Larry Smith v. Minister of National Revenue, [1970] CTC 529, 70 DTC 6344

DUMOULIN, J.:—This is an appeal from the assessment made by the respondent with respect to the appellant’s 1964, 1965 and 1966 taxation years, adding to Larry Smith’s personal income for the above-mentioned fiscal periods revenues of $14,418.29, $14,337.81 and $16,134.21, respectively, on the alleged grounds that such amounts were dividends from a personal corporation, Larry Smith Inc., the sole property of the appellant.

The notice of appeal states that:

Larry Smith Inc. was formed in October 1958 pursuant to the laws of the Province of Quebec. The company was controlled by the appellant, a chartered accountant . . .

As set forth in the letters patent, the company’s objects, among many others of a cognate nature, are (vide notice of appeal, Section 1 and its subsections) :

(a) to buy, collect, hold, possess, sell, give, transfer, mortgage, pledge and otherwise acquire or otherwise dispose of capital, mortgages, debentures, notes, shares and other moveable values, bonds, contracts and recognizance of debts from any companies, corporations or associations

(b) to. acquire in ‘any way, establish, rent, exploit, administer, improve, sell, exchange or otherwise dispose of any kind of i immoveables and mortgage them . . : sell and otherwise dispose

of . . . trade building materials; transact, ‘conduct and carry on a general real estate brokerage business as real estate agents or brokers;

(c) to act as agent, broker, for the investment, the payment, the transfer of money, for the purchase, sale, improvement or administration of any kind of moveables and immoveables . . .;

(d) to employ experts for research, surveys and reports on books, financial situations, projects and businesses of any persons, firms or corporations, and for researches, surveys, reports on titles of any kinds of moveables or immoveables, private or public . . .;

Paragraph 2 next declares that:

In 1958 a group composed of the appellant, Jean Primeau, Larry Smith Inc., Norman Denys, Raymond Eudes, Dominic Cobetto and Aurelien Poirier purchased all the shares of a company carrying on business in Quebec and known as the Veterans’ Taxi Owners Association of Montreal Inc. (hereinafter referred to as V.T.O.A. Inc.). The V.T.O.A. Inc. carried on the business of providing to the owners of taxis and taxi permits the right to use certain taxi stands in the city of Montreal, motor vehicle liability insurance, drivers, radio communications systems, advertising, charge accounts and credit arrangements generally.

Paragraph 3 of the notice of appeal goes on to say:

In 1958 Larry Smith Inc. entered into an oral contract with V.T.O.A. Inc. whereby Larry Smith Inc. agreed to provide management services to V.T.O.A. Inc. Larry Smith Inc. fulfilled its obligations by carrying out the following functions:

(a) purchases of supplies such as dome lights and car radios, the expenditures for which were approximately $200, 000" a year;

(b) the hiring of personnel such as switchboard operators (15), dispatchers (4), clerical staff (7), and bookers, i.e. individuals who keep track of the drivers for the owners of the taxis (3);

(c) negotiations with insurance companies with respect to obtaining motor vehicle ‘liability insurance . . . The monthly insurance premium was approximately $30, 000: . -

(d) location and purchase of a’ building at 1223 St. James Street West to house the staff and equipment of the V.T.O.A. Inc.

In subparagraphs (e), (f) and (g) are outlined other related services required for the furtherance of the Association’s ends, and, lastly, in subparagraph (h), we read the following averment :

(h) operating a financing. business with respect to the purchase of car radios and their subsequent sale to the owners of the cars which amounted to a total outlay of approximately $240,000.

Conformably to the oral contract alleged above, appellant asserts in paragraph 4 that:

4. These services were performed during the period 1958-1966 and Larry Smith Inc. fulfilled its obligations by providing its employee the appellant, who actually performed the services. The appellant declined a salary from Larry Smith Inc. because he decided that the company should attempt to acquire a substantial amount of capital as quickly as possible in order to expand its operations.

It is, furthermore, stated that Larry Smith Inc. "performed other managerial-type services, examples of which’’ are mentioned in paragraph 5 and its subsections (a), (b), (c), (d) and (e), the latter thus worded:

(e) also in 1966 Larry Smith Inc. expanded its business and commenced to offer secretarial and bookkeeping services to its prospective clients. An employee, Mrs. F. Samuels, was hired by Larry Smith Inc. and bookkeeping and secretarial services were performed by her for clients of the company.

We have seen that the relevant. period at issue extends from 1964 to 1966 inclusively, it would, then, seem rather incongruous with the ordinary setting up of an active company to hire its initial and only employee eight years after its inception, the intervening span of time between 1958 and 1966.

