M. D. Donald Limited v. Charles R. Brown, [1928-34] CTC 147

Macdonald, C.J.B.C.:—I think this is a very clear case of an attempt to tax something which was not income. The family was composed of several members who were attempting to straighten out their affairs and they were not clear about how the property should be divided among them and could not arrive at a division and they therefore conveyed the property to

M. D. Donald Limited, I think as a shareholder. It was not a sale. The Donald Company took the property and credited the family, as I shall call them, with the money, they had paid for it. The family took the rents and profits and divided it amongst themselves and carried on for a short time when an agreement was come to between the members of the family and then conveyances were made from the company to the several mem- bers of the family each of his or her share. Thereafter, I- think four months afterward or some months afterward, the family sold the property for $200,000, the cost of the property to them being $123,000, and the Government now claims to assess the company for the difference between these sums it claims on the profit you—your company have made, although it did not make it at all. It seems to me that the transaction is very similar to a case where a person finds that he can deal more justly with his property, if there are different claimants to it, by transferring it to a trustee, we will say, to an individual. He transfers the property to the individual at its cost price $123,000, he is credited in the books. of the individual with that price, the individual carries on and keeps small sums of money for his pains on which he is assessed. In the meantime the c’est que trust who-had conveyed it to the company make an agreement for the division of it amongst those who are entitled to it. He notifies the company and the company gives deeds to each individual for the share of that individual, and thereafter the several individuals sell the property. The company have made no profit out of that sale. This is perfectly clear, there is no dispute about that fact. It did not get the difference between $123,000 and $200,000, the family got it and the family got the rents from month to month to be divided amongst themselves. It seems to me it would be an extraordinary. thing if a company that made no profits should be assessed and compelled to pay taxes on a profit which they had never got and which other people ot. If there’ were any liability to pay taxes, it is on the part of the family who sold and made the profit and not this company. It was held by the Revision Court judge that the transfer to the company was a scheme to avoid assessment. That is to say, that the parties conspired against themselves to transfer property to a company which was assessable from those who were not (since they were foreigners). The fact that the members of the family did not register the deed is immaterial since as between the parties they were the owners and could have no motive for not registering.

MARTIN, J.A.:—In my opinion the Court of Revision has reached the right conclusion in viewing, in effect, the private transaction of the individual members of this company as an unsuccessful attempt, in the same category as the Hastings Street Properties case, to evade the provisions of the statute which imposed the tax objected to upon it. I would therefore dismiss the appeal.

GALLIHER, J.A.:—I take the same view as the Chief Justice. I would allow the appeal.

McPHILLIPS, J.A.:—I am of the same view as my brother Martin. I think it is well to call up. for consideration what the learned judge of the Court cf Revision and Appeal said about the taxation appeal when before him and which is now before this Court upon appeal from his decision. The Judge of the Court of Revision and Appeal said this:

"‘Mr. Grossman contends that the appellant was a mere trustee or agent for the said Mamie Meltzer, Mary Schwartz and William Meltzer. Mrs. Meltzer gave evidence and gives as her reason for the incorporation of appellant ‘We had some domestic difficulties. Therefore we put it in the company’s name.’ She says they took it out of the company’s name because she was sick, and because domestic relationships were bettered. On cross-examination, however, Mr. Harper asks Mrs. Meltzer :

‘* " Did you form the company to avoid any danger of personal liability on business dealings? Yes.

‘Grossman: It shews the reverse.

“ ‘The Witness: I would not have done it.

“ arper : What? I would not do that.

“ ‘You would not have done that? No, sir, I value my reputation more than that. I guess I would be known in business here, of which I am proud. ’

“At all events they got whatever benefit there was from the incorporation and, so far as the evidence goes to shew, may still be doing business. The appellant made returns and Mr. Clyne (a witness called on behalf of appellant) states that he got his information for making up the income tax return from Mrs. Meltzer. I think the evidence shews that Mrs. Meltzer collected the rents and other income and paid taxes and other outgoings without using the company’s bank account, but whether these unorthodox methods of carrying on the company’s business—because it was the company’s business—is sufficient’ evidence to relieve this company of income tax is another question. The appellant, in order to succeed, has to get away from its own returns as made to the assessor, hence the large number of cases cited to me as to the effect of bookkeeping entries. .Mr. Harper agrees that it is permissible for the Court to disregard mere bookkeeping entries if it is necessary to arrive at a just finding. But I do not think Mrs: Meltzer’s or Mr. Clyne’s evidence shews that these figures are incorrect. I think her evidence amounts to this that although she had legal advice as to incorporation _' of the company and, apparently good reasons for it, and though Mr. Clyne says he advised her strict accounts would have to be kept, she would like to give the impression that she did not know what she was doing. From all the evidence it is clear that she was the ""brains’‘ of the family and in control of affairs. She was able annually, or when written to by Mr. Clyne, to give him full and complete details of all payments in and out. She simply carried on as before because she was used to it and it was more convenient.

