Richardson Terminals Limited v. Minister of National Revenue, [1971] CTC 42, 71 DTC 5028

Dumoulin, J.:—This case’s initial paragraph sets out that :

Notice of appeals is hereby given from the income tax re-assessments dated July 19, 1968, and October 11, 1968, wherein additional taxes and interest in the sum of $1,249;878.04 were levied in respect of alleged income for the taxation years ended July 31, 1963, 1964, 1965 and 1966 and December 31, 1966, and as special refundable tax in respect of the. taxation years ended July 31 and December 31, 1966.

Paragraph 3 reads as follows:

3. By further notices of re-assessment dated October +1, 1968, issued to the Appellant in respect of its taxation years ended July 31, 1963, 1964, 1965 and 1966, and December 31, 1966, the Respondent. made some minor adjustments to some of the figures used in the re-assessments dated July 19, 1968, thereby. increasing slightly the additional income taxes and the special refundable tax assessed against the Appellant for the said years.

As a starting point let us elucidate the legal status and industrial pursuits of the appellant. Eastern Terminal Elevator Company, Limited, was incorporated by letters patent. dated October 2, 1913 under the laws of the Province of Manitoba ; its head office is at Winnipeg (cf. paragraphs 7 and 8)..

On May 13, 1965, by supplementary letters patent, appellant’s corporate name was changed from Eastern Terminal Elevator Company, Limited, to its actual one : Richardson. Terminals, Limited (cf. para. 9).

This company’s particular undertakings are sufficiently specified in paragraph 10, hereunder :

10. By virtue of its Letters Patent, the Appellant has the power, among other things: “to carry on all business generally transacted by the owners of elevators, grain warehouses, grain crushing or chopping mills and dealers in grain and every kind of produce”.

Appellant’ s fiscal year, until July 31, 1966 inclusive, ended on July 31, but since November 17, 1966 its fiscal year- end was brought over to December 31 (cf. para. 13).

The appellant’ s authorized capital stock of $250, 000, so states paragraph 11 :

is divided into 2,500 common shares of the. par value of $100.00 each, of which 250 have been issued and are still outstanding and beneficially owned by James Richardson & Sons Limited (hereafter called “Richardson”).

That which might prove to be a tangled skein, were, an attempt made to unravel it with the somewhat ponderous and repetitious information of its 149 paragraphs, comprising 53-pages, supplemented by 18 sections dilating upon the statutory provisions, may, I trust, reach a more simplified solution when narrowed down to this commonplace query : What is it all about ?

It is, in short, a tripartite contingency implicating closely related companies, one of which, Marine Pipeline and Dredging, in the throes ‘‘of a prolonged period of heavy losses’’, obtains financial assistance from a more fortunate parent, James Rich- ardson & Sons, Limited, the latter, in turn, recoups its loans from Richardson Terminals, the appellant, owning its shares in the total of 100%. This intimate corporate relationship is acknowledged in paragraph 50 of the notice of appeal :

50. As a result, the Appellant, Marine, Richardson and Pioneer (another offspring of the latter but of no significance to the issue) are, indirectly but in fact, controlled by Messrs. James A. and George T. Richardson and their sisters, the only distinction between the two brothers and their sisters arising out of the fact that the beneficial holdings of the two brothers in the capital stock of Richardson are slightly larger than those of their sisters.

From such an admission, the respondent, in paragraph 12 of his reply, appropriately draws this inference:

12. He admits paragraph 50 and says that the Appellant, Marine and Richardson are in fact persons who do not deal at farm’s length.

Since it remains undisputed that, on appellant’s side, the three parties concerned all belong, with quite a few others, to the Richardson group of companies, it will suffice to mention the executive officers of each during ‘‘the period from 1963 to 1967’’. Appellant’s officers were :

Under the name and style of Eastern Terminal Elevator Company Limited, later changed to its present designation, the appellant ‘‘commenced business as of October 2, 1913, and since that time its business operations have included :

(b) The lease and operation of the terminal elevator at Port Arthur, Ontario, owned by Richardson;

This lease continued from January 1, 1919, to April 30, 1963 (cf. para. 15).

We shall see that the period extending from May 1, 1963 to April 30, 1968 will be the crucial one for the three participants.

“From August 1. 1956, to date, the Appellant’s auditors have been Price Waterhouse & Co.”, states paragraph 14 of the appeal.

Next in our line of research appears the debilitated Marine Pipeline and Dredging Ltd: (now revitalized to financial health), ‘‘incorporated by memorandum .of association on. October 27, 1954, under the Companies Act of British Columbia’’, with its head office in Vancouver and, since 1967, its administrative seat at Calgary. Also registered under Part IX of the Corporations Act, 1953, of Ontario, Marine ‘‘was therefore entitled to carry on business in the Province of Ontario during the period herein involved. The required annual returns were filed with the Provincial Secretary’’ (cf. para. 18 of the appeal).

The powers granted to Marine by its memorandum of asso- ciation are, of course, of paramount importance in connection with forthcoming developments and the respondent’s reliance upon Section 27(5) (b) of the Income Tax Act (R.S.C. 1952,

c. 148 and amendments), hereafter cited:

27. (5) Paragraph (e) of: subsection (1) does not apply to permit a corporation to deduct for the purpose of computing its taxable income for a taxation year, a business loss sustained by it in a preceding: taxation year, in any case where:

(b) the corporation was. not, during the taxation year, carrying on the business in which the loss was sustained.

I e italics are mine.] •’

Paragraph 19, notice of appeal, mentions that Marine, among other powers, is entitled to:

(a) . . . enter into any contracts in relation to, and to erect, construct, maintain, alter, repair, pull down and restore works of all descriptions, including roads, ways, tramways, bridges, reservoirs, watercourses, dikes, revetments, drainage levees, wharves, docks, aqueducts, mills, pumping stations, pipe lines, laboratories, retorts, refineries, tanks, pumps, ditches, canals, the reclamation of inundated lands, dirt moving and hauling of all types, blasting and drilling for all types of substances, including oil, gas, and water, and mining of all types and for all minerals;

and

(b) to carry on the business of importers and exporters of and to buy, sell and deal in all kinds and descriptions of goods, wares and merchandise, and to carry on the business of warehousemen, forwarders, carriers, carters and other like businesses and to buy, sell and generally deal in wares, merchandise, articles or effects directly or indirectly relating to any of the said businesses whether at wholesale or retail.

