Minister of National Revenue v. Crossley Carpets (Canada) Limited, [1968] CTC 570, 69 DTC 5015

GIBSON, J.:—The issue for decision is whether or not in its taxation years 1961 and 1962 the respondent Crossley Carpets (Canada) Limited is liable to pay an additional 15 per cent income tax pursuant to Section 110B of the Income Tax Act, and calculated thereby, by reason of being a corporation non-resident in Canada during those years.

At all material times the respondent, an English corporation registered in England, carried on the whole of its carpet merchandising distribution business in Canada.

The Minister submits that the respondent corporation during those taxation years was not resident in Canada within the meaning of Section 110B of the Act, but only resident in England. The respondent submits it was resident both in Canada and in England or, alternatively, resident in Canada only.

I am of the opinion that the respondent corporation was so resident in England, and the only question for decision is whether or not it was also resident in Canada within the meaning of that section of the Income Tax Act.

The law, as I understand it, is that a corporation is resident, for income tax purposes, in the country where its central management and control is exercised, (see De Beers Consolidated Mines, Limited v. Howe [1906] A.C. 455) and the place of central management and control is sometimes in the cases said to be the place of paramount authority, (see The San Paulo {Brazilian) Railway Company Limited v. 8S. G. Carter, [1896] A.C. 31 and The American Thread Company v. Joyce (1918), 6 T.C. 163) but if the place of exercise of paramount authority is divided betwen two or more countries then in my view the corporation is resident in each of those countries. (See The Swedish Central Railway Company Limited v. Thompson (1925), 9 T.C. 342 and ef. Unit Construction Co. Ltd. v. Bullock, [1960] A.C, 351).

The pure question of fact for decision by this Court (which as Lord Loreburn stated in the De Beers (supra) case at page 458 is ‘‘to be determined, not according to the construction of this or that regulation or by-law, but upon a scrutiny of the course of business and trading’’) is whether or not on the evidence the place of exercise of paramount authority of central management and control of the respondent corporation was divided between Canada and England during its taxation years 1961 and 1962.

The Tax Appeal Board on the evidence adduced before it came to the conclusion that the place of exercise of such authority was divided between Canada and England during those taxation years and held that the Minister’s contention that the respondent (in those proceedings the appellant) was a non-resident corporation carrying on business in Canada was wrong and accordingly vacated the two re-assessments.

On the evidence adduced in this Court on the Minister’s appeal from this decision I have come to the same factual conclusion as the Tax Appeal Board and agree with the result found by it.

The appeal of the Minister its therefore dismissed with costs. HARRY O. WAFFLE, Appellant,

and

MINISTER OF NATIONAL REVENUE, Respondent.

Exchequer Court of Canada (Cattanach, J.), December 5, 1968, on appeal from an assessment of the Minister of National Revenue.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148—Sections 3, 5(1)(a), 8(1)(c)—Income from office or employment—Shareholders’ benefits—Whether free holiday trip awarded to “dealer principal” by manufacturer income of recipient and if so how valued.

The appellant was one of two equal shareholder-employees in a Ford dealership which, as a result of meeting its quota in a sales promotion campaign, was awarded a free Caribbean holiday for two. The appellant was the “dealer-principal” who, with his wife, took advantage of this award. In the Minister’s view the cost of this award to Ford, or $1,384, was taxable as a benefit accruing to the appellant under Section 5(1) (a), as a benefit enjoyed in the course of his employment, or under Section 8(1) (c), as a benefit conferred on a shareholder by a corporation, or, in any event, under Section 3. The appellant maintained that because the cost of the award was not borne by the employer-corporation of which he was a shareholder, but by Ford, Sections 5(1) (a) and 8(1) (c) did not apply. In any event, he contended that the cost attributable to his wife was not a benefit to him and that the value of the benefit, if any, was not the cost thereof to Ford.

HELD:

It was not necessary that a benefit contemplated by Section 5 come to an employee from his employer. In the present instance the award by Ford accrued to the appellant by reason of his office or employment and constituted a benefit within the meaning of Section 5 both as to his wife’s participation and as to his own. It was not necessary for such a benefit to be capable of being converted into money and there were no grounds for determining the true measure of the value of the award to be other than its cost to Ford. Appeal dismissed.

