Canadian-American Loan & Investment Corporation Limited v. Minister of National Revenue, [1972] CTC 2559, 72 DTC 1463

A J Frost:—This is an income tax appeal in respect of the appellant’s taxation year ended June 30, 1967. Upon notice of objection duly signed and filed the Minister of National Revenue reconsidered the assessment and confirmed it on the ground that an amount of $9,528.60 reported as income by Georgia Marina Boat Works Limited (hereinafter referred to as “Georgia”) was an amount that would have been received by the taxpayer if the right thereto had not been assigned to Georgia and had been properly included in computing the taxpayer’s income in accordance with the provisions of sections 3, 4 and 23 of the Income Tax Act.

This appeal was heard on May 21, 1971 at Vancouver, BC by the Tax Appeal Board as it was then constituted.

The appellant, a company incorporated under the laws of the province of British Columbia, was carrying on the business of investment and marina operations at all times material to this appeal. By agreement dated September 30, 1966 the appellant entered into an agreement with Georgia which reads in part as follows:

IN PURSUANCE OF THE “SHORT FORM OF LEASES ACT”

Between: Canadian-American Loan & Investment Corporation Limited

hereinafter called the “Lessor”

of the First Part:

And:	Georgia Marina Boat Works Limited
	hereinafter called the “Lessee”

of the Second Part:

WITNESSETH, the said Lessor doth demise unto the said Lessee, his executors, administrators and assigns, ALL AND SINGULAR that certain parcel or tract of land and premises situate, lying and being in: the; Municipality of Richmond more specifically designated as Lot A of Lot 14 Block A Section 29 B.N. 5 R.W.6 Map 51813F and in particular the frame building thereon used for the purpose of housing boats of all kinds, under rental agreements with the owners, for various periods of time. The rentals accruing from these agreements also are hereby assigned to the Lessee plus the revenue from the machinery used in conjunction with above mentioned building to raise and lower the boats into and out of the said building.

TOGETHER with all ways, paths, passages, waters, water courses, privileges, advantages and appurtenances whatsoever to the said premises belonging or otherwise appertaining.

From the first day of October one thousand nine hundred and sixty-six for the term of one year thence ensuing.

YIELDING during the said term therefor the rent of six thousand 00/100 Dollars, of lawful money of Canada, payable on the following days and times that is to say:

$500 on the first day of each month during the said term.

The first payment to be made on the first day of November, 1966.

Prior to entering into the above-mentioned agreement with Georgia, the appellant sold to British American Oil Company Limited the marina land, buildings, wharves and equipment it had been using in its marina operations and then within a period of less than six weeks leased back the assets which it subsequently subleased to Georgia. In sum, the appellant sold its marina assets, leased them back and then sublet them to Georgia.

According to the evidence, the internal rearrangements did not change the external operations. Georgia remained in the background, was. not identified to the customers and had no active duties. Georgia was a dormant company which had a loss on its books. The business had been built up and became established as a result of the efforts of the appellant company. It acquired the premises, carried on the business of lifting boats in and out of the water, provided storage and other marina services. Nothing appeared to have been changed after the sublease, not even the stationery. All revenues were collected and all expenses were paid by the appellant. Georgia had no employees, no office, no telephone or directory listing. The customers were not even aware of Georgia’s existence. The appellant continued to operate the business in the usual way recording all transactions through its own books of account. The appellant deducted $500 per month for rent from the net operating returns and transferred the balance to Georgia, thereby feeding profits into a related company for the purpose of offsetting a loss against the profits so transferred.

The question in issue is whether the transfer or assignment come squarely within the language of section 23 of the Income Tax Act which reads:

23. Where a taxpayer has, at any time before the end of a taxation year (whether before or after the commencement of this Act), transferred or assigned to a person with whom he was not dealing at arm’s length the right to an amount that would, if the right thereto had not been so transferred or assigned, be included in computing his income for the taxation year because the amount would have been received or receivable by him in or in respect of the year, the amount shall be included in computing the taxpayer’s income for the taxation year unless the income is from property and the taxpayer has also transferred or assigned the property.

The important words in the section are those shown in italics, which are mine.

Counsel for the appellant in his argument contended that as both Lot A (the property, including the storage shed and hoist located on it) and the income therefrom were transferred or assigned, the transaction came squarely within the final words of section 23, which appear above in italics.

Counsel for the respondent in his argument likened the situation presented in this case to that of a person who owns a flowing well and who says to a friend: “Your pail is empty, hold it under my tap for a few minutes, fill your pail and then walk away.’’ This analogy only points up the artificiality of certain types of business arrangements which legally enable a taxpayer to reduce income taxes. It does not meet the appellant’s submission that no amount was transferred and the property and income were transferred together.

The language of the agreement of September 30, 1966 clearly indicates that the property (Lot A) and the income therefrom were transferred without reference to any amount or right to operate, which in my opinion brings the arrangements within the final words of section 23 of the Act. The agency set-up is a separate matter. The fact that the appellant took possession of the receipts, paid itself $500 per month, recorded all disbursements and transferred the net operating revenues does not alter the legal significance of the underlying facts of the case. Payment of the net operating revenues to Georgia flowed directly from the legal arrangement and the informal agency arrangement between the appellant and Georgia. No amount or amounts were transferred, only the right to income from the transferred property, both the right to income and the property having been assigned under the one document. This, in my opinion, is the substance of the case. The taxpayer arranged his affairs within the four corners of the Income Tax Act, albeit the moneys which flowed therefrom to Georgia were net receipts from a business operation less rent.

From a practical viewpoint, the appellant redistributed its income between parties not dealing at arm’s length so as to reduce taxes that might otherwise have been payable under the Act. Such reductions are: not automatically caught under the avoidance provisions of the Act, irrespective of how artificial these transactions may be. The Act specifically opens the door under section 23 and the Board is powerless to check or disallow any reduction of taxes flowing from the scheme of redistribution* [1] worked out by the appellant. The legal reality is greater than the commercial reality.

Appeal allowed in full.

Appeal allowed.