Saul Bookspan v. Minister of National Revenue, [1978] CTC 2128, 78 DTC 1092

Delmer E Taylor:—This is an appeal against income tax assessments dated August 6, 1974 by which the Minister of National Revenue increased the taxable income of the appellant for the years 1969 and 1970 by amounts of $45,058.64 and $15,053.10 respectively as “Deemed income from Personal Corporation’’. The appellant relied upon subsection 68(1), while the respondent relied, inter alia, upon sections 3, 4, 67 and 68 of the Income Tax Act, RSC 1952, chapter 148 and amendments thereto.

Facts

The company, deemed to have been operating as a personal corporation during the years in question, was Saul Bookspan Limited (hereinafter referred to as “the company”), incorporated on July 10, 1967 under the laws of the Province of Ontario. At all material times the appellant was a director, officer and shareholder of the company. As of September 12, 1968, the shareholdings of the company were:

The common share held by Sheila Meretsky has at all material times been held in trust for The Bookspan Family Trust.

On September 13, 1968 a special resolution of the company was passed authorizing the company to make application for supplementary letters patent extending the objects of the company by adding thereto the following objects:

(a) to act as consultants and advisers in general of any commercial enterprise or industrial organization;

(b) to conduct any consumer research programme and to act as consultants in respect thereof;

(c) to manage and supervise business operations and undertakings in general of any commercial enterprise or industrial organization;

and

(d) to act as commission agents in general of any commercial enterprise or industrial organization.

The supplementary letters patent extending the objects of the company as aforesaid were issued.

On September 18, 1968 an agreement for services was entered into between Jetco Manufacturing Limited (hereinafter referred to as “Jetco”) and the company, and a second agreement also of the same date was executed between Daniel Stein (hereinafter called “Stein”) and the company. The amounts of income in question ($45,058.64 for 1969 and $14,053.10 for 1970) represented the net income of the company for the years under review.

Contentions

It was the position of the appellant that the company was not a “personal corporation” as the term is defined in subsection 68(1) of the Income Tax Act. In each of its 1969 and 1970 taxation years the company carried on an active financial, commercial or industrial business.

The respondent contended that during the years in question the company did not carry on an active financial, commercial or industrial business.

Evidence

Giving evidence on his own behalf, the appellant related his business history—from 1947 until about 1965 he was a partial owner in a company referred to as “Nortex”, manufacturing kitchen equipment from steel and arborite. For the years 1965 and 1966 he had not been very active, but in 1967, as a 25% shareholder, he commenced working for Jetco, selling frames for furniture to other manufacturers, some of whom he had known while working at Nortex. In 1968 he sold his interest in Jetco but after not working for about two months, he returned to that company as a salesman. He had no Supervision or direction in making business calls and taking orders. He acted as a commission agent but did receive a basic salary of $150 per week. He took vacations at his own discretion and during these periods he did not take his $150 per week. The company had been incorporated for purposes of estate planning and he had always considered it was the agent for Jetco. He did not recall any particular reasons for the changes in the charter of the company in 1968 but believed they had been suggested by his advisers—accountants, lawyers, or insurance agents—and again these changes were for purposes of estate planning.

The witness identified and introduced several documents, some of which were:

Exhibit A-1—Memorandum of agreement dated September 18, 1968

between Jetco and Saul Bookspan Limited.

Exhibit A-7—T4A—Statement of pension, retirement and other

income for commissions of $1,800 made out to S Bookspan Limited from Jetco.

Exhibit A-8—Memorandum of agreement between Daniel Stein and

Saul Bookspan Limited.

T4 wage slips for 1969 and 1970 showing commissions paid to him personally. should have been. prepared by Jetco, according to the witness, in favour of the company, and that error on the part of Jetco had been further compounded when his own accountant had included the amounts in his personal income tax returns for those years. With regard to Stein, the appellant asserted their association had been in the residential construction industry.

Under cross-examination, the witness agreed he was the controlling director of the company, in effect its “mind and will”. He could give no reason why the assets in the company were not transferred to it from his personal portfolio until about one year. after the incorporation of the company—at about the same time as the objects of the company were extended by supplementary letters patent. The appellant reviewed with counsel for the respondent the preparation of his income tax returns but was unable to shed much further light on the distinctions to be made between earnings from Jetco shown to be for the company, and those for himself. He agreed, however, that he had performed essentially the same functions for Jetco in the selling field from 1967 through 1970, but during the earlier years when he had been a 25% shareholder his functions had also included management responsibility. He gave no clear basis for his understanding that the company was the agent for Jetco when he personally did all the work. The company (Saul Bookspan Limited) did not have an Office, telephone, employees, or advertising which could be distinguished from Saul Bookspan (the appellant) personally.

Mr Sidney Chusid, chartered accountant, related his involvement in the preparation of the income tax returns in question. Basically, he had accepted the T4 wage slips to mean what they said, whether for the company or for the appellant, and he had no reason to question this any further. He was unable to provide much detail regarding the reason for either the incorporation of the company or the supplementary letters patent.

