The Minister of National Revenue (Appellant)
v.
Furnasman Ltd. (Respondent)
and
The Minister of National Revenue (Appellant)
v.
Furnasman (Metal) Ltd. (Respondent)
Trial Division, Addy J.—Vancouver, November
8; Ottawa, December 4, 1973.
Income tax—Three companies—Formerly three depart
ments of same corporate entity—Reasons for separate exist-
ence—Whether associated companies—Income Tax Act,
R.S.C. 1952, c. 148, s. 138A.
Evidence—Credit reports and interoffice memos—Admiss-
ibility—Canada Evidence Act, R.S.C. 1970, c. E-10, s.
30(12).
Three departments of the same corporate entity were
separately incorporated, each having operations of different
natures. The purposes of separation were claimed to be
primarily for efficiency of operation, separate control,
incentive plans, sales to other corporations which would be
rival organizations if there was but one company and family
estate planning.
Held, affirming the Income Tax Appeal Board, that, on
the evidence, the companies were not "associated". The test
as to whether corporations are "associated" is, if the main
intention was not to effect tax savings, the corporations are
not "associated".
C.P. Loewen Enterprises Ltd. v. M.N.R. [1972] F.C.
773; The Queen v. Bobbie Brooks (Canada) Ltd. 73
DTC 5357, followed.
Held also, although the definition of "record" in the
Canada Evidence Act, R.S.C. 1970, c. E-10, s. 30(12) is
broad enough to cover the type of credit report and interof
fice memo between one department of a financial institution
and another, the opinion evidence contained in one interof
fice memo was inadmissible since a statement therein was
such that it would not be admissible if attested to by viva
voce evidence under oath.
APPEAL.
COUNSEL:
S. Hynes for appellant.
L. M. Little and I. Pitfield for respondents.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Thorsteinsson, Mitchell and Little, Vancou-
ver, for respondents.
ADDY J.—This is an application by the Minis
ter of National Revenue by way of appeal from
the Income Tax Appeal Board whereby the
latter held that, for the taxation year 1964,
Furnasman Ltd. (hereinafter referred to as
"Furnasman") and Furnasman (Metal) Ltd.
(hereinafter referred to as "F (Metal)") were not
associated pursuant to section 138A of the
Income Tax Act.
Previous to incorporation of F (Metal), Fur-
nasman, which was originally an unincorporated
business known as Furnasman Manufacturing
and was later incorporated under the name of
Furnasman Manufacturing Limited, was in the
business of manufacturing coal stokers and vari
ous types of oil and gas furnaces and also in the
business of manufacturing sheet metal duct
work and fittings, and of selling, installing and
servicing heating apparatus.
By 1955, Furnasman and Furnasman Stoker
Western Limited, which is now a wholly owned
subsidiary, were also in the wholesale distribu
tion business. In 1959, a decision was taken to
incorporate two new companies F (Metal) afore
said and Furnasman (Furnace) Limited (herein-
after referred to as "F (Furnace)"). Furnasman
sold to F (Metal) the equipment, supplies and
assets required to do duct work manufacturing
and this new company took over all of this work
which was originally done by Furnasman. Simi
larly, it sold to F (Furnace) the equipment and
inventory necessary to manufacture gas and oil
furnaces.
The assets were transferred at book value, no
consideration being paid for the good will and
the assets were paid for on an open account
basis.
The policy, at the time of incorporation of the
two new companies and for some years previ
ously, had been to limit considerably the salary
of the key personnel but to distribute some 25%
of the gross profits among them yearly, by way
of bonus, as an incentive to increase efficiency
and profits. At the time of incorporation, the
holding of shares of all three companies were
divided in such a way that each member among
the key personnel had his shareholdings equally
distributed among all of the three companies,
except that the original founder of the business,
Charles Helyar, kept all of his shares in Furnas-
man while his wife through a holding company
held all of her shares in F (Metal) and his father
all of his shares in F (Furnace).
