A W Prociuk (orally: June 12, 1975):
1 The appellants Jordan Enterprises Ltd and Jordan Holdings Ltd appeal from the respondent's reassessments of their income for the taxation years 1968, 1969 and 1970, wherein the respondent, pursuant to the provisions of subsection 138A(2), directed that these companies were to be deemed associated for the said taxation years. The notices of reassessment are dated February 14, 1973 in respect of Jordan Enterprises Ltd and February 21, 1973 in respect of Jordan Holdings Ltd.
2 Lakeside Enterprises Ltd and Westside Enterprises Ltd appeal from the respondent's reassessments of their income for the taxation years 1969 and 1970, wherein the respondent directed that, pursuant to subsection 138A(2), these two companies were to be deemed associated for the said taxation years. In each case the notices of reassessment are dated February 15, 1973.
3 At the opening of the hearing, the parties agreed that the four appeals be heard on common evidence.
4 Subsection 138A(2) of the Income Tax Act reads as follows:
138A. (2) Where, in the case of two or more corporations, the Minister is satisfied(a) that the separate existence of those corporations in a taxation year is not solely for the purpose of carrying out the business of those corporations in the most effective manner, and
(b) that one of the main reasons for such separate existence in the year is to reduce the amount of taxes that would otherwise be payable under this Act
5 On appeal, the Board is governed by the provisions of subsection 138A(3) which reads as follows:
138A. (3) On appeal from an assessment made pursuant to a direction under this section, the Tax Appeal Board or the Exchequer Court may
6 Ralph Jordan started in the construction business in 1958, when he built one house, doing most of the work himself. Prior to that, he worked as a labourer in construction, doing anything that came along. In 1956 he married Mary Jahour, whose father was in the real estate and insurance business, and was also a notary public. Mary Jordan had considerable business and bookkeeping training and experience, having graduated from high school with a university entrance certificate, and having worked for General Motors Acceptance Corporation in the Collection Department and for Imperial Investments Limited as secretary to the sales manager. She continued to work until about 1960 and, consequently, had some capital of her own. Ralph Jordan sold the first house, and in 1958 and 1959 built another five or six houses. In 1969 he incorporated Jordan Enterprises Ltd as a construction company, pursuant to the laws of the Province of British Columbia. He and his wife, Mary Jordan, each owned 50 shares. His father-in-law had previously assisted him financially, and I gathered from the evidence that Mary Jordan had also contributed financially to her husband's building business, apart from acting as a bookkeeper and secretary when required.
7 Jordan Enterprises Ltd took over the construction business as a going concern from Ralph Jordan. From 1960 to 1964 Jordan Enterprises Ltd built between 20 and 30 houses and one or two small apartment buildings a year, with Ralph Jordan working full-time, supervising construction, purchasing, sales, and all the other work that is entailed in that business. In 1964 Jordan Enterprises Ltd branched out into construction of bigger apartments, and by 1965 this company had built five apartment buildings: one containing 18 suites, one with 11 suites, one with 20 suites, one with 32 suites, and one with 38 suites, for a total of more than 100 rental units.
8 Ralph Jordan stated that he was at this time very tired, and at times depressed, and felt he wanted to stay out of house construction and just manage the apartments in which, as I stated, he had approximately 100 suites producing rental income. Apparently there was some disagreement in this regard between him and his wife, because in 1964 she insisted on taking her capital out of Jordan Enterprises Ltd and he repaid her the sum of $44,000 in full and then became the sole owner of Jordan Enterprises Ltd. In 1964 Mary Jordan incorporated her own company, Jordan Holdings Ltd, pursuant to the laws of the Province of British Columbia. She states that she had two reasons in mind for getting her money out of Jordan Enterprises Ltd: first, that because her husband at times was depressed and was also not averse to gambling, she feared the family's future would be jeopardized; and, secondly, that she wanted control of an estate of her own, as by now she had two children whose future she was concerned about. She states that she tried to encourage her husband to continue with house construction, but he was reluctant to do so and, for the time being, was content to look after the apartments.
