Judge K A Flanigan (orally: December 12, 1973):—This is an appeal by Stubart Investments Limited, formerly Stuart Brothers Limited, against the reassessments of the Minister of National Revenue for the taxation years 1966,1967 and 1968.
The evidence has been long and to some extent complicated, but I think I can summarize fairly briefly what took place.
The appellant company, which I will refer to as Stuart throughout the reasons for judgment, was a member of the Finlayson Group of companies and in 1962 was known as the W Lloyd Woods Company Limited. In that year it acquired the food flavouring business of Stuart Brothers Company Limited and after the acquisition changed its name to Stuart Brothers Limited.
In the Finlayson group of corporations there were numerous companies. They have been set out neatly in detail, in chart form, in the appellant’s exhibits filed, and one of such companies was a company known as Grover Cast Stone Company Limited. This company had been operating for some time, manufacturing concrete tubs for washing purposes in connection with washing machines, as I interpret the evidence.
Sometime after 1962, which was when Woods acquired Stuart, Grover got into difficulty by getting into the precast concrete field and obtaining a subcontract to do work on the Mall and University Avenue in the city of Toronto. The result was a disaster, to use the words of Mr Sutherland, and the company was not only left with a substantial loss of approximately $200,000, but was forced to sue when its contract was cancelled by Conniston, who was the main contractor for whom Grover was working and, to their shock, no doubt, a counter-claim was entered, seeking some $180,000-odd, I believe. At this time the directors and officers of the Finlayson group of corporations held a meeting on an informal basis, not convening it as a specific meeting as one knows it for corporation purposes, to discuss the various companies and to try and determine what sort of reorganization should take place in order to take maximum advantage under the Income Tax Act of certain losses of certain companies, the greatest loss being in Grover.
It was agreed at the meeting on, I think it was January 7, 1966, that certain specific things would be done and certain other things had to be gone into further and finalized. One thing that was settled at that meeting was that Grover would purchase the assets of Stuart, in the food flavouring field, leaving Stuart only with its interest in subsidiary companies in the West Indies. The extent of these assets or their nature is not relevant to this decision.
What took place was that an agreement was drafted as of January 1, 1966, whereby for the sum of $185,000 in round figures Grover would purchase the food flavouring business of Stuart which included its real estate on St Antoine Street in Montreal, and would give a floating charge debenture to cover this sum and would assume liabilities of some $500,000-odd.
In passing, I note that it is obvious from. the evidence that Grover did not have the money in its own right to honour such a debenture but, by acquiring the assets of Stuart, it would have acquired an asset or sufficient assets which would entitle it to be looked upon as a reasonable risk for the final pay-out of this sum.
Hindsight being the great thing, it turned out in 1968 that the Grover company received an offer from a company, called Givaudan in these proceedings, for the assets that had been allegedly sold under the agreement of January 1, 1966 to Grover and Stuart and Grover sold its remaining assets for the purposes of this judgment, simultaneously, to a company by the name of Atlantic Industries Ltd, a US organization.
At this time, in 1969, all Stuart’s assets had been turned into cash and a completely different situation existed. However, I think the law is quite clear that any trial judge or quasi-judicial member must consider, particularly in income tax law, the situation as it existed at the time the agreements were entered into. It is true that the agreements that were hammered out in January of 1966 were not set down in writing before the directors of Stuart Brothers Limited until March 10, 1966 and were not executed until, 1 think, July of the same year. This I attach no importance to, because I think, in a closely knit group of corporations such as this, the intent was there from the January meeting, and it was simply a matter of physically getting all the documents that were involved completed before the final execution of the agreement took place.
The agreement basically provided that Grover would, as I have said, purchase all the assets of Stuart that were situated in Montreal, including the real estate, and Stuart would operate the business as the nominee of Grover. The question was put to Mr Sutherland and it is raised in the assumptions of the Minister, as to why, when this company, Grover, was without assets of any substance, the directors would run the risk of placing the assets of Stuart in a very vulnerable position. His answer was, I think, that it was a calculated risk, that Grover was the largest of the tax losses that they wished to utilize and they had to keep, in his view, the Stuart name on which a. tremendous amount of goodwill had been built up.