Marine’s officers during the relevant time, i.e. May 1, 1963 to April 30, 1968, were the following :

Its auditors were the firm of McIntosh, MeVicar, Dinsley & Co., Vancouver; from 1963 to October 31, 1966; since then, Price Waterhouse & Co. have acted as such ef. para, 25).

The only witness heard at trial, Gordon Lawson, also is one of Marine’s directors; the latter company commenced active operations “around February 17, 1955” (para. 27).

As the trite saying goes, the last but not the least of this company trio is that of James Richardson & Sons, Limited (herein shortened to ‘‘Richardson’’) ‘‘incorporated by Letters Patent under the Companies Act of Canada, dated December 7, 1909” (para. 31), with head office at Winnipeg.

Once more arises the unescapable necessity of reciting some of those powers extended to Richardson as I read them in para. 33 of the notice of appeal. The firm is thereby authorized :

$8. (a) to carry on- an elevator and warehouse business and for that purpose, inter alia, to erect, acquire, lease, maintain and operate elevators, grain storage and cleaning plants and warehouses, the latter either for grain or general merchandise, to store and ‘clean. grain, to store and handle merchandise, goods and chattels of any and all kinds, to deal in grain and flour, and to purchase, hold and sell the same, either for themselves or as agents for others;

(b) to buy, sell and make advances on grain, lumber, merchandise, coal, live stock and other moveable property upon commission and otherwise;

(c) to raise and assist in raising money for and to aid by way of bonus, loan, promise, endorsement, guarantee of bonds, debentures or other securities, or otherwise, any corporation in the capital stock of which the Company holds shares, or with which it may have. business relations.

Paragraph 39 ‘specifies several types of business activities carried on by Richardson in virtue of its letters patent,, “and more particularly for the purposes hereof:”

•7, 39. (a) it carries on extensive operations in the grain trade:

(d) it owns and has been leasing the Port Arthur terminal to the Appellant, from January 1, 1919, to April 30, 1963, and for five years thereafter to Mariné: and

a statement, forerunner to ‘that ‘repeated in paragraph 50 (supra) :

(e) it acts as a banker for the Richardson group of companies [graphically described on exhibit 67 1, and in particular for r Marine, J and manages. the funds of those companies. .. .

All the. issued and outstanding shares of Richardson ‘‘have béeri and are beneficially owned ’ by Intercolonial Trading Corporation/ Ltd., one of the above mentioned family group (cf. Ex. 67), “Valley Investments Ltd., (a company controlled by xeorge T. Richardson), and by Westmead Limited (a company controlled by James A. Richardson) ” (para. 34).

Its executive board is. listed as follows (ef. para. 36) :

Up to July 31, 1966 this firm’s fiscal year ended ‘on July 31, and from then on it w as changed to December 31 ( para. 31).

These indispensable preliminaries over. with, we reach the crux of the problem, Marine’s monetary woes, and, after due consideration by its owners and advice obtained from several auditors, the remedy hopefully devised to cure them, as, indeed, it did. I believe, after some hesitation, that it might serve the twofold purpose of intelligibility and relative conciseness to cite rather than attempt to summarize the tenor of this notice of appeal more akin to a trustee’s inventory or an auditing report than to a plea in. law.

Here then is the story as told. Mariné Pipeline and: Dredging Company (abbreviated to Marine), so we are apprised by paragraph 26: . !-..U .» ;

‘was created after Missouri Valley Dredging Co., an American Company specialized in undertaking underwater crossing work in pipeline construction, had approached the Richardson interests and agreed to participate, to the extent of one- third, in this new Canadian company.

Within a year, underwater érossing work becoming insufficient to warrant maintaining a costly organization,

Marine, therefore, entered the dredging business on the Pacific coast, as dredging was already an integral part of underwater pipeline construction. (Para. 28)

Nevertheless,

29. Early in 1956 Marine required additional financing. Missouri Valley Dredging Company was not prepared to provide its share and therefore withdrew and sold its one-third interest to Interprovincial [a wholly-owned Richardson enterprise, of which, the corporate name is Interprovincial Trading Corporation Limited].

Let us pass on to the next phase, that of planning a curative scheme as related in the following paragraphs :

93. During the course of Marine’s fiscal year ending October 31, 1961, it became apparent to its directors that a substantial reorganization of its business had to be made.

95. The situation having become even more critical by October 31, 1962, the. directors, in the latter part of 1962 and the first part of 1963, intensified their efforts in searching for the most appropriate remedies.

Several possibilities were duly considered, one of which was the winding-up of Marine, another, its sale to a willing purchaser, if such a Good Samaritan could come riding down the road. Alternative after alternative were carefully examined, weighed on the scales of auditors’ advice and business acumen, found ‘‘too light’’ until, so says paragraph 100:

It was . . . concluded that the only acceptable solution was to permit Marine to survive as a distinct business enterprise, to reorganize its pipeline contracting. business and to cause Marine to engage in additional and profitable operations.

An initial step in that direction was taken on January 4, 1965, when:

the directors of Marine made a specific proposal to the directors of Richardson to lease the Port Arthur terminal elevator,

a most successful enterprise, as evidenced and set out in paragraph 103:

103. Since the terminal operations at Port Arthur had been profitable over the past several years, and could produce more income in the future if the grain shipment with Pioneer [totally owned by Richardson, cf. ex. 67] and Richardson could. be revised on the basis of current competitive business practices, the conclusion reached within the family group of companies concerned was to terminate the lease of the Port Arthur terminal and the grain shipment agreement with respect to the Appellant, to grant a new lease of the terminal to Marine and to have Richardson and Pioneer enter into a new grain shipment agreement with Marine.

