De Salaberry Realities LTD v. Minister of National Revenue, [1974] CTC 295, 74 DTC 6235

Decary, J (judgment delivered from the Bench):—The appeal is from income tax assessments for the years 1963, 1964 and 1965 confirmed by a judgment of the Tax Appeal Board on September 3, 1970 and pertaining to the profit realized by the appellant in selling land alleged to be purchased only for shopping centre purposes.

At the opening of the hearing the Court refused to permit that the transcript of evidence before the Tax Appeal Board be put as exhibit on the ground that the appeal is a trial de novo and that such a way of proceeding would prevent the Court from questioning the witnesses and judging their credibility. The Court requested counsel to establish the chain of authority for the final policy and decision-making for the two ultimate beneficial owners, the Bronfman and the Steinberg families.

For these practical reasons and in view of that turn of events, three witnesses were heard the first day and the case was adjourned to continue the next week. After adjournment, counsel were advised that two witnesses were recalled for the continuance of the case.

The evidence discloses that, during the pertinent years, the way of proceeding for each group, was to cause to have a company incorporated per one or few purchases. It would be naïve to believe that the multiplicity of companies ensuing was wanted for business reasons and not for tax reasons. Indeed each company sells one or a few parcels of land whereas the group sells many.

The Court cannot confine itself, for passing judgment on the course of conduct, to the one of the appellant but must resort to the one of the groups. I do not conceive a medical doctor, having to make a diagnosis on the general state of health of a patient, who would examine only his right arm. Complete examination is required for the medical doctor and so it is needed in the present instance: the appellant is a member of the body of the Bronfmans and of the Steinbergs.

Considering that finding, the rule of Salomon v Salomon, [1897] AC 22 (HL), cannot be invoked for refraining the Court from passing judgment on the course of conduct of the groups of the sister-companies and of the parent companies of the appellant.

The Steinberg group had a case in this Court that was decided by my learned brother Heald where the facts were, in substance, similar to those of the present case inasmuch as the finding of law was concerned. That case is the one of Wilderton Shopping Centre Inc v MNR, [1972] CTC 319; 72 DTC 6277, which is on appeal to the Appeal Division of this Court. In view of the fact that I consider the course of conduct of the group rather than the one of the appellant I do not consider that I should wait for the judgment of the Appellate Division. I agree with the result of the judgment of my learned brother Heald.

It is in evidence that Cemps Investments Ltd [sic] is owned and controlled by trusts settled by the Bronfman family and that Steinberg’s Ltd is owned and controlled by the Steinberg family.

As to the Bronfman family, the Cemps Investments Ltd owns all the shares of Cemps Holdings Ltd [sic], now the Fairview Corporation of Canada Limited. The business of Cemps Holdings Ltd is, inter alia, to manage the dealing in land of its wholly owned or partly owned subsidiaries which are sub-subsidiaries or grandchildren corporations of Cemps Investments Ltd. The sub-subsidiaries are the legal owners of land at the times relevant to this appeal.

As to the Steinberg family, Steinberg’s Limited owns all the shares of Ivanhoe Corporation. The business of Ivanhoe Corporation is the same as the one of Cemps Holdings Ltd, it owns shares of subsidiaries that are legal owners of land at the times relevant to this appeal.

After a careful study of the market possibility and the population growth, Cemps Holdings Ltd or Ivanhoe Corporation causes a company to be incorporated to purchase a parcel of land. No attention is given to the matter of zoning before purchasing because it is assumed that any difficulty in that respect can be overcome.

Plans are prepared that are in fact pre-plans, costing $3,000 to $5,000, whereas definite plans, blues, would cost close to $50,000. These facts are in evidence. The officers and directors of each of these sub-subsidiaries, sister-companies, are the same persons; the objects of the companies are similar; they are managed by their parent company which in turn, on a general policy level, is governed by their grandparent company. The structure is the same in the Bronfman and in the Steinberg group.

Though there may be only one or two purchases, the area being large, too big for the needs, there are many sales made by the subsubsidiaries, sister-companies of the appellant; in fact, it is in evidence that the two parent-companies, Cemps Holdings Ltd and Ivanhoe Corporation are often approached by people wanting to buy land though no advertisement is made by them. I deduce that it has to be known that their subsidiaries have excess land and that they are willing to sell. Notice should be taken that it is not the sub-subsidiaries that are approached but the subsidiaries, Cemps Holdings Ltd and Ivanhoe Corporation. That indicates that the centre of policy and decision-making is not at the level of the sub-subsidiaries but closer to the grandparent companies, Cemps Investments Ltd and Steinberg’s Ltd. The directors of Cemps Holdings Ltd and Ivanhoe Corporation are nominees of their parent company and therefore under their influence.

