Ritchie,
D.
J.:—The
appellant,
since
1949,
a
barrister
and
solicitor
of
the
Supreme
Court
of
British
Columbia,
has
appealed
from
a
re-assessment
made
under
the
Income
Tax
Act,
R.S.C.
1952,
ce.
148.
The
re-assessment
added
$9,500
to
the
taxable
income
shown
on
his
1957
income
tax
return.
During
the
taxation
year
above
mentioned
the
appellant,
under
the
firm
name
and
style
of
Shulman,
Tupper,
Southin,
Gray
&
Worrall,
was
carrying
on
the
practice
of
law
in
Vancouver.
The
other
four
solicitors
whose
names
were
included
in
the
firm
name
and
style
and
one
additional
lawyer,
w
hose
name
was
not
so
included,
were
his
salaried
employees.
An
accountant,
five
stenographers,
a
switchboard
operator
and
a
law
student
comprised
the
non-professional
office
staff.
Prior
to
March
15,
1957
the
appellant’s
practice
had
been
conducted
with
little,
if
any,
overall
management
or
control.
The
office
procedure
was
comparable
to
what
it
would
have
been
had
the
six
lawyers
been
sharing
the
office
space
with
each
carrying
on
his
practice
independently
of
the
others.
What
supervision
did
exist
was
exercised
by
Mr.
Shulman.
He,
of
course,
was
entitled
to
disapprove
and
vary
any
action
taken
by
any
of
his
employees.
Each
lawyer
in
the
office
was
permitted
to
engage
his
own
secretary
and
fix
his
own
charges
for
professional
services.
As
the
work
load
was
not
distributed
evenly,
dissatisfaction
and
unrest
had
developed
among
the
stenographic
staff.
Confusion
and
uncertainty
existed
in
respect
of
the
responsibility
for
rendering
bills
and
tracing
disbursements.
When
making
up
accounts
it,
sometimes,
was
necessary
to
spend
two
or
three
hours
going
through
files
to
ascertain
the
disbursements
which
should
be
included.
Quite
often
it
was
found
no
account
had
been
rendered
because
of
a
misunderstanding
between
two
of
the
lawyers
as
to
on
whom
the
responsibility
for
so
doing
rested.
There
was
no
systemized
vacation
schedule.
A
lawyer
and
his
secretary
might
be
absent
from
the
office
on
vacation
at
the
same
time
and
so
render
it
difficult
to
answer
enquiries
respecting
work
he
had
in
hand.
In
1955,
the
appellant
had
employed
an
accountant
as
an
office
manager
at
a
salary
of
around
$300
to
$350
per
month.
No
improvement
in
office
routine
resulted.
The
other
lawyers
resisted
implementation
of
any
recommendations
advanced
as
to
changes
in
office
procedure.
It
was
not
long
before
the
office
manager
was
devoting
his
time
exclusively
to
accounting
duties
and
the
office
routine
had
resumed
its
haphazard
course.
In
Mr.
Shulman’s
opinion
the
explanation
of
the
failure
of
this
attempt
to
solve
administration
problems
is
that
the
office
manager’s
lack
of
legal
training
permitted
the
lawyers,
by
the
use
of
arguments
he
did
not
understand,
to
talk
him
out
of
every
change
he
wished
to
make
in
the
office
system.
Early
in
1957,
the
appellant
decided
office
administration
was
important
enough
to
warrant
an
expenditure
of
whatever
portion
of
his
time
was
required
to
organize
it
properly
and
that
drastic
and
immediate
action
must
be
taken
if
the
office
was
to
operate
efficiently.
On
March
15,
Mr.
Shulman
caused
Shultup
Management
&
Investments
Ltd.
to
be
incorporated.
For
convenience,
this
company
sometimes
hereafter
shall
be
referred
to
as
“Shultup”.
The
authorized
capital
is
10,000
shares
of
the
par
value
of
$1
each.
The
paid
up
capital
is
the
nominal
sum
of
$4
of
which
$2
was
subscribed
by
the
appellant
and
$2
by
his
wife.
They
are
the
directors
and
only
shareholders
of
the
company.
Mr.
Shulman
is
the
president
and,
presumably,
the
chief
executive
officer.
Under
date
of
March
15,
1957
the
appellant,
under
his
firm
name
of
Shulman,
Tupper,
Southin,
Gray
&
Worrall,
entered
into
a
management
agreement
with
Shultup.
As
this
appeal
is
of
importance
I
will
set
out
the
agreement
in
full.
