James A. Cameron v. Minister of National Revenue, [1971] CTC 97, 71 DTC 5068

CATTANACH, J.:—These are appeals from the appellant’s assessments to income tax for his 1965 and 1966 taxation years.

I was informed by counsel for the litigants that by agreement between them the decision in the present appeals will govern the assessments in two other appeals, those of Robert A. Steele and Gordon Symon, for the same taxation years and which appeals arose from circumstances very similar, if not identical, to those which give rise to the appeals of the present appellant, James A. Cameron. I mention this circumstance to explain the frequent references to Messrs. Steele and Symon in the following recital of facts.

The basic facts are not in dispute but the inferences to be drawn from those facts are.

Prior to August 19, 1964 Messrs. Cameron (the present appellant whom I shall refer to throughout as Cameron for convenience rather than as the appellant), Steele and Symon were employees of J. K. Campbell & Associates Limited (hereinafter referred to as Campbell Ltd.), a company successfully engaged in the business of roofing and heating contractors in the four Western Canadian provinces of Manitoba, Saskatchewan, Alberta and British Columbia, with head office in Edmonton, Alta, and branch offices in Calgary, Alta. and New Westminster, B.C.

Steele was the manager of the Calgary branch, Symon was the manager of the Edmonton branch and Cameron was the assistant manager of the Edmonton branch and as such was under the control of and received his instructions from Symon.

Cameron began his employment with Campbell Ltd. and its predecessor companies in May 1953. On January 13, 1959 he entered into an employment contract with Campbell Ltd. at an annual salary of $9,000 plus a bonus of 5% of the net profit of Campbell Ltd. in Edmonton and Calgary. By the terms of that contract the bonus of 5% was paid for by the issuance to Cameron of fully paid non-voting redeemable preferred shares of Campbell Ltd. Steele and Symon had similar contracts of employment with Campbell Ltd. although the salaries may have differed and in the case of Steele the bonus was 3% of the net profit realized in the Calgary branch. Messrs. Steele, Symon and Cameron became directors of Campbell Ltd. each of whom were holders of preferred shares but held no common shares.

Mr. J. K. Campbell, the president of Campbell Ltd. and sole holder of its issued common shares, testified that he regarded Steele, Symon and Cameron as the promising men in the company, that he was anxious that they should be rewarded for their initiative by participating in the equity or common shares of the company, but not the control of the company during the remainder of his active business life, and upon his death or retirement that ownership and the continuation of Campbell Ltd. should devolve upon them and other promising young men in the business. Messrs. Steele and Cameron are both comparatively young but I suspect that Mr. Symon (whom I did not see), who subsequently retired, was an older man.

For reasons best known to himself and conceivably upon the advice of his chartered accountant, Mr. Campbell testified that he did not want to deal personally with Messrs. Steele, Symon and Cameron but rather with a corporation on mistaken theory that a corporation never dies.

A proposal, no doubt advanced by Campbell’s chartered accountant, was discussed at length with Messrs. Steele, Symon and Cameron, to implement Campbell’s expressed purposes.

Following these discussions the three employees instructed a solicitor to incorporate a joint stock company. Pursuant to those instructions Independent Management Limited (hereinafter referred to as Independent) was incorporated as a private company pursuant to the laws of the Province of Alberta on March 12, 1964 for the principal purpose of providing management services for businesses of all kinds with an authorized capital of $20,000 divided into 10,000 common shares and 10,000 non-cumulative redeemable preferred shares, all of the par value of $1 each.

At the organization meetings held on April 17, 1964 Messrs. Steele, Symon and Cameron became the shareholders and directors of Independent, Cameron became president, Steele the vice- president and Symon the secretary-treasurer. They became employees of Independent under oral contracts.

By pre-arrangement the only business sought by Independent was that of supplying management services to Campbell Ltd. by which was meant that Steele, Symon and Cameron would perform the identical duties that they had heretofore performed as employees of Campbell Ltd. There would be no reason why Independent could not seek additional business other than its personnel would be fully engaged in the affairs of Campbell Ltd.

The negotiations between Campbell Ltd. and Independent respecting the terms of the management agreement between them culminated in the execution of a contract dated August 18, 1964 (Exhibit Al).

Basically that agreement provided that Independent would supply management personnel and services as well as executive personnel to Campbell Ltd. as required for duties and at places designated by Campbell Ltd. The personnel supplied were to be approved by and subject to the control and direction of Campbell Ltd. For such services Campbell Ltd. agreed to pay Independent a management fee of 15% of the net annual profit of the consolidated operations of Campbell Ltd. before taxes and Campbell Ltd. would pay to Independent budgeted expenses to cover the salaries of personnel supplied and sundry like expenses as outlined in paragraph 8 of Exhibit Al.

There was a further agreement also dated August 18, 1964 between J. K. Campbell personally and Independent (Exhibit A2) whereby Independent undertakes to purchase from J. K. Campbell 49% of the issued shares of Campbell Ltd. held by him. It was also agreed that the 15% management fee received from Campbell Ltd. by Independent is to be used to purchase those shares. In addition it was agreed that Independent would purchase an insurance policy on the life of J. K. Campbell at an annual premium of $2,000, the proceeds of which would be used in purchasing shares of Campbell Ltd. held by him in the event of his death.

