis and were taxed on that basis. These circumstances lend irrefutable credence to the submission of counsel for the appellant herein that one of the main reasons for the separate existence of these four corporations was not the reduction in the amount of taxes that would otherwise be payable.
Subsequent to the arrangement in 1957 when the original corporation became a holding company retaining the fixed assets which were rented to the operating company, the assets in the operating company had increased substantially. Added to this the operating company had committed itself to the Manitoba Development Fund to the extent of $400,000 and had a line of credit with its bankers upon which it had drawn about $450,000. Therefore there was a debt of approximately $850,000 which had to be met from current profits. Meanwhile the worth of the operating company, C T Loewen & Sons (1957) Ltd, had increased to $400,000. In the view of the three brothers they were faced with the identical problem with which they were faced in 1957 at which time the fixed assets were placed in the holding company and the business in an operating company thereby facilitating the purchase by the suviving brothers of a deceased brother’s share in the operating company and the income of the holding company providing a source of revenue to the deceased brother’s estate.
If anything the situation now faced by the three brothers was more critical than that faced and solved as above indicated in 1957. Edward’s health was more critical. Insurance could not be obtained on his life. There was now the burden of debt created by the expansion of the millwork operation. The worth of the operating company had grown well beyond the worth of the business in 1957. As before the brothers were short of ready cash with which to purchase the share of a deceased brother because of the policy of putting the bulk of the profits back into the business to supply working capital which was essential to the successful conduct of the operating company’s business and to cope with the expansion of that business. Because of the peculiar nature of the enterprise, that is, its conduct as a family business and its location in an ethnic community removed from main transportation routes, the prospect of sale to outside interests at a price equal to its real worth was remote, although there was evidence that offers had been received for integral parts of the divergent business. It was my impression that none of these offers was seriously considered.
it was the opinion of the three brothers that the business could not be continued by the surviving brothers in the event of the death of one of them as a family business. This was also the opinion of the brothers’ accountant advisers who advised them that if a method were not devised to meet this situation the business would come to an end.
Meanwhile the three brothers were advancing in years. Each had a family the members of which were reaching maturity. Cornelius, the youngest brother, had five sons and one daughter, George, the middle brother, had three sons and Edward, the eldest brother, had four sons. At a family conference it was ascertained that a large number of the family expressed the desire to continue in the business of their fathers, although some expressed an interest in following other pursuits. If my recollection is correct I believe that Edward’s sons ofr some of them expressed the wish to engage in a different life work. It was the natural desire of the brothers to provide for their children’s future. For some that would mean a continuation of the business as a family enterprise and for those who sought a different career income from the business would be the means of preparing for those careers.
Basically the problem to be solved was how to deal with the business in the event of the death of a brother, first to ensure for its continuance as a family business, second to provide an estate for the brothers’ families and lastly to provide a ready and effective method of segregating the businesses making up the whole enterprise for ready sale to an outsider or for continuance by the individual brothers if such became necessary. Accordingly two meetings were held by the brothers, their accounting advisers and their legal advisers. I am quite certain from the evidence that at these meetings alternative plans were not put forward and discussed as to their relative advantages and disadvantages. The problem was known to all present and the desired objectives were also known. It is my belief that possible solutions to the problem which might have the effect of achieving the desired ends were put forward and discussed and that from those discussions a plan evolved. I do not believe that different concrete and formulated plans were put forward and contrasted one with the other. Rather I think that only one plan evolved and was accepted.
That plan, which was adopted and implemented in 1962 is summarized.
Three further corporations were incorporated. They were Edward J Loewen Enterprises Ltd, George F Loewen Enterprises Ltd and C P Loewen Enterprises Ltd, the appellant herein. These three corporations I have referred to previously as the second group of companies contrasting them with the first group of the four previously existing corporations. The shares in each of these three corporations were owned beneficially for the children of the three brothers, as their names appear in the corporate names, by trustees. As the children came of age the shares held by them were transferred by the trustees to the children and those children joined as trustees for the remaining minor children.
