Orange Crush Products Company Limited v. Minister of National Revenue, [1978] CTC 2737, [1978] DTC 1537

Roland St-Onge:—This appeal came before me on March 16 and 17, 1978 at the city of. Toronto, Ontario and the issue is whether this company had its residence in Canada during the 1971, 1972 and 1973 taxation years.

For those years, the Minister regarded the appellant company as having residence in Canada and reassessed the company on the following amounts of income:

The decision in this appeal will be determinative of the issues raised in the other appeal of Gini International Inc as to the applicability of withholding tax on dividends paid to Gini International Inc.

Two witnesses were heard: Mr Lauten, Secretary for most of the international and local companies and also secretary of the appellant company, and Mr Dees, vice-president of Crush International Limited and Crush International (USA) Inc and also director of the appellant company.

Mr Lauten filed a corporate structure chart of all the companies (Exhibit A-1).

Crush International Limited, incorporated in Ontario in 1927, was the holding company and did not carry on any active business. Crush Beverages Limited was incorporated under the laws of Canada on February 13, 1959 and was the operating campany of the Crush group in Canada. It bottles and cans finished drinks made from concentrates that it produces and it also franchises bottlers, but in Canada only.

Crush International (USA) Inc, formerly Gini International Limited, is a company incorporated in Ontario in 1964.

Crush International Inc, formerly The Orange Crush Company, was incorporated under the laws of Delaware, USA in 1946.

Orange Crush Products Company Limited, the appellant company, was incorporated in Ontario on April 26, 1932.

Inter-American Orange Crush Company was incorporated under the laws of Delaware, USA in 1945.

Crush International (USA) Inc is the parent company of all the US companies operating out of Evanston, Illinois. It manufactures the product for the group and also for itself which it sells to franchised bottlers in the USA. It also operates franchises internationally, in Europe, the Middle East and in Africa.

Inter-American Orange Crush Company is a western hemisphere trading company. It franchises bottlers in Mexico, Central and South America and the Caribbean Islands. It buys its concentrates from Crush International (USA) Inc.

In 1968 the appellant company, Orange Crush Products Company Limited, (today inactive) entered into a franchise agreement with the Iraqi bottlers and was a sales company for the products of Crush Cola, Orange Crush and Gini.

The management for the Canadian companies was located in Toronto and for the American companies, in Evanston, Illinois. As for the foreign companies, they were all controlled through the Evanston operation and the management teams thereof were entirely different.

The Orange Crush Company located in Evanston produced Hires Root Beer, Orange Crush, Old Colony, America Dry, Ginger Ale, Wilsons Gingerale, Pure Spring Dry Gingerale, KIK Cola, Sun Drop, Gini Bitter Lemon, Honee-Orange, Swing Mixers, etc which were sold in over 60 countries in Central and South America, Africa, Europe and the Middle East.

Crush International Limited is a public company whose shares are listed on the Montreal, Vancouver and Toronto stock exchanges and Mr James Pattison is the major shareholder, holding approximately 54% of the shares.

The directors of Crush International (USA) Inc are Lewis Collins, Ronald Dees and Donald McGowan and are all residents of Illinois, USA. The directors of Orange Crush Products Company Limited are J M Thompson, Lewis Collins and Ronald Dees. The board of directors for the US and Canadian companies are entirely different. The Canadian operation has a board of 13 directors and operates primarily in the bottling business compared to the Evanston group which operates entirely in the franchise business.

From 1968 through 1971, the two boards of directors operated individually. Until 1946 Orange Crush Products Company Limited bought products from The Orange Crush Company, an Illinois corporation, and sold it to Orange Crush bottlers in Canada. From 1946 to 1969 the appellant company was completely inactive and, for that period, all the board of directors’ and shareholders’ meetings were held in Evanston, Illinois.

Tne franchise operation by the US group was done by giving an agreement to the bottlers with the Orange Crush. Products Company Limited concentrates. In this operation, the said company agreed to license the use of the trademark free of charge and to sell the concentrate to produce the finished soft drink to an individual owner or a corporation engaged in the bottling of soft drinks. The franchise agreements are negotiated by the salesmen representatives in the USA and in the foreign countries and they are finally approved in Evanston by the vice-president of the international operation and the president of the company involved who is Lewis Collins.

