Sandell Developments LTD and Grid Holdings LTD v. Minister of National Revenue, [1976] CTC 2393, 76 DTC 1293

Roland St-Onge:—The appeals of Sandell Developments Ltd and Grid Holdings Ltd were heard together on October 6, 1976 at the City of Vancouver, British Columbia, and the matter at issue is whether Sandell Developments Ltd was associated for income tax purposes in the 1971 taxation year with Grid Holdings Ltd and Burger Construction Ltd, within the meaning of subsection 138A(2) of the Income Tax Act. By agreement, the appeals were heard on common evidence.

In his reply to the Notice of Appeal of Sandell Developments Ltd the respondent has admitted appellant’s Statement of Facts, which reads as follows:

Statement of Facts

1. The appellant is a company which was incorporated in 1969 under the laws of the Province of British Columbia and carries on business in the said Province.

2. All of the issued shares of the appellant are beneficially owned by Ingrid Burger.

3. In the 1969 and subsequent taxation years, the appellant filed tax returns on the basis that it was not associated with any company or companies within the meaning of the Income Tax Act, and in respect of the 1969 and 1970 taxation years, the appellant was assessed accordingly.

4, By direction dated October 15, 1975, the respondent deemed the appellant to be associated for income tax purposes in the 1971 year with Grid Holdings Ltd and Burger Construction Ltd, both companies being incorporated under the laws of the Province of British Columbia.

5. All of the issued shares of Grid Holdings Ltd and Burger Construction Ltd are beneficially owned by Richard Burger, the husband of Ingrid Burger.

The respondent contended that the separate existence of the three corporations in 1971 (1) was not solely for the purpose of carrying on the business of three corporations in the most effective manner; (2) that one of the main reasons, if not the sole or main reason, was to reduce the amount of taxes.

At the hearing, two witnesses, Mr Richard Burger, contractor and the majority shareholder of Grid Holdings Ltd and Burger Construction Ltd, and Mr Biagi, the companies’ accountant, were heard.

Mr Burger testified that he had no shares in Sandeli Developments Ltd, in which company his wife had 99 shares and his accountant one share. In the other two companies he was the majority shareholder, holding 99 shares, and his secretary held one share in trust for him in each company.

He also had 70 shares in Heritage Development Ltd in which a Mr Bishop held the other 30 shares, but in 1970 Mr Burger sold his shares to Mr Bishop and has not held any shares in that company since 1970.

Mr Burger was born in Germany in 1930, was married there but immigrated to Canada with his wife and one son in 1954. He now has four children. He bought a sawmill in Prince George, BC because his family had been in that business and he was familiar with that type of operation. In 1957 the sawmill was destroyed by fire and all the receivables were used to pay the bank loans. After paying the bank, he was still in debt in the amount of $12,000 for sawmill supplies and income tax liabilities.

He came south to Vancouver and found work as a construction millwright in New Westminster at a salary of $140 a month. From 1957 to 1961 he paid off his debts.

In 1962 his wife inherited $1,500. He bought a lot and, in his spare time, built a house thereon with used material that he obtained from Mr Bishop.

Because he wanted to go back into business, he sold his house for $9,800 and moved to a rented one. He acquired another lot, obtained a loan, and built another house that he later sold. All the work was done by himself and his wife, and he devised certain kinds of prefabricated house partitions. In 1963 he was asked to build four houses by the owner of a company known as Continental Ltd. Then, from 1963 to 1967, he built some 65 houses with that company and shared in the profits.

In 1966 Mr Burger wanted to start his own construction business and, with his wife, incorporated Burger Construction Ltd. He bought land and his company earned commissions on the sale of both land and houses.

In 1968 he met with his accountant to discuss his company’s business. He found that he had no control over the expenses and this could place him in financial straits. Because of his Prince George experience, he wanted to protect his wife, and he decided to incorporate two other companies, one to hold land on a long-term basis and create a land bank, the other to raise the necessary financing.

