Griffin Head Farms Limited v. Minister of National Revenue, [1972] CTC 2257, 72 DTC 1225

J O Weldon:—This appeal of the appellant Griffin Head Farms Limited (“Griffin”) initiated by Notice of Appeal dated April 2, 1971 with respect to its 1966 and 1968 taxation years, and those of Allied Vegetable Farms (Kingsville) Limited 71-238 (“Allied”), Edward Remark & Sons Limited 71-239 (“Edward Remark & Sons”) and Frank Remark & Son Limited 71-247 (“Frank Remark & Son”) initiated by Notices of Appeal all dated April 2, 1971 with respect to their 1966, 1967 and 1968 taxation years were heard together at Windsor, Ontario on September 22, 1971 under the Tax Appeal Board as it was then constituted. The appeals of the four separate corporations mentioned above involving eleven taxation years in all have been brought against the Minister’s direction dated November 5, 1969 made by him in connection with each of the above-mentioned taxation years directing that the said corporations be deemed to be associated with each other pursuant to subsection 138A(2) of the Income Tax Act, RSC 1952, c 148 as amended. The year end of each of the said four corporations is February 28. The parties were represented by counsel as follows: A RA Scace, Esq for the four appellants and D J A Rutherford, Esq for the Minister.

For the purpose of explaining the nature of the issue to be decided in this matter, it should be observed: that, as admitted in paragraph 2(g) of the Minister’s Reply to Notice of Appeal, the shares of the four appellants, Griffin, Allied, Edward Remark & Sons and Frank Remark & Son are owned by persons in such a way that the said corporations are not “associated” under subsection 39(4) of the Act: that, in reassessing the said four appellants as associated corporations, the Minister has found it necessary to invoke one of the special provisions contained in Part VI of the Act covering tax evasion, namely, subsection 138A(2) which reads:

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;

that, subsequent to the issue of his aforesaid direction dated November 5, 1969 pursuant to the above-quoted subsection 138A(2), the Minister issued similar reassessments against the four appellants herein all dated April 17, 1970 with respect to the eleven taxation years in question each containing an explanatory note in substantially the following form —

Pursuant to the provisions of section 138A(2) of the Income Tax Act the following corporations are deemed to be associated:

Griffin Head Farms Ltd; Allied Vegetable Farms (Kingsville) Ltd; Frank Remark & Son Ltd and Edward Remark & Sons Ltd.

Pursuant to the provisions of Section 39(3a) of the Income Tax Act, the Department has allocated the $35,000 (low rate) evenly among the aforementioned four corporations,

and that, under subsection 138A(3), on an appeal from an assessment made pursuant to a direction under subsection 138A(2), the Tax Appeal Board may inter alia

(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.

It should be recorded herein and duly noted that it was agreed by counsel for the parties that the Tax Appeal Board should proceed first with the hearing of the Griffin appeal, and also that the evidence adduced and arguments submitted therein should be applicable to the appeals of Allied, Edward Remark & Sons and Frank Remark & Son, and that all four appeals should, in the result, be disposed of on the same basis.

The basic facts leading up to this appeal may be summarized as follows:

1. From the late 1940’s until 1963, say for a period of about 16 years, Frank Remark (53) and Edward Remark (44) carried on a farming operation in the Kingsville area under a partnership arrangement known as “Remark Orchards”.

2. In 1962, the Remark brothers purchased a 179-acre farm known as the “Jasperson Farm” on which there was an existing peach orchard.

3. In 1963, Griffin was incorporated and, during the relevant taxation years, its business was the buying and selling of fruits, vegetables, nursery stock, rose bushes, cider, fertilizer and other garden supplies on both a retail and wholesale basis.

4. The Remark brothers then sold the Jasperson Farm to Griffin for preferred shares of that corporation which assumed the mortgage on the farm property.

5. By Agreement dated January 2, 1963, Griffin and the partnership Remark Orchards (Frank Remark and Edward Remark) agreed to pool their assets, share the expenses equally and carry on their operations jointly for an indefinite period.

