McArthur
T.C.J.
:
These
appeals,
heard
on
common
evidence,
are
from
reassessments
for
the
1991
and
1992
taxation
years.
They
concern
whether
Hughes
Homes
Ltd.
(“Hughes
Homes”)
and
Lopa
Enterprises
Ltd.
(“Lopa”)
were
deemed
associated
corporations
by
virtue
of
subsection
256(2.1)
of
the
Income
Tax
Act
(the
“Act’).
Background:
Hughes
Homes
was
originally
incorporated
in
1986
by
both
Mr.
and
Mrs.
Hughes
working
as
a
team,
each
owing
50%
of
its
shares.
Hughes
Homes
started
off
with
Mr.
Hughes
being
the
directing
mind
behind
the
building,
negotiating,
bidding,
and
supervising
of
sites,
and
Mrs.
Hughes
performing
all
the
office
functions
such
as
data
entry,
answering
phones,
and
the
like.
Over
the
years
Hughes
Homes
evolved
from
a
house
builder
to
a
management
company
that
carried
on
the
building
business
through
five
companies
known
as
the
Park
Ridge
Group.
Mr.
Hughes
continued
to
be
the
directing
mind
of
these
companies.
In
the
late
1980’s
Mr.
Hughes
adopted
the
marketing
technique
of
constructing
a
show
home
in
each
subdivision
where
they
constructed
and
sold
homes.
Mrs.
Hughes
became
responsible
for
the
furnishing
and
interior
decorating
of
these
show
homes
together
with
the
colour
coordination
and
finishings
of
the
interior
and
exterior
of
all
homes.
In
September
1989,
Mrs.
Hughes
incorporated
Lopa
to
provide
the
design
and
decorating
services
to
Hughes
Homes
and
the
Park
Ridge
Group.
At
the
time
of
incorporation
of
Lopa,
Mrs.
Hughes
owned
50%
of
Hughes
Homes
and
100%
of
Lopa.
Subsequently
on
August
24,
1990
Mrs.
Hughes
allowed
a
reduction
in
her
equity
in
Hughes
Homes
from
50%
to
10%.
Throughout
its
1991
and
1992
taxation
years,
Lopa
provided
its
specialized
design
and
decorating
services
exclusively
to
Hughes
Homes
and
Park
Ridge
Group.
Analysis:
The
legislation
relied
on
by
the
Minister
is
an
anti-avoidance
section
of
the
Act,
specifically
subsection
256(2.1),
which
reads:
(2.1)
Anti-avoidance
For
the
purposes
of
this
Act,
where,
in
the
case
of
two
or
more
corporations,
it
may
reasonably
be
considered
that
one
of
the
main
reasons
for
the
separate
existence
of
those
corporations
in
a
taxation
year
is
to
reduce
the
amount
of
taxes
that
would
otherwise
be
payable
under
this
Act
or
to
increase
the
amount
of
refundable
investment
tax
credit
under
section
127.1,
the
two
or
more
corporations
shall
be
deemed
to
be
associated
with
each
other
in
the
year.
The
issue
to
be
decided
under
subsection
256(2.1)
is
whether
one
of
the
main
reasons
for
the
separate
existence
of
Lopa
in
the
1991
and
1992
taxation
years
was
to
reduce
the
amount
of
taxes
that
would
otherwise
be
payable
if
the
operations
carried
on
by
Hughes
Homes
and
Lopa
were
realized
as
one
corporation.
The
onus
is
on
the
Appellants
to
prove
that
none
of
the
main
reasons
for
the
separate
existence
of
the
two
corporations
was
that
of
reducing
taxes.
In
deciding
on
what
significance
is
required
to
constitute
a
‘main
reason’
Decary,
J.
in
Lenco
Fibre
Canada
Corp.
v.
R.,
(1979),
79
D.T.C.
5292
(Fed.
T.D.),
stated
that:
..the
word
“main”
must
be
given
its
significance.
In
the
French
language
version
of
the
statute,
the
corresponding
word
is
“principaux”.
Not
every
reason
will
meet
this
standard.
Thus,
even
where
the
reduction
of
taxes
payable
is
a
reason,
a
judgment
must
still
be
made
as
to
whether
it
was
a
main
or
principal
reason...
The
test
as
to
whether
none
of
the
main
or
principal
reasons
for
the
separate
existence
of
the
corporations
were
for
reducing
taxes
is
a
question
of
fact
to
be
based
on
the
testimony
of
the
Appellants’
witnesses
as
well
as
upon
the
evidence
adduced.
