The Assistant Chairman:
1 This is the appeal of ABC Diaper Service Inc from an income tax assessment in respect of the appellant's 1968, 1969 and 1970 taxation years.
2 By ministerial direction under subsection 138A(2) of the Income Tax Act the Minister in his assessment of the pertinent taxation years associated the appellant with Wee Folks Diaper Service Inc (hereinafter referred to as “Wee Folks”).
3 Since the present appeal is from an assessment made pursuant to a direction by the Minister, the Board in its disposition is bound by the wording of subsection 138A(3) and may either confirm the direction or vacate it, if it determines that none of the main reasons for the separate existence of the appellant company and Wee Folks is to reduce the amount of tax that could otherwise be payable, or finally the Board may vary the direction and refer the matter back to the Minister for reassessment.
4 In the light of subsection 138A(3) it appears to me that the point raised by counsel for the appellant, viz that the Minister must be satisfied or “convaincu”, to use the expression of the French text, of the two factors stipulated in subsection 138A(2) before making such a direction, is beyond the jurisprudence of the Board. Whether the Minister is satisfied or not, “convaincu” or not, of the factors in sub section 138A(2) does not in any way affect the Board's statutory obligations of deciding an appeal from an assessment made pursuant to a ministerial direction, according to the precise wording of subsection 138A(3). The Board can comply with these directives only by making its own study and analysis of the facts and then either confirming, vacating or varying the Minister's direction on the basis of the evidence presented.
5 The facts in this appeal are as follows.
6 Although Wee Folks began its operation in 1946, it was incorporated only on July 22, 1954. Its shareholders at the time of incorporation were Mr Abraham Steinberg, Mr Nadler and Mrs Celia Cohen. In its operations Wee Folks was using a special laundering process known as the diaseptic process and at the time pertinent to this appeal only one enterprise using this process was permitted to operate in a given area.
7 On April 15, 1961, Wee Folks purchased from Baby's Diaper Service Reg'd all the hard assets of the vendor, viz a used Volkswagen truck, all diapers, nets, bags and pins; all the office equipment, furniture, fixtures and all other accessories and inventory for $4,400 (Exhibit R-2). On the same day Dame Sylvia Robinovitch, wife of Abraham Steinberg, acquired on behalf of a corporation to be formed, 256 existing, active, paying accounts for an amount of $5,500 (Exhibit R-2).
8 Also on April 15, 1961, a consort partnership was formed consisting of Dame Sylvia Robinovitch, wife of Abraham Steinberg, Mrs Nadler and Mr Cohen, the spouses of the shareholders of Wee Folks. This partnership operated under the name of Baby's Diaper Service Reg'd.
9 On October 11, 1963, an extract of minutes of a meeting of the board of directors of Wee Folks indicates that a resolution was passed to purchase all the hard assets of ABC Diaper Service Reg'd, diapers, bags, hampers and pins for $3,200 (Exhibit R-3). On the same day, according to an extract of minutes of a meeting of the board of directors of ABC Diaper Service Inc, the latter was to acquire from ABC Diaper Service Reg'd its list of customers for $10,800. These extracts of minutes were not signed. However, by memorandum of agreement dated October 11, 1963, ABC Diaper Service Inc did in fact acquire from ABC Diaper Service Reg'd the vendor's customers' list and diaper service contracts for $10,800 and no other asset was included in the sale (Exhibit A- 2).
10 On July 23, 1968, Wee Folks and ABC Diaper Service Ltd acquired a diaper service business situated in the City of St-Laurent, under the name of AAA Rated Diaper Service, Service de Couche Blanche Neige and Blanche Neige Diaper Service, Snow White Diaper Service (Exhibit A-4).
11 This newly acquired service was operated as an incorporated branch of ABC Diaper Service Inc. Most of the cleaning work of the company was carried out at Wee Folks at 8560 St Hubert in Montreal.
