Amelia Rosh v. . Minister of National Revenue, [1971] CTC 810, 71 DTC 5481

Collier, J.:—This is an appeal by the appellant from two assessments by the respondent Minister in respect to her income for the years 1965 and 1966. The Minister included in the computation of the appellant’s income the sum of $33,911.28 for the year 1965 and the sum of $111,993.66 for the year 1966 on the basis that these amounts were deemed to have been distributed to and received by the appellant as a shareholder of a personal corporation pursuant to Section 67(1)* [1] of the Income Tax Act. Her personal income tax levied for those years was accordingly increased.

The appellant was a shareholder in a company called "‘Am- rose Enterprises Limited’’ (I shall hereafter refer to it as " Amrose”).

I set out here the definition of "‘personal corporation’’ as it appears in Section 68(1) of the Income Tax Act:

(68. (1) In this Act, a personal corporation’’ means a corporation that, during the whole of the taxation year in respect of which the expression is being applied,

(a) was controlled, whether through holding a majority of the shares of the corporation or in any other manner whatsoever, by an individual resident in Canada, by such an individual and one or more members of his family who were resident in Canada or by any other person on his or their behalf ;

(b) derived at least one-quarter of its income from

(i) ownership of or trading or dealing in bonds, shares, debentures, mortgages, hypothecs,. bills, notes or other similar property or an interest therein,

(ii) lending money with or without securities,

(iii) rents, hire of chattels, charterparty fees or remunerations, annuities, royalties, interest or dividends, or

(iv) estates or trusts; and

(c) did not carry on an active financial, commercial or industrial business. ‘ ‘

Counsel for the appellant agrees that in the years in question Amrose fell within paragraphs (a) and (b) of the subsection. The dispute here is in respect to paragraph (c). The appellant contends Amrose did carry on an active commercial business in 1965 and 1966; the Minister takes the opposite view.

An outline of the facts is necessary.

Prior to the Spring of 1965 Webb & Knapp (Canada) Limited had substantially constructed a large apartment building complex in the city of Toronto known as Flemingdon Park. There were eight buildings and a total of approximately 880 suites. Webb & Knapp (Canada) Limited appeared to be in financial difficulties and two families, the Reichmann family and the Oelbaum family decided to acquire a controlling interest in the apartment complex.

In the evidence, these two families were referred to as "The Oelbaum Group’’ and the "Reichmann Group’’. The Oelbaum Group was comprised of eight family companies, as follows :

Amrose Enterprises Limited

Adro Limited

Mirican Enterprises Limited

Marnette Investments Limited Debcan Investments Limited

Juron Enterprises Limited

Mirmak Enterprises Limited

Kosim Enterprises Limited

The principals in each of these companies were as follows:

Amrose—the appellant Amelia Rose, an Oelbaum; Adro—Barrie Rose, husband of the appellant;

Mirican—Annette Cohen, one of the Oelbaum family ; Marnette—Marshall Cohen, husband of Annette;

Juron—Ronald Oelbaum ;

Debcan—the wife of Ronald Oelbaum ;

Mirmark—Judith Oelbaum ;

Kosim—two female members of the Oelbaum family.

In the years 1965 and 1966 Barrie Rose’s principal occupation was with Acme Paper Products Limited as was Ronald Oel- baum's. Marshall Cohen’s principal occupation in the years in question was the practice of law.

The Reichmann Group, for the purposes of this judgment, consisted of Albert Reichmann, Paul Reichmann and Ralph Reichmann. The main occupation of Albert and Paul was in the business of a company called Olympia & York Developments (1964) Limited. Ralph Reichmann was apparently not very active.

In the purchase of an interest in Flemingdon Park, the Reichmann Group primarily acted through a company called 8. Reichmann & Sons Limited, and in the early transactions, this Company acted on behalf of the Oelbaum Group as well.

In the Spring of 1965 a purchase agreement was made with Webb & Knapp (Canada) Limited (Ex. 3). The agreement pro- vided a company would be formed in which Webb & Knapp held 50% of the shares (these were non-voting shares) and the Oelbaum and Reichmann Groups held the other 50%. Ultimately the company was formed under the name Central Park Estates Limited. Exhibit 3 provided that Central Park Estates Limited could enter into certain management and development agreements, which I shall refer to later. The directors of Central Park Estates Limited were the three Reichmanns, and Barrie Rose, Ronald Oelbaum and Marshall Cohen, representing the Oelbaum Group.

