A.I.M. Steel Limited v. Minister of National Revenue, [1969] CTC 479, 69 DTC 5305

SHEPPARD, D.J.:—This appeal is by A.I.M. Steel Limited against the re-assessment by the Minister wherein an income tax of $2,507.75 was levied for the year 1965. The issue is whether a fence business was carried on during the years 1960 and 1961 by A.I.M. Steel Products Division Ltd. as the appellant alleges or by A.I.M. Steel Ltd., the appellant, as the respondent alleges. The facts follow:

At relevant times the Products Company was a wholly owned subsidiary of the Steel Company and the three directors of the Products Company were on the board of directors for the Steel Company. Until 1955 the fence business was carried on by the Products Company. In 1955 to 1959 inclusive the fence business was carried on by the Steel Company as one of its several divisions and during that period the Products Company was inactive.

In 1959 the directors of both companies decided that the fence business, then profitable, should be transferred to the Products Company in order that the Products Company might deduct under the Income Tax Act, Section 27(1) (e) from its taxable income, certain past losses. On June 17, 1959 the directors of the Steel Company resolved as follows:

On Motion it was received that, commencing July 1, 1959, the fencing division of the Company will be turned over to A.I.M. STEEL PRODUCTS DIVISION LTD., including all uncompleted contracts at that date. The Company will assess a Management fee against A.I.M. STEEL PRODUCTS DIVISION LTD., to cover operational expenses incurred by it. Such fee to be determined at a later date. (Ex. A2.)

and on June 17, 1959 the directors of the Products Company resolved as follows:

On Motion it was resolved that, commencing July 1, 1959, the Company will operate the Fencing Divisioon of A.I.M. STEEL LIMITED. All uncompleted contracts held by A.I.M. STEEL LIMITED on the above date will be assumed by the Company. The Company will be assessed a Management fee by A.I.M. STEEL LIMITED to cover operational expenses incurred by them on behalf of the Company. (Ex. A3.)

The year of each company ran from July 1, to June 30 following. The question here is whether or not the Products Company did effectively take over and carry on the fence business during the two years from July 1, 1959 to June 30, 1961 as the directors of both companies intended.

According to the evidence of Eyres, the general manager for the fence business, the fence business while operated by the Steel Company occupied a separate building about 40’ x 80’ on the property of the Steel Company and had a separate inventory as the products of the fence business were galvanized and the products of the other divisions of the Steel Company were not galvanized. The fence business also had its own manufacturing machinery, of which one machine cost $12,000, and also had equipment separate from other divisions as the fence business included installing fences by digging holes, putting in posts and imbedding the posts in concrete.

Prior to June 30, 1959 Eyres was told that the Products Company would operate the fence division from June 30, 1959 but the Steel Company would look after the administration, would keep the records and bookkeeping, do the banking including the payment of accounts payable and the collecting of the accounts receivable and for its services the Steel Company would be paid basically $25,000 per year to be adjusted upwards as the actual expenditures exceeded that amount. For the year July 1, 1959 to June 30, 1960 the Products Company paid $25,000 (Ex. A4, Statement (iii) ) and for the year July 1, 1960 to June 30, 1961 the Products Company paid $70,700, of which $18,200 was in- curred in the year ending June 30, 1960 (Ex. A5, Statement

(11) ).

The Products Company began operations prior to July 1, 1959 as Eyres informed the staff of five engaged in manufacturing that they would thereafter be employees of the Products Company. Eyres also arranged for the documents to be used by the Products Company and in fact used the old documents of the Steel Company with a rubber stamp superimposing the name of the Products Company and when the old forms were used up obtained new forms using the Products Company name alone. A sign was put on the building occupied by the Products Company which read “A.I.M. STEEL PRODUCTS DIVISION LTD.’’ which was known as the fence building. The advertisement for the fence building in the telephone book was changed from the Steel Company to the Products Company. The Products Company also had its own brochures, in some instances with a rubber stamp indicating the origin as in Ex. Al4. Further, the equipment used away from the plant to construct fenees had the name of the Products Company put on it.

From July 1, 1959 to October 1, 1959 the Products Company occupied the same building used for the fence business on the Steel Company’s property. The rent for that building and for the equipment therein was added to the cost of products and charged by the Steel Company to Products Company. Eyres also remained at the head office of the Steel Company although managing the Products Company. At the Steel Company head office he had desk room and used as stenographer an employee of the Steel Company. Fence orders phoned in were received by him at the office of the Steel Company or by an employee at the Products Company building.

