Atlas Development (International) Limited v. Minister of National Revenue, [1973] CTC 2122, 73 DTC 104

Roland St-Onge:—This appeal is from a reassessment dated June 18, 1970, for the taxation years 1966 and 1967.

In his opening remarks, counsel for the appellant filed a written summary of the main facts of this appeal and I would like to reproduce herein the relevant uncontradicted facts as follows:

The company was incorporated under Federal Letters Patent on December 7, 1951 and did for some years maintain a statutory place of business at 1117 St. Catherine Street West, Montreal.

It was purchased by the present shareholders in October 1963.

The original name of the company was H F Pollock (East Asia) Ltd which name was retained until October 28, 1963, when it was altered to the present name.

The company has been assessed as a Foreign Business Corporation for all years up to and including 1967.

For the years 1964, 1965, 1966 and 1967, Notices of Re-Assessment were raised against the Appellant by the Minister as if it were not in those years qualified as a foreign business corporation.

The reasons given by the Minister for the reassessment in each of the said Notices of Re-Assessment were “this company is being assessed as an ordinary corporation not qualified as a Foreign Business Corporation”.

In order to pinpoint the basis of the Re-Assessment the Minister has agreed with the taxpayer that certain issues only are before the Court for determination of this appeal. In order to facilitate this narrowing of the issue, the following facts have been agreed to by both sides:

1) In its fiscal years 1958 to 1959, did the appellant and/or its predecessors carry on any business operations?

2) If the answer to question 1 above is in the negative, was the appellant ipso facto disqualified as a foreign business corporation for its 1964, 1965, 1966 and 1967 taxation years by virtue of the provisions of section 71 of the Income Tax Act?

3) Was the appellant disqualified as a foreign business corporation by virtue of the sole facts that (which facts are admitted by the parties for the sole purpose of determining this third issue and without prejudice to their right to lead other evidence with respect to the first two issues):

a) Atlas Development (International) Ltd was formerly known as H F Pollock (East Asia) Ltd, hereinafter referred to as “the Company”;

b) During the years prior to 1963, the company was in the non-ferrous scrap metal business carried on solely outside of Canada, which business ceased after October 1963;

c) In October 1963, the shares of the company were acquired by completely new shareholders with Mr E L Vosko as president. At that date. the directors of the company were completely changed,

d) After October 1963, the company changed its name to Atlas Development (International) Ltd, hereinafter referred to as “Atlas”;

e) Atlas changed completely the business of the company and started to deal in the oil business, which it carried on solely outside of Canada;

f) After October 1963, the management and the operations of the company were changed.

The parties agree that additional evidence in this appeal shall only be adduced in respect of the 1958 and 1959 fiscal years.

The parties hereto likewise agree that if the answer to question one above is in the negative, and if the answer to question two above is in the affirmative, or if the answer to question three above is in the affirmative, the appeal of the appellant herein should be dismissed, but that in any other event the appeal of the appellant herein should be allowed.

Mr H F Pollock, president of H F Pollock (East Asia) Ltd testified that the said company was incorporated for, and carried on the business of non-ferrous scrap metal outside of Canada although its main office was at Montreal. The material was purchased from various countries and most of it was shipped to Japan. The company had agents in various cities such as New York, Tokyo, etc and they were authorized to buy as long as they felt certain they could sell. In case of substantial financing being required, they had to contact Mr Pollock. Usually the scrap metal would leave the UK or US only after a letter of credit was received from Japan.

As already stated, the head office was at Montreal but every transaction took place outside the country and for the years 1958 and 1959 a ledger was filed to prove the transactions. In 1957 he went to Japan because the business in scrap metal was very difficult. The Japanese were reluctant to buy the material because of a surplus of non-ferrous metal in particular. Consequently the company had to maintain contact in order to keep the market. In 1959 the business became better and the company carried on numerous transactions although it did not show any profit.

Mr Pollock had other companies in the same line of business which were quite profitable during the 1958 and 1959 taxation years, ie H F Pollock and Company Limited in Montreal, H F Pollock and Company Inc in New York and H F Pollock and Company UK Ltd.

As already mentioned, in 1963 he sold the shares of H F Pollock (East Asia) Ltd which later became Atlas Development (International) Ltd because he saw an opportunity of getting out of the company by realizing a capital gain and not because the company was not profitable.

Upon cross-examination he testified that during 1958 and 1959 he was living in Montreal and doing business directly or through an agent. He had a staff at Tokyo and East Asia but never paid any salary to either the U K or New York companies. His manager in Japan was earning $8,000 to $10,000 a year and in 1958 and 1959 he had two or three employees in Japan. When asked to enumerate the transactions which took place in 1958 and 1959, he had to admit that there were no expenses recorded for Montreal or Japan with respect to salaries, commissions, phone calls, cable expenses or carrying charges. He testified that some of these expenses could have been paid by the other companies, but there was nothing in the appellant’s financial statements to show that such expenses had been paid either in Japan or in the US.