6. In the fall of 1964, Frank Remark and Edward Remark incorporated three more corporations:

(a) Frank Remark and Son — to which corporation Griffin sold the Jasperson Farm accepting a promissory note as consideration;

(b) Edward Remark & Sons — to which corporation Edward Remark and Frank Remark sold the farm property which they had Originally used in their partnership business Remark Orchards taking a promissory note as consideration therefor;

(c) Allied — to which corporation Frank Remark and Edward Remark sold a number of greenhouses which they had originally used in their partnership business Remark Orchards accepting as consideration therefor a promissory note and the issued shares of Allied.

7. On December 22, 1964, the shares of Griffin were transferred as follows: 50% to Eleanor Remark, wife of Frank Remark, and 50% to Rita Remark, wife of Edward Remark.

8. As of December 31, 1964, the assets originally owned by Frank Remark and Edward Remark and used by them in the operation of their partnership business Remark Orchards were held by the above- mentioned four separate corporations, Griffin, Frank Remark & Son, Edward Remark & Sons and Allied, the shares of which corporations were, admittedly, owned by persons in such a way that the four separate corporations were not “associated” under subsection 39(4) of the Act.

9. The overall result in the relevant taxation years was as follows:

(a) The shares of Griffin were owned equally by the said Eleanor Remark and Rita Remark.

(b) The shares of Allied were owned equally by the former partners of Remark Orchards, namely, Frank Remark and Edward Remark.

(c) The shares of Frank Remark & Son less directors’ qualifying shares were held by Bernard Grabowicki, George Horne and William Benjamin Tripp, as Trustees (they were also the directors of the corporation), under a Declaration of Trust dated December 10, 1964, for Harold Remark (15) only son of Frank Remark.

(d) The shares of Edward Remark & Sons less directors’ qualifying shares were held by Wilfred Clifford, Emil B Remark (father of Frank Remark and Edward Remark) and Wilbert Benjamin Tripp, as Trustees (they were also the directors of the corporation), under a Declaration of Trust dated December 10, 1964, for Clifford Remark (18), Robert Remark (17), Gerald Remark (14) and Paul Remark (10) the 4 sons of Edward Remark.

10. Since January 1, 1965, the business carried on by the four corporations listed above has been substantially the same business as was, prior to 1963, carried on by the partnership business Remark Orchards of which Frank Remark and Edward Remark were the partners. In that regard, it should be noted, first, that the two corporations Edward Remark & Sons and Frank Remark & Son have been operating under a partnership arrangement using the name “Remark Farm Companies”; that that arrangement is covered by an agreement dated March 1, 1965 which provides that the parties thereto shall carry on their respective farming business enterprises together until they decide otherwise upon the terms and conditions therein set forth; that the respective farm properties of Edward Remark & Sons and Frank Remark & Son situated about three-quarters of a mile apart in the Kingsville area both grow vegetables, fruits and roses, and that the partnership Remark Farm Companies was arranged, in line with up-to-date farming husbandry, to effect operating efficiency and economies by the common sharing of implements, machinery and equipment also of the available manpower, secondly, that Allied grows greenhouse tomatoes — it acquired 17 greenhouses from Frank Remark and Edward Remark at the time of its incorporation in 1964 and has now built up its business to the point where it is operating 57 greenhouses, and thirdly, that all the produce of the partnership Remark Farm Companies and Allied’s tomatoes are turned over to Griffin to sell on a commission basis to wholesalers, brokers and retailers.

The three principal assumptions on which the Minister based his reassessments against the four appellants herein are as follows:

2(i) Frank Remark and Edward Remark manage the affairs of all four corporations and the operation of each corporation is dependent on the other and all operations are directed and supervised by Frank and Edward Remark;

(k) the operation of all four companies complement each other and could have been carried out under one corporate structure equally effectively as by means of the four corporations and the separate corporate existence of the companies in the taxation years in question was not solely for the purpose of carrying out the business of those corporations in the most effective manner;

(l) the main reason, or one of the main reasons for the separate existence of the four corporations in the taxation years in question was to reduce the amount of taxes that would otherwise be payable under the Income Tax Act.