It
reads:
“This
AGREEMENT
made
in
duplicate
the
15th
day
of
March,
1957:
BETWEEN
:
SHULMAN,
TUPPER,
SOUTHIN,
GRAY
&
WORRALL,
Barristers
&
Solicitors,
Suite
404-510
West
Hastings
Street,
Vancouver,
British
Columbia,
(hereinafter
referred
to
as
‘‘the
Solicitor’’)
OF
THE
FIRST
PART
AND:
SHULTUP
Management
&
INVESTMENTS
Ltd.
a
body
corporate,
incorporated
under
the
laws
of
the
Province
of
British
Columbia
and
having
its
registered
office
at
Suite
404-
510
West
Hastings
Street,
Vancouver,
British
Columbia,
(hereinafter
referred
to
as
‘‘the
Company”)
OF
THE
SECOND
PART
WHEREAS
the
Solicitor
carries
on
business
as
Barristers
and
Solicitors
at
Suite
404-510
West
Hastings
Street,
Vancouver,
British
Columbia;
AND
WHEREAS
the
Company
has
agreed
with
the
Solicitor
to
perform
certain
non-professional
services
as
hereinafter
set
forth
;
NOW
THEREFORE
in
CONSIDERATION
of
the
premises
and
the
terms
and
conditions
hereinafter
set
forth,
it
IS
AGREED
AS
FOLLOWS
:
1.
The
Company
shall
at
such
time
and
from
time
to
time
as
shall
be
required
or
requested
by
the
Solicitor
to
perform
the
following
non-professional
services
(hereafter
referred
to
as
the
‘‘non-professional
services’’).
(i)
The
employment
of
any
and
all
secretarial
and
clerical
staff.
(ii)
The
employment
of
any
and
all
maintenance
staff.
(iii)
The
purchasing
or
acquiring
of
any
and
all
secretarial
and
clerical
staff’s
equipment,
furniture
and
fixtures.
(iv)
The
purchasing
or
otherwise
acquiring
of
all
general
office
equipment,
furniture
and
fixtures.
(v)
The
purchase
of
all
stationery
and
legal
forms.
(vi)
The
purchase
of
all
periodic
and
professional
literature.
(vii)
The
purchase
of
any
and
all
text
books
and
reference
materials.
(viii)
Purchasing
or
leasing
of
office
and
waiting
room
space.
(ix)
Management
of
all
secretarial
and
clerical
staff.
(x)
Management
of
maintenance
staff.
(xi)
Collection
of
all
outstanding
accounts,
including
the
taking
as
agent
for
the
Solicitor
of
any
and
all
legal
proceedings
to
secure
payment
of
such
accounts.
(xii)
The
appointment
of
any
and
all
Auditing
and
Accounting
staff.
(xiii)
The
purchasing
or
otherwise
acquiring
and
maintenance
of
transportation
facilities
to
be
used
by
the
Solicitor
for
business
purposes.
(xiv)
Payment
of
any
and
all
insurance
premiums
necessary
to
maintain
good
and
adequate
insurance,
including
fire,
theft,
and
private
and
professional
liability
insurance.
(xv)
Preparation
and
filing
of
Income
Tax
Returns.
(xvi)
Such
other
duties
as
may
be
agreed
upon
by
the
parties
from
time
to
time.
2.
In
consideration
of
the
performance
by
the
Company
of
the
non-professional
services
agreed
to
be
performed,
the
Solicitor
agrees
to
pay
to
the
Company
a
fee
(hereinafter
referred
to
as
‘‘the
management
fee’’)
in
the
sum
of
One
Thousand
($1,000.00)
Dollars
per
month
commencing
the
15th
day
of
March,
1957,
until
the
end
of
the
first
fiscal
period
of
the
Company
and
thereafter
a
rate
to
be
agreed
upon
by
the
parties
hereto
and
in
the
event
the
parties
shall
fail
to
agree
on
such
rate,
the
question
of
determination
of
the
amount
of
the
management
fee
shall
be
referred
to
the
Company’s
Auditor,
whose
decision
shall
be
binding
upon
both
parties.
Each
of
the
parties
hereto
agree
to
make
do
and
execute
or
cause
to
be
made
done
or
executed
all
such
further
and
other
acts,
deeds,
documents,
conveyances
and
assurances
as
may
be
necessary
or
reasonably
required
to
carry
out
the
intent
and
meaning
of
this
Agreement.
This
Agreement
shall
enure
to
the
benefit
of
and
be
binding
upon
the
respective
parties
hereto,
their
heirs,
executors,
administrators,
successors
and
assigns.
IN
WITNESS
WHEREOF
the
parties
hereto
have
caused
these
presents
to
be
executed
as
of
the
day
and
year
first
above
written.
THE
COMMON
SEAL
of
SHULTUP
|
SIGNED,
SEALED
and
DELIVERED
|
MANAGEMENT
&
INVESTMENTS
|
by
SHULMAN,
TUPPER,
SOUTHIN,
|
LTD.
was
affixed
hereto
in
the
GRAY
&
WORRALL,
per:
presence
of
:
|
in
the
presence
of
:
|
(No
signature)
|
(Signature
illegible)
|
(Sed.)
W.
J.
Worrall
|
(Sed.)
Harold
W.
Tupper
|
(Sed.)
J.
Graham
|
|
No
evidence
was
lead
as
to
the
authority
of
Messrs.
Worrall
and
Graham
to
execute
the
agreement
on
behalf
of
the
company
nor
as
to
whether
they
were
officers
thereof.
They
were
both
employees
of
the
appellant.
The
management
fee
of
$1,000
per
month
is
an
arbitrary
figure
set
by
the
appellant.
For
the
period
from
March
15
to
December
31,
1957,
pursuant
to
the
terms
of
the
agreement,
Shultup
was
paid
$9,500.