Argument

Basically, counsel for the appellant contended to the Board that there were only two points with which the appellant was faced: (1) that valid agreements existed between the company and both Jetco and Stein, providing for the revenue to the company; and (2) that the company was “active” as required by the Income Tax Act. Counsel accepted that both the documents between the parties (Exhibits A-1 and A-8) were minimal in their content and depended to a substantial degree upon supporting information to warrant their consideration as agreements for income tax purposes. The supporting information in counsel’s view was found in the fact that at least one of the T4 wage slips (Exhibit A-7) had been made out to the company, that cheques from Jetco had been made out to the company, and that these cheques had been deposited in the one bank account, to the credit of the company. On the activity question, counsel related the work of the appellant both for Jetco and Stein, and stated that it had often consisted of long hours every day each week. The appellant was not sophisticated about corporate and legal matters and he should not be penalized because in his mind, in practical terms, there was often little difference between the company and himself. It was important to note that the point was not whether the income had been earned directly by the company, only that there was hard tangible evidence concerning the intentions and actions of the parties involved—that the company was to be considered the agent of Jetco and Stein. Counsel indicated that there were distinctions to be made between what might be considered an “active” business under section 68 of the Income Tax Act, RSC 1952, c 148 (old Act) and under section 125 of the Income Tax Act, SC 1970-71-72, c 63 (new Act) and that section 68 should not be interpreted narrowly as had been done in some cases dealing with section 125. Reference was made to the following case law: Joseph M. Weintraub v Her Majesty the Queen, [1975] CTC 112; 75 DTC 5050; Her Majesty the Queen v Rockmore Investments Ltd, [1976] CTC 291;' 76 DTC 6156; Roméo Poirier v MNR, [1976] CTC 2276; 76 DTC 1205; Her Majesty the Queen v Cadboro Bay Holdings Ltd, [1977] CTC 186; 77 DTC 5115.

Counsel for the respondent stressed the inadequacy in the evidence of any agreement between Jetco or Stein and the company. The documents dated September. 18, 1968 (Exhibits A-1 and A-8) were quite worthless in themselves, and there was little if any evidence that either Jetco or Stein had ever dealt with the company as their agent. T4 wage slips representing commission cheques from Jetco, with the one exception, had all been made out in the name of the appellant personally, not to the company. Counsel further argued that there was no basis for the contention put forward on behalf of the appellant that the relevant portions of section 68 of the old Act should be interpreted differently than the Court had already done for section 125 of the new Act—that it was the activity of the corporation itself which mattered, not that of the controlling director or shareholder. References were made to the case law cited by counsel for the appellant, where it could be distinguished from the instant case. In support of the Minister’s position, counsel directed the Board’s attention to several quotations from the following: Earl B Finning v MNR, [1961] CTC 425; 61 DTC 1251; Larry Smith v MNR, [1970] CTC 529; 70 DTC 6344; Poppy Beale Glaspie v MNR, 33 Tax ABC 274; 63 DTC 828: Amelia Rose v MNR, [1973] CTC 74; 73 DTC 5083; Her Majesty the Queen v Rockmore Investments Ltd (supra).

Counsel for the appellant concluded the hearing by reiterating that Mr Bookspan had been acting at all times on behalf of the company, and that even certain passages from the case law submitted by counsel for the respondent should be considered by the Board as supporting his position both regarding the satisfactory nature of the agreement between the parties, and the activity demonstrated by Saul Bookspan Limited.

Findings

First, I am unable to discern any distinction in the terms "active financial, commercial or industrial business" (paragraph 68(1 )(c) old Act) and active business (subparagraph 125(1)(a)(i) new Act) which would be of merit in this case. Accordingly, case law dealing with either section which would serve to enlighten the Board in this matter has been examined.

Second, in previous decisions dealing with this general subject (to which reference will be made later), I have not made a distinction between income from an “active business’’ and a “non-active business”;/only between business income and investment income. This approach would seem to be consistent with the decision of the courts, and is given considerable helpful elaboration in the judgment of Collier, J of the Federal. Court—Trial Division in Her Majesty the Queen v Cadboro Bay Holdings Ltd (supra).

Third, it does not appear to me that there are two points to be determined, as outlined by counsel for the appellant. I am prepared to accept that the appellant was in complete control of the corporation and could direct its activities informally, as suggested by his counsel, as well as formally, which would seem to be the requirement of counsel for the respondent. I do not regard this as the critical point and it is my view that the matter should be examined on one issue— whether or not there was business activity in the company itself, distinguishable from the business activity of the appellant personally.

A substantial part of the argument of counsel for the appellant dealt with a particular quotation from Weintraub (supra) to be found at page 119 [5055]:

While the source of the income in the present case is undoubtedly the property owned by Jodol, the property clearly could not have produced the income without the active and extensive work of plaintiff on behalf of the company. The fact that he was regularly employed by Northern Electric Company during the years in question does not alter the fact that he spent a very substantial part of his time on behalf of the company in operating its business of property rentals so as to derive some net income from same. It is not unusual under contemporary conditions for a person to have more than one type of business activity or to “moonlight” in other work despite being regularly employed.

