The Assistant Chairman:
1 These are the appeals of Lindstrom Construction Ltd from income tax assessments in respect of the 1970, 1971 and 1972 taxation years. By agreement, the three appeals were heard on common evidence.
2 By notice of reassessment dated June 27, 1973 the Minister of National Revenue disallowed in the appellant's 1970 taxation year a deduction of $3,455.77 claimed by the appellant in respect of an alleged loss in its 1971 taxation year.
3 By notice of reassessment dated June 27, 1973 as subsequently replaced and varied by a notice of reassessment dated August 19, 1974 the Minister of National Revenue included in the appellant's income for 1971 a net amount of $32,567.26 as income transferred from Mill City Woodworking Ltd (hereinafter referred to as “Mill City”) plus additional capital cost recapture on Class 6 assets in the amount of $2,563.97. The latter amount is not in issue in the 1971 appeal filed with this Board.
4 By notice of reassessment dated June 27, 1973 the Minister of National Revenue included in the appellant's income for the 1972 taxation year an amount of $23,622.85 as income transferred from Mill City.
5 The issue in this appeal is whether the appellant company or Mill City was entitled to the profits derived from the execution of eight contracts for the construction of dry kilns.
6 The president of the appellant company is Mr Arthur Lindstrom, who incorporated the appellant company in 1960 for the purpose of carrying out a general contracting business in which he was the majority shareholder, his wife and children holding the balance of the shares.
7 Mill City and Arjo Holdings Ltd were also companies in which Mr Lindstrom and his family owned all the shares on the same basis as in Lindstrom Construction Ltd. In still another company, Inland Mill Builders Co Ltd (hereinafter referred to as “Inland”), Mr Lindstrom and his wife each owned 50% of the shares.
8 In 1969 Mill City, which had previously been engaged exclusively in mill work, was in serious financial difficulties, and Mr Lindstrom decided that the company should get into the assembling of dry kilns used by the lumber industry rather than continue in mill work.
9 On July 15, 1970 Moore Dry Kiln Company of Canada Ltd (hereinafter referred to as “Moore Canada”), a manufacturer of dry kilns, entered into an agreement with Lindstrom Construction Ltd, the appellant, whereby, for a period of 10 years, Lindstrom Construction Ltd would be the contractor for the assembling of dry kilns manufactured by Moore Canada.
10 In the years pertinent to this appeal, Mill City allegedly executed eight contracts for kiln installations, five of which were for Moore Canada. In evidence, both Mr Arthur Lindstrom and Mr Foulston, manager of the Prince George office of Moore Canada, stated that most of the negatiations in respect of the kiln installation contracts were carried out between Moore Canada and Lindstrom Construction Ltd. by telephone. Any written bids were made on Lindstrom Construction Ltd letterhead.
11 Mr Lewis P Rennie, office manager of Lindstrom Construction Ltd, Mill City, Inland and Arjo Holdings Ltd, testified that, if the tenders made by Lindstrom Construction were successful, the jobs would be turned over to him to be given contract numbers. Once a contract number was assigned to a job, Mr Rennie would then allocate the job to one or other of Mr Lindstrom's associated companies depending upon its proximity to the installation site and, more importantly, on whether the ultimate purchaser of the kiln insisted on a union certified company or a non-union company. The appellant company, which also engaged in kiln installations, is a non-union company, whereas Mill City, for example, is a union certified company.
12 In the execution of the installation contracts, Mill City would use the milling equipment it possessed for various openings in the kilns, but had to rent any other required equipment, including trucks, welders, etc, from Arjo Holdings Ltd. All materials required for the job were ordered by the appellant company but the invoices were paid by Mill City. Mill City had no employees and the Lindstrom Construction Ltd staff was used on the jobs. The full payroll cost, plus a 22% fringe benefit and a 10% administrative cost, was charged to and paid by Mill City by means of a transfer of funds in the inter-company accounts after the end of each fiscal year (Exhibit R-4, pp 35, 36 and 37).