Paragraph 6 of the notice of appeal sets forth the "‘commis- sions and other business income’’ (eleven in number) earned by Larry Smith Ine. during the decade 1958-1968. Of these eleven earnings, the three lowest occurred precisely in 1964 : $1,500, in 1965 : $4,300, and, for 1966 : $1,833. Were these the only sources of income, they assuredly would point at a static and perilously anemic enterprise. It will be shown later on that there were a few others, which, presumably, prompted the conelusion in paragraph 12 of the appeal, hereunder recited :

12. Appellant says that Larry Smith Inc. was at all material times a viable commercial enterprise carrying on an active business in the nature of the provision of management services, secretarial and bookkeeping services and rendering services as a land and mortgage broker and therefore Larry Smith Inc. was not in 1964, 1965 or 1966 a personal corporation within the meaning of sections 67 and 68 of the Income Tax Act and the appellant should not be deemed to have received a dividend of the amount of income of Larry Smith Inc.

It had previously been said that:

at all material times Larry Smith had business stationery, an office . . . identified by the company name on the door, a postal address and a separate and independent accounting system.

(Para. 9 of the notice of appeal.)

In a general refusal to admit the pertinency of appellant’s plea, the respondent rests his case on the following submissions of his reply :

4. The Respondent says that on assessing he included the said sums of $14,418.29, $14,337.81 and $16,134.21 in computing the Appellant’s income for 1964, 1965 and 1966 respectively on the following basis:

(a) Larry Smith Inc. was, during the whole of the 1964, 1965 and 1966 taxation years controlled by the Appellant, an individual resident in Canada;

(b) Larry Smith Inc., during the whole of 1964, 1965 and 1966 taxation years, derived at least one-quarter of its income from ownership of bonds, shares, debentures, mortgages, hypothecs, bills, notes or other similar property or an interest thereon, or from lending money;

(c) Larry Smith Inc. did not, during the whole of the taxation years carry on an active financial, commercial or industrial business;

(d) That, during 1964, 1965 and 1966, Larry Smith Inc. was a personal corporation within the meaning of sections 67 and 68 of the Income Tax Act and accordingly its income for those years, being at least the said sums of $14,418.29, $14,337.81 and $16,134.21, was deemed to have been distributed to and received by the Appellant, the sole shareholder thereof on the 31st day of December of each of the said years 1964, 1965, and 1966 respectively, by virtue of section 67 of the Income Tax Act.

It should be noted right now, once and for all, that. the appellant admits the statements made in subparagraphs (a) and (b) above, namely his absolute control over his company, owning 98% of its shares, and that Larry Smith Inc. derived at least one-quarter of its yearly income from the sources mentioned in subsection (b) (i) of Section 68(1) of the Act.

As a consequence of these two admissions, only one qualifying trait of a personal corporation remains in dispute, to wit, that Larry Smith Inc. in the very words of paragraph (c) of subsection (1) of Section 68:

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

during the whole of the three taxation years concerned.

In the course of his address to the Court, appellant’s able counsel, Mr. Bruce Verchere, suggested as a guideline for the solution of this point these indicia:

1. Whether the transactions reported were at arm’s length.

2. Did Larry Smith Inc. have operational facilities?

3. The volume of transactions performed and of services rendered.

These are, indeed, helpful suggestions which, in the light of both the oral and literal evidence adduced, should provide a proper answer; let us apply each of them in the above order.

1. Were the company’s transactions at arm’s length ?

Exhibit A-3, entitled Larry Smith Inc.” is a "‘List of Loans and Mortgages issued since Inception’’, starting on January 21, 1959, but the Court must limit its investigation to the pertinent years. For 1964, the appellant identified as a company deal a loan (or mortgage) of $2,500 to one Chaim Fogel, and "‘was not sure’’ whether a $10,000 loan (or mortgage) to Em-Ar Development Inc. was extended. by the company or Larry Smith, chartered accountant. One single company transaction in 1965, a sum of $18,000 in favour of Mrs. D. Z. Holzer. None whatsoever in 1966, but three personal loans to, respectively, H. Smith : $5,000, S. Smith : $2,000 and to Ronda Smith: $2,000, a brother, a nephew and a niece of Larry Smith.

Samuel E. Cohen, an executive and real estate owner, also from Montreal, testified that Larry Smith is his chartered accountant, adding that "‘in our business, we occasionally need mortgage funds. Some such loans were, within the last five years negotiated for my company by Larry Smith Inc. to which commissions were paid’’. Even so, appellant’s own listing, Exhibit A-3, writes down those important transactions as having occurred on January 21, 1959, October 15, 1961 and August 1, 1967, all three dates outside the scope of the relevant taxation period.

Exhibit A-4 specifies the ‘‘commission income’’ of Larry Smith Inc., amounts of $1,500, one entry, for 1964; of $4,300, two entries, during 1965, and of $1,833.75 in 1966, three entries. Yet, I have no doubt that these rather sparse transactions were at arm’s length, excepting of course the three family loans in 1966.

2. Did Larry Smith Inc. have operational facilities? is the second but somewhat inaccurate norm suggested by appellant’s counsel.