By purchasing, even if forced to, more land than reasonably required, it is evident that the appellant, like the group, has the intention to sell the excess which is of no other use. It is inventory for the appellant. The appellant is an instrument of his parent company and its grandparent company in purchasing and selling land.

I do regard the appellant as a legal entity distinct from the other companies of each group but I look at each group to find out the course of conduct which stamps the one of the appellant, an instrument of the group.

That the appellant is an instrument of the group is revealed by its thin capitalization: $1,000 divided in 100 shares of a par value of $10 each. With such a thin capitalization the appellant made two purchases amounting to nearly two millions. Funds had to be obtained from the two groups. That is a strong clue that the appellant is nothing but an instrument of its grandparent companies, of the two families, but a liability of such an amount warrants a certainty of available funds from the groups.

The little, if any, attention paid to zoning and the assumption that any difficulty in that regard could be overcome have been proven wrong in the present case for the two purchases of the appellant. In my opinion such carelessness about zoning indicates strongly that the main objective is to acquire land that can always be disposed of if the plans are frustrated. To me, that and the thin capitalization are the birth of a sham or of a docile instrument. Primarily there is a slight desire of building a shopping centre and secondarily there is an intention to sell land. Such a way of doing, in my opinion is not serious and is prompted only for possible tax advantages. To grasp the magnitude of the Bronfman and the Steinberg groups, I think it is required to know of the corporations of each group.

In the Bronfman group, there are the trusts owning all the shares of Cemps Investments Limited and that company owns all the shares of Cemps Holdings Limited at times relevant to this appeal, now the Fairview Corporation of Canada Limited, and Cemps Holdings Limited owned 50% of the shares of the appellant at the time of purchase and sale of land by the appellant.

The Fairview Corporation of Canada Limited owns all the shares of the Fairview Corporation Limited which, in turn, owns all the shares in two other companies; 51% of the shares of one company; 50% of the shares of five companies; 33 1/3% to 30.1% of the shares of three companies. There were 13 companies in the Bronfman group in 1972 after many subsidiaries were amalgamated during the years 1967 to 1969. There were about ten companies so amalgamated. At the times relevant to this case the total of the companies in the Bronfman group was over ten companies.

In the Steinberg group, the family owns all the shares of Steinberg’s Limited which in turn owns all the shares of Ivanhoe Corporation. The latter company in turn owned all or a substantial part of the shares of 18 companies in the Montreal district.

In the Bronfman group, we have a great-grandparent corporation, a grandparent corporation, a parent corporation and two wholly owned sub-sub-subsidiary corporations and eight companies where the interest of the parent corporation, Ivanhoe, is 50% or more. In the Steinberg group, there are the grandparent corporation, the parent corporation and 18 companies wholly or partially owned by the parent-company.

It is my opinion that such pyramiding of corporations, in each group, demonstrates the extent of the need not to restrict the scrutiny of the course of conduct to the one of the appellant which is only an instrument in the hands of the groups.

In each group the directors of the subsidiaries, of the sub-subsidiaries and of the sub-sub-subsidiaries are nominees of the great- grandparent or grandparent corporation from where emanates the general policy making and decision taking of the group.

The Court takes note that the sister-companies, those in each group of the same level as the appellant, do not deal with each other but deal only with their respective parent company, that is, Cemps Holdings Ltd for those of the Bronfman group and Ivanhoe Corporation for those of the Steinberg group. Each of these sister-companies has the same general objects and its business is essentially similar. Each one buys and sells land. if one is isolated from its sister-companies there is only one or two purchases and a few more sales. When they are reunited then their dealings are impressive and indicate that their business includes buying and selling in the ordinary course of events.

Furthermore these sister-companies are all instruments of their parent companies, Cemps Holdings Ltd and Ivanhoe Corporation, which have caused them to be incorporated; have determined their thin capitalization; have made the market and population growth surveys; have seen that pre-plans of architect be drafted that could be used for any supermarket, the said pre-plans cost at most $5,000, whereas blues would cost $50,000; have been approached by people wanting to buy land owned by the appellant and its sister-companies; have authorized the sale of land of the appellant and its sister-companies; have dictated the course of conduct of the sister-companies; have received and have obeyed the policy making and the decision taking of Cemps Investments Ltd or Steinberg’s Limited their parent company, and grandparent or great-grandparent of the sister-companies.

