Les Entreprises Blaton-Aubert Societe Anonyme v. Minister of National Revenue, [1972] CTC 609, 73 DTC 5009

The Associate Chief Justice:—This is an appeal from a decision of the Tax Appeal Board dismissing the taxpayer’s appeal from an assess- ment dated April 19, 1967 when a tax in the sum of $24,412.50 was levied in respect of the appellant’s 1966 taxation year from an income of $70,000 accruing from the execution of a contract, ie, the construction of the Belgian pavilion on the site of Expo in the city of Montreal.

In 1965 the appellant company, a resident of Belgium, entered into a joint venture agreement with a Canadian construction firm for the purpose of securing and executing the above-mentioned contract. The Minister, relying on subsection 31(1) and section 110B of the Income Tax Act* [1] taxed the profits accruing to the contract.

The appellant submits that the only reason why it was invited to join in the tender made to the Belgian Government by Argo was the requirement of the Belgian Government that a company with its head office and its assets located in Belgium assume responsibility for the proper carrying out of the contract. The appellant company, according to its counsel, earned its share of the profits by agreeing to assume liability for any claims made by the Belgian Government as a result of the construction of the pavilion.

The true nature of the transaction by which the appellant earned the profits is, according to counsel for the appellant, simply an undertaking to underwrite Argo’s responsibility as to 100% towards the Belgian Government and as to one-half thereof towards Argo and the assumption of such a contractual responsibility by a non-resident corporation to a Canadian corporation does not, he says, constitute “carrying on business” in Canada within the terms of subsection 139(7) of the Income Tax Act which defines “carrying on business” for “a non-resident” as follows:

(a) produced, grew, mined, created, manufactured, fabricated, improved, packed, preserved or constructed, in whole or in part, anything in Canada whether or not he exported that thing without selling it prior to exportation,

The appellant, according to its counsel, earned its share of the profits on the construction of the Belgian pavilion by agreeing to assume liability for any claim made as the result of such construction by the Belgian Government. In other words, the appellant sold its undertaking to assume such responsibility to Argo for one-half of the potential profits and Argo purchased such assumption of responsibility towards the Belgian Government from the appellant because without it, Argo would not have obtained this contract.

The joint venture, in his view, did not constitute a partnership but rather a division of responsibility by Argo and appellant for any claims made by the Belgian Government in carrying out the said construction contract. If, he says, the contract is not a partnership, then the appellant never carried on business in Canada. It never had an office or other permanent establishment in Canada, never used any equipment in Canada, never entered into any contracts in Canada and, therefore, it cannot be taxable under the Income Tax Act.

There was some evidence by the appellant, through a Mr Hugh Hallward, president of Argo Construction, the Canadian construction company with whom the appellant entered into the joint venture, to the effect that the Belgian company did not participate in any active way in Canada in the construction of the pavilion, which was carried out exclusively by Argo Construction. It was also established that Argo prepared the bid estimates, which were then reviewed by Blaton- Aubert, in Belgium, and then Argo negotiated and let out all the subcontracts. The Belgian company, however, carried out several functions in Belgium such as obtaining and expediting the granite for the floor of the pavilion and the brick for the walls. He also said that there were only two persons connected with Blaton-Aubert, Mr Jacques Molle, and its president, Mr Blaton. Mr Molle, according to Hallward, made a total of four visits during the whole enterprise. His first visit lasted one hour and his second lasted 15 to 20 minutes. These visits, according to Hallward, were mere formalities. Molle, he said, would come to the office and chat. The Belgian company also played a third role in the enterprise in dealing with the Belgian architect who em- ploye-d a. Quebec architect for the plans and the construction in accordance with the requirements of the Quebec Architects Act. The Belgian company, however, had no office in Montreal, or in Canada, during the performance of the construction nor any employees nor construction equipment. It had not entered into any business activities in Canada before this venture nor has it since. Although the joint venture document mentions that the Belgian company could have a job supervisor on the premises, none was ever appointed. In so far as the supplying of capital for the pursuance of the contract was concerned, counsel for the appellant stated that he thought the Belgian company had supplied some, but could not remember the amount. It was also stated that although a board of management was contemplated in the agreement, none was even appointed. For whatever contribution the appellant had made or was making to the job, the joint venture agreement provided for an equal division of profits or losses. The position taken by counsel for the appellant is that, although the latter was a construction company, the functions fulfilled in this venture by it was not a construction function but a financial one adding that it was a “once and for all” venture. It appears to me that the appellant has here a considerable hurdle to overcome in that it is a construction company and if one relies on the joint venture document entered into with the Canadian company, the object of the contract, ie, the construction of the Belgian pavilion, was the execution of a type of work in line with the business for which it was created and which it normally and usually performs in its every day operations. The only difference, of course, is that here they were operating far from their home base in a foreign country and because of a joint venture agreement by means of a Canadian company which, however, is, in this day and age, a normal way for a construction company to operate in the performance of its business activities. Counsel for the appellant says that notwithstanding the above agreement, the appellant’s activities, in so far as this venture is concerned were, except for the few times the company in Belgium expedited some material, limited to a financial function. If this was the sole or main purpose for the tie-up with the Canadian company, one may well ask why the Belgian Government was not content to rely on a performance bond which would have given all the financial protection the owner wished to obtain. Counsel for the appellant explained that there was a. further purpose in requiring the participation of a Belgian construction company here in that the Belgian Government wanted to be able to lean on a construction company in Belgium and on their know-how or expertise in case something turned up or went wrong. They wanted, he said, to be able to pick up a phone in Brussels and say, for instance, “we don’t like the colour of the bricks or something”.

