Bobbie Brooks (Canada) Limited v. Minister of National Revenue, [1972] CTC 2015, 72 DTC 1030

The Chairman:—This is another of those troublesome appeals regarding the alleged association of certain private corporations, in this instance, during 1965, 1966 and 1967. The matter was heard at Montreal where the appellant, a Quebec company, carries on business as a manufacturer of ladies’ sportswear and has done so since on or about September 15, 1960, the date of its formation.

Before continuing, it is necessary to record a little history. A company known as Pantel Inc, hereinafter called “Pantel”, had been incorporated on January 16, 1951 and was controlled by the three Pantel brothers, its business, evidently a successful one, being exclusively the manufacture and sale of low-priced ladies’ dresses. In 1960, the Pantels obtained a licence from an American public corporation permitting the manufacture in Canada of ladies’ and teen-age sportswear as soon as it was learned that such a licence from a widely-known corporation could be had. Thereafter, the Pantels caused the appellant, hereinafter called “Brooks”, to be incorporated and the sportswear business was commenced at Montreal.

At the start Pantel and Brooks occupied the same premises in the interests of economy, but it became apparent that these two businesses would not thrive satisfactorily unless in separate premises and Brooks eventually moved to another location in Montreal so as to be viewed as entirely separate from Pantel. It had become recognized that dress manufacturing and selling, and dealing in ladies’ sportswear, were incompatible enterprises and simply could, and should, not be conducted under the same roof. However, the upshot of it all was that the respondent ruled in or about December 1969, that Brooks was deemed to be associated with Pantel under subsection 138A(2) of the Income Tax Act and reassessed under subsection 39(3a) accordingly. The appellant has vigorously resisted such a reassessment.

At the hearing, the principal witness for the appellant was Issie Farber, CA, who had been closely familiar with the appellant’s business for some years and was its auditor. His knowledge of everything that went on was next to phenomenal. No detail seemed to have escaped his notice and no question put to him in cross-examination failed to elicit a ready and informed answer. In fact, this witness was a host in himself and clearly knew more about the appellant’s policies, plans and aims than anyone present in the court-room. Cross- examination only tended to lend verification to what the witness had said in his examination-in-chief. He gave what I consider were excellent and adequate reasons for having the two businesses operating as they were and satisfied me that the avoidance or reduction of taxes otherwise payable was not one of them. Instead, it was made to appear to me that the existence of the two corporations as separate entities was conducive to the achievement of efficiency in the operations carried on by both.

An assessor was called on behalf of the respondent, but his testimony was rendered all but nugatory during a penetrating cross- examination by Mr Manuel Shacter, counsel for the appellant.

I have not analysed the shareholdings, as there was no dispute about them; the issue to be decided was purely one of fact, viz were two corporations, instead of one, warranted in the circumstances narrated.

As was indicated toward the end of the hearing, I only can come to the conclusion that the reassessments were ill-founded in point of fact and should not stand. Consequently, the appeal ought to be allowed.

Appeal allowed.

FREDERICK D COUSINS, Appellant,

and MINISTER OF NATIONAL REVENUE, Respondent.

Tax Review Board (The Chairman: Keith A Flanigan, QC), December 29, 1971.

Income Tax Act, RSC 1952, c 148 — 5(1)(a) — Employee benefit.

The appellant was an employee of IMC Ltd at Esterhazy, Saskatchewan. In 1962 he built a residence, taking advantage of the program provided for company employees. IMC made a building lot available, and held a second mortgage in the amount of $1,662 for the full purchase price to enable the employee to obtain a first mortgage on the land and the house to be constructed. In 1968 the appellant received a discharge of that mortgage. However, a little later he left Esterhazy due to a decline in the industry, and could not sell his property until 1970, when he sustained a loss. The Minister added the amount of $1,662 to his reported net income.

HELD:

There was a real benefit conferred on the appellant by virtue of his contract of employment with IMC. The fact that the appellant lost money was unfortunate, but it would have been $1,662 greater if the second mortgage had not been discharged. Appeal dismissed.

The Appellant acted on his own behalf.

S A Hynes for the Respondent.