After incorporation, the policy was, and it
apparently still is for key personnel in each
company, to acquire as much as possible shares
in their own company rather than in the other
two companies. The shares were usually pur
chased on a purely voluntary basis from their
yearly bonuses.
Evidence was given on behalf of the taxpay
ers by the owner of the original business,
Charles Helyar, by the Plant Manager of F
(Furnace), the President and General Manager
of F (Metal) and the Vice-President and General
Manager of Furnasman.
They all testified that the three businesses
were completely separate and were of a differ
ent nature: each required different tradesmen,
different types of skilled workers and different
key personnel as well as a different organiza
tion. They testified that Furnasman being a
sales and service organization was staffed with
salesmen, distributing agents, installers and ser
vicemen; F (Metal) was composed of qualified
metal workers; F (Furnace) was composed of
assemblers, machine operators, painters, etc.
Evidence was also given to the effect that the
last two companies were in no way related from
a manufacturing standpoint and this clearly
appears to be a fact.
Originally, the three types of operation were
merely departments of the same corporate
entity but these witnesses all testified that, for
purposes of control by the key men of the
particular business in which they possessed ex
pertise as well as incentive to key personnel, it
was decided that it would be much preferable
for the three businesses to be separate, as each
could then be entirely responsible for its suc
cess or failure and not dependent on the others
in any way or have to suffer by reason of any
incompetence or unfortunate decision on the
part of another completely separate operation
over which the key men of the partial busi
nesses concerned had no effective say or con
trol. Furthermore, they would not have to share
with any other organization any part of the
bonus which they would be paid from the prof
its which they earned from their own work and
efforts.
In addition to this, evidence was given that,
with a manufacturing company completely sepa
rate from the retail and wholesale sales and
distribution portion of the business, the furnace
manufacturing company could then produce and
in fact did produce brand name furnaces for
other sales and distributing organizations who,
naturally, would have been reluctant to do busi
ness with a company in which they were in
direct competition in the sales and distribution
field.
In addition to the evidence that the main
reasons for the existence of the three companies
were efficiency of operation, incentive, control
and the sale to other businesses, which would
be rival organizations if there was but one com
pany, there was evidence by Helyar that there
were considerable benefits to be gained from
the standpoint of estate planning and family
security by not having all their risk capital in
one business. These last reasons, however, were
not major reasons.
Evidence was given to the effect that income
tax savings was also a factor but, having regard
to the other important reasons which motivated
the creation of the three separate companies, it
was to be considered but a relatively minor
factor and definitely not one of the main rea
sons for the splitting of the operations into
separate corporations.
The Crown called as a witness one Mr.
Guppy, who had been a manager of a local
branch of the bank of the original company and
who had a knowledge of the affairs of the
business. He testified that for credit purposes
the bank, in order to fully protect itself, natural
ly required that Furnasman, which was transfer
ring a very substantial portion of its assets and
business to the new companies, remain the guar
antor of any credit advanced to the other two.
In fact, the bank insisted on mutual guarantees
throughout for all credit advanced by it. The
witness Guppy, however, largely supported the
evidence of the witnesses called on behalf of
the respondents taxpayers to the effect that tax
savings was not the main reason for the creation
of separate corporations. He stated that he was
never told that it was one of the main reasons.
During the course of the case, the Crown
sought to introduce by producing them, a por
tion of the records and inter office bank corre
spondence and memos in order to establish a
contrary intention on the part of the respond
ents and, especially, on the part of Helyar who
had the controlling interest in Furnasman at the
time of the incorporation of F (Metal) and F
(Furnace).