Miss Bradnam, controller of East Asia Ltd, testified that she kept the books for April 1958 to April 1963 but was never paid therefor by the company. The company was on an accrual basis for 1958 and 1959 and its books (general ledger) did not indicate any purchase or sale, any inventory, stock-in-trade or assets and apparently the company used to pay to the agent 1% of the sale price. It seems that the amount of $281.07 paid in 1958 was for a transaction which took place in 1957. She stated that there was no other disbursement than $7.27 for banking charges and $31 to the Province of Quebec for late filing of some documents. She filed the ledger of the company for 1958 and 1959 to show that all the transactions referred to were registered.

At this juncture, it is interesting to reproduce the appellant’s Profit and Loss Statement which was filed with its return for the year ending July 31, 1959:

In the 1958 taxation year the appellant company’s receipts were $42,088.90 and the expenses $42,600.00, resulting in a small loss.

As already mentioned, the most important question to be answered in the present appeal is whether the appellant in its fiscal years 1958 and 1959 carried on any business operations and by the same token was able to benefit from section 71 of the Income Tax Act which states:

71. (2) In this Part, a “foreign business corporation” is a corporation that during the whole of the taxation year in respect of which the expression is being applied

(a) was not a personal corporation,

(b) (not material here)

(c) complied with one of the following conditions:

(i) its business operations were of an industrial, mining, commercial, public utility or public service nature and were carried on entirely outside Canada (except for management and the designing, purchasing and transportation of goods if the goods were not acquired for resale in the course of trading and were acquired for the operations so carried on outside Canada) either directly or through ownership of shares in or control of subsidiary or affiliated corporations and in its property, except securities and bank deposits, was situate entirely outside Canada,

In his written submissions, counsel for appellant argued that any of the activities of the appellant company during the 24 months constituted a business operation and that it is certainly a business operation:

(1) to maintain books of account on a daily basis;

(2) to maintain bank accounts on an active basis;

(3) to have serious directors’ meetings;

(4) to file financial statements;

(6) to maintain active brokers and commission agents in three foreign jurisdictions a substantial amount of whose time is involved in contacting customers and seeking business;

(5) to receive and disburse substantial sums of money;

(7) to have prepared financial statements and to file income tax returns.

According to the financial statements filed, there is no purchase or sale for the period April 30, 1958 to July 31, 1960, and the entries for that period do not show any business transactions. As to the bank accounts, the expense of $7.27 reveals that the said bank accounts were not very active during the 1959 fiscal year and there is no evidence to demonstrate that any serious directors’ meetings were held, except annual meetings of shareholders.

Furthermore, the disbursement of $589.45 mentioned in the 1959 Profit and Loss Statement is not accurate since out of this money $281.07 was paid in 1959 for a sale effected during the 1958 taxation year and another sum of $250.00 was paid in 1959 for services rendered during the 1957 and 1958 taxation years. As to the allegation of “maintaining active brokers and commission agents in three foreign jurisdictions a substantial amount of whose time is involved in contacting customers and seeking business”, the evidence is far from being convincing. In that respect, it appears that some work was carried on by independent companies of Mr H F Pollock and consequently the said work cannot be credited to the appellant company. Nothing in the 1959 financial statement of the appellant company reveals that the latter paid any salary to its employees or made any expenses with respect to telephone calls, telegrams, entertainment, rents or the purchase of stationery, such type of expenses having been claimed for the taxation years 1953 to 1957.

Mr Pollock’s testimony gives the impression that he did not make any distinction between his acting personally or through his other companies, and his acting in the appellant company. There is no doubt that some business operations were carried out during 1958 and 1959 by Mr H F Pollock and the said companies, but not by the appellant which spent only $7.27 as banking charges and $31 for late filing of some statements with the Province of Quebec.

The money paid in 1959 was for work done in previous years, which shows that no business operation was carried on in the 1959 taxation year. The only operation left for the years under consideration was the preparation of financial statements to file income tax returns which per se do not prove that the company was carrying on business in those years.

Counsel for appellant argued that from August 1, 1957 to July 31, 1959, the appellant did carry on a business operation in the sense that any activity conducted by a company to further or maintain its commercial standing and, if possible, to render it profitable, is carrying on business within the meaning of section 71 of the Income Tax Act; that although the business was not profitable, this did not necessarily mean that the appellant was not carrying on business (see Alberta Consolidated Pacific Oils v MNR, [1947] Ex CR 48 at 51; [1946] CTC 296; 2 DTC 886; that section 71 does not use the words “active business” as they were used in section 67 dealing with personal corporations, as well as in the other sections of the Act where the empha- sis was on activity, that the words used in section 71 are merely “business operation” and the proven activities of the company during the twenty-four months would constitute a business operation.

