Thomas Pallant v. Minister of National Revenue, [1972] CTC 2378, 72 DTC 1321

Roland St-Onge:—These appeals were heard at the City of Vancouver, in the Province of British Columbia on October 27, 1971 by the Tax Appeal Board as it was then constituted, and are from reassessments involving the taxation years 1963, 1964, 1965 and 1966.

The appellant is a fisherman who, in the above-mentioned taxation years, was the main shareholder of Pallant Services Ltd, a company incorporated under the Companies Act of the Province of British Columbia and hereinafter referred to as “the company”. In the years 1965 and 1966 the company received inter alia the sums of $26,074.10 and $19,575.94 respectively in respect of contracts whereby the company had to provide captain and crew member services to various fishing companies.

The appellant is also a shareholder of Silver Fishing Company Ltd and Bounty Fishing Ltd (hereinafter referred to as “Silver” and “Bounty”) which reimbursed him for the use of his car in the amounts of $240 and $270 respectively in each of the above taxation years.

The company reported as income the sums of $26,074.10 and $19,- 575.94 and paid taxes thereon, By notice of reassessment dated May 28, 1968, the Minister of National’ Revenue reassessed the appellant by adding to his income the above-mentioned amounts in addition to those he received from Silver and Bounty for the use of his car.

The appellant filed a Notice of Objection to the said assessment dated May 28, 1968 and on September 17, 1969 received a Notice of Reassessment from the Minister reassessing the appellant by deducting the sum of $2,540.10 from his income for the 1965 taxation year and by adding $8,230.43 to his income for the 1966 taxation year.

The appellant filed a second Notice of Objection to the second Notice of Reassessment and on January 30, 1970 received a notification by the Minister that the second Notice of Reassessment was confirmed — which resulted in the current appeal. At the hearing, the appellant withdrew his appeal with respect to the 1963 taxation year and also with respect to the car allowance for the taxation years 1964, 1965 and 1966, as well as his management fees and special bonuses of $1,000 and $1,200. Consequently, the Board has only to decide whether the amounts of $23,534 and $27,806.37 were income to the appellant or to the company by ruling whether the appellant in those years was or was not the employee of the company.

The appellant began fishing in 1940 at Prince Rupert, BC where fishing is the major industry. In 1957 he became, on a 50-50 basis with one John Johnson, the owner of a ship known as Silver Bounty. In 1962 they sold it to Silver Fishing Company and with their wives became shareholders as follows:

In the same year they acquired a larger boat similar to the Silver Bounty and then transferred it to Bounty Fishing Lid which was incorporated in 1964.

The appellant also decided to incorporate “Pallant Services Ltd” which was to supply captain services to other companies. He stated that his other purpose in incorporating such a company was to limit his personal liability and build up an equity therein. With his wife who owned one common share and 500 preferred shares therein, the appellant became the main shareholder with 99% of the common shares.

His partner incorporated a similar company under the name of “Johnson Services Ltd” and both partners met to discuss the manner in which each company would provide captain services.

The appellant testified that no written agreement existed between him and the company to enunciate the terms of his agreement with the company but an unsigned minute gave the particulars thereof; and that in the fishing industry everything was done orally and it was not customary to resort to written agreements. He claimed that the Minister’s allegations to the effect that a company could not become a member of the co-op or of the credit union were incorrect, and filed the signed marketing contract made between Pallant Services Ltd and the said coop. With respect to the fishing business, he explained that the fishing of halibut and herring was done by boat under the supervision of a captain who selects an engineer, a cook and six fishermen. The captain is chosen by the owner of the boat who gives his name to the co-op, and to deal with the co-op one has to be a member thereof. When the crew comes back with the fish they are delivered to the co-op in return for a tally slip which indicates the quantity of fish delivered. The crew receives 80% of the proceeds and the owner of the boat 20%. Usually the captain gets two shares — one in his capacity as captain paid by the owner of the boat and the other as a member of the crew. In 1964, 1965 and 1966 the co-op paid the appellant and his company the following amounts:

At the hearing it was brought to the attention of the Board that in the above table the figure $9,911.07 under “Thomas Pallant” should be recorded under “Pallant Services Ltd” and the $8,231.00 under ‘‘Pallant Services Ltd” should be recorded under “Thomas Pallant”.

Upon cross-examination, the appellant stated that the “catch” belonged to all the members of the crew on a share basis set down by the union; that Pallant Services Ltd was incorporated not only to supply captain services but also for tax advantages; that the appellant was always the captain of the boat of his other companies; that Pallant Services Ltd did not have a boat and did not employ anyone except the appellant who was paid in 1965 according to a general entry in its books; that he did not have any arrangement with Pallant Services Ltd as to the percentage he was to receive and what he received varied from year to year; that all the minutes of Pallant Services Ltd were signed with the exception of the one dealing with his own hiring.

Obviously, not having any employees, Pallant Services Ltd did not pay any premiums in order to be under workmen’s compensation or unemployment insurance, and had no public liability insurance. Pallant Services Ltd did not have a business licence or telephone listing, and its office was at the appellant’s home. The captain’s fishing licence was in his own name and the boat and salmon licences were in the name of Silver Fishing Company Ltd.