Much of the material required was admitted
as statements by or on behalf of the respond
ents themselves and no difficulty arose concern
ing their admissibility. However, there were two
reports which counsel for the Crown sought to
have admitted as part of the bank records pur
suant to sections 29 and 30 of the Canada
Evidence Act, R.S.C. 1970, c. E-10. The first
one was contained in a copy of an application
for credit forwarded by the branch to head
office in an attempt to obtain authorization for
an increase in credit for F (Metal). This was
contained in a report annexed to a regular bank
form and it was forwarded by the branch
manager at the time in the regular course of the
bank's business. The particular manager who
signed that report is now deceased. The passage
consisted of a purely factual report on the
accounts and operations of the business and an
extract from its financial statement and is, in my
view, definitely admissible under the provisions
of section 30 since all or any of the evidence
could certainly have been given on all of these
matters and since it was a record made in the
usual and ordinary course of business of the
bank. I admitted it at trial as Exhibit No. 14.
A more difficult situation arose out of a por
tion of another report on credit forwarded in the
normal course of business by the same branch
manager to head office on the 7th of October,
1966. The report contained the following pas
sage which the Crown wished to have admitted
and to which the respondents firmly objected:
In order to effect income tax savings in the ensuing years'
operations, as well as to place additional responsibility upon
the local management for the overall operation, including
carrying of reduced inventories and the necessity of obtain
ing prompt payment of their receivables, the executive
decided to conduct their operations in British Columbia and
the Calgary area as two separate Concerns. These have been
incorporated and are presently operating for this purpose. A
further important factor in this decision was that, in case of
labour disputes, these separate units would not be directly
involved at any one time.
(The underlining is mine.)
There is no doubt about the importance of the
underlined portion, as it is evidence that tax
savings was one of the main reasons, if not the
main reason, for the operations being split.
The Crown argued that it was admissible both
under section 29 and under section 30. For
purposes of convenience the relevant parts of
both these sections are reproduced hereunder:
29. (1) Subject to this section, a copy of any entry in any
book or record kept in any financial institution shall in all
legal proceedings be received in evidence as prima facie
proof of such entry and of the matters, transactions and
accounts therein recorded.
(2) A copy of an entry in such book or record shall not be
received in evidence under this section unless it is first
proved that the book or record was, at the time of the
making of the entry, one of the ordinary books or records of
the financial institution, that the entry was made in the usual
and ordinary course of business, that the book or record is
in the custody or control of the financial institution and that
such copy is a true copy thereof; and such proof may be
given by the manager or accountant of the financial institu-
tion and may be given orally or by affidavit sworn before
any commissioner or other person authorized to take
affidavits.
30. (1) Where oral evidence in respect of a matter would
be admissible in a legal proceeding, a record made in the
usual and ordinary course of business that contains informa
tion in respect of that matter is admissible in evidence under
this section in the legal proceeding upon production of the
record.
(12) In this section
"record" includes the whole or any part of any book,
document, paper, card, tape or other thing on or in which
information is written, recorded, stored or reproduced,
and, except for the purposes of subsections (3) and (4),
any copy of transcript received in evidence under this
section pursuant to subsection (3) or (4).
In so far as section 29(1) is concerned the
word "entry" in the expression "entry in any
book or record" means an ordinary financial or
bookkeeping entry, that is, the figures and the
required explanation for such figures, in a
ledger, book, card system or computer card
system. In my view, it is intended to cover
primarily the bookkeeping type of information
or, in other words, the debit, credit or balance
type of entry with the required explanatory
words to identify or clarify the entry. It does
not, in my view, cover such things as interoffice
memos or written reports between branches of
an organization such as in the present case.
This interpretation is reinforced by the read
ing of subsection (2) above. It is to be noted
also that in the section it is the entry itself
which is referred to as being admissible and it is
further to be noted that the word "record" is
not given the very broad definition that we find
attributed to the same word in section 30. I
therefore find that the above-quoted extract
from the credit report is not admissible under
section 29(1).