The
payment
was
made
in
a
lump
sum
on
December
27,
1957.
Immediately
after
its
incorporation,
Shultup,
through
the
appellant
as
agent,
took
over
the
control
and
supervision
of
the
law
office
administration.
Mr.
Shulman
previously
had
devoted
not
more
than
one
hour
per
day
to
administrative
duties.
In
the
ensuing
nine
and
one-half
months
of
1957,
he
spent
from
one-
third
to
one-half
of
his
time
reorganizing
the
office
set-up
and
endeavouring
to
evolve
a
more
efficient
administrative
system.
Any
proposed
change
in
procedure
was,
before
being
implemented,
discussed
with
the
other
lawyers
in
the
office.
After
discussions
with
Ediphone
executives
extending
over
some
months
there
was
installed
in
September
1957
a
mechanical
dictation
system
whereby
each
of
the
lawyers,
by
merely
switching
a
button
on
his
desk,
could
dictate
direct
to
any
one
of
the
stenographers.
The
new
system
of
dictation
speeded
up
office
production
and
improved
secretarial
morale.
It
became
the
rule
rather
than
the
exception
for
dictation
to
come
back
engrossed
on
the
same
day.
The
dictation
equipment
cost
slightly
more
than
$7,000.
While
the
purchase
was
negotiated
by
Shultup
it
was
billed
to
the
law
office
under
an
agreement
covering
payment
by
monthly
installments.
In
September
1958,
when
the
interest
rate
on
the
deferred
payments
under
the
purchase
agreement
increased
sharply,
Shultup
borrowed
from
a
bank
the
amount
required
to
pay
the
balance
owing
and
paid
out
the
Ediphone
account.
The
law
office
then,
over
a
period
of
time,
reimbursed
the
company.
The
use
of
printed
forms,
sold
over
the
counters
of
stationery
stores,
was
discontinued
and,
in
lieu
thereof,
Shultup
installed
a
set
of
office
forms
especially
drafted
to
meet
the
type
of
transactions
usually
encountered
in
the
office
practice.
Substantial
Savings
were
effected
by
purchasing
an
inferior
quality
paper
for
use
in
drafting
documents
and
a
superior
quality
paper
for
engrossing
them
in
final
form.
A
new
car
was
acquired
by
the
law
office
but
the
purchase
was
negotiated
by
the
appellant
as
the
agent
of
Shultup.
Part
time
staff
were
employed
to
handle
seasonal
tasks,
such
as
the
preparation
and
filing
of
annual
reports
on
behalf
of
corporate
clients.
A
more
efficient
accounting
method
was
inaugurated
to
effect
a
better
control
of
trust
accounts
and
a
time
control
system
adopted
to
maintain
a
record
of
the
time
spent
by
each
lawyer
on
the
business
of
clients.
Lists
of
accounts
receivable
and
disbursements
were
prepared
each
month.
Bills,
for
the
most
part,
were
rendered
monthly,
after
first
having
been
submitted
to
the
appellant,
as
the
agent
of
Shultup,
for
approval
and
a
comparison
of
costs.
Additional
office
space
was
leased
and
a*
more
satisfactory
floor
layout
devised.
Any
changes
necessary
in
the
office
staff,
vacation
periods,
etc.
were
arranged
by
Mr.
Shulman
in
his
capacity
as
the
agent
of
Shultup.
Prior
to
Shultup
assuming
administrative
control,
each
of
the
lawyers
had
purchased
law
books
for
the
office
account
as
he
saw
fit.
No
record
was
kept
of
books
loaned.
The
binding
of
law
reports
and
periodicals
was
neglected.
When
Mr.
Shulman
checked
the
library
he
found
no
inventory
existed
and
that
text
book
duplications
had
resulted
from
the
haphazard
purchasing
system.
A
library
inventory
was
compiled
and
a
system
set
up
whereby
a
record
was
kept
of
all
books
loaned
and
the
binding
needs
attended
to
monthly.
New
purchases
for
the
library
were
made
by
the
appellant
as
agent
of
Shultup
but
for
the
account
of
the
law
office.
The
expense,
if
any,
incurred
by
Shultup
in
respect
of
the
I
law
office
management
was
negligible.
It
had
no
employees,
no
letterheads,
no
stationery
and
no
files.
Any
Shultup
correspondence
or
memoranda
were
kept
in
the
law
office
files.
Staff
salaries
were
paid
and
all
disbursements
made
by
the
law
office.
Although
the
appellant
spent
from
one-third
to
one-half
of
his
time
performing
the
duties
which
Shultup
had
contracted
to
perform,
he
received
no
remuneration
from
the
company.
In
effect
the
only
service
rendered
by
Shultup
was
making
Mr.
Shulman
available
to
perform
the
management
duties
as
its
agent.
The
non-professional
staff,
apart
from
the
accountant,
would
not
notice
any
change
in
office
management
procedure.
The
assets
of
Shultup
include
the
house
in
which
the
appellant
resides,
an
interest
in
‘‘Cambridge
Enterprises’’,
an
interest
in
“Burnham
Enterprises”
and
shares
in
the
capital
stock
of
“Public
companies”.