Mr Odd Eidsvik, a chartered accountant who resides in Prince Rupert, testified that he was a native of Norway and used to work on fishing boats before he articled to become a chartered accountant. He now advises about 200 fishermen in Prince Rupert where about 40% of income received comes from the fishing business. He stated that in all his years of experience with the fishermen he had never seen any written contract between them and that everything was done in partnership on a trust basis. He has known Mr Pallant since 1957 and began to do some work for him about the year 1962. According to him, what really happened began when Johnson wanted to invest his money in land and Pallant wanted to invest in fishing boats. He advised them to incorporate their business in order to limit their personal responsibility and the arrangements between Pallant and Johnson were discussed in his presence at that time. He also stated that the fishermen are not covered by unemployment insurance because they are considered to be employers; that in 1964 a salary of $7,800 for the appellant was set up in the books of the company from which he was to withdraw $4,000 in each of the next two years; that he suggested to the appellant that he stop taking out substantial amounts of salary so that a larger fishing business could be built up and also to safeguard his fisherman status so that he would be able to borrow from the government up to $25,000 at a low interest rate.

He also stated that Johnson was reassessed and did not dispute the assessment because he did not have the money needed to do so; that salaries paid by Pallant Services Ltd to the appellant were not effectuated by issuing cheques but by entries in the company’s books; that at the beginning of each season it was determined who was going to render captain services in order to help the appellant keep his fisherman status; and that the tally slips were issued either in the name of the appellant or Pallant Services Ltd according to the instructions given by the appellant.

In argument the appellant contended that Pallant Services Ltd was incorporated as a separate legal entity and as such entered into a contractual relationship with Silver Fishing Company Ltd through which it earned income which it reported and paid taxes thereon. Consequently, this was the company’s income and, according to the law, the Minister is not allowed to shift to an individual the income earned by a company. He claimed that the contractual relationship between himself and Pallant Services Ltd took place through an oral agreement which, according to the judgments rendered in the following two cases, is considered to be a valid contract: Ralph J Sazio v MNR, [1969] 1 Ex CR 373; [1968] CTC 579; 69 DTC 5001; James A Cameron v MNR, [1971] CTC 97; 71 DTC 5068. To further substantiate this verbal agreement, he referred the Board to unsigned minutes of Pallant Services Ltd. He also argued that in some circumstances the form of the contract should be put aside in order to discover the true substance of the matter (CIR v Duke of Westminster, [1936] AC 1); that the fact that a company was incorporated to serve the interests of an individual is not sufficient to say that the income of the company should be that of the individual.

Counsel for the respondent did not dispute the fact that an individual can incorporate a company and that he is allowed to arrange his affairs so as to attract the least amount of tax, but he contended that in the current appeal the income was that of the appellant, and if the Board rules that the appellant has succeeded in so arranging his affairs then he did not do so legally but in contradiction to section 137 of the Income Tax Act. He referred the Board to the following jurisprudence: Wilbour Lee Craddock and Stanley Curtis Atkinson v MNR, [1969] 1 Ex CR 23; [1968] CTC 379; 68 DTC 5254; C S Smythe et al v MNR, [1968] 2 Ex CR 23; [1967] CTC 498; 67 DTC 5334; James A Cameron v MNR (supra); Ralph J Sazio v MNR (supra). He concluded by saying that on the facts adduced before the Board there are no valid business reasons for Mr Pallant entering into this transaction and incorporating Pallant Services Ltd. In his opinion, the only reason and the motivating factor was the reduction of taxes and, consequently, the transaction can be attacked either on the basis of the assignment of income or the company being a sham, a simulacrum or a cloak, or, alternatively, on the basis of the provisions of subsection 137(1).

Oddly enough, the company, Pallant Services Ltd, was incorporated for certain purposes and none of them has been carried out. The company was supposed to render captain and crew member services to various clients, but there is no evidence to show that such services were ever rendered. As a matter of fact, the company never entered into formal contracts in that respect. Apparently, its sole employee was its main shareholder — the appellant in this appeal.

Above all, everything was accomplished by the appellant or under his name or the name of other companies. It is a proven fact that the captain’s fishing licence was in his name and the licence to fish salmon in the name of Silver Fishing Ltd; that the cooperative was doing business with the appellant and a substantial amount of money was received by the appellant personally; that the catch of fish belonged to the members of the crew, including the captain, and that 20% of the proceeds went to the owner of the boat which was not Pallant Services Ltd but Silver or Bounty. Pallant Services Ltd had no employees, no boat, no telephone listing or office of its own and no business license. In other words, Pallant Services Ltd had nothing and was doing nothing.

The most important and striking point is the fact that no written agreement existed between the appellant and Pallant Services Ltd to fix the appellant’s salary and conditions of employment so that the appellant was at liberty to use his company as a sham or simulacrum to minimize his tax rate by shifting part of his personal income to the company as circumstances warranted. The unsigned minutes appear to be the result of an afterthought especially considering the fact that all the other minutes of the company were duly signed.

A taxpayer is permitted to organize his affairs so as to pay less income tax, but when he incorporates a company, such legal entity should act as a business organization. The fact that it had a separate bank account is not sufficient to brand the said company as one carrying on a bona fide business.

For the above reasons, the appeals are dismissed.

Appeal dismissed.