Table of Contents


Since the time of the Salomon case it has been well established that a corporation is regarded in law as a legal entity with a personality of its own, i.e., as a person that is separate from its shareholders and subsidiaries. The separate legal personality of a Canadian business corporation also is recognized for purposes of the Act, with the result that it is treated as a separate taxpayer.

The relatively rare circumstance in company law where the separate legal personality of a corporation effectively is ignored is referred to as "lifting the corporate veil". This metaphor occasionally is used in a taxation context as well (Desnomie).

The propositions that a corporation has separately legal personality from its shareholders and subsidiaries, and that it is not an agent (or principal) in respect of them, are joined at the hips.

It may not be clear whether a foreign enterprise (to use a neutral name) is a separate entity for purposes of the Act>. This question usually arises in considering whether the enterprise should be treated as a separate foreign affiliate under the Canadian foreign affiliate role, but also may be relevant in determining the manner of the application or relevance of an international income tax convention to the foreign enterprise.


Desnomie v. Canada, 2000 DTC 6250 (FCA)

Rothstein J.A. applied (at p. 6256) the determination in Pioneer Laundry & Dry Cleaners Ltd. v. MNR, [1939] 4 DLR 481 (HL) that "in a taxing statute the corporate veil could only be pierced in instances of fraud or improper conduct" to find that the court should not look through the character of the taxpayer's employer as a corporation.

Colbert v. The Queen, 94 DTC 6620, [1994] 2 CTC 345 (FCTD)

Before finding, on the evidence, that the taxpayer had transferred all the assets of his chicken farm business to a corporation other than the land and the chicken quota and that the corporation was not an agent of the taxpayer, Wetson J. stated (p.6622):

"... one must start from the presumption that generally when a company is incorporated to carry on a business, the business becomes that of the company and the shareholder cannot claim that business as his or her own. However, it has also been recognized that the relationship between a company and a shareholder can be such as to constitute the company as an agent of the shareholder. ... When such circumstances exist, the business carried on by the company can in reality be said to be that of the shareholder."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Agency shareholder generally does not carry on business of corporation 138
Tax Topics - General Concepts - Separate Existence 138
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Former Business Property 60

The Queen v. Jennings, 94 DTC 6507, [1994] 2 CTC 106 (FCA)

In finding that losses of an incorporated farm business could not be deducted by the individual who had incorporated the business, Robertson J.A. accepted the Crown's submission that the individual and his corporation were "separate legal entities and that 'the normal rule of a corporation being a separate and distinct legal entity from its shareholder' should apply":

"Only in the clearest of cases, and in compelling circumstances and after a thorough legal analysis could the 'normal rule' be displaced."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Separate Existence farm losses of corporation not those of shareholder 87

The Queen v. MerBan Capital Corp. Ltd., 89 DTC 5404, [1989] 2 CTC 246 (FCA)

The taxpayer ("MerBan") in connection with a leveraged share acquisition arranged for borrowings to be made to two special purpose subsidiaries in order to limit its liability and to facilitate the use of an income debenture. "MerBan was no doubt the driving force behind and ultimate beneficiary of the subsidiaries' activities, restricted as they were. It may be that the Trial Judge believed that the subsidiaries as mere instrumentalities served no business purpose. But it has been held that, even when there is a lack of business purpose, courts will recognize otherwise legally valid and complete transactions or legally created relationships which are clearly enforceable."

Tobias v. The Queen, 78 DTC 6028, [1978] CTC 113 (FCTD)

"... I cannot accept the proposition that the Company carried on a hobby as agent for the plaintiff for to do so would be to disregard the very concept of the nature of a corporation laid down in Salomen v. Salomen & Co. ([1897] 2 AC 22) ..." (p. 6038)

Bank Voor Handel En Scheepvaart v. Slatford, [1951] 2 All E.R. 779

Devlin J. affirmed the principle that the assets of a company are not the assets of a shareholder and accepted as correct a statement by the Permanent Court of International Justice, in Standard Oil Co.'s Claim [1927] BY Int'l L156, at 162:

"'... The decisions of principle of the highest courts of most countries continue to hold that neither the shareholders nor their creditors have any right to the corporate assets other than to receive, during the existence of the company, a share of the profits, the distribution of which has been decided by a majority of the shareholders, and, after its winding-up, a proportional share of the assets'."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Ownership international principle that shareholder does not own corporate property 116

See Also

K.J. Beamish Construction Co. Ltd. v. MNR, 90 DTC 1584, [1990] 2 CTC 2199 (TCC)

In light of the "fundamental principle laid down in Salomon v. A. Salomon and Company Limited, [1897] AC 22 that a corporation is regarded in law as a legal entity with the personality of its own and it is quite distinct from its shareholders" (p. 1592), Christie ACJ found (at p. 1596) "that a person who acquires a share in a corporation does not thereby acquire an interest in land that is an asset of the corporation", and accordingly refused to extend the principle in the Fraser case to find that loans made to a real estate company by its shareholder had the same character as if they had been incurred in connection with the business of that company.


Perry, "Capitalization and Asset Acquisitions for New Private Corporations", 1993 Conference Report, C. 22

Discussion (at pp. 7-11) of the corporate veil.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Corporate/Separate Personality 8