What
this
test
must
be
based
upon,
was
set
out
by
Marceau,
J.
in
R.
v.
Covertite
Ltd.,
(1981),
81
D.T.C.
5353
(Fed.
T.D.)
at
page
5355:
The
onus
on
the
taxpayer
appellant
is
complete
and
the
role
of
the
Court
is
clear.
All
that
may
appear
simple
but
it
is
so
only
in
theory
and
not
in
practice.
The
difficulty
stems
from
the
very
nature
of
the
conclusion
of
the
Minister
that
it
is
put
into
question
and
must
be
verified.
It
is
indeed
a
conclusion
of
fact
as
opposed
to
a
conclusion
of
law,
but
one
of
a
purely
psychological
content,
since
it
refers
to
the
state
of
mind
and
the
intention
of
those
responsible
for
the
creation
and
the
continued
separate
existence
of
the
two
entities.
It
is
obviously
a
conclusion
that
cannot
be
the
object
of
direct
evidence,
at
least
in
the
absence
of
a
clear
prior
statement
of
the
parties
concerned
or
an
admission
made
by
them
afterwards.
It
must
necessarily
be
based
on
inferences
drawn
from
a
series
of
material
facts
directly
ascertainable.
The
Minister
has
inferred
from
a
certain
number
of
facts
that
the
saving
of
taxes,
which
was
actually
realized,
was
not
a
mere
side
effect
but
rather
one
of
the
main
goals
contemplated
by
the
individuals
acting
behind
the
corporations.
In
verifying
the
conclusion,
the
Court
cannot
but
adopt
an
approach
similar
to
that
followed
by
the
Minister.
The
mere
denial
of
the
taxpayer,
whether
or
not
accompanied
by
a
simple
indication
of
the
other
causes
that
could
have
prevailed,
can
be
given
no
weight.
Being
a
mere
assertion
of
a
negative
fact,
and
a
fact
which
has
to
do
with
the
state
of
mind
of
the
witness,
it
can
have
no
convincing
probative
force;
it
cannot
constitute
the
proof
required
to
annihilate
the
conclusion
of
the
Minister.
To
succeed,
the
taxpayer
must:
a)
disprove
the
facts
assumed
by
the
Minister
in
reaching
his
conclusion:
or
b)
convince
the
Court
that
the
inferences
drawn
by
the
Minister
from
the
facts
assumed
were
unreasonable
and
unwarranted;
or
c)
add
further
facts
capable
of
changing
the
whole
picture
and
leading
to
different
inferences
pointing
to
the
conclusion
that
the
other
reasons
alleged
have
actually
been
prevalent.
In
the
case
at
hand,
I
believe
the
Appellants’
witnesses’
assertions
that
tax
saving
was
not
one
of
the
reasons
why
the
separate
corporation
Lopa
was
created
and
existed
in
the
taxation
years
in
question.
I
find
credible
the
Appellants’
witnesses’
statements
that
they
were
not
aware
of
the
rules
of
association
under
the
Act
and
that
Lopa
was
incorporated
without
any
tax
advice.
However,
the
witnesses’
statements
alone
do
not
carry
enough
probative
force
to
meet
the
burden
of
proof
to
negate
the
Minister’s
conclusion.
What
is
required
is
something
more
concrete
than
mere
assertions.
To
satisfy
this
burden,
the
Appellants
must
be
able
to
support
their
assertions
with
objective
facts
such
that
the
inferences
drawn
by
the
Appellants
are
credible
to
the
point
where
they
meet
the
test
set
out
under
subsection
256(2.1)
that
“it
may
reasonably
be
considered”
that
tax
planning
was
not
one
of
the
main
reasons
for
the
separate
existence.
(might
want
to
highlight
the
test
more)
In
following
the
test
set
out
in
the
decision
of
Covertite,
supra,
it
is
apparent
that
the
Appellants’
evidence
must
be
considered
in
light
of
meeting
part
(c)
of
that
test.
Based
on
the
facts
assumed
by
the
Minister,
it
is
reasonable
to
draw
the
inference
that
the
reduction
of
tax
could
have
been
one
of
the
main
reasons
for
the
separate
existence
of
Lopa.
Accordingly,
it
is
for
the
Appellants
to
bring
forward
additional
facts
to
permit
this
court
to
draw
the
inference
that
reasons
other
than
tax
savings
were
the
main
reasons
for
the
Appellant’s
actions.