Cambridge
Enterprises
is
the
owner
of
shares
in
the
capital
stock
of
a
company
which
deals
in
real
estate
and
also
conducts
an
insurance
agency.
Burnham
Enterprises
is
an
“Oil
company”.
The
house
was
purchased
from
Mrs.
Shulman
on
December
5,
1957
for
the
price
of
$33,500,
apportioned
$4,300
to
land
and
$29,200
to
the
building.
Adjustments
of
$31.60
for
taxes
and
$54.40
for
insurance
brought
the
total
cost
to
$33,586.
The
property
was
subject
to
a
mortgage
for
$14,
583.86
which
Shultup
assumed.
The
difference
of
$19,002.14
between
the
total
cost
and
the
amount
of
the
mortgage
was
an
account
payable
by
the
company
to
Mrs.
Shulman.
This
indebtedness
of
the
company
was
assigned
by
his
wife
to
the
appellant
who
then
gave
her
his
promissory
note
for
$19,002.14
and
set
up
a
credit
to
himself
of
the
same
amount
on
the
books
of
the
company.
The
Crown
concedes
this
was
a
perfectly
proper
transaction.
Mr.
Shulman
admits
part
of
the
revenue
of
the
company,
derived
basically
from
the
management
fee,
was
paid
to
his
wife
on
account
of
the
purchase
price
of
the
house
and
that
as
a
result
he,
as
a
shareholder
of
the
company,
acquired
an
indirect
beneficial
interest
in
the
house.
As
above
mentioned,
payment
of
the
$9,500
management
fee
was
made
by
the
law
office
to
Shultup
on
December
27,
1957.
On
the
same
day
$9,000
of
that
payment
was
paid
by
the
company
to
the
appellant
on
account
of
its
$19,002.14
indebtedness
to
him.
Then,
also
on
the
same
day,
the
appellant
paid
the
$9,000
into
the
law
office
bank
account
for
use
as
working
capital,
particularly
in
respect
of
financing
disbursements.
The
$9,500
was
received
as
income
and
disbursed
as
an
operating
expense.
When
the
$9,000
came
back
into
the
law
office
account
it
was
in
the
form
of
‘‘a
loan’’
for
capital
purposes.
On
the
law
office
balance
sheet
there
is
an
item
“Loan
Payable
$9,000’’.
How
Mr.
Shulman
could
loan
$9,000
to
himself
was
not
explained.
In
the
end
result
the
payment
of
the
$9,500
management
fee
reduced
the
cash
resources
of
the
law
office
by
only
$500.
William
Joseph
Worrall,
a
barrister
and
solicitor
of
the
Supreme
Court
of
British
Columbia
who
has
been
associated
with
Mr.
Shulman
since
his
admission
to
the
Bar
in
1956,
corroborated
the
appellant’s
evidence
regarding
the
inadequacy
of
the
office
administration,
particularly
in
respect
of
the
secretarial
and
accounting
services.
He
testified
that
immediately
after
becoming
associated
with
the
Shulman
office
in
1956,
he
noticed
the
administrative
procedure
was
far
less
efficient
than
in
the
office
with
which
he
had
been
articled
as
a
student.
To
illustrate
how
haphazard
the
accounting
methods
were,
Mr.
Worrall
said
that
for
the
same
type
of
services
his
charges
would
vary
in
accordance
with
the
views
of
the
senior
lawyer
with
whom
he
happened
to
be
working.
Based
on
personal
observation,
it
was
his
opinion
Mr.
Shulman,
in
1957,
spent
almost
one-half
of
his
time
on
duties
pertaining
to
office
administration.
Mr.
Worrall
also
said
he
knew
of
at
least
three
mining
companies
who
had
contracted
with
“management
companies’’
to
supply
management
services
on
a
fee
plus
cost
basis
and
that
in
those
instances
the
records
were
kept
by
the
mining
company
staffs.
On
his
1957
return
the
appellant
showed
the
gross
revenue
from
his
law
practice
to
be
$96,888.07
and
his
net
income
therefrom
to
be
$14,892.30.
Operating
expenses
were
shown
at
$81,995.77,
including
the
management
fee
of
$9,500;
staff
salaries
were
$48,782.72;
travelling
and
auto
expense
totalled
$1,302.16;
and
provision
for
depreciation
was
$3,713.40.
The
gross
revenue
figure
of
$96,888.07
covered
a
full
fiscal
period
of
twelve
months
while
the
management
fee
applied
to
a
period
of
only
nine
and
one-half
months.
Neither
the
total
nor
individual
remuneration
paid
the
other
five
lawyers
is
disclosed.
Such
remuneration
was
included
in
the
staff
salaries
total
of
$48,782.72,
more
than
50%
of
the
gross
revenue.
According
to
the
tax
return
figures,
the
appellant’s
practice
netted
him
only
15.37%
of
the
gross
fees
for
professional
services.
Had
the
$9,500
management
fee,
9.8%
of
the
gross,
not
been
deducted
the
net
profit
would
have
been
25.18%.