In such a pattern there is no room for any free will on the part of the appellant and its sister-companies; they are, directly, instruments of their parent corporation and, indirectly, of their grandparent or great- grandparent corporation.

In view of these facts the course of conduct of the appellant must not be viewed in an isolated way but in taking into account the activities of its group. In such a light there is no doubt that the course of conduct of the appellant is the one of trader in land, and even in isolating the appellant, which should not be done, the course of conduct, then, is also that of a trader in land.

I have perused the activities of both groups to ascertain their course of conduct and also to ascertain the course of conduct of one of their instruments, the appellant.

I have disregarded the entity of the appellant in having recourse to the activities of both groups in order to judge the course of conduct of the appellant. There are precedents and authors that justify my collecting of the evidence.

In Palmer and Prentice, Cases and Materials on Company Law (1969) we find these remarks at page 49:

An attempt was made to specify the criteria which, if satisfied, would indicate that a subsidiary company was carrying on the business of the parent company by Avery J in Smith, Stone and Knight Ltd v Birmingham Corporation, [1939] 4 All ER 116, 3 Mod L Rev 226:

“Were the profits treated as profits of the company?—when I say ‘the company’ I mean the parent company—Secondly, were the persons conducting the business appointed by the parent company? Thirdly, was the company the head and brain of the trading venture? Fourthly, did the company govern the venture, decide what should be done and what capital should be embarked on the venture? Fifthly, did the company make the profits by its skill and direction? Sixthly, was the company in effectual and constant control?”

Applying these criteria it can be said that the profits were treated as profits of the parent company: a prospectus for the issue of shares in the Ivanhoe company reveals that fact; the appointments of the persons conducting the business of the appellant were made by the two parent companies and are the same people and they also act in the parent company; the parent company is the head and brain of the

trading venture: the policy is established by the parent company; the capital to be brought in the venture was decided by the parent company, whether or not, once and for all, or in each instance, and that makes no difference; it is by the skilled direction of the parent company that the profit was made; the parent company is in effectual and constant control of the appellant or the said officers of both companies are the same people paid by the parent.

Ibid, same page, we read:

In a similar vein the decision City of Toronto v Famous Players Canadian Corporation Ltd, [1935] 3 DLR 327 (Ont CA), established that the business of one company can embrace the apparent or normal business of another where it can be said “that the second company is in fact the puppet of the first; when the directing mind and will of the former reaches into and through the corporate facade of the latter and becomes, itself, the manifesting agency. In such a case it is not accurate to describe the business as being carried on by the puppet for the benefit of the dominant company. The business is in fact that of the latter.”

In the present instance, the appellant is the puppet of the two parent companies it being owned 50-50: the mind and will of the parent companies reach through the facade of the appellant, the parent companies carry, in fact, the business of the appellant.

Ibid, same page:

• Aluminum Company of Canada Ltd v City of Toronto, [1944] SCR 267, Rand J, commented that the Famous Players case:

“• . . settled that the business of one company can embrace the apparent or nominal business of another company where the conditions are such that it can be said that the second company is in fact the puppet of the first; when the directing mind and will of the former reaches into and through the corporate facade of the latter and becomes, itself, the manifesting agency. In such a case it is not accurate to describe the business as being carried on by the puppet for the benefit of the dominant company. The business is in fact that of the latter. This does not mean, however, that for other purposes the subsidiary may not be the legal entity to be dealt with.

The question, then, in each case, apart from formal agency which Is not present here, is whether or not the parent company is in fact in such an intimate and immediate domination of the motions of the subordinate company that it can be said that the latter has, in the true sense of the expression, no independent functioning of its own.”

The business of the appellant is not apparent unless recourse is to be had to the group to ascertain the overall course of conduct, otherwise only a part of the course of conduct is apparent, the appellant being a shield; the appellant being a subsidiary has to be reckoned with as to the ownership of the land but its conduct must be ascertained by the course of conduct of the whole group; the appellant’s parent companies are in fact in an intimate and immediate domination of the appellant which has no independent functioning of its own.

There is also the case of R v Canada Rice Mills Limited, [1938] Ex CR 257, a judgment of the then President Maclean where we read at page 261 :

Now the facts of this case are quite different from those in other cases which have come before the courts, that is, so far as I am acquainted with them. The plaintiff is not contending that Rice Sales is in any way liable for the tax, in fact it is not even a defendant in this action. The plaintiff takes the position that, for the purposes of the tax at least, Rice Sales is a part

?;•.! ?a Mills, that its business activities are but a part of those of Rice Mills. While cases of this kind are never free from difficulties, yet, I think, it is fairly clear in this case that the defendant must be held liable for the tax. Rice Sales was formed at the instance of the directors and shareholders of Rice Mills in the belief that they might thus minimize the sale tax, or, that, in some way or other, they might put themselves on what they thought would be a parity with their competitors so far as the sales tax was concerned; or, that they might induce the Revenue Department to accept a more favourable basis of assessing the sales tax against Rice Mills, as a manufacturer or producer, The formation of Rice Sales does not seem to have been suggested by the usual motives underlying the creation of business enterprises.