All those people are paid by Crush International (USA) Inc. However, the expenses are allocated by Crush International (USA) Inc to the other selling companies that enter into franchise agreements with bottlers. The personnel for the respective territories in which they operate gather the information such as marketing, data sheet, the financial capacity of the prospective bottler; they also conduct a survey of the market requirements, investigate the character and background of the individual to whom the franchise will be issued and report to the vice-president of International who is Mr McGowan located in Evanston, Illinois.

None of the Canadian employees participate in international franchises which is controlled and directed entirely from Evanston.

As a result of the Arab-Israeli conflict, the Coca-Cola company lost the operation of the franchise and that business became available. Consequently, the American group instructed their representative, Mr Paul Allemeier, residing in France at that time, to conduct the preliminary negotiations, gather all the necessary data and report them to Mr McGowan in Evanston. One Mr Naman, a Lebanese living in Beirut, joined Mr Allemeier in the negotiations with the bottler in Iraq. When the negotiations were finalized, the franchise was prepared and signed by the bottler in Iraq and then transmitted to Evanston where it was finally executed by Mr Collins.

As may be seen, Mr Allemeier, Mr McGowan and Mr Naman were all ‘employees of Crush International (USA) Inc and had nothing to do with the Canadian group companies. All these people knew that Iraq would not accept any products made in the USA and that the source of the product had to be from a location outside the said country. The concentrate sold was a blend of flavouring ingredients, oils and essences which results in a quite highly concentrated liquid which is then sold to the bottler. He, in turn, takes that concentrate and mixes it with simple syrup that is sugar and water in a big blanding tank and adds a preservative and, finally, this is filled into bottles. He gets some 500 cases out of one gallon of concentrate. That concentrate was purer than the one manufactured in Canada prior to the date of the Iraqi franchise agreement and the advantage was to reduce the cost of freight handling, insurance and various ancillary charges involved and gives the bottler a higher yield out of the franchise he buys.

The Crush Beverages Limited did not manufacture this more concentrated product prior to this Iraqi agreement because it was never engaged in the export business. At this particular point, it was pointed out that the Canadian operation was involved primarily in the bottling of finished drinks although it would franchise bottlers in Canada whereas the American operation did not have any bottling plants but was primarily in the manufacturing of concentrates for the purpose of selling it to franchised bottlers totally. The witness filed a blank franchise agreement that was used by Crush International (USA) Inc for its foreign franchise operation. This agreement was only used in the United States and issued by the USA companies.

The American group decided to use the appellant company:

1) because of the Arab-Israeli conflict and

2) because the said company, compared to Crush Beverages. Limited, had few assets and consequently would not be liable to much exposure.

With respect to the Iraqi franchise, Orange Crush Products Company Limited would buy the product and obtain the trademarks from the US group.

According to counsel for appellant, here is a summary of what transpired in Canada:

1. Evanston notified Crush Beverages Limited to produce the requisite concentrate which was subsequently manufactured.

2. Crush Beverages Canada would sell the concentrate to the taxpayer at fair market value being on a cost plus mark-up. Each shipment was costed separately.

3. Dees would follow the general instructions which had been initially issued to him for the first shipment and create the necessary documents for shipment by the taxpayer to New York. Title to the concentrate passed outside of Canada pursuant to the franchise agreement.

4. Dees then forwarded a copy of the documents which he prepared to Evanston. If Evanston found errors they corrected or dealt with same.

5. During the relevant period Dees had only one or two minor communications with Iraq. If Dees received anything from Iraq he would immediately forward it to McGowan or Baez in Evanston for reply. Accordingly, all communications addressed to Toronto would be answered by Evanston. Dees signed his name only on specific instructions from Evanston. Dees was merely acting in a clerical Capacity. It should be noted that the transaction and documents were geared to suit the Iraqis.

6. The letters of credit and payment were handled in the following manner. The Rafidain Bank in Iraq prepared the letters of credit on the basis of pro forma invoices prepared by employees or agents in Lebanon. As part of the requisite export documents the original letters of credit as issued by The Canadian Imperial Bank of Commerce were sent to Orange Crush Products Company Limited in Don Mills with a copy to Evanston. After the required documents were prepared and shipment effected the letter of credit and documents were sent to the freight forwarded in New York who completed the required information including the name of the carrier and the date of shipment and returned same to Dees in Toronto. Dees then forwarded the documents to the bank for payment. The bank was instructed to forward the funds to Evanston.