Apparently Burger Construction Ltd itself could not achieve those two goals because of its precarious position. It had no finances and prospective partners were afraid to put money into this company. Furthermore, in case of serious financial difficulties, all the land could be tied up for a long period of time and partners could lose their input.

At the time of this particular discussion with his accountant, the matter of associated companies or of tax savings did not come up. His sole concern was to protect his wife and to have one company to hold land and another one to attract investors or partners. Consequently, he agreed with Mr Biagi that he would incorporate two companies. Grid Holdings Ltd was established to attract outside shareholders but it never succeeded. Sandell Developments Ltd held undeveloped land, a fully rented office building, and received interest on mortgages. Mrs Burger, as president and chief shareholder, signed the documents for Sandell but Mr Burger managed all the companies and received management fees from Sandell which amounted to about 10% of the profits realized by that company.

Since 1969 Burger Construction Ltd has built houses and buildings, purchased lots from Sandell Developments Ltd and outsiders, developed the land, looked at the plans and the feasibility studies, obtained the necessary zoning and installed the services. According to the evidence, Sandell Developments Ltd has never been in that line of business.

Mr Burger filed two documents, Exhibits A-5 and A-6, to show that the Mortgage Insurance Company of Canada requested that Mrs Burger be one among others to guarantee a loan of some $3,700,000 but, because she was not a sharehloder in Burger Construction Ltd, he succeeded in avoiding her involvement.

In 1975 Tritem Estate Ltd was incorporated, and Mr Burger had to guarantee personally a loan of $1,600,000. Tritem carried out four projects but the interest on borrowed money went from 9% to 12% and Tritem did not earn any profits. Burger Construction Ltd had to advance the balance of its cash flow of $300,000 to Tritem Estate Ltd in order to avoid foreclosure on three properties.

In 1970 Sandell Developments Ltd was still obtaining and supplying land to Burger Construction Ltd and it had net assets of $350,000.

Upon cross-examination, Mr Burger stated that Sandell Developments Ltd never carried on the house-building business and that it had no office, no telephone number, no stationery, no sign at its office, and did no advertising to the public; that it reported an income of $18,200 in its 1968 taxation year; and that there was no discussion about taxes at the first meeting with Mr Biagi with regard to its incorporation.

After the first meeting in 1968, he instructed Mr Davidson, a lawyer, to incorporate two companies, one to hold land, the other to raise mortgage money. At this second meeting, there was no discussion as to tax implications except that Mr Davidson mentioned the fact that they should keep the companies apart to prevent association. It was decided that Mrs Burger would not be a shareholder in Burger Construction Ltd because Mr Burger did not want his wife to be put in the position of having to guarantee the debts of Burger Construction Ltd.

He admitted that he was the moving force behind all the companies, and that his wife and Mr Biagi did not decide anything but just signed the documents.

Later Mr Burger decided that Sandell Developments Ltd would become a co-shareholder with three of his friends in the incorporation of a company to be known as Langley Estate Ltd. The said company acquired land at $12,000 an acre.

He also admitted that he did not have any written management contract with Sandell Developments Ltd and relied completely on his accountant, Mr Biagi, to prepare his income tax returns.

Referring to the income tax returns, counsel for the respondent asked Mr Burger (1) why there was a surplus of $21,400 in the financial statement of Burger Construction; and (2) why Sandell advanced $100,000 to Burger Construction Ltd if Mr Burger wanted to protect his wife. Mr Burger answered that he relied completely on his accountant to prepare his returns, and that Sandell Developments Ltd was the most accessible source from which to borrow, since it had cash in hand at its disposal.

He terminated his testimony by saying that Gaway Homes Lid, in which Burger Construction Ltd is also a shareholder and for which Mr Burger had to guarantee personally a debt of $3,700,000, is still building houses, condominiums and town houses.

