Pratte, J:—This is an appeal from a decision of the Tax Appeal Board allowing an appeal from the reassessments of the defendant’s income tax for the 1965, 1966 and 1967 taxation years. The sole question involved in this appeal is whether the defendant is entitled to a direction under subparagraph 138A(3)(b)(ii) of the Income Tax Act vacating a direction under subsection 138A(2) that the defendant and Pantel Inc be deemed to be associated for the purposes of section 39 of the Act for the taxation years 1965, 1966 and 1967.
Pantel Inc was incorporated in 1951 and has always carried on the business of manufacturing and selling ladies’ dresses. During the first years of its existence, the company was controlled by three brothers: Saul, Hyman and William Pantel. In 1963 Saul Pantel died; the company was thereafter controlled by his two surviving brothers.
At some time in 1960, a well known American manufacturer of ladies’ sportswear, Bobbie Brooks Inc, approached Mr Hyman Pantel with the view of inducing Pantel Inc to manufacture and sell the Bobbie Brooks sportswear line in Canada. After some negotiations with the Pantel brothers, the American company finally granted a licence allowing either Pantel Inc or a wholly owned subsidiary of that company to manufacture and sell the Bobbie Brooks line of sportswear in Canada. The licence agreement was dated August 12, 1960. Soon thereafter, the defendant was incorporated and commenced to manufacture and sell women’s sportswear under the licence agreement.
The licence agreement contemplated that the sportswear business would be carried on either by Pantel Inc or by a wholly owned subsidiary of that company. It is to be noted, however, that Pantel Inc was never directly involved in that business and that the defendant, which actually manufactured and sold the Bobbie Brooks line of sportswear, was not a subsidiary of Pantel Inc. In fact, the defendant company was completely owned by the wives of the three Pantel brothers. It is for this reason that the licence agreement of 1960 was amended in 1962 so as to provide that the defendant would be considered as being the licensee and that Pantel Inc would guarantee the performance by the defendant of all its obligations under the licence agreement.
Mr Hyman Pantel testified that he and his brothers had never been interested in obtaining the licence from Bobbie Brooks Limited. They considered that they had neither the time nor the experience required to manufacture and sell sportswear. Pantel Inc was then doing well in the dress manufacturing business and the three brothers did not wish to jeopardize its assets by entering into a new speculative venture.
Mr Pantel said that in negotiating the licence agreement he and his brothers had acted on behalf of their wives. Mr Pantel knew the officers of Bobbie Brooks Inc and it is for this reason, said he, that he negotiated the licence agreement and, later on, its renewal. Mr Pantel further explained that the licence had not, at first, been granted to the defendant or to the Pantel ladies because the American company wanted to deal with an already established enterprise.
According to the evidence, as soon as Mrs Saul Pantel had learned that Bobbie Brooks Inc was desirous of granting a licence to a Canadian firm and that the Pantel brothers did not wish to enter into the sportswear field, she expressed the desire to obtain the licence and start a sportswear manufacturing business. Apparently, she had no difficulty in convincing Mrs Hyman Pantel and Mrs William Pantel to join her in this new venture. The Pantel brothers then told their wives to consult with the auditor of Pantel Inc, Mr Issie Farber, a chartered accountant. The three ladies met with Mr Farber and, following his advice, caused the defendant company to be incorporated.
Mr Farber testified that his only purpose is recommending that a new company be formed to carry on the sportswear manufacturing business was to ensure that the three Pantel ladies benefit from a limitation of liability. Mr Farber said that, since the three Pantel brothers did not want to get involved in this new venture, the possibility that the new business be carried on by Pantel Inc or by a subsidiary of that company had never been contemplated. He added that, in his discussions with the Pantels and their wives, it had never been mentioned that tax savings might result if the new business was carried on by a new company owned by the wives instead of being carried on by Pantel Inc or a subsidiary.
During the first two years of its existence the defendant company was managed by Mrs Saul Pantel, who was the mainspring of the enterprise. In 1962 the defendant hired a manager, a Mr Lozoff, who remained in that post till his death in 1965. At that time, there was no one to look after the management of the company: Mrs Saul Pantel had died in 1963 and he two other Pantel ladies were interested in the company merely as investors. Mr Hyman Pantel had to step in and, inasmuch as he could, direct the business of the defendant. However, Mr Pantel’s involvement in the daily management of the defendant’s business ceased in 1966 when he found a new manager to succeed Mr Lozoff.
It is not disputed that from its incorporation till 1969, the defendant and Pantel Inc occupied the same premises, in a building owned by the three Pantel brothers to whom both companies paid rent. It is also common ground that during that period, certain employees worked for both companies. All this, said Mr Pantel, was done in the interest of economy.
It was also proved at the hearing that manufacturing and selling dresses, on the one hand, and manufacturing and selling sportswear, on the other hand, are two distinct businesses that are not normally carried on by the same company.
In these circumstances, and particularly in view of the fact that the business carried on by the defendant was, in fact, the business of the Pantel ladies and not that of their husbands, I am of the opinion that the defendant has established that none of the reasons for the separate existence of Pantel Inc and Bobbie Brooks (Canada) Limited during 1965, 1966 and 1967 was to reduce the amount of tax that would otherwise be payable under the Act. Accordingly the direction of the Minister that the defendant and Pantel are to be deemed associated is vacated and the reassessments are quashed.