Classic’s Little Books Inc v. Minister of National Revenue, [1972] CTC 2161, 72 DTC 1155

Maurice Boisvert:—This appeal was heard at Montreal, Province of Quebec on March 25 and May 18, 1971 by the Tax Appeal Board as it was then constituted, and concerns income tax assessments dated June 20, 1969 wherein taxes in the amount of $34,394.19 were levied in respect of income for the taxation years 1966 and 1967. The assessments were the result of a direction issued by the Respondent which reads as follows:

DIRECTION

Having regard to the facts and the recommendation set forth in the attached memorandum dated 25th March, 1969, I hereby direct, under the provisions of subsection 2 of Section 138A of the Income Tax Act that the following corporations be deemed to be associated with each other in the 1966 and 1967 taxation years.

Classic’s Little Books Inc.

Classic’s Little Books (Airport) Ltd.

Subsection 138A(2) of the Income Tax Act (RSC 1952, c 148, as amended) referred to in the above direction, enacts that:

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.

Subsection (3) of the above section reads 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

(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 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.”

It is contended by the appellant that section 39 of said Act under which the assessments were made had no application because the two corporations were not associated and could not be deemed to be associated under a direction of the respondent.

It has been established that the controlling shareholder in Classic’s Little Books Inc was Louis Melzack and that the controlling shareholder in Classic’s Little Books (Airport) Limited, (hereinafter referred to as “Airport”), was Mrs Louis Melzack.

The appellant company was incorporated on February 15, 1955 and has prospered from year to year ever since. The evidence of the growth of the appellant is shown in Exhibit A-1 which gives a list of ten locations where the appellant or Airport was located as at December 31, 1965. By 1971, the appellant had 17 bookshops in Canada while Airport had two in Montreal.

Counsel for the appellant submitted that (a) Airport was incorporated in 1960 in order to venture into the new and hazardous undertaking of establishing a bookstore at Dorval Airport; (b) there was a risk of making losses during the initial years of its operations; (c) it would have appeared that there would have been less taxes to pay because of the deductibility of expected losses and tax reasons would have precluded the incorporation of Airport rather than otherwise; (d) Mrs Rose Melzack owned no shares in the appellant company; (e) Mrs Melzack is an independent contractor with vast knowledge of, and experience in, the book retailing business and had all the technical knowledge, experience, expertise, energy and ability to justify the establishment of Airport; (f) Airport does not carry out the same business as the one carried out by the appellant; (g) the separate existence of each of the corporations was an absolute legal necessity as well as being the sole and most effective manner of carrying out their respective operations; (h) the Minister should be satisfied as to the coexistence of two separate prerequisites for the invocation of subsection 138A(2); (i) the respondent acted upon an initial impression that a direction could be issued. The appellant advanced three other contentions in the following paragraphs of its Notice of Appeal:

15. Subsidiarily while the assessment against the Appellant was issued on June 20th, 1969, it was only on or about August 20th, 1969, and in any event at a date subsequent to the issuance of the assessment that a notice was issued to the Appellant directing that it and Classic’s Little Books (Airport) Limited are deemed to be associated for the purpose of Section 39 of that Act for the taxation years 1966 and 1967.

16. In a rather transparent effort to disguise the fact that the direction was being issued at a date subsequent to the assessment rather than as a prerequisite thereto as required by law, such notice which was sent to the Appellant in August of 1969 was dated April 25th, 1969, the whole contrary to the clear intent and requirement of Section 138A(2) but such an assessment should only issue “if the Minister so directs”.

17. The said Section 138A does not contemplate or permit a retroactive direction by the Minister after the assessment is issued even if such direction is pre-dated to disguise or appear to disguise the fact that it was issued later.

The respondent alleged the following in paragraph 5 of the Reply to Notice of Appeal:

5. The justification referred for the exercise of the Minister’s direction is that (1) the separate existence of the appellant herein is not solely for the purpose of carrying on a business of those corporations in the most effective manner and (2) one of the main reasons for the separate existence is the reduction of taxes;

Of course, in their testimony, Mr and Mrs Melzack stated categorically that the separate existence of the two corporations involved was “solely for the purpose of carrying out the business of those corporations in the most effective manner without contemplating a reduction of taxes from their income”.

Counsel for the respondent introduced devastating evidence to the effect that the separate existence was for the purpose of reducing taxes for the two years under scrutiny. The table reproduced hereafter shows the reduction of taxes gained by the taxpayers due io the fact that they operated separately:

In the first place, I intend to dispose of the submission made by the appellant under paragraphs 15, 16 and 17 of the Notice of Appeal. The direction is dated April 14,1969 and I accept that date.