On the other hand, counsel for the respondent, on the interpretation of the expressions “business operations” and “to carry on business”, referred the Board to two cases and gave the following citations therefrom:

(A) Clevite Development Ltd v MNR, [1961] Ex CR 296 at 301; [1961] CTC 147 at 151; 61 DTC 1093 at 1095:

In my opinion, s. 71 is an exempting provision and must be strictly construed. Toronto General Trusts Corporation v City of Ottawa, [1935] SCR 531 ; [1935-37] CTC 95; Lumbers v MNR, [1943] Ex CR 202; [1943] CTC 281; (2 DTC 631). The section in question appears to me to define and apply to a narrow class of corporations which carry on business operations outside Canada but to whom (but for the exemption) Part I of the Income Tax Act would apply on the basis of their being resident in Canada. Clause (c)(i) of subsection (2) is peculiar. To quality under it, the corporation’s business operations must be first of an industrial, mining, commercial, public utility or public service nature and, second, they must have been carried on entirely outside Canada. Nowhere, however, is it expressly stated that the corporation must be one that has “business operations”. That feature is left to be implied, as I think it must be, for I can see no scope for the application of the section to a corporation which is resident in Canada and derives income from property but engages in no business operations anywhere. Such a corporation could readily be said to carry on no business in Canada, but it would not seem to comply with the requirement that its business operations be of an industrial, etc, nature and that they be carried on entirely outside Canada.

In the present case, the scope of the appellant’s functions became so restricted following the sale of its manufacturing plant that it becomes necessary to consider, first, whether what was left can be regarded as a business at all, as opposed to a mere holding of property and receipt of revenue therefrom.

He continues at page 306:

lt does not, however, necessarily follow that what the appellant did in 1957, even though capable of being characterized as a business, amounted to “business operations”, for I think it is readily conceivable that one may carry on a commercial business and yet for an appreciable time do no act whatever which can be characterized as a “business operation”. In using the expression “business operations” the statute appears to me to contemplate something more than a situation in which nothing of an active nature is done in the material period by the party by whom the business is carried on. In the present case, the appellant’s activities, if not entirely non-existent, were at a low ebb throughout 1957, and the questions thus arise whether there was anything at all in what the appellant did in 1957 which should be regarded as “business operations” and, if so, whether such business operations were carried on entirely outside Canada.

(B) Tara Exploration and Development Co Ltd v MNR, [1970] CTC 557 at 567; 70 DTC 6370 at 6376:

With great doubt as to the correctness of my conclusion, I am of opinion that section 139(1)(e) does not operate to make a non-resident person subject to Canadian income tax in respect of a profit from an adventure that otherwise does not amount to, and is not part of, a “business”. With considerable hesitation, I have concluded that the better view is that the words “carried on” are not words that can aptly be used with the word “adventure”. To carry on something involves continuity of time or operations such as is involved in the ordinary sense of a “business”. An adventure is an isolated happening. One has an adventure as opposed to carrying on a business.

Counsel for the appellant also argued that the first condition for a corporation to be a “foreign business corporation” is enunciated in subsection 71(2) which states that “a foreign business corporation” is a corporation that during the whole of the taxation year in respect of which the expression is being applied “(a) was not a personal corporation;”.

Paragraph 68(1 )(c) defines a personal corporation as one which did not carry on an active financial, commercial or industrial business. Consequently, he concludes that a foreign business corporation must carry on an active financial, commercial or industrial business—otherwise by not being active it would fall under subsection 68(1) and become a personal corporation.

After a careful scrutiny of the appellant’s Exhibit A-4, one must conclude that the registered entries amount only to “bookkeeping” entries for the taxation year 1958-1959. Previous entries may refer to actual transactions but these would apply to the previous taxation year. It is self-evident that the listing comprises all of the General Ledger Accounts, which, at first glance, would be very impressive but do not represent a true picture of the degree of activity of the company’s business. None of the General Ledger Accounts are titled or shown separately. Some would definitely deal with capital stock, some, with sales and cost of sales, some with “receivable” and “payable” accounts. Therefore, which of the figures shown on Exhibit A-4 actually represent genuine business transactions? The said exhibit shows only 26 entries for the taxation year ending July 31, 1959, 19 of which were made on July 31st and are definitely closing entries. The seven other entries deal partly with costs incurred in the previous year and partly with bank charges and fines.

Furthermore, this has been explained very well by Mr Pollock and by Miss Bradnam, comptroller of the appellant company, who never received any monetary compensation for her bookkeeping. Such evidence does not show that accounting and bank records were maintained on a daily and active basis; that serious directors’ meetings were held; that the appellant company received and disbursed substantial sums of money; and that active brokers and commission agents were contacting customers and seeking business in three foreign jurisdictions.

As a matter of fact, the scope of the appellant’s activity became so restricted in 1959 that what was done during the whole of the said taxation year cannot be considered as business operations being carried on outside Canada. It follows that what the appellant did in 1959, even though as being able to be characterized as a business, does not amount to “business operations” because section 71 contemplates “something more than a situation in which nothing of an active nature is done in the material period by the party by whom the business is carried out”.

In the case under review, the appellant’s activities, if not entirely non-existent, can, in no way whatsoever, be construed as business operations within section 71 of the Income Tax Act.

There is no doubt that there was a definite break in operations, substantial enough to interrupt the continuity and therefore to say that the appellant company did not, during the 1958-1959 taxation year, carry out business operations in the ordinary sense of a business. By the foregoing, the first question must be answered in the negative. According to the evidence adduced and the principles enunciated in the two above-referred cases, the present appeal is dismissed.

Appeal dismissed.