7. Over the entire time period only nine shipments other than oxidation inhibitor were produced and shipped from Canada. The entire time spent by Dees on these activities was about a week. Usually, the preparation for each set of documents was no more than 1 hour. The documents prepared by Dees were immediately placed on the truck to New York and copies sent to Evanston. On several occasions Evanston advised Dees of errors made by him.

8. The merchandise purchased from Crush Beverages Limited was not altered by the taxpayer in any way:

9. Purchases from Crush Beverages Limited were made FOB Toronto to the taxpayer who retained title to the goods until they reached the port of importation. This retention of title by the taxpayer is stipulated in the Iraq franchise agreement.

10. Mr Dees did not have authority to accept any order from Iraq. Any orders were sent to Evanston and Evanston instructed Mr Dees how to proceed.

The services performed outside of Canada by personnel located in US, Beirut, Lebanon and Metz, France were as follows:

1. Negotiation of contracts including franchise agreements.

2. All purchase orders for concentrate received and accepted in Beirut.

3. Samples of the initial batches were sent to the laboratory in Evanston. Subsequently, the Canadian lab was responsible for quality control.

4. Evanston arranged for the shipment of the goods from New York. Canada ordered the truck to take the goods from Canada to New York.

5. Employees in Evanston oversaw the shipment of the goods from New York to Iraq.

6. Evanston and Beirut employees were responsible for the normal services to the franchised bottlers including the following:

(a) the employees in Lebanon worked closely with the Iraq franchisee regarding advertising, promotion, sales forecasting and scheduling of purchases of concentrates. They also provided technical assistance and testing of samples of finished drink.

(b) orders for concentrate were received and approved by the Lebanon office which in turn submitted them to Evanston.

(c) the Beirut or Evanston office prepared pro forma invoices which it submitted to the Iraqi franchisee. With these pro forma invoices, letters of credit were arranged through local Iraqi banks by the franchisee.

(d) the taxpayer retained title to the merchandise until it reached the port of importation. The Beirut office arranged the clearing of the merchandise through Lebanon customs and subsequent overland shipment to Bagdad, Iraq.

(e) marketing support.

(f) supply of advertising material.

(g) overseeing plant technical problems in Iraq.

(h) price increase negotiations.

(i) training of franchisee’s employees.

(j) translations from and to Arabic.

(k) sales statistics, forecasts, etc were obtained and forwarded to Evanston.

(l) meetings with the Iraqis.

(m) supply of Arabic media.

(n) monitoring the quality of the advertising and packaging.

(o) supplying the bottling formula for making the product from the concentrate.

(p) most telex and telegram communications.

(q) credit decisions.

(r) all trademark work handled abroad.

(s) at Evanston’s instructions all transactions done in US dollars.

(t) a record of all sales made by Iraq was kept in Evanston.

(u) all collections were directed to the Evanston bank account In Chicago. No funds were received in or converted to Canadian dollars.

(v) any signatures on any documents other than those supporting the shipment had to be signed in Evanston.

(w) all accounting performed in Evanston.

Counsel for appellant argued that by virtue of paragraph 250(4)(c) and subsection 139(4) of the Income Tax Act for the relevant years, the appellant will be deemed to be a resident of Canada and hence its income will be subject to Canadian taxation if its activities constitute carrying on business in Canada.

To him, the only reason the appellant is before the Board is because the Crush organization decided to utilize a non-resident Canadian company to buy goods in Canada and mistakenly filed Canadian tax returns; that for the years under appeal there was no evidence to show that the appellant was carrying on business in Canada and that there were no ties between Crush Beverages Limited and Orange Crush Products Company Limited.

Referring to Sulley v The Attorney General (1860), 5 H and N 711, Lovell & Christmas, Limited v The Commissioner of Taxes, [1908] AC 46 and Grainger & Son v Gough (1896), 3 TC 462, he stated that the function of purchasing goods for export abroad is not the carrying- on of a business in the country of export. He also added that the hiring of an agent in another country to sell goods or to make and collect payment and funds remitted abroad does not constitute the carrying-on of a business within this other country.

Referring to F L Smidth & Co v F Greenwood (1922), 8 TC 193, he read a statement of Lord Buckmaster, ‘‘Mere assistance in the negotiation of contracts, even their execution et cetera . . . . was not enough to constitute carrying on a trade within that country.’’ Then, referring to Erichsen v Last (1881) 4 TC 422, he said that the place of sale in itself will not be the determining factor and that to know whether a trade is exercised within a country is a question of fact.