By
the
re-assessment,
dated
May
27,
1960,
the
Minister
of
National
Revenue
disallowed
the
deduction
of
the
$9,500
management
fee
and
added
it
back
to
income.
The
tax
on
the
so
revised
taxable
income
was
computed
to
be
$6,019.10.
Had
the
mangement
fee
not
been
disallowed,
the
tax
would
have
been
$2,151.89.
The
difference
is
$3,867.21.
The
first
income
tax
return
filed
by
Shultup
was
for
its
fiscal
year
ending
March
15,
1958,
a
period
of
twelve
months.
Gross
income
was
shown
as
$12,612.50
comprised
of
the
$12,000
management
fee
(for
twelve
months)
and
$612.50
derived
from
property
rentals.
Operating
expenses
were
shown
as
$2,948.01
computed
as
follows
:
Accounting
|
$
|
65.00
|
Insurance
|
|
13.97
|
Mortgage
Interest
|
|
226.26
|
Property
Taxes
|
|
81.68
|
Secretarial
Services
|
|
250.00
|
Sundry
|
|
1.50
|
Depreciation
—
Buildings
|
2,810.00
|
|
$2,948.01
|
There
is
no
evidence
as
to
who
received
the
remuneration
for
the
accounting
and
secretarial
services
nor
as
to
the
activities
of
the
company
in
respect
of
which
such
services
were
rendered.
Net
income
was
shown
to
be
$9,664.49
on
which
was
paid
an
estimated
tax
of
$1,932.90,
computed
at
20%,
the
rate
on
corporate
taxable
incomes
not
exceeding
$25,000.
Pending
the
disposition
of
this
appeal,
the
Shultup
assessment
has
been
held
in
abeyance.
If
the
management
fee
is
allowed
as
a
deduction
from
his
income,
the
personal
tax
of
the
appellant
for
1957
will,
as
above
mentioned,
be
$2,151.89.
Computing
the
20%
corporate
rate
on
the
full
$9,500
as
income
in
the
hands
of
Shultup,
without
any
deduction
for
expenses
and
without
regard
to
the
rental
income,
would
mean
a
tax
of
$1,900.
On
that
basis
the
personal
tax
of
$2,151.89
plus
a
corporate
tax
of
$1,900.00
total
$4,051.89,
an
amount
$1,967.21
less
than
that
of
the
revised
assessment.
While
insisting
the
management
fee
was
not
an
expense
incurred
for
the
purpose
of
producing
income
and
its
deduction
had
artificially
or
unduly
reduced
the
income
of
the
appellant,
Crown
counsel
concedes
he
was
an
honest
witness
and
no
question
of
a
deceitful
purpose
is
involved
herein.
Mr.
Shulman’s
manner
on
the
stand
was
frank.
His
credibility
was
not
attacked.
To
support
the
re-assessment
the
Minister
submits:
1.
the
payment
of
the
$9,500
to
Shultup
is
not
an
outlay
or
expense
for
the
purpose
of
gaining
or
producing
income
from
the
business
of
the
taxpayer
and
its
deduction
from
taxable
income
is,
accordingly,
precluded
by
Section
12(1)
(a)
of
the
Act;
2.
the
outlay
of
the
$9,500
is
not
the
expenditure
of
an
amount
that,
in
the
circumstances,
is
reasonable
as
a
management
fee
and
so
falls
within
the
provisions
of
Section
12(2)
;
and
3.
the
management
agreement
with
Shultup
is
a
transaction
artificially
reducing
the
income
of
the
appellant
and
so
the
deduction
of
the
$9,500
is
forbidden
by
Section
137(1).
The
sections
above
mentioned
read
:
“12.(1)
In
computing
income,
no
deduction
shall
be
made
in
respect
of
(a)
an
outlay
or
expense
except
to
the
extent
that
it
was
made
or
incurred
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
from
property
or
a
business
of
the
taxpayer.
12.(2)
In
computing
income,
no
deduction
shall
be
made
in
respect
of
an
outlay
or
expense
otherwise
deductible
except
to
the
extent
that
the
outlay
or
expense
was
reasonable
in
the
circumstances.
137.(1)
In
computing
income
for
the
purposes
of
this
Act,
no
deduction
may
be
made
in
respect
of
a
disbursement
or
expense
made
or
incurred
in
respect
of
a
transaction
or
operation
that,
if
allowed,
would
unduly
or
artificially
reduce
the
income.”
The
income
of
a
taxpayer
for
a
taxation
year
is
defined
by
Section
3
of
the
Act
to
include
‘‘income
for
the
year
from
all
businesses’’.
Section
4
states
income
from
a
business
‘‘is
the
profit
therefrom’’.
The
word
‘business”
is
defined
by
Section
139
(1)
(e)
to
include
a
profession.
Two
principles
which
have
direct
application
to
the
determination
of
this
appeal
are
that
a
corporation
is
an
entity
distinct
from
its
shareholders
and
that
a
taxpayer
is
entitled
to
arrange
his
affairs,
if
he
can
do
so
within
the
law,
so
as
to
attract
upon
himself
the
least
amount
of
tax.
