Debruth Investments Limited v. Minister of National Revenue, [1973] CTC 268, 73 DTC 5233

Collier, J:—This is one of four related appeals which were heard on common evidence. This appellant and the other three are companies. Pursuant to subsection 138A(2) the respondent directed that the four appellants and another company, Don River Heights Limited (hereafter “Don River”), should be deemed to be associated with each other for the taxation year 1964. Assessments increasing the amount of tax payable were issued accordingly, and it is from those assessments these appeals are taken.

The issue is whether none of the main reasons for the separate existence of the four corporations was to reduce the amount of tax that would otherwise be payable under the Income Tax Act.* [1]

A number of facts were agreed upon.t [2] Oral testimony was given on behalf of the appellants by Nathan Silver. He has been in real estate development for some years and, from the evidence, his enterprises have obviously been successful. At all relevant times he and his wife were the sole beneficial shareholders of Don River, which engaged in the development, subdivision and resale of raw land. In 1964 Don River was associated for income tax purposes with six other corporations.^ [3] I need only refer to the name of two: Exbury Heights Limited (hereafter “Exbury”) and Bondeb Developments Limited (hereafter “Bondeb”). Exbury at all material times developed land of the associated companies. Bondeb in 1963 transferred some raw land to a partnership which I shall refer to later. The activities of all of the companies I have mentioned were controlled or guided by Nathan Silver.

Mr Silver said that sometime prior to January 1963 he discussed the question of estate planning with his auditor and his solicitor. Those two men consulted Mr Thom, a well-known lawyer specializing in tax matters. Silver said he was advised to set up a trust for each of his children, and the trustees would then form companies in respect of each trust.

By documents dated January 31, 1963, four trusts were created by Silver as settlor. In each case there were three trustees, all related by blood or marriage to Silver. The property settled on the trustees was $3 for each trust. I set out the name of each beneficiary and his or her age at January 31, 1963:

Four companies were formed on April 8, 1963. The trustees of each trust are the holders of the only issued shares of each of the com- panies. The names of the companies and the beneficiary for whose benefit they were incorporated are as follows:

These companies are the four appellants.

By an agreement dated three days after the incorporation of the companies, they became the four equal partners “in the business of real estate development and investment. under the name of Alliance Developments”. By a further agreement of the same date Alliance employed Exbury to manage the affairs of Alliance. Exbury was at all times controlled by Nathan Silver. He decided to have Alliance purchase some raw land from Don River for $515,000. The purchase was completed as of May 15, 1963. Financing was arranged with the bank and by mortgage. On the same date, a power of attorney was given to Nathan Silver and two others by the four companies. I quote paragraph 18 of the agreed statement of facts:—

18. Throughout the 1964 taxation year portions of the lands acquired by the partners were sold at a profit and at all material times Nathan Silver, as manager and agent, transacted on behalf of Barjo Developments Limited, Bonsu Developments Limited, Shoel Investments Limited and the Appellant, all of the business activities of the partnership.

I add that Nathan Silver agreed that he and not the trustees really directed the activities of the trusts. He described the trustees as “silent”. In fact, the purchase from Don River and the other land transactions in 1963 and 1964 were all decisions of Nathan Silver. Finally, as to the basic facts, the income of each of the partners of Alliance for 1964 was approximately $34,690. In his reassessment, the Minister taxed at 50% (less the Ontario tax credit). The appellants had, using the lower rates if the companies were not deemed to be associated, estimated their tax at approximately $4,160. The difference in the calculations was approximately $10,000 in each case. Don River’s taxable income for 1964 was approximately $159,400 and a federal tax of approximately $55,200 was paid.

I revert now to the issue here: whether none of the main reasons for the separate existence of the four appellants was to reduce the tax otherwise payable. Cattanach, J has said in respect to this issue:* [4]

That question is one of fact to be decided upon the evidence adduced and the proper inferences to be drawn from that evidence and the onus of establishing that the sole main reason was that of business consideration falls upon the appellants. . . .

The intention in this case requires examination of further evidence. Nathan Silver said in chief he would have proceeded with the trusts and the four corporations even if it meant a tax rate of 50%.+ [5] That is, in many ways, an easy statement to make in retrospect. It is another way of saying tax considerations or, more precisely, tax reductions were never present in the minds of the taxpayers or their agents in the year in question or at the time the companies were formed. Even if such a statement can be accepted, it is not necessarily conclusive of the issue before the court. The continued separate existence of corporations can be maintained on the grounds of non-association under subsection 39(4) and in a realistic hope the Minister will not strike under subsection 138A(2). It seems to me, in that situation, one of the main reasons still can be the reduction of tax otherwise payable.

Nathan Silver said the sole intention was one of family planning and his object was to have his children’s financial affairs and investments divorced from himself and his financial affairs, and the children’s financial fortunes or destinies divorced from each other. I accept that family planning was one of the reasons for the separate existence in 1964 of the four companies, but I do not accept that it was the sole reason. In my view, one other reason, and a main reason, was reduction of tax otherwise payable. I do not use that last sentence in any sinister sense. If reduction was accomplished within the framework and spirit of the Income Tax Act, then the end result is legal.

Mr Silver testified in chief that he had not, prior to the incorporation of the four appellants, discussed with his advisers tax implications or whether the four appellants would be associated within the meaning of subsection 39(4) of the Act. That testimony was shaken in cross-examination. He admitted he knew before April 1963 that different rates of tax might be applicable depending on association or not and the rates which might be applicable to the appellants were discussed. He knew there was a lower rate applicable if the income of the companies was kept below $35,000 per year. He had instructed his advisers, including his own solicitors, to obtain advice from a tax specialist before any of this organization was set up. He conceded that after his advisers had met with the specialist, income tax considerations could have well been discussed. He said he wanted to save as much tax as possible “within my legal rights”. He said the tax expert had expressed the view there would be no association under subsection 39(4) and he was aware of that opinion. He was pleased that the four appellants would be separate and would have a low tax basis. On re-examination by his own counsel at examination-for- discovery he gave an answer (0303-4) which seems to me to contradict his evidence at trial that he would have necessarily gone ahead with the scheme knowing it meant a tax rate of 50%.

While family or estate planning was an aim, the reduction, along the way, of taxes otherwise payable was, in my opinion, a main purpose. I cannot find any escape in the evidence from this conclusion. The reduction or possible reduction of taxes had obviously been discussed among Nathan Silver and his advisers. The danger or otherwise of association had been considered. Silver said that when the trusts were set up, the Alliance partnership had not been thought of. I point out the partnership and the management contract were entered into three days after the incorporations, and the land transactions followed. I think it significant that nothing really changed in the operation of the business carried on by Don River. The partnership had no separate premises, telephone number, or employees. No increase in numbers of employees was required because of the appearance of Alliance. Everything carried on precisely as before except income split four ways found its way into the accounts of these four new separate corporations. To me, these objective facts confirm the view that tax reduction was a main purpose.

I think it is also significant that none of the legal or accounting advisers were called by the appellants.

Counsel for the appellant relied heavily on the Doris Trucking case (referred to earlier) and CP Loewen Enterprises Limited v MNR, [1972] FC 773; [1972] CTC 396 ; 72 DTC 6298. I think it is very clear that all these cases arising from directions made under subsection 138A(2) depend on their own particular facts and the inferences to be drawn therefrom.* [6]

The directions of the Minister are confirmed as are the assessments made pursuant to them.

The appeals are dismissed with costs.