105. This final decision was reached by all parties concerned before the end of March, 1968.

The above decision materialized on May 1, 1963 at the expiry of the Port Arthur terminal lease to Eastern Terminal Elevator Company, appellant’s former corporate name, and by a five- year lease from Richardson to Marine ending April 30, 1968, for an annual rental of $50,000 (cf. para. 69 and Ex. 4).

Marine, engaged as it was in pipeline construction, underwater crossing work and dredging work, something quite remote or, in the vernacular, a far stretch, from grain elevator trade, prefaces the ‘recital of the lease agreement s conditions by the undergoing explanation :

83. Having entered into a lease of the terminal, Marine required skilled personnel to operate it. The Appellant, having lost its lease of the terminal, desired to retain its experienced staff and organization and to continue its existence. Marine and the Appellant therefore entered into a management agreement whereby the Appellant was employed by Marine, “as its manager and agent in connection with the management” of the terminal elevator, “subject to the direction of Marine, for a period of five years commencing on the first day of May, 1963, and terminating on the 30th day of April, 1968”, and the Appellant agreed .“to act solely for and on behalf of Marine as its agent in connection with the management” of the terminal. [Quotation marks in text, italics mine. I

The excerpts to follow are taken from Exhibit 4. the original lease and management agreement; they relate the conditions mutually stipulated by sub-lessor, Marine, and its lessee Eastern Terminal Elevator as it then was:

2. Marine agrees to pay Eastern as compensation for the services to be rendered by Eastern to Marine in acting as manager and agent for Marine as aforesaid, during the said term of five years, as follows:

(a) at the end of each three-month period during the term hereof, commencing with the three-month period ending July 31, 1963, . . . an amount equal to the operating expenses of Eastern in acting for and on behalf of Marine as its manager and agent as aforesaid, such operating expenses to be determined and approved by Marine; and

(b) on the 30th day of April in each of the years 1964 to 1968, both inclusive, the amount of $1,000.

8. Eastern agrees to make available to Marine, its authorized representatives and/or its auditors, the financial statements and records of Eastern, in order that Marine may verify the operating expenses of Eastern as hereinbefore referred to, and Eastern further agrees to provide Marine with such periodic statements as may be required by Marine, supported by such certificates of the officials of Eastern as may be required by Marine to satisfy itself as to the said operating expenses.

The two ensuing: paragraphs, 4 and 5, settle the reciprocal payments due to Marine by appellant and grant a. practically free hand to the latter in the pursuit of its specialized trade :

4. Eastern agrees to pay to Marine at the end of each three- month period during the term hereof, commencing with the three- month period ending July 31, 1963, or at such other time or times as may be mutually agreed by Marine and Eastern, revenues earned by Eastern less the operating expenses for such period, to the extent that the same have not previously been paid by Marine.

I should pause here one moment to note that in his evidence Mr. Gordon ‘Lawson, one of Marine’s directors, stressed the substitution at his prompting in Exhibit 4 of the expression “revenues” for that of “profits”, for whatever: help this could be.

Paragraph 5 D provides that :

5. Marine hereby authorizes and empowers Eastern to enter into such agreements in its name as may be required for the conduct of the said business, to the same extent as if Eastern was the principal in respect thereof, it being understood and agreed by Eastern that all such contracts and ‘agreements will be entered into by it for and on behalf of Marine, and Eastern agrees to account to Marine in respect thereof,

On the same day, May 1, 1963, the grain shipping agreement foreseen in the reorganization project was entered into, for the corresponding 1963-1968 period, between Pioneer Grain Company Ltd., and James Richardson & Sons Ltd., of the first part, and Marine Pipeline and Dredging Ltd., hereinafter called ‘‘the Terminal’’, of the second part, in virtue of which the parties of the first part undertook ‘‘to ship to the Terminal at Port Arthur, Ontario, all of the gain owned or controlled by them . . .” (cf, Exhibit 5).

This brings to à close what I might call the case’s first chapter, to Xvit : the structure of the interwoven family group of companies, ten in number, depicted on Exhibit 67 67; the respective operational lines of Richardson, Marine Pipeline and Dredging, and Eastern Terminal Elevator, now Richardson ‘Terminals; the financial pitfalls into which Marine had stumbled: to a deficit depth of some $1,887,832 (para. 87); the extricating ladder contrived by ingenious associates through the more realistic guise of the Port Arthur Grain Elevator quinquennial lease by Richardson to Marine, which simultaneously purported to sublet it, so we have seen,.to appellant acting as its “manager and agent’’.

A fit topic for the second chapter might be to probe the respondent’s submissions that:

(a) at all material times the Appellant carried on at Port Arthur ‘ its own account the business of cleaning, drying and storing grain on its own account and not as agent or servant of Marine;

(b) Marine at no time carried on the. business of cleaning, drying and storing grain;

(c) the agreement between Marine Pipeline and Dredging. Ltd., and the Appellant, of the 1st of May, 1963 (ex. 4) on its true construction, when considered in light of all of the surrounding

circumstances did not:

(i) constitute in fact or in law the relationship of principal or agent; and I

(ii) was an agreement for. the assignment or transfer: to Marine of the income earned by the Appellant in carrying on its own account the business of cleaning, drying’ and storing grain; and

(iii) the said agreement was not a bona fide agency agreement.

Were these allegations substantiated by evidence, then subsection 5(b) of Section 27, coming to the fore, would defeat the appellant’s plea that the dealings at issue in no. wise contravened the Income Tax Act.

A pace backwards seems indispensable at this point, and this refers us to the advice and. consultations sought by. the interested family group in view. of profitably reorganizing their heavily indebted -adjunct. Exhibit 10, labelled ‘/Memorandum to Mr. G. Lawson—A Plan for Marine Pipeline & Dredging Ltd.” presumably from an accounting firm, is unsigned; its paragraph 2 makes the suggestion, repeated in other written directives, that a necessary move would be to:

(2) Obtain supplementary letters: patent for Marine Pipeline & '. Dredging Ltd. in order to change the company name to an appropriate general name, such as Marine Services Ltd., and if necessary to change the objects of the company to enable it to carry on a terminal grain elevator business in. addition to its present powers regarding pipeline construction.