Mr Biagi testified that he was the chartered accountant for all the companies from 1968 to 1973; that, at the first meeting in September 1968, Mr Burger’s only concern was the bad state of affairs of Burger Construction Ltd, which was underfinanced and had substantial liabilities because it had gone ahead too rapidly. There was no discussion about tax implications at that meeting, and it was decided that Mrs Burger would resign her shares in Burger Construction Ltd to become the sole owner of Sandell Developments Ltd and that the two new companies would be incorporated. He went on to say that there was no tax problem in those years; that the two companies had to be incorporated that way, tax implications or not; and that Burger Construction Ltd, as it was then functioning, could in no way obtain the loans of up to half a million dollars that it needed to pursue its goal.

Upon cross-examination, Mr Biagi admitted that, in order to prevent association, Mr Burger did not hold any shares in Sandell Developments Ltd and that there was large indebtedness by Sandell to Burger Construction Ltd.

Counsel for the appellant argued that the Board must rest its decision on the facts in deciding whether Sandell Developments Ltd was associated with the four other companies; that the sole purpose of incorporating Sandell Developments Ltd was to prevent a recurrence of the Prince George experience; that if Mr Burger was to continue to keep a good reserve of land for future development, he had to incorporate both Sandell and Grid Holdings Ltd, and that some of the land is still held by Sandell.

He further explained that Burger Construction Ltd did not have sufficient financing and it was necessary to resort to other sources and to incorporate two companies because those who lend money want the maximum guarantee, which usually includes personal guarantees. Sandell Developments Ltd was incorporated to accumulate land and Grid Holdings Ltd was to serve as an independent vehicle to induce outsiders to provide mortgage funds.

Counsel for the appellant went on to say that the result of the program has been beneficial to Sandell Developments Ltd since that company has accumulated assets of $350,000 and diversified its holdings as follows:

(1) land assembly;

(2) a commercial building fully rented;

(3) many partners to develop land to maximum.

He explained that, because Sandell Developments Ltd was mostly in land banking, it did not need to have its own office or telephone number, and that it was using the management knowledge of Burger Construction Ltd for a fee.

He terminated his argument by saying that there had been no better way than the one they had chosen, and this was the only method that appeared feasible in the circumstances.

Counsel for the appellant referred the Board to Holt Metal Sales of Manitoba Ltd v MNR, [1970] CTC 144; 70 DTC 6108; C P Loewen Enterprises Ltd v MNR, [1972] CTC 396; 72 DTC 6298; MNR v Furnasman Ltd and Furnasman (Metal) Ltd, [1973] CTC 830; 73 DTC 5599.

Counsel for the respondent admitted that the decision in this appeal is more a question of fact than law and he referred the Board to Alpine Furniture Company Limited et al v MNR, [1968] CTC 532; 68 DTC 5338, and Doris Trucking Company Limited v MNR, [1968] CTC 303; 68 DTC 5204.

He went on to say that Mr Richard Burger was the moving force behind all the companies referred to in these proceedings, that Sandell Developments Ltd did not have a separate existence since it did not have anything of its own such as an office, telephone number, stationery or publicity with which to operate as a separate company, and that the payment of some management fees in 1971 by Sandell Developments Ltd to Mr Burger indicates that the separate entity was for tax reduction purposes only.

According to the evidence adduced, it seems that the separate existence of the appellant companies was more to protect Mr Burger’s wife and to create a limited liability than to reduce the income tax liability.

Mr Richard Burger’s past background warrants the adoption of such an attitude and it is reasonable to believe that his main concern, if not his sole purpose, when he incorporated those previously mentioned companies, was to protect himself and his family against a recurrence of his former bad experience. There is no need to analyze the jurisprudence referred to the Board, since both parties agree that the matter at issue is more a question of fact than a question of law.

According to my understanding and' interpretation of the facts, the appeals must be allowed and the matter is referred back to the respondent for reassessment in accordance with the reasons for judgment.

Appeals allowed.