Beginning October 1, 1959 Products Company obtained the lease of a new building one mile away for a term of three years and on that date moved to the new building. Eyres and a clerk moved from the Steel Company’s head office and there were moved from the fence building formerly occupied by Products Company, all machinery, inventory, office records and personnel.

Throughout the two years, however, the bookkeeping was done by Steel Company and a stenographer from Steel Company was used by Products Company, whose employee would write out the letters in longhand at the Products plant and take them over to Steel Company for typing. Insurance policies were in the name of both companies. The invoices were on forms issued by the Steel Company as Steel Company collected and did the banking. Throughout, the Products Company issued its own price list (Ex. AG) and would make its own purchases. The Products Company would issue its tenders, its own bills of lading for shipment (Ex. A7) and its own cards for the representatives of Products Company (Ex. 8). Products Company did its own invoicing, issued its own delivery slips (Ex. A13) and used its own bills of lading (Ex. A7). Some 60% to 70% of the business of the fence business was repeat customers, such as the Government of British Columbia, Imperial Oil Limited and Cominco, and these repeat customers early learned of the takeover by the Products Company. Imperial Oil issued its own purchase orders to the Products Company as of November 2, 1959 (Ex. A9) and further purchase orders of August 8, 1960 and February 21, 1961 (Ex. All). Dominion Bridge Ltd. issued its purchase order as of July 8, 1959 (Ex. All) and the British Columbia Government as of May 2, 1960 (Ex. All). Further, there were letters from the customers to the Products Company, from Imperial Oil Limited as of November 4, 1959 (Ex. A10) and from Cominco Limited as of August 19, 1960, September 22, 1960 and October 28, 1960 (Ex. A12). Other customers would receive tenders from the Products Company and learn of the take-over in that way and throughout the two years the Steel Company continued looking after the collecting of accounts receivable and the banking of the Products Company.

Miss Stables gave evidence that her examination of the books was consistent with the fence business being operated as a division of the Steel Company, in particular that the transactions of the Products Company were recorded in the books of the Steel Company and Steel Company invoices were used for sales by the Products Company. Other evidence confirms the evidence of Miss Stables. The Steel Company continued to carry the inventory, taken over by the Products Company. The Products Company was inactive until about June 30, 1959 when it took over from the Steel Company the machinery, inventory and personnel of the fence business. There was no appraisal of the inventory or of the machinery taken over by the Products Company from the Steel Company. Further, the accounts for fences sold were payable thirty days after delivery and considering that the Products Company was inactive until approximately the end of June, 1959 the wages of employees, the rent for the building and machinery and the inventory used, that is the overhead generally, must have mounted up in excess of the receivables until such time as the accounts for fences manufactured and delivered produced receipts sufficient to equal the overhead of the Products Company. That deficit was paid by the Steel Company who collected the receivables for the Product Company and did the banking business for the Products Company.

On the other hand, the Steel Company would have an extensive control over the fence business whether it were carried on by a division of the Steel Company or by the Products Company. The Steel Company had control of the Products Company by reason of the Products Company being a wholly owned subsidiary and also by reason of its directors being elected by the Steel Company. Hence the control of the Steel Company over Products Company was similar to the control over a division of the Steel Company; such differences are formal rather than material. Under such circumstances of like control one would expect the indulgences to be shown by the Steel Company to the Products Company to be similar to those the Steel Company might show to an operating division of the Steel Company, with like advances of money or inventory in the hope of future profits. Further, statements (Ex. R18) for the years ending 1960 and 1961 indicated that the Products Company was operated as a separate company and the fence business was not carried on as a division of the Steel Company. Also, the rental for the machinery of the Steel Company used in manufacturing fences was entered by the Products Company in its cost to the customers and Products was charged for the use of such machinery by the Steel Company.

Basically, the question is whether the contracts with customers for sale of fences were made by the Products Company or by the Steel Company. If by the Products Company, then the rights to accounts receivable of the Products Company were not vested in the Steel Company and passed only to the Steel Company by assignment or handled by agency from the Products Company. Kyres testified that the contracts for fences were made with each customer by the Products Company and that evidence was confirmed by the purchase orders from customers (Ex. A19 and Ex. All) and by correspondence (Ex. A10 and A12) which imply knowledge of the fact that the fence business was carried on by the Products Company.

In conclusion, it would appear that the fence business was carried on by the Products Company for the years ending respectively June 30, 1960 and June 30, 1961 and not by the Steel Company ; therefore the assessment should be referred back to the Minister to make a re-assessment according to this finding. The costs of appeal will be to the appellant.