Alfred C. Campeau & Michael Petritz v. Minister of National Revenue, [1970] CTC 306, 70 DTC 6223

GIBSON, J.:—The appellants in these two appeals tried together appeal against re-assessments for income tax for the taxation year 1965, whereby $27,000 was added to the income of the appellant Campeau and $30,000 was added to the income of the appellant Petritz.

The issue is the same in each, namely, whether these amounts are income of the appellants respectively or their incorporated management companies.

The relevant facts are as follows :

The appellant Campeau was employed by and owned shares in two incorporated companies named Depco Metal Products Limited (herein called “Depco”) and Hercules Tool & Die Limited (herein called “Hercules”) and the appellant Petritz was employed by and owned shares in one only of the said incorporated companies, namely, Depco.

Depco and Hercules (herein also referred to as the operating companies) carried on manufacturing businesses in Ontario, Depeo making rolled metal products, auto trim and mouldings, grilles and so forth, and Hercules making tools and dies, for sale to the automobile manufacturers. Depco was incorporated in 1963 and Hercules in 1949. Both were and are financially successful.

The appellant Campeau caused a so-called management company by the name of Alco Management Limited (herein called “Alco”) to be incorporated on October 27, 1964; and the appellant Petritz also caused a similar type of company to be incorporated on November 30, 1964. Both were Ontario companies and the objects in each were identical, namely, “to manage businesses, properties and investments’’.

By two agreements dated respectively November 19, 1964 and Deember 19, 1964 (see Tabs 5 and 6 of Exhibit 1), Campeau sold his shares in Depeo and Hercules (along with other assets) to his management company Alco, and Petritz sold his shares in Depeo (also along with other assets) to his management company Petritz.

The fiscal year end of Alco was fixed at March 31 and of Petritz at June 30.

(The fiscal year end of Depco was July 31 and of Hercules April 30.)

Consultant or management agreements were entered into: (1) between Depco and Petritz dated November 30, 1964, (2) between Depco and Alco dated October 22, 1964 and (3) between Hercules and Alco dated’ November 19, 1964. All of these agreements, however, were in fact executed in 1966. (See respectively Tabs 17, 18 and 19 of Exhibit 1.)

Although it was submitted in evidence and argument that orally in September or early October, 1964 there was complete agreement, I find the reason these so-called consultant or management agreements were not executed until the said dates, was because their respective terms in fact were not settled by the parties until at least June 1966 and probably not until after July 28, 1966.

Some of the documentary evidence establishing this is set out in the correspondence between the appellants’ accountant and. solicitors. (Both appellants had the same accountant and solicitors.) (See Tabs 8, 9, 12, 18, 14 and 15 of Exhibit 1.)

(Only when the terms of these so-called consultant or management agreements were finally settled were they approved and authorized for execution by the relevant companies and individuals.) (See for example in the case of Depco, Tab 20 of Exhibit 1.)

The admissible, believable and acceptable oral evidence given at trial complements the documentary evidence establishing this and the oral evidence was given by each of the appellants and their accountant.

This evidence establishes that the appellants did not know what terms should be included in such agreements and relied on and waited until their accountant and solicitors had settled the terms of them and completed the same so that they personally could and did execute them. Specifically, this evidence establishes that no oral agreements incorporating their respective relevant terms existed between Depco and Petritz, between Depco and Alco and between Hercules and Alco, prior to the dates of execution of the said respective written agreements.

The series of adjusting and closing journal entries, in this case, made after the ends of their respective fiscal years in 1965 and 1966 in the books of all these companies, and the results therefrom carried into their financial statements (see Tabs 21, 22, 23, 24, 25, 26, 28, 29, 31 and 32) recording, inter alia, loans made and repaid, commissions accrued and paid, and drawings debited and credited, do nothing to change the three matters of fact which obtain as a result of the above finding, namely, that in the calendar year 1965, (1) that there were no oral or written agreements whereby and under which the management company Alco provided any service to the operating companies Depco or Hercules, or the management company Petritz provided any service to the operating company Depeo; (2) that neither management company otherwise provided any service to the said respective operating companies ; and (3) that the appellant Campeau never ceased to be employed by Depeo and Hercules, and the appellant Petritz never ceased to be employed by Depco.

As a consequence, it is not necessary to consider the question of whether or not the Court, for income tax purposes, may and should look through the corporate entities of these management companies for various reasons, such as those based on the submissions that these management companies did not actually carry on their own respective businesses but were merely agents of the appellants, or that they were shams, simulacra or cloaks not intended to effect any real relationships between and among the relevant parties. Such question would require consideration of principles of law that do not arise in these instant appeals. (Cf. Aron Salomon v. A. Salomon and Company, Ltd., [1897] A.C. 22; Ralph J. Sazio v. M.N.R., [1969] 1 Ex.C.R. 373; [1968] C.T.C. 579; Snook v. London & West Riding Investments, Lid., [1967] 1 All E.R. 518 at 528; Littlewoods Mail Order Stores Ltd. v. McGregor (Inspector of Taxes), [1968] 3 All E.R. 685; [1969] 1 W.L.R. 1241; The Palmolive Manufacturing Company (Ontario) Limited v. The King, [1933] S.C.R. 131 ; Aluminum Company of Canada Limited v. The Corporation of the City of Toronto, [1944] S.C.R. 267; C.I.R. v. Sansom, [1921] 2 K.B. 492; Coleman C. Abrahams (No. 2) v. M.N.R., [1966] C.T.C. 694; Thomas Lamb v. M.N.R. (1963), 34 Tax A.B.C. 79; Reginald William Edwards v. M.N.R., [1969] Tax A.B.C. 1069.)

In the result, therefore, the sum of $15,000 paid by Depco to Alco and the sum of $12,000 paid by Hercules to Alco were income of the appellant Campeau in his taxation year 1965 from an office or employment within the meaning of Sections 3 and 5 and by virtue of Section 16 of the Income Tax Act and were not income of Alco; and the sum of $30,000 paid by Depco to Petritz (the management company) was income of the appellant Petritz in his taxation year 1965, for similar reasons, and was not income of Petritz (the management company).

The appeals are dismissed with costs.