That judgment of President Maclean was confirmed on the Bench by the Supreme Court, [1939] SCR 84, and also by the Privy Council, [1939] 3 All ER 991, where we read these remarks of Lord Aikin at page 993 et seq:

The sales company was formed in circumstances which did throw some Suspicion on its formation as being formed specially for the purpose of evading the tax, but it is not necessary to Say that, because there is certainly evidence that it was in contemplation to form such an association at one time before the question of the tax came into existence. . . .

The partnership had no capital; it had no warehouse; the warehouse was the warehouse of the mills company; the offices were the offices of the mills company; and, what is rather significant for a company that on this footing must have been trading on a very large scale, it had no banking account; the only banking account was the banking account of the mills company. The servants who attended to the sales part of the business were in fact paid by the mills company, whose servants they had been before the partnership came into existence. The proceeds of the sales were all in fact received ultimately by the mills company, who are said to have accounted for the proceeds afterwards to this partnership. . . .

All those facts put together appear to their Lordships to afford ample evidence-they deal with it because counsel for the appellants has suggested that there was no evidence upon which the courts could come to this conclusion—upon which the courts could come to the conclusion to which they did come, namely, that these transactions were in fact being conducted throughout by the sales company for and on behalf of the mills company.

These remarks of Lord Atkin on behalf of the Council are pertinent to the case before this Court. If the facts in the Canada Rice Mills Ltd case permitted to ignore the partnership and to tax the appellant therein, it follows much more that in the present case the Court may look into the operations of the group Bronfman and the group Steinberg to determine the course of conduct of these two groups that impregnates the course of conduct of the appellant and assimilates it to the course of conduct of its sister-companies.

Substantially similar facts prevailed in R v Colgate-Palmolive-Peet Co Ltd and Palmolive Manufacturing Co (Ontario) Ltd, [1933] SCR 131.

In these cases, decided by higher courts, the companies had one master whereas in the present instance the appellant had two masters, Cemps Holdings Ltd and Ivanhoe Corporation.

The Court reiterates and underlines that it does not consider the appellant as an entity having no life of its own or as an agent. It had a life of its own in having title to the land and the proceeds of sales of the parcels were its for all legal purposes. To find otherwise would directly imply that the profit does not belong to the appellant but to its two parent companies. The appellant being owner of the land is owner of the proceeds of sale of the same land. If it were an agent, the proceeds would belong to the parent companies.

These five cases could by themselves justify the request of the Court that evidence be adduced relating to the course of conduct of each group owning 50% of the shares of the appellant but other authorities can be resorted to for the same purpose.

in Gower, The Principles of Modern Company Law, we read at page 194 as to holding and subsidiary companies:

The most striking limitation imposed by the Companies Acts on the recognition of the separate personality of each individual company is, however, in connection with associated companies within the same group enterprise. As we have seen, it has become a habit to create a pyramid of inter-related companies, each of which is theoretically a separate entity but in reality part of one concern represented by the group as a whole.

In the present case we have a pyramid of corporations and the appellant is part of the group of companies.

Ibid, at page 200 we read:

lt may therefore be said that not only has the veil been lifted in the interests of the Revenue but further steps have been taken in the interests of members towards recognising “enterprise entity” rather than corporate entity.

As to group enterprises, which is the case we are concerned with we read: ibid, at page 213:

Consideration of the cases in which the courts have treated a company as the agent of its controlling shareholder suggests that they are more ready to do so where the shares are held by another company. In other words, they are coming to recognise the essential unity of a group enterprise rather than the separate legal entity of each company within the group.

There is in the present case an essential unity of a group enterprises which, for purposes of evidence of course of conduct, I recognize rather than the course of conduct of the separate legal entity of the appellant.

I believe it is useful to look at the doctrine evolved from the case law in the United States of America.