The trustees were most carefully selected by the brothers to serve in that capacity. They were men of certain business acumen but primarily they were selected by reason of their high moral and religious principles. They served without remuneration but were not content to act merely as nominees. Because of their religious scruples they made it clear that they would not take part in any nefarious tax avoidance scheme. It was only after they were advised by the three brothers and the accountancy advisers and satisfied themselves that such was not the purpose but that the plan was in furtherance of other legitimate reasons that the trustees consented to act.
These three corporate entities formed a corporate partnership under the firm name and style of C T Loewen & Sons.
The operating company, C T Loewen & Sons (1957) Ltd sold the business to the corporate partnership, C T Loewen & Sons for a price of $404,000, the net worth of the operating company, so that the worth of the business of that corporation (apart from the sale price as an asset) was again reduced to what it was at its original inception in 1957. The security for the purchase price was a demand promissory note.
The corporate partnership then operated the business, the profits from which were shared equally by the three enterprise corporations, Edward J Loewen Enterprises Ltd, George F Loewen Enterprises Ltd and the appellant, C P Loewen Enterprises Ltd and through those corporations to the children of the three brothers.
The three brothers did not own any shares whatsoever in the three enterprise corporations, nor did any corporations of which there were shareholders, but they continued to hold their shares, in equal proportions in C T Loewen & Sons (1957) Ltd and Loewen Holdings Ltd.
The corporate partnership leased the fixed assets from the holding company, Loewen Holdings Ltd for the same rental as had C T Loewen & Sons (1957) Ltd when it was the operating company. This assured the three brothers an income from that source. The brothers, by their wills, left their shares in the holding company to their respective wives.
C T Loewen & Sons (1957) Ltd then became a management company. Through the three brothers, management and direction was given to the corporate partnership which paid a fee for that service to the C T Loewen & Sons (1957) Ltd, now the management company.
The three brothers each received a salary from the management company.
In the result, therefore, the income of each of the three brothers was reduced to their equal share of the rental received by the holding company and their salaries from the management company. All profits from the operating corporate partnership eventually went to the respective families of the three brothers in equal shares. This arrangement the three brothers were willing to accept. Edward was contemplating complete retirement in any event because of his failing health and Cornelius, the youngest brother felt that he had about ten to fifteen years of active business life remaining. George would have three years less.
The cost of purchasing a deceased brother’s share in C T Loewen & Sons (1957) Ltd was frozen at the purchase price of the sale in 1962 to the corporate partnership. Any growth in that business was thereby ended and the growth was transferred to the corporate partnership.
In the corporate partnership it was agreed that should one of the corporate partners withdraw, the remaining partners could purchase the withdrawing partner’s assets from the trustees for that partner. Mr Cornelius T Loewen testified that the remaining corporate partners would always have twice the amount available to purchase the assets of the withdrawing partner. I found some difficulty in following why this logic was not equally applicable with respect to the surviving brother of a deceased brother purchasing the assets of the deceased brother in C T Loewen & Sons (1957) Ltd when it was the operating company. The explanation appears to be that it was the policy of the three brothers to take modest salaries for their own personal needs and that the profits which would have accrued to them were ploughed back into the company to provide working captial which was essential to the conduct and expansion of the business for which reason the three brothers were always individually short of ready cash and the amount required to purchase a deceased brother’s share would have to come from the assets of the company thereby depleting its working capital. Mr Loewen testified that since the profits in the operating corporate partnership were divided three ways the growth was reduced. From this I assume that the brothers were content that the business might remain static or at least the growth might be retarded rather than that all profits should be put back into the operating partnership as had been the case when they were devoting their energies and ambitions to expanding the business.