After reviewing the mass of evidence given by Edward Remark herein (the only witness called in this appeal) along with the material filed with the Board, I have come firmly to the conclusion that the appeal of Griffin should succeed also the appeals of Allied, Edward Remark & Sons and Frank Remark & Son, and that the direction of the Minister mentioned earlier herein made under subsection 138A(2) of the Act should, pursuant to subsection 138A(3), be vacated with respect to the reassessments now under appeal made against the four appellants mentioned above.

The following is a summary of my reasons for the conclusion outlined above:

1. First and foremost, it should be noted that Edward Remark who is plainly a hard-working, sincere, straightforward person gave his evidence in this matter — and I had a full and ample opportunity to observe his demeanour in the witness box and to weigh his answers to the hundreds of questions put to him by Mr Scace, Mr Rutherford and by me — in a frank, helpful and conscientious manner. On that basis, it would seem to be reasonable to conclude that the evidence of Edward Remark (ie the evidence on which the Board must base its decision in this appeal) should be treated as plausible and trustworthy.

2. It was obvious to me — as I think it was to Mr Scace, counsel for the four appellants, and to Mr Rutherford, counsel for the Minister, that this is the type of case which turns to a very great extent on its own peculiar facts.

3. Without going into a lot of painful personal facts, two matters of the greatest importance in this appeal can be taken as having been proved to my satisfaction, first, the physical health of Frank Remark is undoubtedly precarious and has been for some years, and secondly, there has been in existence for some years a discernible, unsolvable and regrettable animosity which has built up between the two key figures in this matter who are, of course, the former members of the partnership Remark Orchards (about 1947 to 1963) Frank Remark (53) and his younger brother by 9 years Edward Remark (44). From my standpoint as the referee in this appeal, the two basic problems barely identified above permeate and colour this whole matter.

4. Being curious as to how it happened — in view of the above animosity — that Frank Remark was, evidently, content to let his brother Edward Remark have the carriage of this appeal, instruct counsel, and so on, I pursued that query and satisfied myself that Edward Remark was given the main responsibility for prosecuting this appeal for good reasons, namely: both brothers were justly proud of their joint farming achievement and “were scared of destroying all we had done”; each brother recognized that the other brother “understood certain parts” of the business, ie each brother, in effect, respected the other’s contribution to the business; Edward Remark was physically up to the onerous responsibility of testifying in court on behalf of the four appellants herein, and Frank Remark is an outside man while Edward Remark is better versed with the whole situation both inside (in the office) and outside.

5. About the time Frank Remark and Edward Remark purchased the 179-acre Jasperson farm which was in 1962, they were becoming “concerned about the partnership way of carrying on business” and decided to seek legal advice in Windsor. In that regard, Edward Remark testified as follows:

Sometime before 1963 — I can’t recall exactly when, but my brother and I both agreed and approached Mr Riddell in Windsor. We explained to him our partnership and what we were actually doing, the business we were doing and our greenhouses and farms. We asked him for advice as to how we could take and do something about this. We didn’t feel the partnership was the proper thing to do. In fact, if I recall, I think Mr Riddell’s first question was, ‘Do you have a will?’ I don’t think I had one at that time:

and —

He (Mr Riddell) thought that we should be setting up some estates and making some provision for our children and wives, some protection in the way of liability should be done in the areas of possibly forming some companies;

and —

He felt that we should make provisions and I believe Mr Riddell referred to, at that time, something to the effect of estate freezing, possibly that we could take and provide for our children and estate freeze our own growth. He felt that because of what we had in our partnership that he felt it necessary to consider very seriously doing something about our estates.

6. On the basis of the five reasons set out above, it is most obvious that the situation extant in this appeal is clearly not one of the type where the corporate taxpayer involved has set out to split its business into two or more divisions (keeping subsection 39(4) of the Act in mind at all times) incorporating a second or more corporations to carry on such additional division or divisions of the company’s business with the hope that each of the said corporations would be taxed in due course as a separate taxpayer under subsection 39(1) of the Act. To succeed in that purpose, the original corporate taxpayer would. of course, have to show: first, that pursuant to paragraph 138A(2)(a) of the Act its separate existence and that of the corporation or corporations created by it as aforesaid were solely for the purpose of carrying out the business of those corporations in the most effective manner, and secondly, that pursuant to subparaoraoh 138A(3)(b)(ii) of the Act none of the main reasons for the separate existence of the two or more corporations was to reduce the amount of tax that would otherwise have been payable under the Act. Thus, the principal allegations in the appellant’s Notice of Appeal and in the Minister’s Reply thereto are directed specifically to the rovisions. contained in paragraph 138A(2)(a) and subparagraph 138A(3)(b)(ii), respectively.