Then comes Exhibit 13, a ‘‘Draft memorandum on proposed transfer of Terminal Elevator and Pellet Plant operations to Marine Pipeline & Dredging Ltd.’’ prepared by Price Waterhouse & Co., dated March 27, 1963.

In slightly different terms, it renews the preceding recommendation :

. .., it will be necessary to carry out the following procedures:

1. Ensure that Marine. Pipeline & Dredging Ltd. has the legal powers to operate a terminal elevator and is licensed to carry on business in Ontario. Legal opinion should be obtained in this regard because it may be necessary for Marine Pipeline & Dredging Ltd. to obtain supplementary letters patent to change its corporate powers and it may also be necessary to apply for a licence to carry on business in Ontario.

2. We suggest that Marine Pipeline & Dredging Ltd. change its name to Marine Services Limited or some other suitable name. It will be necessary: to apply for supplementary letters patent in order to accomplish this.

3. We suggest that once the name of Marine Pipeline & Dredging Ltd. has been changed and any necessary changes to its corporate powers made together with any necessary licensing in Ontario that Marine Services Limited operate two divisions—(a) a terminal division and (b) a contracting division . . .

Price Waterhouse & Co., in a letter to Gordon Lawson, dated March 29, 1963, two days after their Draft Memorandum just cited, emphasized the importance of reconciling a pipeline and dredging concern, having its head office at Vancouver, B.C., with the hardly comparable business of a terminal grain elevator operating at Port Arthur, Ontario. It is significant, also, that the signers of Exhibit 14 qualify the proposed reorganization scheme as effecting ‘‘a transfer of income to Marine Pipeline’’ I quote textually :

Dear Mr. Lawson:

MARINE PIPELINE & DREDGING CO. LTD.

You have proposed that, instead of transferring the operations of Eastern Terminal Elevator Co. Ltd. to Marine Pipeline & Dredging Co. Ltd., Eastern Terminal Elevator Co. Ltd. continue as manager of the Terminal. Under this variation to the plan Marine Pipeline would become the lessee of the Terminal but would enter into a management contract with Eastern Terminal Elevator Co. Ltd. for the actual operation of the Terminal.

In our view this amended plan would probably accomplish the desired objective. However, we think that there is a greater degree of risk that the arrangement might be attacked by taxation officials at some time in the future than if the entire operation of the Terminal were transferred to Marine Pipeline. With the large amount of money involved we feel that it would be worth the initial extra steps inherent in the original plan in order to make the plan as free from risk as possible.

Although the. Income Tax Division’s assessing practice at the present time indicates that they would accept the revised plan, we do not like to depend solely upon assessing practice if a more solid base can reasonably be established. Under the original plan, we feel that the transfer of income to Marine Pipeline [italics added] would be firmly supported by the fact that the actual business operations would be carried on in the name of Marine Pipeline rather than in the name of Eastern Terminal Elevator Co. Ltd.

In summary, we feel that the amended plan will work at the present time, but that the extra steps required in the original plan might be a small price to pay for the additional safety involved.

Expert opinion Was likewise sought from the well- known accounting office of Clarkson, Gordon & Co., of Montreal. On March 28, 1963 Mr. Gordon Lawson, Mariné’s secretary-treasurer and director, discussed the matter at his office with Mr. Arthur

W. Gilmour, of the firm hereinabove mentioned, and the very next day, March 29, acquainted him by a letter (Exhibit 15) of a rather. dissenting reaction ; once more a verbatim reproduction is unavoidable:

re: Marine Pipeline & Dredging Limited

Dear Mr. Gilmour:

Soon after you left our office yesterday, I advised our Auditors of the plan which we discussed with you. You will be interested in their reaction as given in the attached memorandum.

Naturally we will want to be in as strong a position as possible but I do not think our Auditors realize the many complications that will result if Marine actually become the operators of the Terminals. There will be no end of legal details in getting all licenses transferred to Marine and there are many agreements with the Wheat Board and the Board of Grain Commissioners and of course all the details in respect to staff such as Unemployment Insurance, Workmen’s Compensation, Pension arrangements, Union agreements etc. etc. As I see it, under the plan we discussed, all of these could remain undisturbed with Eastern, if Eastern simply operate the Terminals for Marine.

Perhaps our position might be a little better if we adopted the plan previously discussed with our Auditors but I am loath to give up the revised arrangement which we discussed with you.

We will be having a talk with our Auditors on Monday and the matter may resolve itself quickly. If, however, you would care to give me any comment in confidence, I would appreciate it.

Yours very truly, (signed) Gordon

Secretary-Treasurer

A lengthy reply to the latter communication, signed ‘ Arthur ’ ’ (Gilmour), dated April 10, 1963, was forwarded to Lawson. The gist of this memorandum (Exhibit 16) appears below; though fairly repetitive it sums up the line of action arrived at definitely :

The steps which are involved in the plan presently under consideration are:

1. Marine will enter into a lease with Eastern whereby Marine leases a terminal elevator for a period of years for a nominal rental of $1 per annum plus capital cost allowances and other fixed charges.

As a result of this lease, the net profits of the elevator less the rental will belong to Marine, and so be available to reduce the losses incurred by Marine in past years.

2. Marine will enter into a management contract with Eastern whereby Eastern and its staff will operate the elevator for the risk and account of Marine, and will be paid a nominal fee of, say $1,000, for its management services.

The penultimate paragraph is surely not unworthy of mention in its pardonable though sophisticated approach to candour ad usurp, publicanorum :

In any tax scheme, other considerations being equal, it is always well to give a good business reason or to give substance to any transaction, which safeguards can be advanced to defend the transaction should the necessity arise, or should the basic facts on which the arrangement rests be weak. I have no quarrel with the well-tried principle of dressing up any transaction to the greatest extent possible, and do so whenever the facts warrant. In the present instance, I would be quite content to see the elevator sold to Marine in compliance with the principle that an excessive caution is always desirable, but this safeguard is not available at the present time.

No blame attaching, one might think this unequivocal advocacy of the dressing-up principle” to be slightly reminiscent of Machiavellian ink.