Those
two
principles
must,
however,
be
considered
having
regard
to
the
fact
that
in
enacting
the
Income
Tax
Act,
Parliament
undoubtedly
intended
to
impose
a
tax
on
income.
Wherever
the
law
draws
a
line,
any
action
taken
by
a
taxpayer
must
be
on
one
or
the
other
side
of
it.
If
on
the
safe
side,
the
action
is
not
illegal.
If
on
the
wrong
side,
it
is
illegal.
If
the
management
fee
is
not
deductible
it
must
be
because
of
some
provision
or
prohibition
contained
in
the
Act.
The
rule
of
strict
construction
applies
to
the
two
sections
of
the
Act
upon
which
the
Minister
rests
his
revised
assessment.
The
letter
of
the
law
and
not
its
assumed
or
supposed
spirit
must
govern.
The
intention
of
Parliament
to
impose
a
tax
must
be
gathered
solely
from
the
words
by
which
it
had
been
expressed
and
from
reading
them
in
the
sense
they
ordinarily
are
used.
Executors
of
David
Fasken
v.
M.N.R.,
[1948]
Ex.C.R.
580
at
589,
[1948]
C.T.C.
265.
Because
the
management
fee
was
paid
to
a
corporation
of
which
the
appellant
and
his
wife
are
the
only
shareholders
and,
so
far
as
the
record
discloses,
the
management
agreement
was
negotiated
between
the
appellant
in
his
personal
capacity
and
the
appellant
in
his
capacity
as
the
agent
of
Shultup
does
not
per
se,
preclude
the
management
fee
from
being
a
legitimate
operating
expense
of
the
law
practice.
The
personal
and
corporate
entities
are
distinct.
Salomon
v.
Salomon,
[1897]
A.C.
22
(H.
L.)
;
Pioneer
Laundry
&
Dry
Cleaners
Ltd.
v.
M.N.R.,
[1940]
A.C.
127
(P.C.)
;
[1938-39]
C.T.C.
411;
Duke
of
Westminster
v.
C.I.R.,
[1936]
A.C.
1.
In
the
absence
of
precise
evidence
as
to
how
the
terms
of
the
management
agreement
were
settled,
I
assume
they
were
thought
out
by
Mr.
Shulman
in
his
dual
capacities.
The
signatures
of
the
individuals
who
executed
the
agreement
on
behalf
of
the
corporation
suggest
the
possibility
the
appellant,
speaking
as
the
owner
of
the
law
practice,
may
have
discussed
the
terms
of
the
agreement
with
those
individuals
as
representing
Shultup.
Discussions
respecting
the
agreement
with
his
employees
as
dummy
representatives
of
the
company,
or
with
his
wife,
as
a
director
of
the
company,
would
be
a
mere
formality.
A
solicitor
is
not
precluded
from
entering
into
a
contract
with
a
corporation
to
perform
the
non-professional
duties
relating
to
the
management
of
his
law
office
which
he,
if
so
minded,
could
perform
himself.
Unless
I
find
fraud
or
improper
conduct,
I
cannot
disregard
the
separate
legal
existence
of
Shultup
and
hold
the
fee
payable
under
the
management
agreement
is
not
a
legitimate
operating
expense
solely
because
the
appellant
and
his
wife
are
the
only
shareholders
of
Shultup
and
because
the
appellant,
as
a
lawyer,
negotiated
with
himself,
as
the
president
of
the
company.
If
the
re-assessment
is
to
stand,
justification
for
deduction
of
the
$9,500
fee
being
brought
within
either
or
both
of
the
sections
of
the
Act
upon
which
the
Minister
relies
must
be
found
in
the
procedure
by
which
the
terms
of
the
agreement
were
implemented
and
the
results
flowing
therefrom.
Mr.
Shulman
admits
that
whatever
he
did
as
the
agent
of
Shultup
he
could
have
done
in
his
personal
capacity
as
a
lawyer.
He
also
admits
that
had
the
management
fee
been
paid
to
him
personally
as
compensation
for
the
time
spent
on
administrative
work
it
would
have
been
income
in
his
hands.
The
explanation
advanced
for
incorporating
Shultup
and
entering
into
the
management
agreement
is
that
had
the
appellant
undertaken
the
management
duties
in
his
personal
capacity
the
office
records
would
have
shown
him
as
a
very
small
contributor
to
the
gross
income
earned
by
the
law
office.
I
do
not
understand
that
explanation.
So
far
as
the
effect
of
the
time
devoted
to
administrative
duties
on
his
contribution
to
the
professional
income
is
concerned,
the
result
would
be
the
same
whether
that
time
was
spent
as
the
agent
of
Shultup
or
in
his
personal
capacity.
When
questioned
as
to
whether
his
assuming
the
responsibility
of
management
had
resulted
in
loss
of
income
for
the
law
office,
the
appellant
stated
he
was
satisfied
that
if
the
time
he
consumed
in
management
duties
had
been
devoted
to
performing
professional
services,
it
would
have
produced
fees
grossing
at
least
$2,000
per
month
;
that,
as
a
result
of
the
administrative
duties
he
performed
as
the
agent
of
Shultup,
his
personal
professional
billings
for
1957
decreased
but
the
gross
revenue
of
the
law
office
and
his
own
net
professional
income
increased;
and
that
had
he
not,
as
the
agent
of
Shultup,
devoted
from
one-third
to
one-half
of
his
time
to
office
administration,
his
own
net
income
from
the
professional
fees
of
the
law
office
would
have
been
less.