As to section 30, having regard to the very
broad definition given to the word "record"
which includes "document" or "paper," it
would, in my view, be broad enough generally
speaking, to cover the type of credit report
between one department of a financial institu
tion and another, interoffice memos, etc., pro
viding the other conditions of the section are
met, namely, the record must be one made in
the usual and ordinary course of business and
the statement must be such that it would other
wise be admissible if attested to by viva voce
evidence under oath.
In the present case, it is not stated anywhere
in the report that the manager was informed of
this intention by any of the parties or by any
person acting on behalf of the parties. The state
ment contained a conclusion as to a condition of
mind or a motive and it is not something that
can be directly observed as a fact by a witness.
The statement could have originated in only one
of two other ways: the writer might have
received the information from a third party, in
which case it would be inadmissible as hearsay,
or it might have originated as a mere deduction
or opinion on the part of the witness and, since
the bare fact of the existence or non-existence
of an intention cannot be the subject matter of
opinion evidence, except perhaps in certain
restricted cases where the opinion of a psychia
trist might be admissible on such a point, opin
ion evidence from the bank manager on this
issue would not be acceptable as oral evidence.
Furthermore, it would be inadmissible on the
grounds that the witness was being requested to
give an opinion, or come to a conclusion, on the
very issue which the Court is being called upon
to determine.
The further possibility of this statement being
merely an argument which the branch manager
thought up on his own in order to convince head
office to extend the credit of his client, was also
brought up by the witness Guppy, called on
behalf of the Crown, who stated that it was the
practice of a good bank manager, when writing
on behalf of a person whom he considered a
good financial risk, to advance what arguments
seemed reasonable to him in order to convince
head office to extend the credit and that a
possible tax savings was obviously a good argu
ment in so far as the officials of any bank were
concerned. For these reasons, I ruled the par
ticular statement to be inadmissible. My ruling
would have been otherwise had the deceased
bank manager stated that he had been informed
by Helyar or by any one acting on behalf of the
respondents as to the purpose for splitting the
operation.
It was established that all three companies
shared the same accounting services and evi
dence was given that this was solely for pur
poses of economy, as none of them could afford
to pay for the same type of accounting services
having regard to the value of its business. They
also shared, for some time for purposes of
economy, the same switchboard services and
also for a couple of years there was some con
fusion in the yellow page listings. As to publici
ty and advertising material, although there were
a couple of instances where the word "Furnas-
man" or "Furnasman Ltd." was used by one or
the other company instead of its full and correct
designation, having regard to the fact that the
three companies were using the name "Furnas-
man" there was, in my view, comparatively few
instances of any misuse of this name by any of
the three companies.
I remain convinced that each company was
jealous and proud of its own identity, although
naturally anxious and willing to benefit from the
good will that the word "Furnasman" obviously
enjoyed in the market generally.
In the case of Levitt-Safety (Eastern) Ltd. v.
M.N.R. 73 DTC 5374 my brother Urie J. found
that many of the operations including purchas
ing, warehousing, cataloguing, invoicing and
accounting were centralized and, therefore,
came to the conclusion that the changes and
new incorporations were "merely cosmetic" and
that one of the main reasons on the facts before
him was to evade payment of income tax.
I was also referred to and I considered the
following cases, where the Court found that the
main intention was not to effect tax savings and
the companies were held to not be associated:
The Queen v. Bobbie Brooks (Canada) Limited
73 DTC 5357; C.P. Loewen Enterprises Ltd. v.
M.N.R. [1972] F.C. 773 at p. 794; and Jordans
Rugs Ltd. v. M.N.R. 69 DTC 5290. I also con
sidered the following cases where a contrary
conclusion was arrived at: Debruth Investments
Limited v. M.N.R. 73 DTC 5233; Pay-Less
Meat Market Ltd., New-West Meat Market Lim
ited and Save-On Meat Market Ltd. v. M.N.R.