12 On December 22, 1970, Wee Folks, ABC Diaper Service Inc and Baby's Diaper Service were condemned by the Exchequer Court of Canada under the Combines Investigation Act of a monopoly offence as set forth in subsection 31(2) of that Act (Exhibit R-7).
13 I am not at all certain that such a condemnation is material to the issue in this appeal and although we are in fact dealing here with a group of at least five companies owned by the same members of three families, the issue in this appeal is simply whether one of the main reasons for the separate incorporation of ABC Diaper Service Inc and Wee Folks was to pay less taxes than would otherwise be payable.
14 Counsel for the appellant contends that the separate existence of the two companies was motivated by sound business reasons. He pointed out that Wee Folks utilized a special laundering process, whereas ABC Diaper Service Inc did not; that the incorporation of two companies separately made it possible to cater to clients of different incomes and different languages and it was also useful in holding the clients it had bought by retaining the name of the company with which the client had become familiar.
15 In order to illustrate that Wee Folks and ABC Diaper Service Inc were not associated, counsel for the appellant referred to a wholly-owned subsidiary of Wee Folks, acquired by Wee Folks in 1967 and which was automatically associated without ministerial direction. In support of his contention counsel for the appellant cited the case of C P Loewen Enterprises Ltd v Minister of National Revenue, [1972] C.T.C. 396, 72 D.T.C. 6298. On the facts of that case it was held that the separate incorporation of the companies was dominated by considerations other than tax advantages, and that the tax advantages were not the main reason for the separate incorporation.
16 From the facts of the appeal before us it is not that clear that the separate existence of Wee Folks and ABC Diaper Service Inc is dominated by considerations other than tax advantages.
17 Even if one were to conclude that the reasons advanced by the appellant for the separate existence of the two companies could be considered a sound business arrangement, it still does not eliminate the possibility that one of the main reasons for the separate existence of the two companies is to pay less taxes than otherwise payable.
18 It is clear from the evidence that ABC Diaper Service Inc had no hard assets whatever, no plant, no equipment, no office, no employees, all it had was a list of clients whose laundering was done by Wee Folks and all the administrative work and bookkeeping was done by the personnel of Wee Folks. It is somewhat difficult in the circumstances of this appeal to consider ABC Diaper Service Inc as operating independently of Wee Folks. Although there may exist some business advantages to be gained by their separate existence, there also exist some major fiscal advantages which, in my opinion, were seriously considered in making that arrangement.
19 In Annex B of Exhibit R-13, the following is recorded:
Taxable Income 1967 1968 1969 1970
"WEE" $25,573.00 $19,461.00 $ 5,415.00 $33,992.00
"ABC" 24,439.00 35,874.00 28,457.00 25,353.00
"MONTREAL BABY" -- 4,607.00 16,962.00 21,167.00
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$50,012.00 $59,942.00 $50,834.00 $80,512.00Additional Taxes
Income taxable at 40% instead of 11% if subsection 138A(2) is applied on above income for 1967–68–69–70:
1967 $50,012.00
35,000.00
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$15,012.00 @ 29% $ 4,353.00
1968 $59,942.00
35,874.00
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$24,068.00 @ 29% 6,980.00
1969 $50,834.00
35,000.00
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$15,834.00 @ 29% 4,592.00
1970 $80,512.00
55,159.00
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$25,353.00 @ 29% 7,352.00
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TOTAL TAXES INVOLVED $23,277.00
20 If subsection 138A(2) were applied and ABC Diaper Service Inc were to be associated with Wee Folks, the total tax payable would then be $23,277. On the basis of the evidence adduced, this amount of additional tax in relation to the income of each of the companies for 1967, 1968, 1969 and 1970 is sufficiently substantial, in my opinion, to have been considered by the appellant as one of the main reasons for the separate existence of the two companies.
21 On the evidence before us, I find that the appellant did not satisfy the Board pursuant to subsection 138A(3) that none of the main reasons for the separate existence of ABC Diaper Service Inc and Wee Folks was to reduce the amount of tax that would otherwise be payable.
22 The appeal is therefore dismissed.
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