At the meetings concerning the reorganization of the corporate structure of the enterprise Cornelius T Loewen testified that the brothers were advised by one of their two chartered accountant advisers that there was the possibility of an income tax saving. That advice must have been predicated upon the fact that the original four companies, Loewen Holdings Ltd, C T Loewen & Sons (1957) Ltd, Build-A-Home Co, Ltd and Loewen Millwork (Canada) Ltd were as- sociated corporations and as such these four corporations could have allocated to them an amount of $35,000 of taxable income which would be taxable at the reduced rate of 18% rather than 47%.
However, the three enterprise corporations were also accepted as being associated corporations and similarly those three corporations could have allocated among them a like amount of $35,000 of taxable income also taxable at the reduced rate. These two groups of corporations were not associated with each other under subsection 39(4) of the Act. Subsection 138A(2) was not enacted until 1963 applicable to the 1964 and subsequent taxation years. Accordingly it could not have been known in 1962 that there was the possibility of the Minister directing that corporations not associated under the law as it then existed be deemed to be associated. Since the corporations in existence prior to 1962 all had taxable incomes in excess of $35,000 and that all corporations after the incorporation of the three enterprise corporations in 1962 and including those three enterprise corporations would continue to have taxable incomes in excess of $35,000, the fact that there would be a tax saving was almost a certainty.
Mr Cornelius T Loewen conceded that he was well aware of the possibility that there would be a tax saving but he testified that he would have been prepared to adopt the foregoing corporate reorganization even if no tax saving resulted and he went even further to state that he would be prepared to pay increased taxes to secure the benefits that resulted from the plan. While I believe Mr Loewen’s testimony in this respect he could not have been aware ai the time the decision was made that increased taxes could result, although there would be expenses necessarily resulting from the implementation of the plan by way of iegal costs and the like.
He did instruct that income tax returns for the three enterprise corporations should be prepared on the basis of taxation at a reduced rate but indicated that if the returns were not accepted and assessment was made by the Minister at a higher rate he would be prepared to pay that higher rate and the penalty for late payment of 6% on the increase on the ground that he would consider the increased tax as a short term loan with interest thereon at 6%.
In view of this testimony it appears inconsistent that the direction of the Minister under subsection 138A(2) and consequent increased assessment should be opposed but this has no real significance because if that assessment was wrong in law the appellant is entitled to object thereto.
Mr Loewen candidly admitted that a reduction of tax payable was a reason for adopting the plan but consistently contended that it was not the paramount reason.
As i understood the motivating reasons for the establishment of the separate corporations outlined by Mr Loewen and reiterated by his accountancy advisers, they were,
(1) to ensure the continuance of the business as a family enterprise,
(2) to provide an estate for the children of the three brothers, and (3) to facilitate the segregation of the business into its component parts among the brothers of their families or to facilitate the sale of the component parts if such became desirable.
I do not doubt that these were compelling reasons present to the minds of the brothers and their legal and accountancy advisers to constrain them to select the creation of the three enterprise corporations, the formation of the corporate partnership, the sale of the assets of the former operating company to the corporate partnership, the change of the function of the former operating company to that of a management company and the retention of the fixed assets in the holding company which were then rented by the corporate partnership as a solution to the problems with which they were faced.
With respect to the first reason advanced that the purpose was to ensure the continuance of the business as a family enterprise, the agreement among the three brothers that the surviving brothers would purchase the interest of a deceased brother (a real and imminent possibility) in the operating company, because of its growth, would require an outlay which the brothers could not meet from their own resources or the life insurance so that resort would be necessitated to the funds in the operating corporation thereby depleting the working capital to the extent that it would be impossible to carry on or seriously impair that possibility. The device of retaining the fixed assets in a holding company and selling the business to an operating company worked successfully in 1957.
The sincerity of the three brothers that this was the motivating reason for their doing this in 1957 rather than a reduction in tax that would have otherwise been payable is confirmed by the facts that they acknowledged that the four corporations existing at that time were associated and they paid tax on that basis. It follows that this plan would have [been] adopted at that time regardless of tax consequences.