It was counsel’s view that this supported the contention that the business activity of the appellant himself should be taken as satisfying the requirement for activity in the corporation. I would suggest that this is a rather limited view of the reasons advanced by Collier, J, and I would read the above phrase in conjunction with several others in the same judgment, notably:

At page 115 [5052]:

They employed a janitor who had an apartment in one of the buildings in addition to which there were two elevator operators and three cleaners who worked part-time. Mr Weintraub maintained an office in his home and his wife looked after the books and answered the telephone in connection with advertisements for employees or for rental of office space. . . . There was quite a turnover of employees and in order to keep six at all times he might have to hire as many as eighteen during the course of a year.

And at page 116 [5053]:

The company had its own stationery and he estimated that he had to write 35 to 40 cheques a month and make two to four deposits as well as dealing with perhaps 100 letters or other documents a month. He would also receive telephone calls at home in connection with the company’s business.

And at page 120 [5055]:

The situation is quite different from the Finning and Larry Smith cases (supra) where there was very little activity on the part of the company as such as distinguishable from the activity of the appellant personally.

The Board points out in particular the last quotation which supports a view that the learned judge decided the case on the only point which appears to me to be significant in this case. One final quotation might be offered to emphasize the distinction which is to be sought and it is quoted from the case of Amelia Rose (supra) at page 78 [5086]:

For the purpose of deciding whether Amrose carried on an active business, I do not see the relevance of what Amrose’s shareholders did or did not do in the operation of the business.

The point is regularly raised by counsel in cases of this nature that the basis is not always clear upon which one taxpayer providing a service apparently can organize his affairs within a corporate structure In a manner acceptable for income tax requirements, while another taxpayer apparently cannot do so. The various decisions of the courts have also pointed out and recognized this difficulty, and the Board can only attempt to determine within the guidelines provided the degree to which, in a particular situation, the corporate structure represents a viable, functioning business entity as contrasted with a manifestation of individual endeavour. This holistic view, for purposes of establishing separate taxable identity appears, in the court decisions, to require characteristics not always easily identifiable within the bounds of the purely legalistic attributes of the corporation.

On earlier occasions I have given my views on this subject, notably in Spence Building Limited v MNR, [1977] CTC 2104: 77 DTC 71, and in William W Fotheringham v MNR. [1977] CTC 2372; 77 DTC 275. In Fotheringham (supra) at page 2384 [282] there is the following:

Dealing with this issue as seen by counsel for the appellant and quoted earlier, the Board is of the opinion that the question is not “whether or not Mr Fotheringham . . . is entitled to either create a company for this purpose or to make use of an existing one’’. It is clearly the right of any individual to create or use a corporate structure for business purposes. That question, more appropriately phrased, would be whether or not such a corporate structure, its purpose and the conduct of its affairs related to activities for which the company could be, should be and, in reality, was responsible. A corporation, for purposes of the Income Tax Act, is a person, although artificially created through legislation, separate and distinct from the persons (both corporate and individual) who may form its participating and controlling body as shareholders or directors. For various reasons the legislators in Canada have provided a format for the taxing of the financial results of the operations of a corporation, distinct from the schedules applicable to most other persons. Utilization of this separate taxing structure Should require evidence supporting the establishment, in fact. as well as in law, of a corporation having the separate identity indicated above. Without such characteristics the corporation might be viewed as only a repository, the private enclave of other personal activity or business operations. The difficulties in determining and maintaining well defined parameters are measurably heightened when the corporation is dealing not only through, but with one or more of its major shareholders—potentially a non-arm’s length transaction.

And from Spence (supra) at page 2110 [76]:

There is no doubt from the evidence that the president. Dr Spence, did expend considerable time and effort on the matters of maintenance, renovation, administration, security, etc in the interest of a functioning business establishment. The business establishment involved, however, was clearly the medical clinic, not the appellant corporation.

In the instant case the company neither could nor did act as commission agent for Jetco. Saul Bookspan Limited in any relationship with Jetco was indistinguishable from Saul Bookspan personally—in fact, the company was incapable of doing anything for Jetco when the appellant was unavailable, such as when he was on holidays. The company, by the evidence, was incorporated for a particular purpose—planning for tax purposes; in the view of the appellant, to freeze his estate—his investment portfolio was transferred to the company, and presumably the purpose of the company’s existence was being accomplished. However, the use of the corporation, even after supplementary letters patent, as a vehicle through which the income from the appellant’s personal services to Jetco might be channelled, could only serve to distort that objective in relation to current and future income tax liability. No other purpose for such a routing of income has been demonstrated at this hearing.

The Board finds that the appellant has failed to show that the operations of the company Saul Bookspan Limited could be described as forming an active financial, commercial or industrial business.

Decision

The appeal is dismissed.

Appeal dismissed.