The direction was issued after long and detailed discussions with respect to the various aspects of the appellant’s contention. The dis- cussion took place between Mrs Melzack, Mr Abramowitz, CA, who was representing the appellant, and a Mr G W Elliott, who reported to the Assistant Deputy Minister. The memorandum was issued on behalf of the Chief Assessor. The conclusion of the memorandum reads as follows:

Therefore, we believe each and every one of the taxpayers contentions has been refuted and that a direction under 138A(2) is justified.

In 1967, Mr Abramowitz informed Mr John Harmon, of District Taxation Office in Montreal, that the appellant “never suffered losses in its Airport store”. The Minister issued the direction from the study of all the facts, circumstances, conversations, inquiries, etc, made by qualified officers of the Department of National Revenue from 1965. Therefore, the respondent did not act upon an impression or a presumption but after full consideration of all the facts and due deliberation.

The above submission made by the appellant being eliminated, there is no doubt that the appellant had the onus to prove that the respondent issued a wrong direction. Counsel for the appellant stressed the point that it was admitted by the respondent that they had “compelling reasons” to seek a new company for the purposes of Operating a new store at Dorval Airport. Having compelling reasons and the fact that they were husband and wife is not enough to make them associated. Why would Airport be a new store, a different store while the appellant had a dozen similar operations? Their anticipation of losses was not real. They never closed a store on account of losses. The Act does not deny the right to incorporate a separate entity but evidence must be shown that it was done “solely for the purpose of carrying out the business of those corporations in the most effective manner”. To reduce taxes may be a compelling reason to set apart a store or two. With the facts adduced by the evidence, the appellant failed to prove its submission. What was said about Airport could have applied to the other 15 stores which were opened within the city limits of Montreal.

“Solely” means: alone, unique, singular, exclusive. It is my conviction that what motivated a separate entity and separate operations does not meet the significance of the word “solely”.

Mrs Melzack had learned from her experience with the appellant how to develop good business out of selling books. Selling books at different places is the same business. They are books for sale, any kind of books. She indulged herself in making loans and borrowing money between the two corporations. Both corporations’ accounting merged to a certain extent. Both had the same purchasing operations; both had the same advertising in the newspapers. In the telephone directory a list of the seven locations is mentioned under the heading: “CLASSIC BOOK SHOPS”. In the newspapers’ advertisements filed as Exhibit R-2, the seven stores referred to include those owned by both stores and there appears to be no distinction between the two as far as the public is concerned.

There cannot be any doubt in my mind that the separate entity of the two corporations was one of surface, a front well painted with stated intentions which are not shown behind. It is not difficult to presume that there was another purpose for incorporating Airport and that undisclosed purpose was to acquire a tax advantage.

It is with great care that I have perused the evidence and after due examination of said evidence, I have reached the conclusion to dismiss the appeals for the taxation years 1966 and 1967.

Moreover, the Exchequer Court of Canada seems to have set the right jurisprudence in Alpine Furniture Co Ltd et at v MNR, [1969] Ex CR 307; [1968] CTC 532. At page 319 [543], Cattanach, J had this to say:

It is inconceivable to me in this day when the incidence of tax is always present that persons with the business experience and acumen which Mr and Mrs Goldstein possessed would have been oblivious of the tax advantage that might result from the arrangement adopted and it is even more inconceivable that the incidence of tax was not raised and discussed with them by the specialists whom they consulted. I say this despite the fact that Mr Goldstein testified that the question of income tax was not discussed with their professional advisers prior to February 1, 1963, when present arrangement was implemented, although he admitted that it was discussed subsequent to that date. I think that I must infer from the nature of the plan adopted and the circumstances preceding its adoption that the probability of a reduction in the amount of income tax payable was one of the main reasons for the adoption of the arrangement even though Mr Goldstein gave evidence to the contrary.

Reference is also had to: Doris Trucking Co Ltd v MNR, [1968] 2 Ex CR 501; [1968] CTC 303; Kitchener Manufactured Homes Limited v MNR, [1968] Tax ABC 748; Provident Finance Corporation Ltd v MNR, [1969] Tax ABC 413; MNR v Howson & Howson Ltd, [1970] CTC 36; Baycast Products Ltd et al v MNR, [1969] Tax ABC 339; Barkman Developments Ltd et al v MNR, [1968] 1 Ex CR 229; [1967] CTC 325, upheld unanimously by the Supreme Court of Canada without written reasons.

For the foregoing reasons, I confirm the Minister’s direction and dismiss the appeals.

Appeals dismissed.