13 In September 1972 Miss Clay, then a chartered accountant in the Business Audit Section of the Department of National Revenue, together with her supervisor, made a routine audit of the books of Lindstrom Construction Ltd, Mill City, Inland and Arjo Holdings Ltd in Prince George, and reviewed the first four contracts for kiln assembly referred to in Exhibit A-1.
14 It was found that the jobs were filed by numbers but that suppliers of materials for these jobs had billed Lindstrom Construction Ltd instead of Mill City. The invoices that were shown to the auditors whereby Moore Canada was billed for the work done were on Mill City letterhead.
15 The auditors then decided to visit Moore Canada's head office in Richmond, BC, where they met John Howard, the chief accountant, and asked to see the invoices relative to the kiln assembling contracts. All the invoices in relation to the contracts, which were identical in every other respect to those seen in Prince George, were, however, on Lindstrom Construction Ltd letterhead, and no invoices from Mill City were in fact found at Moore Canada's head office (Exhibit A-4). Mr Howard is claimed by the auditors to have stated that he had never heard of Mill City.
16 From the bank statements of Mill City it appears that Mr Lindstrom, who was the controlling shareholder of Mill City as well as of the appellant, did not allow more than a few thousand dollars to remain in the Mill City account. Even though the auditors found that cheques of large amounts payable to and endorsed by Lindstrom Construction Ltd had been deposited to the Mill City account, the funds had been withdrawn from the account within a very few days (Exhibit A-12).
17 In order to determine whether or not the appellant company sustained a loss in 1971 which could be carried back to its 1970 taxation year, and whether the amount of $23,622.85 was properly added to the appellant's 1972 income, it is necessary to decide which of the two companies—Lindstrom Construction Ltd (the appellant herein) or Mill City—should, for income tax purposes, be considered to have been legally entitled to the profits derived from the execution of the kiln contracts.
18 Counsel for the appellant, in support of his contention that Mill City was entitled to the profits, referred to the case of Frank Sura v Minister of National Revenue, [1962] S.C.R. 65, [1962] C.T.C. 1, 62 D.T.C. 1005, where Mr Justice Taschereau of the Supreme Court of Canada (who delivered his original reasons for judgment in French,[1962] S.C.R. 65, [1962] C.T.C. 4–5 says at page 1006 of the CCH translation:
Nothing in subsequent amendments of the Act changes the rule that it is not ownership of property which is taxable, but that the tax is imposed on a taxpayer, and the tax is determined by the income received by the person who is the legal beneficiary from employment, businesses, property or ownership. As Mr Justice Mignault stated in the case of McLeod v. Minister of Customs and Excise, [1917–27] CTC 290, at page 296 (1 DTC 85 at page 87):
“All of this is in accord with the general policy of the Act which imposes the Income Tax on the person and not on the property.”
We can no more question this proposition than we can have the least hesitation in conceding without reservation that only he must pay income tax who has absolute enjoyment of the income, unfettered by any restriction on his freedom to dispose of the income as he sees fit. (Vide Robertson Ltd v Minister of National Revenue, [1944] Ex. C.R. 170at page 180).
19 Counsel for the appellant claims that the only legal beneficiary of the profits from the contracts was Mill City and that it alone had an enforceable legal claim against both the customer and Lindstrom Construction Ltd with regard to the profits.
20 Counsel for the appellant claims that Lindstrom Construction Ltd, in bidding on the contracts and accepting them, was acting on behalf of all the associated companies. Each contract was then allocated to whichever one of the companies was decided to be the most suitable to carry out the contract. Appellant's counsel refers to the evidence given by Mr Foulston, in which he stated that the agreement between Moore Canada and Lindstrom Construction Ltd was never referred to and that it was not binding because it made no difference to Moore Canada which of Mr Lindstrom's companies actually carried out the contract.