J. N. Brown, for the Appellant.

F. J. Dubrile, for the Respondent.

CASES REFERRED TO:

Goldman v. M.N.R., [1953] 1 S.C.R. 211; [1953] C.T.C. 95;

Ransom v. M.N.R., [1968] 1 Ex. C.R. 298; [1967] C.T.C. 346;

Tennant v. Smith, [1892] A.C. 150.

CATTANACH, J.:—This is an appeal from an assessment to income tax by the Minister whereby an amount of $1,384 was added to the income of the appellant for his 1964 taxation year.

The amount of $1,384 represents the cost of a vacation trip for the appellant and his wife from Toronto, Ontario to Fort Lauderdale, Florida from where they embarked on a Caribbean cruise, and return to Toronto. It was agreed between the parties that the foregoing sum represents the cost of such trip to Ford Motor Company of Canada Limited (hereinafter referred to as "Ford”).

The appellant is a shareholder and the secretary-treasurer of Thornerest Motors Limited (hereinafter referred to as "Thorncrest”), a company incorporated pursuant to the laws of the Province of Ontario which carries on the business of a dealer in Ford Motor products in the western area of the city of Toronto. Thorncrest holds a franchise to deal in certain of the automobiles manufactured by Ford, but not all of them.

The appellant and George Ledingham own an equal number of the issued common shares in Thornerest and they have owned those shares from the inception of Thornerest. Later preferred shares were issued to the appellant and his wife and Mr. Ledingham and his wife in equal numbers. Neither Mrs. Waffle nor Mrs. Ledingham take any active part in the business of Thorncrest other than holding preferred shares.

As part of its general efforts to promote the sale of its products it has been the custom of Ford to organize sales incentive programs.

The program, the results of which give rise to the present appeal, was described as ‘‘The Winning Combination’’ emphasizing the co-operation of Ford, as manufacturers, its dealers, and the sales managers and salesmen of its dealers to their respective mutual benefit.

Each dealer who wished to participate in the program was required to complete, prior to April 10, 1964, a document described as a ‘‘Dealer Participation Agreement and Registration Form’’ (Exhibit A.l), appended to which were the rules and instructions pertaining to this particular program, and to name therein the ‘‘dealer principal’’ who would accept the award provided by Ford if the dealer qualified therefor.

All Ford dealers in Canada were eligible for the awards if they registered in the program.

Dealerships were divided into categories within each region as outlined by Ford for the purpose of competing for the award of a Caribbean cruise for two to 185 winning dealers.

Dealership objectives were set by Ford and those dealers who met those objectives during the period of the program qualified for the award.

Similar conditions were set for the sales managers and salesmen nominated by the dealers who were awarded lesser awards, but I am only concerned with the "dealer principal’’ in this instance.

Thorncrest completed the participation agreement and nominated George Ledingham as its “dealer principal’’ to accept the award of a Caribbean cruise for two if Thornerest met its set objectives.

It was never explained in the evidence to my satisfaction what constituted a ‘‘dealer principal’’. I gathered that since many dealers were corporations, as Thornerest was, and which, therefore, could not take the trip in the event of its winning, that corporate dealers were obliged to name a natural person in the participation agreement to take the cruise in the event of the corporate dealer qualifying and that the natural person so named should be a predominant shareholder and officer of the corporate dealer.

In any event it was established in evidence that Mr. Ledingham and the appellant who were equal shareholders in Thorncrest and its president and secretary-treasurer respectively were the only two persons who qualified as ‘‘dealer principals’’ of Thornerest.

Mr. Ledingham had been named as ‘‘dealer principal” by Thornerest in three previous programs initiated by Ford and which were conducted on a basis similar to the present one. In each instance Thorncrest met its sales objective and in each instance Mr. Ledingham, with his wife, took the trip offered as the award.

As previously intimated, Mr. Ledingham was again named as “dealer principal” by Thornerest in the present program. However the participation agreement provided that a substitute ‘‘dealer principal’’ could be named to accept the award if circumstances required a change.

Thornerest met its sales objective set for the period of the program by Ford and the ‘‘dealer principal’’ was awarded a vacation cruise for two, the expenses of which were to be paid by Ford.

Mr. Ledingham, because of his wife’s illness, was unable to accept the trip. The appellant suffers from a physical handicap for which reason he had always been reluctant to embark upon a trip or cruise which was conducted for a large group of persons.