It is inaccurate because it is insufficient and imprecise. One single telephone in common with other users, one office room shared by another business concern, might, in the literal sense of the words, constitute operational facilities. However, such is not the appropriate criterion in true compliance with the requirements of the statute’s Section 68(1) and its paragraph (c). Otherwise put, would a common telephone line in partially occupied office space be consistent with carrying on "‘an active financial, commercial or industrial business . . . during the whole of the taxation year . . .’’?

The appellant’s evidence should provide the proper answer ; it can be summarized as hereunder,

Initially, Larry Smith Inc. had its premises at 1293 St. J ames Street West, on the second floor of the Veterans Taxi Owners’ Association, whose treasurer was the appellant. From 1958 to 1966, including the period at bar, Larry Smith Inc. had a room there and shared the anteroom with V.T.O.A. No rent was paid to the landlord, an agreement having been reached for a compensatory exchange of managerial services, appellant devoting in fact 70% of his time to the affairs of Larry Smith, chartered accountant, the major part of which was in pursuance of his task with V.T.O.A., and 30% to Larry Smith Ine. "‘In 1966”, testifies the witness, “we moved to number 8235 Mountain Sights, suite 302, occupying a waiting room, a reception room and three private offices. The lettering on the main door read : Larry Smith, Chartered Accountant and Larry Smith Inc.”. V.T.O.A. paid for the Larry Smith Inc. telephone service “pursuant to an arrangement’’: Smith, cross-examined by Mr. Gerald J. Rip, respondent’s learned counsel, corrects a former statement and admits ‘‘that the several management duties described in subsections (a), (b), (c), (d), (e), (f)-', (g) and (h), Section 3 of his notice of appeal, were attended to “in his personal capacity of V.T.O.A.’s treasurer and auditor and not by Larry Smith Inc.”.

While in the taxi building Larry Smith Inc. had the same telephone number as one Shatsky, also a chartered accountant and former partner of appellant. i,. : .

Replying to a question of mine, the : witness says that his company was listed in the telephone index, ‘bus: in common with Larry Smith, c. a.

With the exception of a period in 1966, Larry Smith Ine. paid no salaries, having no employees; some time ‘in the latter year, a Mrs. Samuels was engaged as secretary for Smith, his erstwhile partner Shatsky, and V.T.O.A.

I am unable to perceive in the preceding set of facts: any admissible trait of a business actively pursued; neither do. I find a sufficient recourse to those aids, material and personal, without which no so-called company may lay claim to viability. 3. The volume of transactions performed and of:services rendered, is the third and last point raised by appellant in vindication of his contention that Larry Smith Inc. ‘ ‘was at all material times a viable commercial enterprise carrying. on an active business in the nature of the provision of management services, secretarial and bookkeeping services and rendering services as a land and mortgage broker’’ ef. notice of appeal, para. 12).

The appellant’ 8 evidence disposes of any pretence: that management services” were rendered to any other clients but the V.T.O.A., and those, by himself as treasurer of the latter firm and not through the instrumentality of Larry Smith Inc.

For the remainder, as pointed out by respondent’s counsel and admitted by Smith, the agreed statement of documents, Exhibit A-2, shows, on pages 207 to 217, inclusive, that throughout the relevant years 1964, 1965 and 1966, no more than three cheques in 1964, three in 1965 and four in 1966 were made payable by Larry Smith Ine. to others than the Minister of Finance of Canada or Quebec, to some of his close relatives, to his bank and to himself.

Appellant did not refute Mr. Rip’s contention that those parties to whom financial assistance was extended and who paid commissions to Larry Smith Inc. were already clients of Larry Smith, chartered accountant and, therefore, the latter knew perfectly their financial standing and had no further research work to accomplish.

The witness does not dispute the fact that Larry Smith, chartered accountant, can do all and any of the work that can be attended to by Larry Smith Inc.

Exhibit A-3, the list of loans and mortgages issued by Larry Smith since January 21, 1959 up to December 1, 1967, after deletion of the three family loans in 1966, leaves a total of 40 such transactions over a period of nine years, less than five per year. Of the clients thus listed, 24 were regular clients of Larry Smith, c.a. And, again, referring to the pertinent three years, merely four loans or mortgages appear in the 1964 column, three in 1965, and one in 1966, exclusive of the loans to Smith’s brother, nephew and niece.

One must persist in the strong impression that so light a volume of financial dealings, coupled with the accompanying circumstances, fully justifies the respondent’s view that in the years 1964, 1965 and 1966, Larry Smith Inc. was a personal corporation within the meaning of Sections 67 and 68 of the Income Tax Act and, therefore, the inclusion in his personal income of the sums of $14,418.29, $14,337.81 and $16,134.21 is warranted.

For the reasons above, the Court adjudges that the appellant was properly taxed by respondent for the fiscal years 1964, 1965 and 1966, and, therefore, that the appeal must be dismissed, with costs in favour of respondent fixed at a sum of $1,000, according to the agreement reached at the hearing by the parties.