By an agreement dated August 20, 1964 between J. K. Campbell and his wife, Louise Campbell, and Independent, Independent agreed to purchase all of the issued shares of Campbell Ltd. held by J. K. Campbell and his wife on the death of J. K. Campbell.

By an agreement dated September 22, 1964 between J. K. Campbell and Independent, the agreement of August 18, 1964 between the same parties was amended to clarify that the right of Independent to purchase the shares of Campbell Ltd. held by J. K. Campbell was limited to the extent of the management fee paid by Campbell Ltd. to Independent under the management contract between them.

Having entered into the foregoing agreements the parties thereupon did a series of acts to implement them.

On August 19, 1964 Messrs. Steele, Symon and Cameron submitted their resignations as employees from Campbell Ltd. effective as of August 31, 1964.

On August 21, 1964 their resignations as directors of Campbell Ltd. were accepted. The preferred shares of Campbell Ltd. held by Steele, Symon and Cameron were redeemed.

On August 25, 1964 Independent applied to Monarch Life Assurance Company for a group annuity policy. By letter dated November 2, 1964 J. K. Campbell requested the Monarch Life Assurance Company to transfer to that policy all benefits accumulated by Messrs. Steele, Symon and Cameron under a similar policy with the same life insurance company held by Campbell Ltd.

By letter dated September 22, 1964 J. K. Campbell on behalf of Campbell Ltd. appointed Cameron as sales manager of Campbell Ltd. effective September 1, 1964. Mr. Campbell carefully explained in his testimony that Cameron was merely appointed to that position in order that he might have the status that the title of the office implied and that was the service that Cameron as an employee of Independent was to perform for Campbell Ltd. He further emphasized that the title which was so conferred upon Cameron (which was the same as he had held as an employee of Campbell Ltd.) was deliberately bestowed in order that customers of Campbell Ltd. would be unaware of any change in the conduct of the business of Campbell Ltd. which he considered would be detrimental to the conduct of that business. The lesser employees of Campbell Ltd. were not apprised of any change in the functions of Cameron. Cameron signed correspondence in the name of Campbell Ltd. over the title so conferred upon him. He occupied the same office space and facilities as he had done before as an employee of Campbell Ltd. and exercised the same direction and control over the other employees of Campbell Ltd. as he had done formerly.

Because Campbell Ltd. had undertaken to reimburse Independent for expenses to be included in a budget, one witness described it an ‘‘exercise in futility’’ for Independent to incur office expenses when all necessary facilities were available with Campbell Ltd. and for Independent to do so would be a duplication of expenditure.

Letters also dated September 22, 1964 or on dates approximate thereto in terms similar to that sent to Cameron, differing only in respect of the offices, were sent to Steele and Symon. The remarks applicable to Cameron as to how he carried out his office are equally applicable to Steele and Symon.

In accordance with the agreement of August 18, 1964 between J. K. Campbell and Independent a 15-year policy on the life of J. K. Campbell in the principal sum of $102,881, with an annual premium of $2,000 was purchased by Independent, such policy being in effect from January 5, 1965.

Also in accordance with that agreement the following common shares in Campbell Ltd. were purchased by Independent from J. K. Campbell on the dates and at the prices indicated hereunder and pursuant to the authority of a directors’ meeting of Independent held on the dates also indicated :

It was disclosed, incidentally, in evidence that a plan was also devised whereby the employees of Campbell Ltd. at a rank immediately below that held by Steele, Symon and Cameron could participate indirectly in the purchase of common shares of Campbell Ltd. held by J. K. Campbell by Independent. This was accomplished by the incorporation of Modern Construction Management Limited (hereinafter called Modern) with those employees as shareholders and directors. The detailed operation of Modern was not given in evidence, that is what services Modern: performed, under what arrangements, and for whom or the source of its revenue. One source of funds which was disclosed was that bonuses paid to the employees by Campbell Ltd. were used to buy shares of Independent. The indirect participation of the shareholders of Modern, in the purchase of common shares of Campbell Ltd. was by the purchase of common shares of Independent by Modern.

The following shares of Independent were purchased by Modern :

Steele, Symon and Cameron each held 200 common shares of Independent. By an agreement among them it was provided that if one of them should retire the others would purchase the shares of the retiring shareholder, On May 27, 1969 Mr. Symon retired. Under that agreement Cameron and Steele each purchased 100 of the 200 shares in Independent held by Symon at a price of $1,048.74 per share. À method of periodic payment was devised, the shares to be held in trust until payment of the purchase price in full.

On May 27, 1969 Steele was appointed secretary-treasurer of Independent in succession to Symon.

By letter dated September 2, 1969 from J. K. Campbell to Cameron, Cameron was appointed as Edmonton branch manager of Campbell Ltd. in succession to the office previously held by Symon.