"‘If M. D. Donald Limited can escape taxation on the facts set out in the evidence before me then all the shareholders in The Hastings Street Properties Limited case (recently decided by the Court of Appeal of this Province [1928-34] C.T.C. 60) need have done to escape taxation if they did not wish to buy and sell as individuals for some reason, was to purchase the lot in question there in their own names, transfer it to the company and when a sale came in sight, transfer it back to their own names, hold the deed up until the sale is. consummated and then register all documents together in the Hastings Street Properties Limited, case, however the shareholders put everything in black and white and it was found, by a majority of the Court, to be a fraudulent scheme.

"‘Mr. Grossman, for appellant cites: As to onus, Anderson Logging Co. v. The King [1925] S.C.R. 45 at pp. 50-2. As to a company being bound by its bookkeeping entries Gresham Trustees (City f s Moiety) v. The Commissioners of Inland Revenue (1897) 4 T.C. 304 at p. 341; Doughty v. Commissioner of Taxes [1927] A.C. 327 at 336; J. and M. Craig {Kilmarnock) y Ltd. v. Cowperthwaite (1914) 13 T.C. 627, 668, and 669; The Liverpool and London and Globe Insurance Co. v. Bennett (1913) 6 T.C. 327 at p. 359; Edinburgh Life Assurance Co. v. Lord Advocate [1910] A.C. 143 at p. 163; Collins v. The Firth-Brearley Stainless Steel Syndicate, Ltd. (1925) 9 T.C. 520 at p. 569.

‘“In the last mentioned case Pollock, M.R. SAYS :

" " ‘In all cases one has to look at the substance of the transaction. The particular way in which the item has been dealt with in the balance sheet or in the profit and loss account does not bind the Court’, and this is more or less the same

opinion as in the other cases quoted above, and also Isaac Holden & Sons, Ltd. v. The Commissioners of Inland Revenue (1924) 12 T.C. 768 at pp. 772-3.

"Mr. Harper, for the assessor (respondent), contends that the deed dated June 12th, 1928, was executed and held until such time as a sale could be arranged for and then registered. He further contends that by virtue of section 34 of the Land Registry Act, e. 127, R.S.B.C. 1924, so far as a claim by the Crown for income tax is concerned, no interest passed to defeat their claim until registration in February, 1929. The sale to Vested Estates was on New Year’s Day, 1929. He cites District of Burnaby v. Clowes [1923] 3 W.W.R. 1078 hereon and cases cited therein. That case was before the Court of Appeal of this Province and the decision was upheld. The section in question has been amended since that case, but I do not. think the amendment affects the position of the assessor who is entitled to consider only the registered owner. This would dispose of the contention of appellant that one lot (lot 10) was held by the company only five weeks. The word ‘owner’ is also defined in the Taxation Act and refers only to ‘registered’ agreements, deeds, etc.

"‘Mr. Harper also contends that it does not matter who the shareholders of the company are or what their relationship to one another. He cites Plaxton & Varcoe’s Dominion Income Tax Law, 2nd Ed., p. 7, where the learned authors say :

"‘‘In connection with corporations and joint-stock companies, it is a cardinal distinction that the incorporated body is a totally different person or entity from the individuals comprising it, even if an individual holds the whole of the shares of the corporation’, and cites John Foster & Sons v. Commissioner of Inland Revenue [1894] 1 Q.B. 516, 528, 530, and The Alabama Coal, Iron, Land and Colonization Co., Ltd. v. Mylam (1926).11 T.C. 232 at p. 252 thereon.

"‘So far as carrying on business is concerned, one transaction is enough. Only one transaction ever took place in the history of Hastings Street Properties Limited, supra. Here there were two distinct transactions and rentals and assumption of mortgages by the appellant company involved, depreciation, directors’ fees, etc. These people had the advantages and protection too, of incorporation, and when it was realized that a sale would involve payment of a substantial sum ($5,600) as income tax I do not think the company is able to repudiate its returns by alleging faulty book-keeping or misunderstanding over a period of years. I think it should be borne in mind, too, that Mr. Clyne, who made the returns on information supplied him is a taxation expert.

"‘I find that the company did in fact carry on the business of buying, selling and dealing in real estate, within its powers, and made the profit alleged from such dealings. The fact that all the shares were not allotted does not, I think, make any difference. It would not have helped them any to have allotted 33 shares each to each member of this family, they each held one share, and they were in it equally and received distribution of the profits equally. I do not think appellant has discharged the onus upon it.’’

I am of the opinion that the learned judge of the. Court of Revision and Appeal came to the correct conclusion. His judgment in the matter shews that he had a proper appreciation of the facts and the law and I find no error in his adjudication. I would, therefore, affirm the judgment of the learned judge of the Court of Revision and Appeal (Vancouver Assessment District) and confirm the assessment. The appeal to this Court in my opinion should stand dismissed.

MACDONALD, J.A.:—I only find it necessary to say and I think it is a fair inference to draw from the evidence—that this company acquired the property, owned it and in reality pursuant to its powers to buy and sell real estate effected a sale of it; none the less so because of the circuitous way they took to bring it about. I: would dismiss the appeal.

Appeal dismissed.