9 Len, Nick and Hugh Noort emigrated from Holland in 1956, at the ages of 18, 16 and 14 respectively, with their parents. Len, who testified, stated that he had had one year and a half of technical schooling in Holland as a carpenter and had worked as a carpenter's apprentice. On arriving in Canada he started working as a carpenter's helper and also enrolled in designing and draughting courses and the study of English during the evenings throughout the year. Nick soon left technical school and started as a carpenter's helper, while the youngest continued to go to school for some time. Len and Nick obtained employment with a small speculative house builder, who went out of business in the ensuing two years. In 1958 Nick and Len began operating on their own as framing contractors, and continued in that line until 1962. In this period they framed many houses for Jordan Enterprises Ltd and got to know Ralph Jordan very well. They got along well with him, and this amicable relationship has continued until this date, although they are no longer associated with each other in construction. In 1963 the three Noort brothers decided to incorporate under the name of Noort Brothers Construction Ltd, each brother holding a one-third share in the corporation. I gathered from the evidence that this company became very successful in construction, and at present, while the three brothers are operating under a somewhat different structural form, they rank among the top builders in the province. In 1967 Noort Brothers Construction Ltd had management and some financial difficulties. As Len Noort stated in his evidence: “It is difficult to build, supervise and attend to downtown business all at the same time.” They discussed the possibility of a partnership with Mary Jordan's company, Jordan Holdings Ltd. Noort Brothers Construction Ltd had three lots on Gordon Street, and an agreement was reached to try a partnership on a 50/50 basis by building on that property. The partnership was called Jordan-Noort Construction, with a separate bank account. Jordan Holdings Ltd provided some of the funds, office management, bookkeeping and payroll records, etc, and Noort Brothers Construction attended to the construction and site supervision. The partnership apparently worked well.
10 In 1968 Westside Enterprises Ltd was incorporated, principally to build speculative-type houses in the Coquitlam and Delta areas. Mary Jordan owned 50% of the shares while each of the Noort Brothers held 162/3% of the shares. According to the evidence of Len Noort and Mary Jordan, a good deal of risk was involved in building in this area, and it was decided to incorporate this new company for this purpose. Another reason given for starting up a separate company was the fact that there was a quota on the number of mortgages that any lender such as Prudential or Royal Trust would grant to any one builder of speculative houses. Westside built economy-type houses, ranging in price from $23,000 to $24,000, in the outlying areas. It ceased operation in 1970 and has not done any more construction since.
11 Noort Brothers Construction Ltd obtained a choice area of some 24 lots on a steep grade in the Municipality of Burnaby. It required re-subdivision into 20 building sites for executive-type residences that would sell in the range between $40,000 to $56,000. They approached Ralph Jordan to join them for developing this one location, and it was decided to incorporate a separate company for this joint venture. Len Noort stated that additional capital was required which Ralph Jordan could provide from his other company, but they could not, for many practical reasons, buy into Jordan Enterprises Ltd. Their lawyer advised them to stay away from this site and from doing any construction thereon because of possible legal entanglements regarding re- subdivision and procurement of titles to the land. This advice meant that they might find it very difficult and costly, and perhaps might not succeed at all. Notwithstanding this warning, a new corporation, Lakeside Enterprises Ltd, was incorporated with Ralph Jordan owning 50% of the shares, and the three Noort brothers 162/3% each, and the project was tackled. After some initial difficulties, not entirely unforeseen, this company succeeded in completing the building of this project and was successful in selling the 20 executive type residences at a good profit. The company ended up with one apartment block, which it still owns but, as far as further construction is concerned, the company has been dormant since 1970.
12 In auditing the accounts of each of the companies for the taxation years in question, the respondent observed that in each case the net taxable income was close to, or just slightly under, the figure of $35,000. Learned counsel for the respondent pointed out that, while the profit and loss statements showed a substantially higher figure, in most cases this was reduced by such items as management fees, supervision fees, and capital cost allowance, to bring the taxable income of each company under $35,000. Len Noort stated in his evidence, when questioned in this regard, that reputable accountants had been employed to handle their books, and they accepted their advice as to the amounts they could claim, either as a corporation or as individuals, in respect of the items referred to. As learned counsel for the appellants pointed out, if this is a case of artificial reduction of taxable income, then there are, of course, other avenues available to the respondent to proceed in that regard.
13 Dealing with subsection 138A(3), in each case I am satisfied, on the evidence, that the separate companies would have been formed for the reasons given whether or not a reduced tax rate for companies earning under $35,000 had been in existence. I am not governed by the answers given to counsel on a direct question in each case. I have checked the evidence, and I have taken into consideration the totality of the evidence and the circumstances in each case in arriving at my conclusion. Each company was managed successfully and was incorporated for good business reasons. There is no doubt in my mind that the various shareholders were cognizant of the tax schedules, but I am satisfied that the amount of taxes that would otherwise have been payable was not the main reason, nor one of the main reasons, for the separate existence of each company. Similarly, I entertain grave doubts as to whether in fact it would have been possible for the various projects to be completed as successfully as they were if it had been done otherwise.
14 Accordingly, the direction made by the respondent in each case under subsection 138A(2) of the Act is vacated, and the appeals are allowed.
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