This, of course, indicates clearly that although financial considerations entered into the Belgian Government’s requirement to have a Belgian company and possibly also a Belgian architect on the job, this was not the only reason for such a demand. The Belgian Government indeed required the participation of the Belgian company not only as an endorser of the Canadian company, but also as a possible participant in the construction of their property in the event the Canadian company could not complete the job. It is true that the appellant’s participation did not turn out to be as active or as great in the actual construction of the job, as that of the Canadian company, but it surely, as indicated above, could have gone beyond a simple financial endorsement. As a matter of fact, had things gone badly, its participation could have become as active as that of the Canadian company whom it was under the joint venture agreement obligated to replace in order to terminate the job. Such an obligation cannot, in my view, be considered as anything else but the ordinary performance of the obligations of a construction company and the fulfilment of what a construction company normally does in the execution of its business operations. Counsel for the respondent pointed out that the agreement, in addition to providing for the division of profits on a 50-50 basis, as mentioned above, also provides for each partner to bear the taxes levied on his share of the profit. This, however, does not mean that each taxpayer could not be treated differently in so far as taxes are concerned as the matter of taxation depends always on the particular situation in which a taxpayer happens to be in under the relevant tax laws and, of course, the separate and possibly different situations of the partners here could affect the amount of taxes each of them could be called upon to pay. It does show, however, that the agreement was such as to indicate that neither of the parties had no intention of assuming payment of taxes for the other. The agreement also provides for a further division of profit on a 50-50 basis in all cases when a part of the job is given to a subcontractor.

Counsel for the appellant submitted that the respondent here is attempting to take shelter behind a document which does not represent clearly the true facts under which taxation arises. Counsel for the respondent indeed took the position that under article 1234 of the Civil Code “testimony cannot, in a case, be received to contradict or vary the terms of a valid written instrument” and stated that all the evidence submitted by Mr Hallward should be set aside. I am afraid that I cannot do this because I am not satisfied that all of the evidence adduced by this witness contradicts or varies the terms of the joint venture document.

This does not mean, however, that because of this evidence, the appellant has successfully established that it was not, in this venture, carrying on business in Canada. The terms of the joint venture agreement indicate that this is a construction contract entered into by both parties and not only a financial endorsement by one partner to the owner and the matter will have to be dealt with on the basis of the agreement as well as on whatever acceptable and relevant evidence was adduced to establish in what manner the obligations of the appellant were carried out. It is true that so far this has been the only venture of this nature entered into by the appellant in Canada. It might still, however, be considered as the carrying on of a business within subsection 2(2) of the Income Tax Act if this appears to be on the facts what the appellant actually was doing as part of the business it was set up to carry on and this, in my view, is what it was doing in participating as it did in the joint venture agreement and the construction of the Belgian pavilion. Counsel for the appellant relies on Tara Exploration and Development Company Limited v MNR, [1970] CTC 557; 70 DTC 6370, a decision of the President of the Exchequer Court, as he then was, confirmed by the Supreme Court of Canada ([1972] CTC 328; 72 DTC 6288), where, assuming that the taxpayer had engaged in an adventure in the nature of trade, he reached the conclusion (at p 564 [6374]) that the appellant, a non-resident corporation could not be considered as thereby

“carrying on business in Canada” within the ordinary meaning of the words “carrying on business” and was not a part of a larger activity that falls within those words. It was an isolated transaction and it was not a part of the “business” for which the appellant had raised its capital or that it was actually carrying on.

(Italics are mine.)

The above decision, in my view, cannot assist the appellant. The transaction here, the building of the Belgian pavilion, although the only such venture entered into by the appellant to date in Canada, was nevertheless clearly conducted as part of the business that it “was carrying on” and, may I add, is a normal and usual way of operating in the construction field today. It, therefore, falls clearly within the ambit of subsection 2(2)* [2] of the Income Tax Act.

The appeal is, therefore, dismissed with costs.