According
to
the
Appellants’
contentions
at
trial,
the
main
reasons
for
the
incorporation
of
Lopa
were
to
create
a
separate
business
entity
for
Mrs.
Hughes,
and
to
accomplish
asset
protection
for
her
endeavours,
as
well
as
for
Mr.
Hughes’
endeavours.
Separate
Business
Activity:
Mr.
and
Mrs.
Hughes
working
as
a
team
carved
out
a
significant
notch
in
the
home
construction
business
in
the
lower
mainland
areas
of
Langley
and
Surrey
in
southern
British
Columbia.
While
they
worked
as
a
team,
I
have
no
difficulty
in
finding
that
Mrs.
Hughes
had
a
division
or
business
of
her
own.
She
is
gifted
with
a
flare
and
talent
for
decorating
and
directed
her
energies
towards
that
important
facet
of
the
business.
It
is
sufficient
to
say
that
while
she
operated
a
business
that
complemented
her
husband’s
activities,
the
scope
of
her
activities
were
adequately
separate
and
distinct.
Mr.
Hughes
dealt
with
the
financing,
construction
and
sales
of
single
family
homes,
while
Mrs.
Hughes
furnished
and
decorated
the
showhomes
as
well
as
colour
coordinating
the
design
of
the
interior
and
exterior
of
all
the
homes.
Mr.
Hughes
was
the
directing
mind
of
Hughes
Homes
and
Mrs.
Hughes
was
the
directing
mind
of
Lopa.
On
the
basis
of
this
evidence,
I
am
satisfied
that
Lopa
was
created
with
a
sufficient
business
purpose
and
existed
as
a
distinct
and
separate
business
from
that
of
Hughes
Homes.
Although
it
was
put
forward
by
the
Respondent
that
Lopa
almost
exclusively
provided
its
services
to
Hughes
Homes
and
was
not
seeking
to
get
work
from
other
builders
and
should
therefore
not
be
considered
separate
and
distinct,
I
do
not
find
it
unreasonable
to
believe
that
such
a
company
with
so
great
a
work
load
would
foster
its
existing
business
relations
by
not
seeking
work
with
the
competition.
Each
business
was
exclusively
doing
its
own
thing,
with
neither
business
encroaching
on
the
field
of
the
other.
The
second
reason
put
forward
by
the
Appellants
for
the
separate
existence
of
Lopa
was
that
of
asset
protection.
It
was
stated
by
the
Appellants’
witnesses
that
recent
events
had
created
the
concern
that
the
assets
of
Lopa
should
be
insulated
from
that
of
Hughes
Homes.
Those
events
were
the
recent
lawsuit
by
Mr.
Kolb,
and
the
lawsuit
that
almost
put
a
fellow
builder
and
friend
into
bankruptcy.
It
was
stated
at
trial
that
the
construction
business
of
the
sort
engaged
in
by
Hughes
Homes,
is
a
business
with
substantial
risk
for
loss.
This
was
Mr.
Hughes’
first
lawsuit
from
his
business
dealings.
Both
events
highlighted
to
Mr.
and
Mrs.
Hughes
that
substantial
risks
could
potentially
arise
from
their
business
operations.
I
believe
it
to
be
true
that
these
significant
risks
could
substantially
affect
the
business
of
Hughes
Homes,
and
from
any
personal
guarantees
given,
substantially
affect
the
Hughes’
personal
assets
as
well.
Given
Mrs.
Hughes’
success
in
interior
decorating,
I
find
it
reasonable
that
Mrs.
Hughes
would
want
to
insulate
herself
from
any
risk
that
was
attached
to
either
Hughes
Homes
or
to
Mr.
Hughes’
estate.
By
separate
incorporation,
Lopa
is
a
distinct
entity
from
either
Hughes
Homes
or
Mr.
Hughes,
and
is
able
to
accumulate
its
own
capital
free
of
any
encumbrances.
In
Lenco,
supra,
the
court
was
presented
with
an
analogous
situation
where
a
wife
who
was
originally
providing
services
to
her
husband’s
companies
as
a
salaried
employee,
incorporated
a
company
to
provide
these
services.
Decary,
J.
found
that
it
was
believable
that
the
main
reason
for
the
separate
existence
of
the
taxpayer,
the
wife’s
company,
was
to
protect
the
value
of
her
services
to
the
husband’s
companies
from
any
claims
against
those
companies.