21 Said counsel then contends that Mill City, which was a legal entity with the legal capacity to act, usually carried out the contracts. Witnesses for the appellant stated that Mill City maintained its contracts with the labour unions and arranged for them to supply labour, paying Lindstrom Construction Ltd 22% fringe benefits and 10% administrative charges over and above the full payroll costs, and that, though the supplies were ordered by Lindstrom Construction Ltd, Mill City paid for them, used its own milling equipment and paid for any equipment rented from Arjo Holdings Ltd; Mill City invoiced Moore Canada but at the request of Mr Foulston of Moore Canada, made duplicate accounts on Lindstrom's letterhead. Payments on the invoices were deposited in Mill City's account and, by means of transfers of intercompany accounts, Mill City paid its indebtedness to Lindstrom Construction Ltd and even made advances by way of loans to that company after the end of the fiscal year.
22 Counsel for the appellant also claims that, from the releases (Exhibits A-6 and A-7), it is evident that Lindstrom Construction Ltd, Inland and Mill City had all executed contracts for Moore Canada. Counsel for the appellant contends that it was Mr Lindstrom's intention that if Mill City executed the eight contracts that gave rise to these appeals, it would be required to pay for labour and for the rental of equipment from Arjo Holdings Ltd, and that Mill City would have the right to retain the profits realized on the execution of its contracts, Exhibit A-8 being the invoices from Lindstrom Construction Ltd to Mill City Woodworking Ltd for supplying labour.
23 Counsel concludes that the preponderance of the evidence tends to confirm that Mill City had, in fact, executed the contracts and was the legal beneficiary of the profits derived therefrom. He contends that the receipt of the profits by Lindstrom Construction Ltd would give rise to a legal claim by Mill City against that company and would also give rise to a charge of unjustified enrichment on the part of Lindstrom Construction Ltd.
24 Counsel for the respondent, on the other hand, contends that the agreement of July 15, 1970 between Lindstrom Construction Ltd and Moore Canada was a binding contract; that no assignment was ever made to include Mill City; that the agreement was generally complied with and was never rescinded. Counsel then points out that the bids were made in the name of the appellant company, that the purchase orders were made by Moore Canada to the appellant company, that the only performance bond found was made in the name of the appellant company, that only the invoices on the appellant's letterhead were paid by Moore Canada, that the cheques in payment thereof were made out in the name of the appellant, and that everything per taining to the eight kiln contracts was also in the name of the appellant company (Exhibit A-4). Counsel for the respondent then refers to the substantial withdrawals from the Mill City account which were made very shortly after large amounts were deposited to that account, and he concludes that Mill City did not retain the bulk of the income from the contracts. The rental payment to Arjo Holdings Ltd for the use of a $30,000 truck, as well as for other equipment required and rented by Mill City, was, according to counsel for the respondent, unusually and obviously low. In 1970, when Mill City's total income was $141,206.11, the rent for the building owned by Arjo plus the trucks and other equipment, was $10,200 (Exhibit R-2). In 1971, when Mill City's income was $83,900.67, the rent for the same building and equipment was $6,000 (Exhibit R-3). Counsel for the respondent also notes that the transfers of inter-company accounts between the appellant and Mill City were effected after the end of the fiscal year and that there is evidence that such transfers were in fact made in the second or third month of the following fiscal year.
25 Counsel for the respondent concludes that the whole procedure followed by Mr Lindstrom in respect of the Mill City and the Moore Canada contracts was nothing but paper work aimed at permitting the appellant company to take advantage of the provisions of paragraph 27(1)(e) of the Income Tax Act in respect of alleged business losses.
26 No one would quarrel with the statement made by Mr Justice Taschereau, in the Sura case referred to by counsel for the appellant, that “only he must pay income tax who has absolute enjoyment of the income, unfettered by any restriction on his freedom to dispose of the income as he sees fit”. I am not sure, however, that this undoubtedly correct statement of an important principle is of any practical application to the issue in this appeal, which is to determine precisely which of the two companies, Lindstrom Construction Ltd or Mill City, has a legal right to, and absolute enjoyment of, the income from the Moore Canada contracts in issue.