However it was considered by Mr. Ledingham and the appellant that one or other of them should accept the trip because Thornerest was negotiating with Ford to extend its franchise to include the Lincoln automobile produced by Ford. It was felt that an opportunity might arise during the cruise to discuss the extension of the Thorncrest franchise with officers of Ford who were also going on the cruise.

Accordingly the appellant and his wife went on the cruise which lasted eight days aboard an Italian luxury liner, the M/S Franca C. which had been chartered by Ford for this express purpose with a full program of entertainment and sight-seeing arranged. No formal business discussions or meetings were arranged. It was purely a pleasure cruise.

The officers of Ford who went on the cruise did so to ensure that Ford received all the facilities and amenities for which it had contracted with the charterer.

An officer of Ford testified that the ‘‘dealer principal’’ named by the dealer could accept or reject the cruise, but if the cruise were rejected neither he nor the dealer would receive the cash equivalent of the cost thereof.

In assessing the appellant as he did, the Minister relied on the following assumptions set out in the reply to the notice of appeal as follows:

(a) In the taxation year 1964 the Appellant received an expense paid vacation trip to the Caribbean for himself and his wife sponsored by the Ford Motor Company of Canada Limited;

(b) The said vacation trip was received and enjoyed by the Appellant and his wife in respect of, in the course of, or by virtue of his office or employment in Thorncrest Motors Limited;

(c) In the alternative, the said vacation trip was received and enjoyed by the Appellant and his wife by virtue of a benefit or advantage conferred on the Appellant qua shareholder by Thorncrest Motors Limited, a corporation of which he was a shareholder;

(d) The Appellant thereby received or enjoyed a benefit in an amount not less than $1,384.00 pursuant to paragraph (a) of subsection (1) of Section 5, or in the alternative, paragraph

(c) of subsection (1) of Section 8 of the Income Tax Act, R.S.C. 1952, c. 148;

(e) The sum of $1,384.00 is to be included in the Appellant’s income for the 1964 taxation year pursuant to Section 3 of the Income Tax Act.

By Section 3 of the Income Tax Act the income of a taxpayer for a taxation year is his income for the year from all sources inside or outside Canada, including his income from all offices and employment.

By virtue of Section 5(1) (a) income for a taxation year from an office or employment is the salary, wages and other remuneration including gratuities received by the taxpayer in the year, plus the value of board, lodging and ‘‘other benefits of any kind whatsoever . . . received or enjoyed by him in the year in respect of, in the course of, or by virtue of the office or employment”.

Therefore the first issue to be determined is whether the appellant received or enjoyed a benefit of $1,384 in respect of, in the course of, or by virtue of his office or employment in Thorncrest.

As I understood the argument of counsel for the appellant it was to the effect no benefit was received by the appellant in respect of, in the course of, or by virtue of his office or employment in Thorncrest within the meaning of Section 5(1) (a) because, if there was a benefit to the appellant, it was not received by him from Thornerest but rather it was received by him directly from Ford which is not his employer.

However he was prepared to concede that if there was a benefit and that benefit came to the appellant through Thornerest and it constituted remuneration, then the amount received by the appellant is properly taxable.

I do not accede to the proposition that it follows from the fact that the person paying the cost is not the employer of the recipient, that such payment does not accrue to the recipient in respect of, in the course of, or by virtue of his office or employment.

Here there was a ‘‘ Dealer Participation Agreement’’ entered into between Thornerest and Ford so that Thornerest took part in the sales incentive program. The normal business of Thomcrest was selling the products of Ford. As an extra incentive and reward for the more vigorous conduct of that business by Thornerest, Ford was willing to provide a ‘‘dealer principal” of Thornerest, its sales manager and certain of its salesmen, certain awards over and above the remuneration normally received by them from Thomcrest subject to a prescribed quota being met. This arrangement between Thorncrest and Ford had been entered into on many occasions and it was a legitimate and normal business arrangement which Thorncrest was capable of making. Because the awards made by Ford were such that could only be enjoyed by natural persons, Thorncrest was afforded the privilege of nominating natural persons who, to be eligible to receive the awards provided by Ford, must be officers or employees of Thorncrest.

Accordingly it follows that the cost of the awards was borne by Ford as a consequence of circumstances arising in a business context and to conclude that the recipients of the awards did not receive them in respect of, in the course of, or by virtue of their office or employment in Thorncrest, would be an unwarranted restriction of the language of Section 5(1) (a).