The Chairman:—This appeal was brought from an assessment made in respect of the appellant’s income for the 1968 taxation year. By notice of appeal, the taxpayer complained that the Minister erroneously added an amount of $1,662 to his reported net income for income tax purposes. The appellant alleged that the Minister, in adding this amount as the value of a mortgage discharge, had incorrectly assumed that the said discharge constituted a benefit within the meaning of paragraph 5(1 )(a) of the Income Tax Act. By notice of reply counsel for the respondent affirmed the latter’s position. The appellant, at that time residing at Cassiar, British Columbia, thereupon intimated in a letter to counsel for the Minister that, in view of the costs of time and travel and the lack of legal counsel, he wished to abandon his appeal. Having been informed of this understandable, though regrettable reaction on the part of the appellant, the Registrar of the Board communicated with the parties concerned who eventually agreed upon statements of fact and. written submissions were received from the appellant and counsel for the respondent. On this basis, I will summarize the facts and nature of the dispute as follows:

The appellant was an employee of International Minerals & Chemical Corporation (Canada) Limited (referred to hereinafter as IMC) which operated a potash plant at Esterhazy, Saskatchewan, from approximately November 1961 to December 1968. In 1962 he built a residence in Esterhazy and, in doing so, he took advantage of the program provided by IMC for its employees. Pursuant to this program, IMC offered houses or building lots near the village of Esterhazy on attractive financial terms in order to encourage employees to own their own homes.

For each employee who wanted to build his own house IMC made a building lot available at a price of $18 per foot frontage (ordinarily 70 feet). However, a second mortgage for the full purchase price was to be held by IMC in order to enable the employee to obtain a first mortgage on the land and the house to be consructed thereon from a mortgage loan company to a maximum of 90% of the appraised value. If the employee remained in the employ of IMC for five years after the date of the purchase of the property and occupied the house during those years, the second mortgage would be discharged.

In 1962 the appellant, as an employee of IMC, took advantage of this program and entered into, inter alia, a mortgage in favour of Esteroy Realties Ltd in the amount of $1,662, which amount represented the value of the lot acquired by him.

On February 14, 1968 the appellant received from IMC a discharge of the above mortgage which the appellant had caused to be registered. Pursuant to the program the appellant had made no payments on the mortgage at any time during its term.

In December 1968 the appellant left Esterhazy due to a decline in the potash industry but could not sell his property until August 1970, at which time he sustained a loss. In his notice of appeal he now complains: “As I cannot deduct this loss from earnings over that period, why should I have to pay tax on a supposed benefit from a previous period?” In the alternative, he submits that the benefit — if any — should have been spread over the taxation years 1962 to 1967, in which case the Taxation Division should have collected the additional tax from IMC.

It could be said at this point that the alternative claim of the appellant has no legal basis since the alleged benefit did not materialize before the five-year employment period had been completed. Confining my consideration to the first claim, the question seems to be whether there was indeed a benefit conferred on the appellant by virtue of his contract of employment with IMC.

It appears that, at the time the appellant purchased the land in 1962, the opportunity to buy the land and to construct a house thereon seemed to be an attractive arrangement which the appellant decided to accept as part of the employment package. Nobody foresaw at that time that the potash industry would decline to such an extent that the appellant would leave Esterhazy and be forced to sell his house. The second mortgage, obtained through his employer with the prospect of discharge after five years, was a bonus which would not have caused any complaint if things had gone well and the appellant had stayed in Esterhazy or had been able to sell his house at a good price. The fact that the appellant lost money on a more or less forced liquidation of his real estate in Esterhazy was unfortunate, but he should not forget that his loss would have been $1,662 greater if the second mortgage had not been discharged. He sold the property in 1970 for $14,903.49, ie some $2,200 in excess of the first mortgage.

In these circumstances the income tax levy on the amount of $1,662 may have seemed to be an insult added to injury but was actually the assessment of a real benefit because the discharge of the second mortgage decreased the appellant’s loss on the disposal of a capital asset in Esterhazy. The fact that the creditors’ benefit from the various improvements made to the property and paid for by the appellant enhanced the security for the loans provided by them does not affect the problem to be decided herein.

The words of paragraph 5(1 )(a) in this connection are so Clear that it is not necessary to refer to any jurisprudence concerning the interpretation of its provisions.

The appeal is, therefore, dismissed.

Appeal dismissed.