27 It seems to me that the Board is faced in this appeal with two contradictory sets of evidence: one oral and one written. On the one hand, we have the signed agreement between Moore Canada and the appellant naming the latter as the contractor for the kiln assembling contracts. We have invoices on the appellant's letterhead charging Moore Canada for the work done. The head office of Moore Canada was in receipt only of the invoices made out by Lindstrom Construction Ltd, and had made its cheques payable to that company and not to Mill City.
28 On the other hand, the Board is faced with some oral evidence to the effect that the agreement was merely a device to acquire a trucking licence from the Public Utilities Commission and that the agreement was really not binding on the parties.
29 From the evidence in this appeal taken as a whole, I am of the opinion that the appellant, Lindstrom Construction Ltd, as a result of the agreement of July 15, 1970, was the legal contractor responsible for carrying out the contracts in issue in this appeal, and any explanations that may now be invoked as to its reasons for signing the relevant contracts are, in my view, immaterial. Evidence was given by Mr Foulston, and by Mr Anthony of Moore Canada's head office, that the agreement was substantially respected and was never rescinded. In my opinion, the agreement is legally binding, and the appellant company was the responsible contractor. The fact that the appellant and not Mill City made the bids and accepted the contracts, invoiced Moore Canada for the work done, and received the payments therefor, is a further confirmation that it alone was responsible for the execution of the contracts and had a legal and absolute right to any payments made under those contracts.
30 How the appellant chose to execute the contracts is another matter. The evidence is that, once it had obtained a contract, the job would be allocated to one or other of its associated companies. In the case of these particular contracts, Mill City was chosen to do the work because it was a union-certified company, this being one of the requirements of the customer who ordered the kilns. Mill City, although a legal entity, had no employees whatever. The labour force, the equipment, the required material had to be obtained from the appellant or from one of its associated companies. This, of course, might well give rise to suggestions that Mill City was a shell, or a dummy, company as the actual execution of the contracts was indeed carried out by the appellant. However, whatever the status of Mill City as a company might be, it is my opinion that Mill City was not in law the contractor but was at most a subcontractor or agent to whom the appellant had assigned the execution of certain work.
31 That there was no subcontract between the appellant and Mill City and that moneys paid to the appellant by Moore Canada were deposited to the account of Mill City does not, in my opinion, change the legal significance of the facts as presented to the Board, these facts being that Mr Arthur Lindstrom, who controlled both Lindstrom Construction Ltd and Mill City, deposited to the account of Mill City, without there being any contractual obligations for doing so, moneys received by Lindstrom Construction Ltd from Moore Canada and, for no apparent or valid reason promptly withdrew the greater part of these deposits. The transfer of the inter-company accounts between the two companies some months after the end of the fiscal year has also, in my opinion, an important bearing on the facts of this appeal.
32 However, whether the juggling of the accounts from Lindstrom Construction Ltd to Mill City was done for valid business reasons, or for the purpose of creating a loss in the books of Lindstrom Construction Ltd for the year 1971 and claiming it as a deduction under paragraph 27(1)(e) of the Income Tax Act, is, in the circumstances, of secondary importance in determining the issue in these appeals.
33 The determination of the issue turns principally on the legality of the agreement signed by Moore Canada and Lindstrom Construction Ltd on July 15, 1970.
34 In my opinion, it is because the agreement was legally binding, and was recognized by the parties as being binding, that Lindstrom Construction Ltd invoices and not those of Mill City, were forwarded to Moore Canada's head office for payment, and it is on the basis of the aforesaid agreement that Moore Canada made its cheques payable to Lindstrom Construction Ltd and not to Mill City. Regardless of what financial arrangements Lindstrom Construction Ltd might have had with Mill City, Lindstrom Construction Ltd was nevertheless the contractor legally responsible for the execution of the contracts, and it alone had the legal right to the income derived from that source.
35 I hold, therefore, that the income derived from the contracts in issue in 1971 and 1972 belonged exclusively to the appellant, Lindstrom Construction Ltd, and was properly added to the appellant's declared income for those years. Consequently no loss was incurred in 1971 by the appellant and there was therefore no loss that could be carried back to the 1970 taxation year.
36 The appeals are therefore dismissed.
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