As the scheme progressed, on September 9, 1963. Mr. Gordon Lawson of Marine, in a memorandum, enjoined secrecy to that company’s president, Mr. D. J. Baldwin; I quote the relevant passage (Ex. 31):

The enclosed agreements [copies of the reorganization deeds I are of no concern to anyone in your organization other than yourself and Mr. Gill. Therefore, I would suggest that they be retained in a confidential file. In due course they will no doubt have to be exhibited to officials of the Income Tax Department but before that time, we will give you some direction to assist you in explaining the whole arrangement to that Department.

Mr. Baldwin faithfully kept his peace’’ as advised, so that Mr. Lawson, in cross-examination, could testify accordingly, saying: I would think that during the 1963-68 lease, our Mr. Grant, in charge of. Appellant’s business operations at Port Arthur, never had any: communication with Mr. Baldwin, President of Marine.’ ,

Such a policy of discretion, within the intimate circle of those responsible for the plan’s smooth functioning, if understandable, may nevertheless: evolve into a moot point when carried to the degree one finds in paragraph 113 of the appeal :

113. Since the Appellant was duly qualified and licensed to operate a terminal, its operations on behalf of Marine did not make it necessary to disclose the agency relationship to the Board of Grain Commissioners, to the Lake Shippers Clearance Association and to the Winnipeg Grain Exchange, and such disclosure was not deemed to be advisable.

Later. on, some consideration will be given to. ascertain whether the explanation above savours more of wishful thinking than of statutory compliance.

Thus ends the second chapter; a third, refreshingly shorter, will set out, as accurately as possible, the losses incurred by Marine Pipeline and Dredging Co. up to October 31, 1962, and the outstanding balance of loans helpfully assumed by Richardson as of October 31, 1960.

According to appellant’s claim in paragraph 87, hereunder :

87. The total business losses [of Marine] .- .- . up to October 31, 1962, available for application against any business profits earned in fiscal periods subsequent to October 31, 1962, by virtue of the provisions of section 27(1) (e), (5) and (5a) of the Income Tax Act were as follows:

Year ended October 31, 1959	$ 363,137
1960	296,219
1961	769,741
1962	458,735
	$1,887,832

One of the sister companies, Interprovincial Trading Corporation Limited, first rushed to the rescue, lending Marine no less than $2,370,000 from 1956 to October 31, 1960 (cf. para. 88).

These advances were, by October 31, 1960, reduced to $1,170,000, by means of Interprovincial’s subscription for 120,000 Class A shares of Marine at the price of $1,200,000.

Eventually, the real “blood donor” that brought back the wasted ‘‘child’’, Marine, to a flourishing condition, proved to be Richardson as stated I in paragraph 90:

90. During Marine’s fiscal year ended October 31, 1960, Richardson assumed this outstanding balance of loan of $1,170,000 in accordance with its policy of acting as banker for companies in the Richardson group.

Paragraph 122 relates in detail. the accounting procedures ‘‘adopted to record the revenues and expenses involved ‘in the management of the Port Arthur Terminal”, of which a sufficient sample is found in subparagraphs (c) and (f) :

122. (c) In accordance with Marine’s instructions and as soon as possible after the end of each quarter, the Appellant issued a cheque for the amount of the quarterly net revenue to Richardson for the account of Marine, and this payment was recorded on the Appellant’s accounts by the following typical entry:

Marine Pipeline & Dredging Ltd.		——	$66,556
To cash . ...	...		$66,556

To record cheque for quarterly net revenues to April 30, 1966, issued to James Richardson & Sons Limited for the account of Marine Pipeline & Dredging Ltd.;

(f) on receipt of the quarterly cheque from the. Appellant for the Account of Marine, Richardson credited the cheque to its loan account with Marine and notified Marine of the amount so received.

A more or less humdrum transition brings these notes to a fourth chapter: the oral evidence phase, since the only witness heard, Mr. Gordon Lawson, a director of Marine, the secretary- treasurer of Richardson, Interprovincial and Intercolomial, during a protracted deposition, most willingly tendered, of. absolute clarity and openness, was, in fact, questioned in chief and cross-examined mainly upon the statements alleged in the notice of appeal, which, of course, he did not contradict or refute, and in support of appellant’s exhibits. Yet, reference will be had to quite a few passages; for instance, the witness agreed that: Each and every warehouse receipts for grain, from 1963 to 1970, were always delivered in the name of either Eastern Terminal Elevator Co. or Richardson Terminal Ltd., but never to Marine Pipeline & Dredging Ltd.”

Exhibit 54 is a specimen, No. A-14516, issued November 16, 1967, of all warehouse receipts signed and delivered by Richardson Terminals Limited.

Mr. Lawson readily admits that “Marine Dredging and Pipeline, prior to 1963, never had engaged in grain dealing operations, neither had it ever owned or leased any grain elevator”. The deponent’s attention is brought, in cross-examination, to Exhibit 11, addressed to himself, one of chartered accountant Gilmour’s memorandums, March 18, 1963, and does not deny, after it was read to him, that the following advice was not accepted :

In this connection [i.e. the reorganization plan], I would point out that if you arrange for the company to carry on a new type of business, it is essential that you transfer thereto the assets which will earn the income, and not merely attempt to transfer income already earned by some other company.

Also agreed by witness that ‘‘ After Eastern Terminal’s books of accounts were closed, April 30, 1963, no new set of records were started as of May 1st. The records of Eastern Terminal disclosed the operations at Port Arthur without mentioning its connection with Marine and Pipeline Ltd.’’. Neither were Price Waterhouse’s suggestions in paragraphs 5, 6, 7, 8 and 9 of their draft memorandum accepted, as may be seen in Exhibit 13, dated March 27, 1963. The entire reorganization method therein recommended was discarded because, according to paragraph 109 of the appeal :

109. It was felt that this plan entailed many complicated moves, substantial expenses, some extremely undesirable procedures such as the negotiation of a new labour agreement, disturbance to the trade, and the disappearance of the name, goodwill, reputation and of the excellent business connections that the Appellant had built-up over some 45 years.