If authority need be cited for the proposition that the payment to the employee need not be made by the employer, it can be found in Goldman v. M.N.R., [1953] 1 S.C.R. 211; [1953] C.T.C. 95.

Since I have concluded that this particular award by Ford accrued to the appellant by reason of his office in Thornerest, it follows that the award was a payment by way of remuneration and it cannot be construed as being a mere gift or present (such as a testimonial) made to the appellant on personal grounds.

The circumstances of the present appeal make such conclusion clear. This award was not received by the appellant as a testimonial in his personal capacity, but came to him by reason of his office in Thornerest and by reason of him being the substituted “dealer principal” of Thornerest in which capacity he must be assumed to have contributed to the success of Thorncrest in meeting the quota of sales and other conditions of the incentive program to qualify for the award.

There remains the question whether the award to the appellant constituted a benefit to him and if so whether the cost of the cruise to Ford, admitted to have been in the amount of $1,384, is the true measure of the benefit to the appellant.

The word ‘‘benefit’’ is nowhere defined in the Income Tax Act. In commenting upon Section 5(1) (a) and (b) Noël, J. said in Ransom v. M.N.R., [1968] 1 Ex. C.R. 293 at 307; [1967] C.T.C. 346 at 358, The Canadian taxation section uses such embracing words that at first glance it appears extremely difficult to see how anything can slip through this wide and closely interlaced legislative net.’’ He went on to say that Section 5 is concerned solely with the taxation of income identified by its relationship to an office and it must have been received as income from that office or employment.

Because I have found that the award the appellant received was remuneration from his office or employment, it follows logically therefrom that what he received was also a benefit. The obvious intention of Section 5 is to include in the taxable income of a taxpayer those economic advantages arising from his employment which render the taxpayer’s office of greater value to him.

Counsel for the appellant next submitted that since the award was not convertible into money, it is not taxable and, while admitting that the sum of $1,384 was the cost of the cruise for two to Ford, he further contended that such amount was not necessarily the value of the award to the appellant and that in any event the cost of the trip attributable to the attendance of Mrs. Waffle was not a benefit to the appellant.

There is no question that if the appellant had not accepted the award and gone on the cruise, accompanied by his wife, he would have received nothing. I do not consider the fact that the appellant may have been motivated to accept the trip for possible business reasons to have any bearing on the matter. The fact remains that he did go on the trip with his wife.

The doctrine that no form of remuneration is taxable unless it is something which is money or money’s worth and convertible into money stems from Tennant v. Smith, [1892] A.C. 150, decided in the House of Lords as long ago as 1892.

I think that the language employed in Section 5 to the effect that the value of board, lodging and other benefits of any kind whatsoever’’, is to be included in taxable income, overcomes the principle laid down in Tennant v. Smith (supra). Obviously board which has been consumed and lodging which has been enjoyed cannot be converted into money by the taxpayer either subsequently or prior thereto and, in my view, the identical considerations apply to other benefits of any kind whatsoever’’.

The next question is to consider whether the value of the award is the cost thereof to Ford. I fail to follow how the true measure of the value of the award can be other than the cost of the award to Ford. There is no other standard which is applicable. I can see no grounds for holding that the amount should be limited to an estimate of an amount which the appellant might have spent on the trip himself if Ford had not borne that cost. The appellant knew what was being offered to himself and his wife and he accepted the award, although he would not know the precise cost of the award to Ford.

As I understand the intention of Section 5 it is simply to bring the benefits of any kind whatsoever from an office or employment into tax, that is to say, what has been spent to provide those benefits.

Because the award was a cruise for the appellant and his wife and was so accepted by the appellant, it follows that his wife’s presence was a benefit to him and the value of that benefit to him, for the reasons expressed above, is the cost to Ford of his wife’s expenses.

Because of the conclusion I have reached on the first issue in this appeal, that is, that the amount of $1,384 is properly included in the appellant’s income by virtue of Section 5(1) (a) of the Income Tax Act, it is not necessary for me to consider the alternative submission on behalf of the Minister that the sum of $1,384 should be included in the appellant’s income as a benefit or advantage conferred upon him as a shareholder of Thorncrest within the meaning of Section 8(1) (¢).

The appeal is, therefore, dismissed with costs.