I do not think it necessary to refer to the financial arrangements for the purchase, other than to say they were ultimately completed.

In an agreement setting out the interests of the Reichmann Group and the Oelbaum Group (Ex. 4, dated May 3, 1965) paragraph 6 provided in part :

6. A new partnership will be established to conduct the management of various finished buildings situate in Flemingdon Park as contemplated in the Management Agreement. This partnership will be owned again fifty per cent by the Reichmanns and fifty per cent by the Oelbaums . . .

A further agreement dated June 28, 1965 provided, in part, that Central Park Estates Limited could employ the Reichmann and Oelbaum Groups to manage the apartment project and fees equal to the going rates charged by reputable property managers in the City of Toronto would be paid. This agreement went on to provide that Central Park Estates Limited could employ any other company or partnership to manage the property, even though shareholders, officers or directors of Central Park Estates Limited might have an interest in the company or partnership so employed.

Still another agreement dated June 23, 1965 was introduced in evidence as Exhibit 8. It set out the relationship between Central Park Estates Limited and the various other companies involved, including the Oelbaum companies. Article VI provided that a new partnership, known as Central Park Management Company would be established, owned 50% by the Reichmann Group and 50 % by the Oelbaum Group, and all rights of management under the prior agreements would be assigned to the partnership.

In describing the various documents earlier referred to, I have endeavoured to summarize those portions I deem relevant to this appeal and I have substituted, where necessary, names of companies that were ultimately used, though those names were not used in the particular agreement.

To summarize and amplify somewhat, at this point :

1. The Reichmann and Oelbaum Groups acquired, through Central Park Estates Limited, control of Flemingdon Park.

2. The Oelbaum Group of family companies held a 25% interest in Central Park Estates Limited; the Reichmann companies held 25% ; Webb & Knapp (Canada) Limited held 50%, but had no voting powers.

3. The directors of Central Park Estates Limited were at all times

Paul Reichmann

Albert Reichmann Ralph Reichmann

Barrie D. Rose

Ronald Oelbaum

Marshall A. Cohen

4. The directors were not entitled to any remuneration from Central Park Estates Limited. (It should be noted that certain of the Oelbaum family companies had no direct representation on the Board, for example, Mirmark and Kosim.)

5. A partnership to manage the project was contemplated.

For some time after these agreements were entered into, Central Park Estates Limited itself managed the property. It employed approximately twenty-five people; twenty-two were engaged in various maintenance and service functions; five were full-time people: the apartment complex supervisor, two bookkeepers and two clerks. Most of these employees had been taken over from Webb & Knapp (Canada) Limited.

Barrie Rose, the main witness on behalf of the appellant, testified that Central Park Estates Limited managed the property up to November 1965 through what he termed an ‘‘ Executive Committee”. This Committee consisted of the two active Reichmann brothers, Ronald Oelbaum, Marshall Cohen and himself (the active directors of Central Park Estates Limited). I accept Mr. Rose’s evidence that this Committee met as required, perhaps once a week, although the business appears to me to have been done informally. Mr. Rose estimated he spent approximately ten hours a week on these matters. The members of the Executive Committee were not paid for their services. The detailed work in respect to the management and maintenance of the apartment complex was done by the employees of Central Park Estates Limited, formerly, as I have said, employees of Webb & Knapp (Canada) Limited.

In November of 1965 a formal partnership agreement was drawn up. There were nine partners: the Reichmanns (Reich- mann Realty Limited) and the eight Oelbaum family companies. The name of the partnership was Central Park Management Company and its alleged purpose was to conduct and carry on the business of managing and administering apartment buildings. The agreement is dated November 1, 1965.

By an agreement, ostensibly dated the same day, Central Park Estates Limited agreed to retain the partnership as manager of the apartment complex for a fee of 5% of gross rental receipts. Mr. Rose was not positive that all parties signed this agreement or the partnership agreement on the date in question: he was reasonably sure that Amrose and Adro had.

In fact this management contract did not obtain formal approval in the minutes of the board of directors of Central Park Estates Limited until May 31, 1966, at which time the controlling interest held by the company had been or was about to be sold. As Mr. Goodman for the appellant pointed out, this does not necessarily mean a contract had not been entered into before that date.