It is undenied by Lawson that he never imparted instructions to appellant’s personnel regarding the conduct of operations, but discussed the preparation of the financial statements. He also admits that: ‘‘No efforts were made: to segregate’ the grain received and stored prior tg April 30, 1963, nor after May 1st of that year, and no segregation asked for in either the bank accounts or balance sheets of April 30, 1963”, nor subsequently, for moneys received in payment of grain.

“Marine’s Taxation Adjustment Sheet’’, dated October 31, 1963, an initial lapse of six months under the alleged agentmanagement agreement, does not refer to the assets, accounts receivable nor liabilities of Eastern Grain Terminal, otherwise said, no mention of appellant’s own inventory. appears in Exhibit 62, concedes Mr. Lawson.

Exhibit 62, annexed to Marine’s Corporation Income Tax Return ‘‘in respect of fiscal periods ending on or after 1st January, 1962” lists, with a few others, these financial returns:

A closing entry goes thus:

Losses Available for Application Against Future Years’ Profits.

The witness, commenting on such returns, refers to these confirmatory listings in Exhibit A-1 headed: “Earnings from operations of terminal elevator credited to Marine Pipeline & Dredging, Ltd.’’ from May 1, 1963 until December 31, 1967.

All of this bookkeeping data is private matter and, insofar, did not form part of the information afforded to the income tax officials.

The respondent’s learned counsel urged this, in support of his argument that Marine never, in fact nor in law, carried on the business, at Port Arthur, of “purchasing, grading, storing and reselling grain’’, and that assets derived therefrom by the real operator, i.e. the appellant, ‘‘were not shown in the financial statements of Marine’’ (reply, para. 41).

Mr. Ainslie, Q.C., in a thorough and relentless cross-examination, reminded Mr. Lawson of a letter he wrote to the Director of Income Tax, bearing date of January 1966, drawing to the latter’s attention that, some time before, departmental inspectors had asked for additional information concerning the balance sheets of both the appellant and Marine. Proceeding further,

thé learned counsel read: to the witness questions 925 to 930 inclusive, from the official transcript of his Examination for Discovery, held at Winnipeg, June 18, 1970, which I deem appropriate to quote:

By Mr. Ainslie, Q.C.

925. Q. Well, will you confirm that Marine never kept under its

possession any general ledger, accounts that would show the persons who became indebted to either the Appellant or to Marine arising from the operation of the storage of grain?

A. Yes, I would confirm that, no more than would their

Calgary books disclose certain operations in Alberta.

926. Q. And that the only books that disclosed the operations of

the Port Arthur Terminal, the day-to-day transactions, would be the books that were kept under the control and possession of the Appellant? A. Correct.

927. Q. And if one were to ask for those books and look at those

books would you confirm that the title would indicate that they were the books of account of the Appellant? A. They would.

928. Q. And that nowhere in those books of account would they

indicate that they were the books of account of Marine?

A. Correct.

929. Q. Would you also confirm to me that there was no change

in the accounting procedures in respect to the operation of the Port Arthur Terminal between the time prior to May 1963 and subsequent thereto? A. I would confirm that the routine followed for 45 years would carry on exactly the same.

930. Q. And would, you confirm to me that at all material times,

the vouchers and other documents which support the entries in the ledger account or in the journal were physically kept in the possession of the appellant? A. I would, and would remind you that that is why I advised Marine in Vancouver that if any questions were raised in respect of this operation, they should be referred to Winnipeg where the records were kept.

The witness acknowledges the exactness of the questions and of his answers thereto, adding that: ‘‘Since the 1963 arrangement by which James Richardson & Sons Ltd. leased the Port Arthur Terminal Elevator to Marine Pipeline had ended April 30, 1968, no transfers of assets or of bank accounts. were resorted to from Eastern Terminal to Marine, neither was it thought advisable to obtain a transference of grain ownership certificates. ’ ’

Respondent’s counsel, after reading to Mr. Lawson Section 79(3) of the Canada Grain Act, R.S.C. 1952, e. 25 (about which more later on), proceeds to give lecture of questions 642 to 647 of the Examination for Discovery :

642. Q. Now could I direct your attention . . . to section 79, sub-

section 3 of the Canada Grain Act, and that deals with the security. Would you confirm to me that Marine at no time furnished any security by bond or otherwise for the obligations which are imposed upon a manager of an elevator under the Canada Grain Act*! A. Marine did not directly, no. ,. , .. ;

643. Q. Yes. And would you confirm that at the time the licences

were issued which we have referred to as Exhibit 131 (now exhibit 57) security had been lodged with the Board of Grain Commissioners? A. . . . Would it help if I answered by saying that the security bond in respect to the appellant is provided by James Richardson & Sons, Limited.

644. Q. And would you confirm to me that the terms of the bond

are such that the obligation to pay is one that would arise on the default of the appellant? A. I would assume so, yes.

645. Q. And that under the bond there was no obligation to pay

any amounts on the default of Marine? A. Oh, I’m afraid I—that could be a hairy one, I would think,

646. Q. Well, all right, let me put it to you this way, Mr. Lawson.

Would you confirm to me that in the face of the bond no reference is made to Marine? A. Fine.

647. Q. And that on the face of the bond reference is made to

the appellant, to the default of the appellant and maybe other companies? A. I would believe so. Not having the bond in front of me, I’m not certain, but I would be amazed if it wasn’t so.

Filed as Exhibit 84, the Subscription Policy No. MW13522, is indeed made out in keeping with the witness’s expectation, by United Grain Growers Insurance Agencies Limited, for the period from August 1, 1966 to August 1, 1967; the insured: Richardson Terminals Limited, and any eventual loss, to a grand total of $7,000,000 payable to: “Richardson Terminals Limited, in trust for the holders of warehouse receipts for grain stored in the elevator in which their loss oceurs . . .’’.

The licences issued to appellant by the Board of Grain Commissioners for Canada to operate a ‘‘Semi-Public Terminal Elevator at Port Arthur, Ontario, for the years ending July 31, 1963, through 1968, inclusive”, on record as Exhibit 57, all purport to license none other than ‘‘Richardson Terminals Limited of Winnipeg, Manitoba’’, or previously to August 1, 1965 Eastern Terminal Elevator Company. On the other hand, Marine Pipeline’s returns of Corporate Information to the Province of Ontario (Exhibit 59) ‘‘for years ending 31 March, 1964, to 31 March, 1969, inclusive’’ do not hint at any business occupation other than “Undertaking and carrying out construction contracts ’ ’.

