Noren Construction (Toronto) Limited v. Minister of National Revenue, [1972] CTC 325, 72 DTC 6290

Gibson, J:—The appellant appeals from a reassessment for the taxation year 1968 in respect to the sum of $133,099 being one-half of a total profit of $272,197.32 which was made in completing a contract for the construction of 309 housing units for Central Mortgage Housing Corporation in a project known as Thistletown. Thistletown is a suburb of Toronto, Ontario. The appellant claims that this one-half of the profit was income of a related company of the appellant called Noren Construction (Maritimes) Limited and not its income, alleging that the total profit was earned equally and jointly by it and that company in completing that construction contract.

The respondent, on the contrary, alleges that the whole of the profit, namely, $272,197.32 was the income of the appellant and that none of it was the income of Noren Construction (Maritimes) Limited.

The Thistletown project was begun in the summer of 1965 and was substantially completed in 1968, in which year the profit from it, $272,197.32, wsa taken to the extent of one-half into the income of the appellant and as to the other half into the income of Noren Construction (Maritimes) Limited.

The shares of the appellant and of Noren Construction (Maritimes) Limited were owned equally by one Aldo Lorenzetti (through a company he wholly owned, called Noren Construction Limited) and by one Max Tanenbaum and members of his family (through various companies).

some of the relevant background facts are as follows:

In 1964 Noren Construction (Maritimes) Limited entered into and completed a CMHC contract for the construction of family housing at Camp Gagetown, Military Base in Oromocto, New Brunswick. This contract resulted in a substantial loss for that company.

In an attempt to recoup the loss, the appellant was incorporated and after tendering on several CMHC contracts, obtained the contract for the subject Thistletown project on which, as stated, a profit of $272,197.32 was made.

It was the submission of the appellant that it entered into, carried on and completed this Thistletown project as a joint venture with Noren Construction (Maritimes) Limited.

All contract and subcontract documents for this Thistletown project were in the name of the appellant only and there was a general holding out to the public that the appellant alone entered into, carried on and completed this Thistletown contract.

The appellant submitted that the documentary indicia in evidence to prove that the appellant and Noren Construction (Maritimes) Limited jointly entered into, carried on and completed this contract were as follows:

1. The contract dated August 13, 1965 between the appellant and Noren Construction (Maritimes) Limited (Exhibit 5) at paragraph 1 of that contract, providing that “The parties confirm the recitals herein and hereby agree that the terms and conditions provided in this agreement shall govern the joint venture (hereinafter referred to as the ‘Thistletown Joint Venture’)”.

Paragraph 2 of that contract providing that:

Maritimes shall furnish the services of P KENNUNEN, P VAN HOOF and T VAN HOOF, such services to be paid for by the Thistletown Joint Venture.

Paragraph 3 of that contract providing that:

Maritimes shall furnish from time to time all its contractors’ equipment which may be required to complete the Thistletown Joint Venture.

(The evidence was that P Kennunen, P Van Hoof and T Van Hoof were paid by the appellant; and that (see Exhibit 16) there was not enough equipment owned at any material time by Noren Construction (Maritimes) Limited to complete the so-called Thistletown Joint Venture. In addition, the evidence was that this same paragraph 3 was inserted in three other contracts in respect of which there was alleged to be a joint venture between these parties, and again there was not enough equipment to carry out any of them.)

2. Exhibit 9, a letter from the accountant of the appellant dated February 9, 1967 to the Canadian Imperial Bank of Commerce, Keele and Flamborough Drive, Toronto, setting out a schedule of loans receivable by the appellant in which this item appears “Joint Venture with Noren Maritimes — $30,072.50 — December 31, 1966”.

3. Exhibit 11, a letter from the accountants of the appellant to the Canadian Imperial Bank of Commerce, Keele and Flamborough Drive, Toronto, enclosing two copies of the Financial Statements for the joint venture for the year ended July 31,1967.

4. Exhibit 9, a letter dated May 2, 1968 from the accountant of the appellant to the Canadian Imperial Bank of Commerce, Keele and Flamborough Drive, Toronto enclosing “two copies of Interim Financial Statements for the Joint Venture for the period of August 1, 1967 to January 31, 1968”.

5. Exhibit 17, a copy of the balance sheet of the appellant and Noren Construction (Maritimes) Limited — Joint Ventures as at July 31, 1966 where there appear on the assets side, these words and figures:

Advances to Noren Construction (Toronto) Limited $364,285.82

6. Exhibit 18, a copy of the balance sheet as at January 31, 1966 of the appellant wherein on the current assets, the following item appears: “Advance Re Joint Venture $82,606.81”

(The evidence was that this was the total of the net amount, that is revenue minus expenses, not one-half.)

7. (The year end joint venture was July 31.) The July 31, 1967 financial income tax return filed with the respondent showing the $272,197.32 profit allegedly made by the joint venture.

The appellant also submitted that the oral evidence adduced amplified this documentary evidence and proved that these documents were acted upon, so that the conclusion should be that the appellant and Noren Construction (Maritimes) Limited both participated in undertaking, carrying out and completing this Thistletown contract; and that, as a result, one-half of the profits never belonged beneficially to the appellant.

Counsel for the appellant also submitted that it was not necessary for the appellant to prove that it and Noren Construction (Maritimes) Limited carried on this business project of Thistletown contract in common, but instead the question for decision only was for whose benefit was the business carried on.

The respondent made three submissions, namely: (1) that when this joint venture agreement is analysed, the conclusion should be that the two contracting parties did not agree that they would carry on the business in common; (2) that it should be held that the joint venture agreement was at most a careful device for cloaking or disguising the true nature of the transaction which in fact was a transfer to Maritimes, profits earned by the appellant, and that therefore the agreement was a sham; and (3) that at no time in any real sense can it be said when regard is had to all the evidence that the appellant carried on in common the business of contracting homes in Thistletown. In other words, the issue is, was there or was there not partnership?

In my view, certain facts were established in evidence which are conclusive.

Firstly, it was the intention of the parties to the Thistletown project contract, that is, the appellant and CMHC, according to its express provisions that the construction would be the work of the appellant only.

secondly, none of the subcontractors were aware of any joint venture.

Thirdly, both the applications for and the performance bonds themselves read in the name of the appellant only. Noren Construction (Maritimes) Limited was the guarantor only.

Fourthly, there was no oral evidence that Noren Construction (Maritimes) Limited participated in any way in carrying out and completing the Thistletown project.

Fifthly, the statutory declarations (for lien purposes) during the life of the contract were all made by officers of the appellant, and these declare that the appellant only carried out and completed the Thistletown project contract.

In sum, having regard to the whole of the evidence, no facts were established from which it should be inferred that one-half of the said profit realized on the Thistletown project was the income of Noren Construction (Maritimes) Limited in the said relevant taxation year so as to enable it to invoke the loss carry-forward provisions of paragraph 27(1)(e) of the Income Tax Act, and the appellant to reduce its taxable income.

The appeal is therefore dismissed with costs.