7. In attempting to apply the test contained in paragraph 138A(2)(a) to Griffin and the three other appellants herein, ie as to whether or not the separate existence of those corporations was solely for the purpose of carrying out the business of the said corporations in the most effective manner, it is like trying to insert a square peg in a round hole because ! do not think that the present appellant should have been placed in the unfortunate position of having to extricate itself from the effect of having had section 138A of the Act invoked against it for the very simple reason that that particular section is one of three extraordinary provisions included in the Act to assist the Minister in assessing taxpayers where he has reason to suspect tax evasion. In support of the above observation, it should be noted that, in the course of testifying herein, Edward Remark provided the Board with a plausible explanation for each and every step which had been taken in the arrangement of his personal affairs and those of his brother Frank Remark which were obviously designed with great care to obviate the disastrous situation which would have ensued if the partnership Remark Orchards had suddenly been dissolved by reason of the death of either the ailing Frank Remark or Edward Remark, himself, or by reason of the animosity referred to earlier which exists between the two brothers. Since it is extremely important for a testator in the position in which Frank Remark and Edward Remark found themselves in 1963 to work out and decide upon an acceptable and appropriate plan of distribution of his real and personal property for estate purposes as a condition precedent to the drafting of his will and, since life is fleeting and full of uncertainties, it has not been possible for me to see why Frank Remark and Edward Remark should not — without being brought face to face with the tax evasion provisions of the Act — have separated their personal affairs so far as possible (they still own Allied), have made a separate provision for their wives (they own Griffin), why Frank Remark should not have made a separate provision through trustees for his one 15-year old son (he is the beneficial owner of Frank Remark & Son) and why Edward Remark should not have made a separate provision through trustees for his four sons, 18, 17, 14 and 10 (they are the beneficial owners of Edward Remark & Sons). It should be carefully observed that, under the aforesaid arrangements, both Frank Remark and Edward Remark have surrendered valuable property rights, have assumed substantial risks and have greatly changed their personal estate holdings on an Irrevocable and absolute basis.

8. In reply to the Minister’s assumptions 2(i), (k) and (I) quoted earlier, Edward Remark testified with definiteness, in effect, as follows: that, while he and his brother Frank Remark are still active in the overall operations of the four corporations involved herein, each of the said corporations could, if necessary, carry on quite independently of the other three corporations which was, of course, the guiding principle on which the four corporations were organized and set up to do; that, while all four corporations do complement one another, their separate functions could not have been carried out under one corporate structure because that would not have solved the “two matters of the greatest importance in this appeal”, namely, the precarious state of health of Frank Remark and the deep-seated animosity which exists between the said Frank Remark and himself, to say nothing of several other considerations which could easily have created problems either in his estate or in Frank Remark’s estate, such as the provisions each brother might make for his wife, the fact that Frank Remark has only one son and Edward Remark has four sons, and so on, and that, while he and Frank Remark were aware at all relevant times that the overall plan worked out with Mr Riddell would minimize their tax obligations in the future in comparison with the allegedly more effective plan suggested by the Minister, namely, that the assets and the entire operation of the partnership business Remark Orchards (Frank Remark and Edward Remark) should have been turned over to one corporation, that was certainly not one of the main reasons for the separate existence of Griffin, Allied, Edward Remark & Sons and Frank Remark & Son.

9. To sum up, Edward Remark has given the Board cogent, plausible and overriding reasons for the course of action which he and his brother Frank Remark have taken in this matter. Therefore, the fact that such course of action has been effective to minimize taxation should not be viewed as if the two brothers had planned something tantamount to tax evasion.

In the result, as already mentioned, the appeal with respect to the 1966 and 1968 taxation years should be allowed and the Minister’s direction made pursuant to subsection 138A(2) of the Act vacated.

Appeal allowed.