I am unable to share Mr. Lawson’s opinion that Exhibit 77 would tend to show a separation of the Port Arthur Terminal returns begun on July 31, 1963. Exhibit 77 is a ‘‘special report’’ of appellant’s accounts addressed by Price Waterhouse & Co. to the appellant’s directors for their own information, covering ‘‘the fiscal years ended July 31, 1963, 1964, 1965, 1966 and December 31, 1966 and 1967”. Were the income tax inspectors privy to this report? I cannot hind anything to that effect. Furthermore, Exhibit 65, an auditors’ report, April 19, 1967, to the shareholders. of Marine Pipeline & Dredging Company, does not dispel the impression of lurking suspicions about the statutory propriety of this oft quoted ‘‘arrangement’’;. these apprehensions are insinuated in the opening lines:

We have examined the balance sheet of Marine Pipeline & Dredging Ltd. as at October 31, 1966 and the statement of profit and loss for the year ended on that date . . . We did not examine the statements of assets and liabilities and gross profit of the Port Arthur Terminal operations but we were furnished with a report of other auditors on these statements which report did not include an opinion on the consistency in the application of generally accepted accounting principles.

(Marine’s) balance sheet and statement of profit and loss present fairly the financial position of the company as at October 31, 1966, . . . except that the assets and liabilities of the Port Arthur Terminal were not included in the balance sheet of the preceding year ...

So far as I can ascertain, an indication of the Port Arthur Terminal agreement is first given in Exhibit 66, on a separate sheet, labelled ‘‘Marine Pipeline & Dredging Ltd.—Notes to Financial Statements, October 31, 1967” annexed to the relevant T2 Corporation Income Tax return:

4. Port Arthur Terminal Operations:

Under a rental agreement with James Richardson & Sons, Limited, the company rents the facilities of the Port Arthur Terminal for $50,000 per annum; this agreement expires on April 30, 1968. The Port Arthur terminal is operated by Port Arthur Terminals Limited on behalf of the company under a management agreement.

To my mind, even an earlier disclosure, to the proper parties, of the agreement (Exhibit 4) could not ‘‘have saved the day”, if the matter disclosed in its ‘‘pith and substance” ran counter to the pertinent provisions of the Income Tax Act. Under the circumstances, secrecy or outspokenness might only bespeak a state of mind devoid of any consequence on the letter of the law.

The witness confirms that during the years 1962 to 1968 appellant, the apparent tenant, was assessed for the real prop- erty and business taxes, none of these being ever charged to Marine. At no time during the five-year period did Richardson Terminals either notify the Port Arthur Municipality that Marine and not itself should be taxed, nor, consequently, did it appeal those annual assessments.

At the close of his testimony, Mr. Lawson unhesitatingly repeats that Marine Pipeline and Dredging Ltd. never engaged in the business of grain or wheat trade or in terminal elevator operations; he also contends that ‘‘Marine was not the parent of appellant”. Be that as it may, chart or Exhibit 67, graphically illustrating the ‘‘family tree’’ of the closely allied company group, though not assigning a direct parenthood to Marine, unquestionably traces a first degree cousinship between it and appellant, graced with most congenial intercourses throughout.

A fit ending to the lengthy recital of facts might be the repetition of their practical results, set. forth in Exhibit A-l to the notice of appeal and in paragraph 32 of the reply, namely, the profits earned and realized by appellant in carrying on its regular business at Port Arthur. Those profits admittedly were:

Minus the operating expenses and a nominal $1,000 a year rental, the balance of profits ‘‘in accordance with Marine’s instructions and as soon as possible after the end of each quarter . . . for the amount of the quarterly net revenue (was paid) to Richardson for the account of Marine” (cf. notice of appeal, para. 122(c)). It may be remembered that Marine’s indebtedness to Richardson, by October 31, 1960, amounted to $1,170,000 (cf. appeal, para. 90). Other loans had also been granted to Marine by Richardson (advances assumed by Interprovincial) and by Patricia Transportation Company, the latter and Interprovincial merged into the associated bevy of companies. With its “policy of acting as banker for companies in the Richardson group”, one may presume that adequate refunding was attended to by that financial fountainhead.

The ultimate chapter, now reached, calls for a repetition of this threefold assertion by Mr. Lawson, I quote anew:

1. After closing Eastern Terminal’s books of accounts on April 80, 1963, no new set of records were started as of May 1st. Eastern Terminal’s records disclosed the dealings at Port: Arthur without any mention of its arrangement with Marine Pipeline and Dredging Company.”

. ‘Witness repeats his oft-stated: admission that, ‘ at no time,

did Marine Pipeline and Dredging, Ltd. engage in the grain or wheat trade nor act as terminal elevator operators”.

3. “Upon the expiry of this 1963 ‘arrangement’ on April 30, 1968’’, so says Mr. Lawson, ‘‘no transfers of assets nor “of bank accounts were made from Richardson Terminals Ltd. (as it had then become) to Marine Pipeline and Dredging Company. Neither was it necessary to transfer grain ownership certificates from one firm to the other.”

A proper starting ground for an ultimate decision might be a greatly summarized statement of the contending pleas submitted by both the distinguished counsel.

Mr. Roger Létourneau, Q.C. qualified his client, the appellant, “a wholly owned subsidiary of James Richardson & Sons Limited”, an assertion fully borne out, for instance, by the graphic chart (Exhibit 67) and proceeding to retrace the ‘‘agnate’’ relationship or connection of those aforementioned firms with Marine Pipeline & Dredging, asserts that a like degree of corporate intimacy is tantamount to practical identity; therefore the agreement scheme at issue would merely amount to, so the popular saying does, ‘‘the right hand putting money into the left one”. Although most ably argued, this plea, in accord with the bare facts, should not in law vindicate or warrant the appellant’s conclusions, retorts the respondent, whose objections are derived from paragraphs 27, 28 and 29 of the reply :

27. At all material times the Appellant applied for and was the holder of a licence granted by the Board of Grain Commissioners for Canada to operate and manage for its own benefit and advantage a semi-public terminal elevator at Port Arthur pursuant to the provisions of the Canada Grain Act, R.S.C. 1952, c. 25. (cf. exhibits 56 and 57)

28. The Appellant, in making application for the said licence, represented that with respect to the elevator at Port Arthur, it was the person in possession of the premises known as Port Arthur Terminal, either as owner or lessee thereof, or as. being entitled under a contract with the owner or lessee to operate such an elevator for its own benefit or advantage and that it was not a person in charge of the elevator who was remunerated for his services by commission.