There
is
no
evidence
as
to
how
many
income
producing
hours
the
appellant
applied
to
his
law
practice
in
1957
and
in
the
years
prior
thereto.
Also
lacking
is
evidence
as
to
the
gross
income
of
the
office
and
the
net
professional
income
of
Mr.
Shulman
in
the
years
prior
to
1957.
His
testimony,
couched
in
general
terms,
as
to
the
increase,
because
of
his
efforts
as
the
agent
of
Shultup,
in
the
gross
revenue
of
the
office
and
in
his
own
professional
income
has
not,
however,
been
contradicted.
Payment
of
a
management
fee
is
not
objectionable,
per
se.
In
the
absence
of
special
circumstances
the
payment
of
such
a
fee
is
an
expenditure
deductible
in
accordance
with
accepted
business
practice.
The
employment
of
an
office
manager,
sometimes
a
chartered
accountant,
is
not
unusual
in
law
offices
having
a
volume
of
business
necessitating
a
staff
of
employees
and
an
accounting
system
requiring
more
supervision
than
any
lawyer
in
the
office
can
exercise
without
encroaching
on
time
he
should
devote
to
revenue
producing
professional
services.
In
some
cases
a
managing
partner
supervises
the
office
manager.
In
the
case
at
bar
the
appellant
chose
to
incorporate
a
company
to
assume
the
responsibility
of
the
office
management
and
then
chose
to
perform
the
duties
pertaining
to
such
management
himself,
as
the
agent
of
the
company.
I
attach
no
importance
to
the
fact
the
management
agreement
was
a
departure
from
the
previous
office
management
procedures
of
the
appellant.
The
fact
the
$9,500
was
not
paid
to
Shultup
until
December
27,
just
before
the
taxation
year
end,
has
not
in
my
view,
any
special
significance.
The
1957
profit
of
the
law
office
would
not
be
ascertained
at
that
date.
I
do
not
regard
the
payment
to
Shultup
as
being
a
distribution
of
profits.
Shultup
had
no
right
to
participate
in
the
profits
earned
by
the
law
office.
In
view
of
the
uncontradicted
evidence
of
Mr.
Shulman,
I
am
not
prepared
to
find
the
provisions
of
Section
12
(1)
(a)
demand
the
dismissal
of
the
appeal.
According
to
Mr.
Shulman’s
testimony
the
duties
he
performed
as
the
agent
of
Shultup
had
a
direct
relation
to
increasing
the
income
of
the
office
and
his
own
professional
income.
In
such
circumstances
I
am
unable
to
find
payment
of
the
management
fee,
standing
by
itself,
was
not
an
outlay
or
expense
that
can
be
justified
on
the
ground
of
having
been
made
in
accordance
with
the
ordinary
principles
of
commercial
trading
or
accepted
business
practice.
Despite
the
nature
of
their
relationship,
the
appellant
and
Shultup
are
separate
legal
entities.
It
is
obvious
that
when
the
management
agreement
was
executed
the
appellant
did
not
expect
he,
as
the
agent
of
Shultup,
would
spend
all
his
working
hours
in
attending
to
the
requirements
of
office
management.
Had
he
had
any
such
expectation,
the
monthly
management
fee
would
have
been,
at
least,
double
and
there
would
have
been
some
provision
for
his
personal
remuneration.
It
may
be
a
competent
full
time
office
manager
could
have
been
secured
at
a
salary
less
than
$2,000
per
month
and
a
part
time
manager
for
less
than
$1,000
per
month.
Mr.
Shulman
has
sworn
he
would
have
welcomed
the
opportunity
to
obtain
a
competent
manager
capable
of
controlling
his
professional
staff;
that
he
would
have
had
to
pay
to
a
competent
manager
of
Shultup,
other
than
himself,
a
salary
approximating
$1,000
per
month;
and
that
he
had
not
been
able
to
obtain
such
a
manager.
There
is
no
evidence
as
to
the
scale
of
salaries
competent
office
managers
command
in
Vancouver.
There
is
the
testimony
that
results
were
nil
from
an
office
manager
paid
a
salary
of
$350
per
month.
In
the
circumstances
there
is
no
foundation
on
which
I
can
apply
Section
12(2)
and
apportion
the
extent
to
which
the
management
fee
was
reasonable
in
the
circumstances.
It
must
stand
or
fall
in
its
entirety.
The
disposition
of
the
appeal,
in
my
view,
rests
on
Section
137
(1).
On
behalf
of
the
appellant
it
was
urged
the
words
“made
or
incurred
in
respect
of
a
transaction
or
operation’’
in
subsection
(1)
add
nothing
to
its
meaning
and
that
the
subsection
should
be
read
as
though
they
were
not
included
therein.