Referring to the Sulley v The Attorney General case, counsel for respondent stated that the said decision does not apply in the case at bar because in the Sulley case, the profits went to another country whereas, in the case at bar, the profits came to Canada, the export country, that the test to be applied is where the action takes place which gave rise to the profits and that the profits were received in Canada.

Counsel for the respondent advanced two questions:

1. Is the appellant company carrying on business?

2. Is the appellant company carrying on business in Canada?

From 1932 to 1946 the appellant company bought concentrates from Evanston and sold it to bottlers in Canada; then the company lay dormant until 1966. Subsequent to that year, it was reactivated for the same purpose to buy and sell but this time, with the additional responsibility of shipping the goods to Iraq. To him the appellant did what it was incorporated to do: purchase, resell and ship the goods and that constituted carrying on business.

Counsel for respondent referred the Board to the decision on the issue of active business (section 125 of the Act) and more particularly to the statement of Mr Justice Walsh to say that there is a distinction between business activities carried on by an individual and a corporation; that if a corporation carries on the business for which it is formed, it creates a presumption that the profit from these activities is profit derived from the business.

Then, according to the said jurisprudence, he said that a lack of substantial business facilities such as factories, office equipment, bookkeeping does not necessarily mean that there is no business being carried on.

As to the second question, counsel for respondent answered that the business is not carried on where the contract is negotiated or signed or where the offer is accepted, but where the operation from which the profits arise takes place.

He also stated that the profit-making operation was not the negotiation of a contract but was the manufacturing of a product and the shipping thereof, including documentation and the receipt of revenues for that product which, in this case, was substantial. All these activities took place in Canada, regardless of whether or not the money was subsequently wired to Evanston. The money came to Canada because the product was manufactured in Canada and the goods were shipped from Canada and the money was always at the disposal of the appellant.

According to counsel for the respondent, there were two important differences between the case of Firestone Tyre & Rubber Co Ltd (as agents for Firestone Tire & Rubber Co of Akron, Ohio, USA) v Lewellin (H M Inspector of Taxes) 37 TC 111 cited by the appellant and the case at bar. In the Firestone case, the English company received orders directly from the franchisees in practice and shipped directly. That did not occur in the case at bar. The other difference in the Firestone case was that one company in England manufactured and shipped the product to the franchisees whereas, in the case at bar, two companies did so.

According to the evidence adduced, it is obvious that the appellant company was carrying on business, to a certain degree, in Canada.

As a matter of fact, it bought the concentrate in Canada from a parent company carrying on business in Canada and sold it to clients in Iraq. As already mentioned in the evidence, it was a sales company in Canada for a product to be sold in Iraq. Mr Dees was acting for both companies in Canada and the appellant company was realizing profits from these activities.

These activities are sufficient enough to brand the appellant company as doing business in Canada. The fact that some individuals in the United States, France and Lebanon were helping the appellant company to do business with Iraq does not mean that the appellant company was not doing business in Canada. The Board should not forget that because the American company could not do business with Iraq, a Canadian company was reactivated to do so-.

In the case at bar, the place where the negotiations of contract or the management took place is not the determining factor and the Board should look at all the facts as a whole.

The appellant company was incorporated in Ontario on April 26, 1932 and until 1946 bought products from The Orange Crush Company from Illinois, and sold it to Orange Crush bottlers in Canada. From 1946 to 1969 the appellant company was inactive. Then it was reactivated to sell products, but this time to bottlers in Iraq.

Everything that was done in Iraq was sent to Mr Dees who was acting for both Canadian companies. The selling of products and the payment thereof were done completely in Canada and consequently the appellant company realized profits in Canada.

As may be seen from the two periods of operation, mainly prior to 1946, the appellant company bought products from the United States to be sold in Canada and after 1969, it bought products from a parent company in Canada to be sold in Iraq. In both cases, the appellant company was doing business, the basic operation being the buying and selling at profits and the only difference being the source and destination of the products.

As may be seen, the moment it is found that the appellant company was carrying on business in Canada, there is no need to deal with any other factor in order to find out the place of residence of the appellant company.

Consequently, for these reasons, the appeal is dismissed.