29. Marine was at no time the holder of a licence from the Board of Grain. Commissioners for Canada to operate and manage for its own benefit and advantage at Port Arthur, a semi- public terminal elevator.

Sections. 2(17), 79(3), 89(1) and 90 of the Canada Grain Act, relied upon by Mr. Ainslie, Q.C., prescribe thus :

2. (17) “Manager”, when used with respect to an elevator, means the person in possession of the premises constituting such elevator, either as owner or lessee thereof or as being entitled under a contract with the owner or lessee to operate such elevator for his own benefit and advantage, but does not include a person in charge of an elevator who is remunerated for his services by commission.

79. (3) The Board shall, before issuing any licence under this Act, require the applicant for such licence to furnish security, by bond with proper sureties or otherwise to the satisfaction of the Board, for the due performance by the licensee of all the obligations which may be imposed upon him by this Act, by the regulations or by the terms of the licence applied for; and for the payment by him of all sums that may become due under any contract. made by him as such licensee, or under any order of the Board . (Cf. Exhibits 56, 57 and 84.)

89. (1) Neither the manager of an elevator nor anyone acting on his behalf shall, in any record or acknowledgement of the receipt or discharge of any western grain into or out of such elevator, use any grade name to describe the grain so received or discharged, unless the manager of such elevator has obtained a licence to operate the same under this Act.

90. (1) No person shall issue or sign any ticket, warehouse receipt or note pursuant to this Act respecting western grain received into or stored in an elevator unless he is the holder of a licence as manager of such elevator or is:a person expressly authorized by such manager to issue such ticket, receipt or note.

Time and again it was seen that each and every statutory prescription of this order were met, not by Marine Pipeline & Dredging, but “well and truly’’ by Richardson Terminals Ltd. So much so that appellant in its paragraph 140, speaking for Marine, resorts to this rather lame excuse e regarding the practical fruition of the scheme:

140. For the foregoing reasons, and also in order to avoid duplication in the presentation of the assets and liabilities in respect of the management of the terminal elevator, the directors. of Marine decided not to record these same assets and liabilities in the financial statements of Marine.

Regrettably, respondent’s taxing: officers remained impervious to the doubtful nuisance of such duplication and seem to have. interpreted its purpose quite differently, contending that. this “ segregation ” of assets and liabilities arose ‘‘from the carrying on by the Appellant, at the Port Arthur terminal, for its own benefit and advantage, of the business of purchasing, grading, storing and reselling grain . . .” (cf. para. 41 of the reply).

Finally, in paragraph 45 of the defence,

5. The Respondent submits that at no material time did Marine attorn as tenant of Richardson or effect an entry and possession of the Port Arthur Terminal or carry thereon any business whatsoever.

The sequence of facts throughout, of which weighty instances are the appellant’s refusal to abide by the prudent advice of all the chartered accountants consulted to obtain supplementary letters patent, enabling a pipeline and dredging firm to engage in the totally different pursuit of the grain elevator trade; the severance of all relations between Marine and Richardson Terminals the very moment Exhibit 4 was signed, amply justifies respondent’s plea that the ‘‘pith and substance”? of the reorganization plan amounted to nothing else than a transfer of income from the affluent grain terminal elevator to the then impoverished pipeline and dredging concern, in disregard of the basic requirements above quoted of the Canada Grain Act.

Even more so, every material factor at bar invalidates a plea of bona fide transaction, however candid the promoters’ intentions might otherwise have been.

Repetitiously but not needlessly, may I quote as a peremptory condition with which the appellant has, in my humble opinion, utterly failed to comply, Section 27(5) (b) of the Income Tax Act :

27. (5) Paragraph (e) of subsection (1) does not apply to permit a corporation to deduct for the purpose of computing its taxable income for a taxation year, a business loss sustained by it in a preceding taxation year, in any case where

(b) the corporation was not, during the taxation year, carrying on the business in which the loss was sustained.

The large profits accruing, annually, during the five-year period May 1, 1963 to April 30, 1968 resulted from the business carried on at Port Arthur solely by the appellant, and not by Marine Pipeline and Dredging, which neither in name, fact or law ever engaged in any suchlike pursuit.

Of the numerous authorities invoked by the parties, one of particular applicability is that of Eugene Lagacé and Georges Lagacé v. M.N.R., [1968] C.T.C. 98; [1968] 2 Ex. C.R. 98, decided by the learned President of this Court, the Honourable Wilbur Jackett, who, about this comparable instance, wrote (page 107 [109]):

The most significant feature of the appellant’s contention in this Court, as it strikes me, is that it is inherent in the contention that profits that would otherwise have accrued to the appellants have ended up in the name of a company controlled by them, not because of bona fide business transactions between the appellants and such company, but because of transactions that have been arranged between them to implement a contract between the appellants and a third person to accomplish objects desired by the third person. In other words, the contention is based on the assumption that profits of the appellants’ business operations were put into the hands of the company by a device and that the profits were not the result of the company having embarked on business transactions.

In my view, therefore, the short answer to the contention, even assuming the facts to have been established, is that, for purposes of Part I of the Income Tax Act, profits from a business are income of the person who carries on the business and are not, as such, income of a third person into whose hands they may come. This to me is the obvious import of Sections 3 and 4 of the Income Tax Act and is in accord with my understanding of the relevant judicial decisions. [Italics added.]

Consequently, for all the reasons above, the Court reaches the decision that this appeal should be dismissed, with taxable costs allowed to the respondent.