One must remember that this happened in 1966. Mr Sutherland is a busy lawyer, without question, and a man of great integrity and a man who has produced, either personally or under his direction, some very commendable work in connection with these. clients. However, one cannot overlook the fact that we are dealing with the year 1966 and, human frailties being what they are, it is often. difficult after such a lapse of time for a witness to distinguish between recollection and reconstruction. One finds it awfully difficult to see why Stuart, which has been a revenue-producing business from 1962 to 1965, should risk its assets in Grover, which was involved in a law suit that was settled only a couple of years ago. However, I don’t know how it was settled or what effect it had on the company.
In any event, by that time Grover had disposed of the remaining assets of Stuart for some $2 million. The appellant did some very overt acts under the terms of the agreement. It transferred the property in the province of Quebec into. Grover’s name and registered it. It transferred the trademarks into Grover’s name. These were items that were open and above-board and available for anyone who knew where to look to see. As Mr Sutherland said, they did not wish to attach a red flag to the fact that there were now assets in Grover and he says that everything else was therefore left as it was and for anyone on the street it would appear that nothing had changed. In fact, nothing did change. The same people operated in Montreal, the same licences were issued, the T4 slips were issued by Stuart, a certificate for retail Sales tax purposes was issued to Stuart and in fact all that happened was that, at the end of the year, Mr Sutherland supposed, a book entry was probably made transferring the profits to Grover.
The appellant’s answer to all this, through its witnesses and its documentary exhibits, is that this was exactly what was intended by the parties when the nominee portion of the agreement was executed.
The learned counsel on behalf of the Minister has called the agreement a sham, and both parties rely on section 23 of the Act to find Solace for their position. The term “sham” has become quite common in income tax law and I quote, as the learned counsel for the Crown did, from the decision of Lord Justice Diplock in Snook v London & West Riding Investments Ltd, [1967] 1 All ER 518 at 528. Halfway through that comment he says with reference to the word “sham”:
... I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.
I think, as I have said in other cases, that that is the best definition of “sham” that I have come across, and it therefore lies for me to consider that definition of “sham” as it might apply to the agreement of January 1, 1966 between Stuart and Grover.
As I have said, learned counsel for the appellant has pointed out the overt acts that took place: the transfer of the trademark; the transfer of the real estate. This, he says, shows that it was a valid and genuine agreement. With great respect, I cannot come to that conclusion. The reason I cannot come to that conclusion, with respect to the agreement, is that in the Finlayson group of companies there were sufficient common directors and officers in Stuart Brothers Limited and in Grover to reverse those overt acts at any time that it suited them. They ran no risks whatsoever in conveying the property from one company to another, because they could simply have reversed the whole proceeding by another agreement, and so I must find, on my interpretation of the definition of Lord Justice Diplock and in view of what took place in this case, that the agreement was never intended to be implemented in the manner in which it reads, but that it was always intended that Stuart would continue to operate the business and merely put money into Grover until. the loss was used up and then the property could be put back where it belonged and where, I feel, it had never, in law, left.
The second issue in question is whether or not, if I am wrong in finding this agreement is a sham, the appellant can find help in the exclusion clause of section 23 of the Income Tax Act as it then existed with regard to the transfer of rights to income, that is, in the closing words thereof, and I quote,
.. . unless the income is from property and the taxpayer has also transferred or assigned the property.
The question in my mind is: What is property? It is true that the trademarks are referred to in the jargon of the trade as “industrial property”. It is also true that there was a real estate building that went with this transaction. But when I look at the Act, I look at section 22 which deals with new property deemed substituted. I cannot come to any other conclusion but that section 23, the section of the Act with which I am dealing, covers real property in the sense that one speaks of “property” on the street, and not property of a technical or scientific nature known only to those in a small field of law.
As I have said before, one must remember that, in interpreting this Act, one must assume, although one must go a long way in some instances to make such an assumption, that the Act was written for the ordinary everyday taxpayer to read and understand.
I am, therefore, satisfied that the appellant does not come within the exclusion set out in section 23, as the income transferred came, not from a property, but from a business: the business of operating, manufacturing, trading and selling food flavouring. For that reason, I think the matter fails to come within section 23. Therefore, on both issues, I must find that the Minister’s assessment is correct, both in fact and in law, and the appeal must be dismissed.
I am indebted to counsel for both parties for the extent to which they have assisted me in this case with the documents and the arguments presented.
Appeal dismissed.