Decary
J.
states
at
page
5296:
I
find
from
it
(Mr.
and
Mrs.
Mandelcoms’
testimony)
as
well
from
the
whole
of
the
evidence
that
the
main
reason
for
the
existence
of
the
Plaintiff
as
an
entity,
separate
from
that
of
the
two
corporations
owned
by
Leonard
Mandelcorn
in
the
years
in
question,
was
to
enable
Elaine
Mandelcorn
to
realize,
through
a
corporation
of
which
she
was
the
owner,
the
value
of
the
services
she
was
rendering
to
her
husband’s
corporations
free
from
any
claims
against
them
that
might
threaten
the
result
of
her
efforts
to
build
up
the
business
if
she
simply
continued
to
act
as
a
salaried
employee.
On
the
basis
of
the
finding
in
Lenco,
supra,
and
the
testimony
of
Mr.
and
Mrs.
Hughes
in
this
case,
I
am
satisfied
that
Lopa
was
incorporated
so
that
Mrs.
Hughes
would
be
able
protect
her
endeavours
from
any
business
risks
that
exist
for
Hughes
Homes
or
any
risks
resulting
from
Mr.
Hughes’
personal
guarantees.
I
am
also
satisfied
that
this
was
one
of
the
main
reasons
why
Lopa
was
incorporated.
Conclusion:
In
conclusion,
I
am
satisfied
that
of
the
main
or
principal
reasons
for
the
separate
existence
of
Lopa
in
the
taxation
years
under
appeal,
none
of
them
were
for
the
reduction
of
tax.
I
find
this
for
two
reasons.
The
first
reason
is
that
although
Lopa
was
incorporated
in
1989
and
the
assessment
by
the
Minister
is
for
the
1991
and
1992
taxation
years,
I
find
that
the
explanations
put
forward
by
the
Appellants’
witnesses
as
to
why
the
separate
existence
of
Lopa
was
created,
continued
to
be
the
main
reasons
for
its
existence
in
the
1991
and
1992
taxation
years.
On
the
basis
of
the
evidence
before
me,
I
am
satisfied
that
the
main
reasons
for
Lopa’s
incorporation
and
separate
existence
in
1989
were
to
accomplish
asset
protection
and
provide
Mrs.
Hughes
with
a
separate
and
distinct
business
entity
so
that
she
could
undertake
her
efforts
in
her
own
business.
I
believe
the
Appellants’
witnesses
to
be
credible.
Tax
reduction
was
not
a
reason
for
Lopa’s
incorporation
in
1989,
and
I
find
no
evidence
to
lead
me
to
an
inference
that
tax
reduction
was
one
of
the
main
reasons
for
its
incorporation.
Second,
is
that
although
Mrs.
Hughes’
share
reduction
in
1990
resulted
in
a
tax
reduction
for
the
1991
and
1992
taxation
years
for
Hughes
Homes
and
Lopa,
I
do
not
find
that
I
can
reasonably
consider
that
tax
reduction
became
one
of
the
main
or
principal
reasons
for
Lopa’s
separate
existence
from
Hughes
Homes
in
those
years.
This
share
reduction,
while
it
could
accomplish
asset
protection
if
done
completely,
did
accomplish
disassociation
between
the
corporations,
previously
associated
under
paragraph
256(1
)(c)
of
the
Act.
It
is
a
reasonable
inference
that
one
of
the
reasons
for
this
share
reduction
was
to
accomplish
tax
savings
for
Lopa.
What
I
do
not
find
however
is
that
I
can
draw
the
inference
that
this
tax
savings
from
the
share
reduction
can
reasonably
be
considered
to
be
one
of
the
main
or
principal
reasons
for
Lopa’s
separate
existence
for
1991
and
1992.
I
find
the
share
reduction,
although
accomplishing
tax
savings,
was
incidental
to
the
reasons
why
Lopa
kept
a
separate
existence
from
Hughes
Homes.
lam
satisfied
on
the
basis
of
the
testimony
of
Mr.
and
Mrs.
Hughes
and
on
the
evidence
before
me,
that
the
explanations
for
Lopa’s
existence
for
the
taxation
years
in
question
are
sufficient
to
conclude
that
these
reasons
were
the
main
reasons
for
its
separate
existence,
and
that
tax
reduction
was
not
one
of
the
main
reasons.
The
appeals
are
allowed
with
costs
to
the
Appellants.
Appeals
allowed.
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