In 1962 because of the growth of the operating company the same problem recurred augmented by the fact that there were debts to the Manitoba Development Fund and the bank which were a first charge on the assets and that there were now 13 children whose future prospects depended upon the family business.
The creation of the three family enterprise group of companies which formed a partnership meant that the profits from al! the businesses were equally distributed to the families, an estate for each of the families was created, growth went to the partnership, the operating company provided a continuation of the management, the assets remained in the holding company and all the surviving brothers had to do in the event of the death of one of them was to buy his shares in the management company.
It was therefore reasonable to adapt the same plan which had served its purpose in 1957 to the situation that prevailed in 1962 with the further embellishments.
That the plan provided an estate for the children of the three brothers is obvious.
Furthermore that the plan would facilitate the segregation of the businesses was demonstrated by subsequent events.
Edward decided that he would withdraw from the business completely. It was agreed that George would take over the retail lumber and hardware business and Cornelius would take over the millwork business. To do this the partnership was dissolved and new leases for the fixed assets were entered into by two of the enterprise corporations, the appellant, C T Loewen Enterprises Ltd and George F Loewen Enterprises Ltd, with the holding company.
Similarly the plan would have facilitated the sale to outside interest if such were possible and desirable. The likelihood of the sale of the business as a whole was remote because of its location and its location in an ethnic community. No such offers were ever received. There had been offers for some of the component parts of the business. Whether such would have been accepted is doubtful because of the avowed desire to have the businesses continued by the children and because of the debentures outstanding the return from a sale to an outsider would have been small.
It is for these reasons that I have concluded that these reasons were legitimate and compelling reasons which influenced the three brothers in adopting the corporate structures they did in 1962. However this conclusion does not determine the matter. For the appeals to succeed the appellant must discharge the onus of establishing that none of the main reasons for the separate existence of the corporation was to reduce taxes.
In Holt Metal Sales of Manitoba Ltd v MNR, [1970] Ex CR 612; [1970] CTC 144; 70 DTC 6108, the present Chief Justice, then President of the Exchequer Court, said at page 620 [149, 6111]:
There were many possible advantages to be gained from the incorporation of the one or other or both of the appellants, which, I am sure, were in the minds of those responsible for taking the decision to incorporate them.
He then outlined some of those main advantages and continued on page 620 and 621 [149 and 150, 6111 and 6112]:
... If the evidence were such as to convince me that some or all of these and other reasons that have been advanced were sufficiently compelling in the minds of William Holt and his advisers to constrain them to select the creation of the appellants in preference to all other possible methods of achieving the same results, I should have thought that it might be open to me to conclude that the probable reduction in income taxes through having three companies instead of one to enjoy the 18 per cent tax rate was not one of the “main” reasons for deciding to have three companies instead of one. An example of a case where other considerations dictated the creation of several corporations and the income tax benefit arising therefrom was only an incidental benefit, is Jordans Rugs Ltd et al v MNR, [1969] CTC 445. Here, however, no attempt was made to show that, in the minds of William Holt and his advisers, to achieve any one or more compelling objectives (such as conferring property benefits on members of the family) the only practicable method was the creation of multiple companies (and other methods of achieving such objectives certainly existed); one is left with the conclusion that the very substantial prospective annual reduction in income tax must have been, consciously or unconsciously, one of the main factors that operated on the thinking of William Holt and his ad- visers to bring them to elect for this particular method of re-organization and re-arrangement of William Holt’s affairs in preference to all other alternatives.
Basically as I see it the purpose of the three brothers was to provide an estate for their children and incidentally a life work in the continuance of the family business should the children desire.
The other reasons I have mentioned above, while ends in themselves, are all directed to the basic ultimate end of providing for the children.
In view of the language of Jackett, CJ quoted above it is now incumbent upon me to consider that in the minds of the three brothers and their advisers to achieve this objective the only practicable method was the adoption of the plan so outlined herein even though other methods may have existed.