In Fletcher’s Cyclopedia of the Law of Private Corporations (1963 Revised Volume), vol 1, we read at page 166:

41. Disregard of the corporate entity-ln general. In previous sections the doctrine that a corporation is an “entity” or a “personality” has been discussed. It there appeared that the entity or personality of the corporation is, by some authorities, regarded as a fiction or abstraction, the real thing or being consisting of the collective or unitary body of members; while others regard the entity as the fact or thing to deal with. Notwithstanding the lack of agreement on these points, practically all authorities agree that under some circumstances in a particular case the corporation may be disregarded as an intermediate between the ultimate person or persons or corporation and the adverse party; and should be disregarded in the interest of justice in such cases as fraud, contravention of law or contract, public wrong, or to work out the equities among members of the corporation internally and involving no rights of the public or third persons. There is a growing tendency of courts to do so.

Ibid, at page 203 et seq as to corporate agencies or affiliates of other corporation:

A very numerous and growing class of cases wherein the corporate entity is disregarded is that wherein it is so organized and controlled, and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit, or adjunct of another corporation. The control necessary to invoke what is sometimes called the “instrumentality rule’’ is not mere majority or complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own and is but a business conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place in order that the entities be disregarded at the time. Ownership of all the stock of a corporation coupled with common management and direction does not, however, operate as a merger of the two corporations into a single entity. So it is a matter of common knowledge that certain business transactions are carried on between closely associated corporations without destroying or merging their respective corporate entities. One corporation may be disregarded where the two are identical or indistinguishable in fact. Unless it is a mere instrumentality or agency or adjunct in that sense, or as a sham or is used in fraud, by the dominant corporation, it will not be disregarded; and it will not be disregarded unjustly.

In the present instance it is evident that the appellant is nothing but an instrument in the hands of two parent companies and the rule of instrumentality should be applied to lift the veil in order to assess the course of conduct of the appellant and of the group.

Ibid, at page 239 we read about inadequate capitalization:

If a corporation is organized and carries on a business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that the stockholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibilities to creditors is an abuse of the separate entity and will be ineffectual to exempt the stockholders from corporate debts. It is coming to be recognized as the policy of the law that stockholders should in good faith put at the risk of the business unencumbered capital reasonably adequate for its prospective liabilities. If the capital is illusory or trifling compared with the business to be done and the risks of loss, this is ground for denying the separate entity privilege.

The capitalization of the appellant was indeed a thin one being $1,000 to purchase first a land paid about $900,000 and later on a second one nearing $1,000,000. Such a thin capitalization implies that the appellant was in dire need of financial help from its parent companies, the Bronfman and the Steinberg groups. That way of doing reveals the artificiality of the legal entity of the appellant.

Ibid, at page 240 et seq we read as to prevention or evasion of law or legal obligation to pay:

Where the corporate form of organization is adopted or a corporate entity is asserted in an endeavor to evade a statute or to modify its intent, courts will disregard the corporation or its entity and look at the substance and reality of the matter. This has been applied to violations of laws against “trusts” and combinations in restraint of trade and commerce, partnership law, evasion of stockholder’s liability, evasion of usury laws, evasion of rent, infringement suits, laws regulating public utilities, laws against rebating and overcharges, investments by insurance companies, tax laws, bankruptcy laws, and a workmen’s compensation law. The courts will, conversely, refuse to regard corporations as the same in favour of one which seeks thereby to evade law or legal obligations.

lt would be naïve not to see that the incorporation by each group of one corporation for each parcel of land is not made to give a capital item aspect to the whole of the parcel purchased though it is then known that only one part or maybe the whole parcel may be resold.

The matter of the lifting of the veil of the legal entity has been studied by Stone and by Friedmann.* [1]

The theory of the form and substance could also be invoked but it is definitely not necessary.

Upon the evidence adduced, I find that the appellant, being a member of an horizontal group of sister-companies incorporated for the same object and a member of a vertical group, there being a parent and a grandparent company for the Bronfman family and for the Steinberg family, must have its course of conduct determined by the one of its sister-companies, its parent companies and its grandparent company because the appellant is only an instrument in the carrying on of the business of its parent companies and of its grandparent company, whose business of the parent and grandparent companies include, inter alia, directly or indirectly, the real estate one, under many forms and shapes, and the course of conduct of the appellant is hereby determined to be the one of a trader in land as a member of the horizontal business group and of the vertical business group of the member-companies, and that membership not being, in fact, for business reason as shown, inter alia, by the thin capitalization of the appellant and its dominance by its parent companies, consequently the profit realized in 1963, 1964 and 1965 on the sale of parcels of land is one made in the turning into account of inventory and is income of the appellant under the provisions of sections 3 and 4 of the Income Tax Act.

The appeal is dismissed with costs.