Mr. Ollson, counsel for the Minister also pointed out that it was not until June 1, 1967, almost a year after the controlling interest was sold and long after the principals had any part in management that an amending agreement was signed by all the parties in their various capacities, whereby 8. Reichmann & Sons Limited, who under the original agreements held the management rights, formally assigned those rights to the members of the partnership in the percentages agreed upon.

After the formation of the partnership, the direction or management of the property was in fact carried on by the same five individuals who composed the former executive committee. They met as before, although not as frequently. The four senior employees, previously mentioned, (the superintendent, two bookkeepers and a clerk) were transferred to the payroll of the partnership, but the remainder of the employees continued on the payroll of Central Park Estates Limited. Mr. Rose testified management was conducted from offices leased by the partnership from one of the Reichmann companies, whereas formerly an office had been maintained at the apartment complex itself.

The evidence was very vague as to whether there was any separate telephone number for the partnership itself, or whether the tenants knew these management services were being provided by a new entity. Some of the invoices referred to at trial indicated that suppliers billed not only Central Park Management Company, but at times Central Park Estates Limited or Flémingdon Park Holdings Limited, an affiliate of Webb & Knapp (Canada) Limited.

My impression of the evidence is that the ordering of supplies and payment of accounts fundamentally went on as before, although new bank accounts had been created in the name of the partnership.

According to its financial statements there was a profit of $2,359.05 for the fiscal year ending November 30, 1965 and $21,931.42 for the fiscal year ending November 30, 1966. These net profits were distributed to the various members of Central Management Company in the proportions set out in the management agreement (Ex. 10).

The partnership ceased to operate in the summer of 1966 when Central Park Estates Limited sold its controlling interest. It was formally discontinued in 1969.

The appellant’s position in argument is as follows:

1. The management of the apartment complex was an active commercial endeavour.

2. Central Park Management Company was a partnership in fact and in law and carried on an "‘active commercial business”.

3. Amr ose, as one of the members of the partnership therefore carried on an active commercial business.

Counsel for the Minister argued that the evidence as to the existence of an actual partnership or management organization separate and apart from Central Parks Estates Limited (in effect, the owner), was inconclusive. He further contended that if there were an active commercial business carried on by anyone it was not carried on by Amrose. Other arguments were raised by counsel for the Minister, but in view of the conclusion I have come to, I do not think it necessary to deal with them.

No doubt the Oelbaum and Reichmann Groups, from the early stages in 1965, contemplated the possibility of a partnership being formed to manage the apartment properties, even if its main usefulness might at some stage be for tax-saving benefits. I shall assume that a partnership, in fact, was formed which included Amrose and these other family companies and that the partnership carried on in the fiscal years 1965 and 1966, a small com- emrcial business sufficient for it to be characterized as active rather than inactive or passive.

What was the situation in respect to Amrose? Mr. Rose, in answer to a question, agreed the only thing Amrose itself did in respect to the management of the apartment complex was to join the partnership.

In my view the real question is not whether Central Park Management Company carried on an active commercial business, but: whether Amrose did within the meaning of Section 68(1) (c). On the evidence, I find that Amrose did not.

None of the shareholders in Amrose had anything to do with the management of the complex. Admittedly the appellant’s husband did contribute to the activities of the partnership, but he personally was not a shareholder in Amrose. He was unsure whether or not he was an officer of Amrose in 1965, and he conceded he may not have been an officer until May of 1966. His family company, Adro, was a shareholder. Mr. Rose was personally paid some salary by Amrose in 1965 and 1966, but this remuneration, in my view, was primarily for services to Amrose other than those relating to his contribution to the management of the apartment complex.

I do not think the activities of the appellant’s husband and Adro confer any different status on Amrose within the meaning of Section 68(1) (c) of the Income Tax Act.

The mere fact that by virtue of the partnership agreement and under the law of Ontario and other common law jurisdictions Amrose subjected itself to the liability of an individual partner (for example, to third persons) does not to me convert Amrose from an inactive commercial business to an active one.

A number of cases were cited including Stekl v. M.N.R., [1956-60] Ex.C.R. 376; [1959] C.T.C. 442, Finning v. M.N.R.,

[1961] Ex.C.R. 408; [1961] C.T.C. 425, and Larry Smith v. M.N.R., [1970] C.T.C. 529. The latter two in particular considered paragraph (c) of Section 68(1). As I read them, their outcome largely depended on their particular facts, as I think the outcome here must depend primarily on the particular facts.

The appeal is dismissed with costs.