For the reasons I have previously mentioned, I do not think that alternative plans were conceived and considered as such at the two meetings of the three brothers and their advisers. Rather I think that the plan adopted evolved as the most practicable way of achieving the desired objectives.
There was a provision in the buy and sell agreement among the three brothers that the option need not be exercised. I formed the impression that the three brothers were possessed of high religious and moral principles and considered that they had a moral obligation to the children of a deceased brother and that they would not avail themselves of that escape provision. Even if they should do so the result would be a compulsory winding up of the company which none of them wished. Neither did they wish to sell to a stranger.
At one stage it was suggested that the growth element could be avoided by the creation of preferred shares. However on the death of one of the brothers the other would still be obligated to purchase those shares. The creation of preferred shares would not have the effect of “freezing” an estate which is a desirable element in estate planning. It would not eliminate the growth element. This is predicated upon the fact that under the Estate Tax Act the value of the shares is at the fair market value at the date of death and the fair market value bears a direct relationship to the profits. Under the plan adopted the growth element was directed into the corporate partnership.
Accordingly I am satisfied that it was the concensus of the brothers and their advisers that the plan evolved and adopted was the best practicable method to achieve the desired end.
The test to be applied in considering the meaning of subparagraph 138A(3)(b)(ii) is set out in Doris Trucking Company Limited v MNP, [1968] 2 Ex CR 501; [1968] CTC 303; 68 DTC 5204, where Dumoulin, J stated at page 505 [307, 5207]:
. . . “the proper test is . . . if one supposed that all corporations were subject to tax at a flat rate of 50%, as has been recommended by the Royal Commission on taxation, would it be expected that these particular operations would have been carried on by separate corporations’’.
This test was adopted and applied by Sheppard, DJ in Jordans Rugs Ltd et al v MNR, [1969] CTC 445; 69 DTC 5290.
In short the test amounts to this — if there had been no tax advantage would the plan have been adopted in any event?
In /RC v Brebner, [1967] 1 All ER 779, Lord Pearce stated at page 781 that the question whether one of the main objects was to obtain a tax advantage was a question of subjective intention.
After having given careful consideration to all the evidence adduced, I have concluded that the intention of the three brothers was to accomplish puposes other than a reduction in tax payable and that the plan adopted was the best practicable to achieve those purposes. The whole arrangement by which the plan was carried into effect was dominated by considerations other than tax advantage. It provided continuity of management, it “froze” the assets of the estate for the children, it facilitated the re-allocation of the businesses among the brothers and their families, and it lessened the load the surviving brother would have to pay to a deceased brother’s estate. This subjective intention of the brothers is confirmed by the adoption of a somewhat similar plan in 1957 which did not result in a tax advantage.
I might also add that I was influenced in reaching the conclusion that I have by the evidence of Mr Cornelius T Loewen and the manner in which he gave that evidence. I was convinced that he was a man of strong religious and moral principles as well as an industrious and astute businessman. He was aware of the possibility of a tax saving but he also stated that this was not the dominant factor. The dominating consideration was to provide for the future of his children and his brothers’ children. That was the subjective intention. I have accepted his testimony.
Accordingly I find that a reduction of the amount of tax payable was not one of the main reasons for the existence of the three enterprise corporations, including the appellant herein.
Having so concluded it is not necessary for me to consider the second issue which is the applicability of subsection 39(5) of the Income Tax Act.
Accordingly the direction of the Minister to the extent that it deems the first group of four corporations, namely, Loewen Holding Ltd, C T Loewen & Sons Ltd, Build-A-Home Co, Ltd and Loewen Millwork (Canada) Ltd are associated with the second group of three corporations, namely, Edward J Loewen Enterprises Ltd, George F Loewen Enterprises Ltd and the appellant, C P Loewen Enterprises Ltd in the 1964, 1965 and 1966 taxation years to be associated is vacated and the assessments are referred back to the Minister for reassessment accordingly.
It also follows that the appeals are allowed with costs.
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