Counsel
for
the
appellant
further
submitted
the
word
“that”
in
the
phrase
‘‘that
if
allowed”
should
be
construed
not
as
relating
to
the
immediately
preceding
words
‘‘transaction
or
operation’’
but
as
relating
to
the
words
‘‘a
disbursement
or
expense”.
The
meanings
to
be
ascribed
to
the
words
‘‘unduly’’
and
“artificially”
also
were
the
subject
of
argument.
While
the
language
of
Section
137
(1)
is
not
as
clear
and
explicit
as,
on
first
examination,
it
appears
to
be,
I
do
not
regard
any
of
it
as
surplus.
In
my
opinion
the
word
‘‘that’’
relates
to
‘‘deduction’’.
I
interpret
‘‘unduly’’
as
relating
to
quantum
and
meaning
“excessively”
or
‘‘unreasonably’’.
In
the
context
found
here,
“artificially”
means
‘‘unnatural’’,
—
“opposed
to
natural’’
or
“not
in
accordance
with
normality’’.
I
construe
subsection
(1)
as
though
it
read:
‘‘In
computing
income
for
the
purpose
of
this
Act
no
deduction
that
if
allowed
would
unduly
or
artificially
reduce
the
income
may
be
made
in
respect
of
a
disbursement
or
expense
made
or
incurred
in
respect
of
a
transaction
or
operation.”’
In
considering
the
application
of
Section
137
(1)
to
any
deduction
from
income,
however,
regard
must
be
had
to
the
nature
of
the
transaction
in
respect
of
which
the
deduction
has
been
made.
Any
artificiality
arising
in
the
course
of
a
transaction
may
taint
an
expenditure
relating
to
it
and
preclude
the
expenditure
from
being
deductible
in
computing
taxable
income.
In
my
opinion,
the
primary
object
of
injecting
Shultup
into
the
management
set-up
was
to
reduce
the
income
tax
payable
by
the
appellant
on
his
professional
income.
Had
the
main
objective
of
the
appellant
not
been
so
to
order
his
affairs
as
to
reduce
tax,
he
would
have
drawn
some
salary
as
compensation
for
the
time
spent
on
management
duties
as
the
agent
of
Shultup.
The
intention
of
the
appellant
would
appear
to
have
been
to
forego
any
salary
for
the
time
spent
on
management
duties
and
obtain
remuneration
for
having
performed
such
duties
by
way
of
any
capital
gain
which
might
result
from
using
the
tax
savings
to
build
up
the
assets
back
of
the
issued
shares
in
the
capital
stock
of
Shultup.
The
non-payment
of
any
direct
remuneration
to
the
appellant
for
the
services
performed
as
agent
for
Shultup
is
opposed
to
the
usual
and
natural
relationship
existing
between
a
company
and
an
agent
who
devotes
from
one-third
to
one-half
of
his
time
to
the
business
of
the
company.
The
dividing
line
between
the
appellant
as
the
owner
of
the
law
practice
and
the
appellant
as
the
agent
of
Shultup
was
so
thin
as
to
be
invisible
to
his
own
employees.
By
a
simple
exercise
in
mental
acrobatics
the
appellant
was
able
to
move,
at
will
and
instantaneously,
over,
or
through,
that
invisible
line.
The
transition
from
one
capacity
to
the
other
could
be
effected
without
anyone
other
than
the
appellant
himself
being
aware
it
had
occurred.
As
he.
put
it,
“From
the
point
of
view
of
the
employees
they
were
not
aware
of
any
change”?
The
manner
in
which
the
management
agreement
was
implemented
cannot
be
regarded
as
natural.
Shultup
was
used
as
a
two
way
conduit
pipe
through
which
to
withdraw
$9,500
from
the
operating
revenue
of
the
law
office
and
then
return
$9,000
of
that
withdrawal
to
the
law
office
treasury
as
a
loan
for
use
as
urgently
needed
working
capital.
That
is
clearly
an
artificial
transaction.
Mr.
Shulman
cannot
loan
money
to
himself.
Notwithstanding
the
separate
entities
of
the
appellant
and
Shultup,
the
uncontradicted
testimony
of
the
appellant
and
the
fact
his
credibility
has
not
been
attacked,
I,
after
most
careful
consideration,
have
reached
the
conclusion
that,
having
regard
to
the
primary
object
of
creating
Shultup
to
assume
the
functions
of
office
management
being,
in
my
view,
to
reduce
tax,
the
manner
in
which
the
management
agreement
was
implemented
and
the
non-payment
of
any
salary
to
Mr.
Shulman
for
the!
management
duties
he
performed,
the
procedural
mechanics
of
(a)
the
December
27,
1957
payment
of
the
$9,500
fee;
(b)
the
application
of
$9,000
of
such
payment
to
reduction
of
the
indebtedness
of
the
company
to
the
appellant;
and
immediately
thereafter
(c)
the
return
of
$9,000
to
the
law
office
treasury
by
way
of
“a
loan’’
from
the
appellant
to
himself
add
up
to
an
artificial
reduction
of
the
taxable
income
of
the
appellant
by
the
sum
of
$9,500.
The
appeal
will
be
dismissed,
with
costs.
Judgment
accordingly.