Addy, J:—This is an application by the Minister of National Revenue by way of appeal from the 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), Furnasman, 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 various 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 distribution business. In 1959 a decision was taken to incorporate two new companies F (Metal) aforesaid and Furnasman (Furnace) Limited (hereinafter 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. Similarly, 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 goodwill and the assets were paid for on an open account basis.
The policy, at the time of incorportion of the two new companies and for some years previously, had been to considerably limit 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 incorportion, 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 the three companies, except that the original founder of the business, Charles Helyar, kept all of his shares in Furnasman 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 purchased on a purely voluntary basis from their yearly bonuses.
Evidence was given on behalf of the taxpayers 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 different nature: each required different tradesmen, different types of skilled workers and different key personnel as well as a different organization. They testified that Furnasman being a sales and service organization was staffed with salesmen, distributing agents, installers and servicemen; 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 expertise 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 success 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 businesses concerned had no effective say or control. Furthermore, they would not have to share with any other Organization any part of the bonus which they would be paid from the profits which they earned from their own work and efforts.
In addition to this, evidence was given that, with a manufacturing company completely separate 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 business 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 company, 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 reasons 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, naturally required that Furnasman, which was transferring a very substantial portion of its assets and business to the new companies, remain the guarantor 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 respondent 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 portion of the records and inter-office bank correspondence and memos in order to establish a contrary intention on the part of the respondents 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 respondents themselves and no difficulty arose concerning their admissibility. However, there were two reports which counsel for the Crown sought to have admitted as part of the bank records pursuant to sections 29 and 30 of the Canada Evidence Act, RSC 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 nd 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 portion of another report on credit forwarded in the normal course of business by the same branch manager to head office on October 7, 1966. The report contained the following passage which the Crown wished to have admitted and to which the respondent 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 obtaining 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 italics are mine.)
There is no doubt about the importance of the italicized 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 institution 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 information 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 subsection 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 inter-office memos or written reports between branches of an organization such as in the present case.
This interpretation is reinforced by the reading of subsection 29(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 subsection 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 institution and another, inter-office memos, etc, providing 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 otherwise 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 statement 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 psychiatrist might be admissible on such a point, opinion 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 argument in so far as the officials of any bank were concerned. For these reasons, I ruled the particular 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 evidence was given that this was solely for purposes 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 confusion in the yellow page listings. As to publicity and advertising material, although there were a couple of instances where the word “Furnasman” 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 “Furnasman” there were, 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 goodwill that the word “Furnasman” obviously enjoyed the market generally.
In the case of Levitt-Safety (Eastern) Ltd et al v MNR, [1973] CTC 483; 73 DTC 5374, my brother Urie, J found that many of the operations including purchasing, 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, [1973] CTC 431; 73 DTC 5357; C P Loewen Enterprises Ltd v MNR, [1972] CTC 396; 72 DTC 6298; and Jordans Rugs Ltd et al v MNR, [1969] CTC 445: 69 DTC 5290. I also considered the following cases where a contrary conclusion was arrived at: Debruth Investments Limited v MNR, [1973] CTC 268: 73 DTC 5233; Pay-Less Meat Market Ltd, New-West Meat Market Limited and Save-On Meat Market Ltd v MNR, [1973] CTC 102; 73 DTC 5102: Classic’s Little Books Inc v Her Majesty The Queen, [1973] CTC 94: 73 DTC 5096; Dominion Freehold Limited v MNR, [1971] CTC 523; 71 DTC 5261; Holt Metal Sales of Manitoba Limited and Industrial Metals Processing Limited v MNR, [1970] CTC 144; 70 DTC 6108; MNR v Howson & Howson Limited and Howson & Howson Company (Cargill) Limited, [1970] CTC 36; 70 DTC 6055; Alpine Furniture Company Limited and Monte Carlos Furniture Company Limited v MNR, [1968] CTC 532; 68 DTC 5338; and Doris Trucking Company Limited v MNR, [1968] CTC 303; 68 DTC 5204.
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 payable under the Act, is a pure and simple question of fact. A question of intention or motive is necessarily subjective; it cannot be otherwise, for nothing can be more subjective or dependent 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 eminently 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 importance. 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 circumstances 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 subparagraph 138A (3)(b)(ii) applies was laid down by Dumoulin, J in the case of Doris Trucking Company Limited v MNR (supra). My brother Cattanach, J at pages 409-10 [6308] of the above-cited report of Loewen Enterprises Ltd v MNR stated as follows:
The test to be applied in considering the meaning of subparagraph 138A(3)(b)(ii) is set out in Doris Trucking Company Limited v MNR, [1968] 2 Ex CR 501; [1968] CTC 303; 68 DTC 5204, where Dumoulin, J stated at page 505 [307, 5207]:
. the proper test is . . . if one supposed that all corporations 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, DJ in Jordans Rugs Ltd et al v MNR, [1969] CTC 445; 69 DTC 5290.
In short the test amounts to this—if there had been no tax advantage would the plan have been adopted in any event?
In /RC v Brebner, [1967] 1 All ER 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 section 138A.
Having regard to the fact that I accept the evidence of Mr Helyar and of the other witnesses 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 evidence 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 respondent.
The finding of the Tax Appeal Board must therefore be confirmed and the present appeals dismissed with costs. Judgment shall issue accordingly.