73 DTC 5102; Classic's Little Books Inc. v. Her
Majesty The Queen 73 DTC 5096; Dominion
Freehold Limited v. M.N.R. 71 DTC 5261; Holt
Metal Sales of Manitoba Limited and Industrial
Metals Processing Limited v. M.N.R. 70 DTC
6108; M.N.R. v. Howson & Howson Limited
and Howson & Howson Company (Cargill)
Limited 70 DTC 6055; Alpine Furniture Com
pany Limited and Monte Carlos Furniture Com
pany Limited v. M.N.R. 68 DTC 5338; and
Doris Trucking Company Limited v. M.N.R.
[1968] 2 Ex.C.R. 501.
As each of the above cases necessarily turns
on its particular facts, the cases in themselves
can be of little assistance. The question as to
whether or not one of the main reasons why two
or more companies either came into being or
continue to exist, is for the purpose of reducing
the amount of tax that would otherwise be pay
able under the Act, is a pure and simple ques
tion of fact. A question of intention or motive is
necessarily subjective; it cannot be otherwise,
for nothing can be more subjective or depend
ent upon credibility than intention or motive,
since it is essentially a condition of the mind. It
is, indeed, the type of issue that would be emi
nently suitable for determination by a jury. In
the case of a corporation, it is a question of
what was the collective intention of its directors
or shareholders at the relevant time.
Whenever, contrary to the great majority of
taxation problems, a question of intention is
paramount, credibility is of a very great impor
tance. When evidence of intention is given by
the party mainly responsible for the separate
existence of the two corporations, to the effect
that the question of income tax saving was not
one of the main intentions for this separate
corporate existence, and when, having regard to
all of the other evidence and the other circum
stances of the case, the Court is prepared to
accept that evidence, then the burden of proof
which the taxpayer must discharge has been
satisfied and the Court must then find that the
companies must be deemed to have not been
associated in accordance with section 138A.
A very useful test in determining whether
section 138A(3)(b)(ii) applies, was laid down by
Dumoulin J. in the case of Doris Trucking Com
pany Limited v. M.N.R., (supra). My brother
Cattanach J. at page 794 of the above-cited
report of Loewen Enterprises Ltd. v. M.N.R.
stated as follows:
[Test to be applied]
The test to be applied in considering the meaning of
section 138A(3)(b)(ii) is set out in Doris Trucking Co. v.
M.N.R., [1968] 2 Ex.C.R. 501 where Dumoulin J. stated at
page 505:
... the proper test is ... if one supposed that all corpora
tions were subject to tax at a flat rate of 50%, as has been
recommended by the Royal Commission on taxation,
would it be expected that these particular operations
would have been carried on by separate corporations.
This test was adopted and applied by Sheppard D.J. in
Jordans Rugs Ltd. v. M.N.R. [1969] C.T.C. 445.
In short the test amounts to this—if there had been no tax
advantage would the plan have been adopted in any event?
In I.R.C. v. Brebner [1967] 1 All E.R. 779 Lord Pearce
stated at page 781 that the question whether one of the main
objects was to obtain a tax advantage was a question of
subjective intention.
I fully agree that the test mentioned in these
cases is the proper one which the trier of facts
must apply in considering his finding under sec
tion 138A.
Having regard to the fact that I accept the
evidence of Mr. Helyar and of the other wit
nesses called on behalf of the taxpayer as to the
main intention or reasons why the companies
were incorporated originally and were continued
in existence, and having regard to the fact that
not only is such evidence largely uncontradicted
but is substantially reinforced by the evidence
of the sole witness called on behalf of the
Minister of National Revenue, namely, the evi
dence of the bank manager, Mr. Guppy, I have
no difficulty in coming to the conclusion that,
even if there had been no income tax advantage
whatsoever, the separate corporations would
have been created and would have continued in
existence and that the burden of proof in this
regard has been fully discharged by the
respondents.
The finding of the Tax Appeal Board must,
therefore, be confirmed and the present appeals
dismissed with costs. Judgment shall issue
accordingly.
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