In its fiscal years ending August 31, 1965 and 1966 Independent received from Campbell Ltd. the respective amounts of $47,294.24 and $56,691.43 as salaries and expenses which under paragraph 8 of the management agreement between them (Exhibit Al) are to be reimbursed by Campbell Ltd.

In the same fiscal years Independent received from Campbell Ltd. the 15% management fee also under the management contract between them (Exhibit Al) in the respective amounts of $37,745 and $119,710.

Cameron filed income tax returns for his 1965 and 1966 taxation years reporting as taxable income the salary and bonuses received from Independent.

By notices of re-assessment dated March 14, 1968 the Minister added to the taxable income of the shareholders of Independent the 15% management fee received by Independent from Campbell Ltd. in its 1965 and 1966 taxation years. Because Steele, Symon and Cameron were the only shareholders of Independent during those taxation years and because each held 200 shares of the 600 issued common shares of Independent, one- third of the 15% management fee received by Independent from Campbell Ltd. was added to the taxable income of each shareholder.

In Cameron’s case (being the only appeals before me) in the 1965 taxation year the management fee received by Independent from Campbell Ltd. was $37,745. The Minister added one-third of that amount, being $12,581.67 to the reported income of Cameron and his tax was computed on the total.

In the 1966 taxation year the 15% management. fee received by Independent from Campbell Ltd: was $119,710. In that year Independent paid a bonus of $24,500 to each of its three share- holders, Steele, Symon and Cameron, a total of $73,500, upon which the shareholders paid income tax. Therefore the Minister deducted $738,500 from $119,710 the result being $46,210. The Minister added one-third of $46,210, being $15,403.33 to the income of Cameron and computed his income tax payable accordingly.

The payment of the bonus of $73,500 by Independent to its shareholders in the 1966 taxation year was a device suggested by the auditor of Campbell Ltd. who was also the auditor of Independent and Modern, whereby shares of Campbell Ltd. could be purchased from J. K. Campbell by Independent. Under the provisions of the agreement between Independent and Campbell Ltd. shares of Campbell Ltd. were to be purchased from J. K. Campbell with the proceeds of the 15% management fee, but J. K. Campbell in his discretion could sell shares to Independent to be paid for with money raised by borrowing or from sources other than its earnings. When the shareholders received the bonuses totalling $73,500 and after deducting the income tax payable on that amount, the balance of $38,382.66 was lent to Independent by its shareholders. That sum was added to the net remaining from the $119,710 management fee which was $31,155.69 together with a bonus received from the shareholders of Modern in the amount of $7,224.24 together with adjustments from audits on previous purchases of shares which were not sufficient to purchase a full share, amount to $76,704.24 which Independent paid to J. K. Campbell for the purchase of 201 shares of Campbell Ltd.

Quite frankly I can see no advantage in effecting the purchase of the shares by this devious route rather than in a straightforward manner. other than the saving of income tax payable by the shareholders and Independent. However a taxpayer is entitled to order its affairs in a legitimate manner so as to attract a lesser tax and there was nothing illegitimate in the foregoing procedure except that a liberty was taken by the auditor in deducting the $2,000 life insurance premium from the $119,710 management fee when that premium was a refundable expense item which Campbell Ltd. was obligated to pay to Independent. His explanation was that it made no difference in the end result since all the funds came from Campbell Ltd. I do not agree since it was from the management fee that shares were to be purchased so in effect $2,000 less was available for that purpose, but J. K. Campbell could and did in his discretion accept the purchase price of shares received from other sources by Independent.

At this point I should mention that Independent paid income at the corporate rate on the amounts of $37,745 and $119,710 received by it after deducting its allowable expenses. No credit was given by the Minister to the shareholders of Independent for any tax so paid by Independent in assessing them as he did.

Counsel for Cameron argued that the 15% management fee was income of Independent taxable in its hands and that it was not income of Independent’s shareholders and therefore not properly taxable in their hands. However if the contrary should be found, that is, that the management fee was income in the hands of Independent’s shareholders it could not be income of Independent, which had already paid tax thereon. In that event he pointed out that the Minister was exacting tax on the same amount twice, once from Independent and then from Independent’s shareholders. While I have not considered the matter, counsel for Cameron pointed out that should I find that the management fee was income of Independent’s shareholders, the time within which Independent could claim reimbursement from the Minister for the tax paid by it had expired so that Independent was without remedy. He further submitted that in the event I should find that the management fee was income of Independent’s shareholders, I should then refer the matter back to the Minister for re-assessment with the direction that a credit should be allowed to the shareholders of Independent for the tax paid by it.

In assessing Cameron as he did the Minister did so on the assumptions outlined in paragraphs 4, 5 and 6 of his reply to the notice of appeal, which read as follows:

4. In making the assessments dated March 14th, 1968 for the Appellant’s 1965 and 1966 taxation years the Respondent acted, inter alia, upon the following findings or assumptions of fact:

(a) THAT the Appellant, James A. Cameron, was throughout his 1965 and 1966 taxation years an employee of J. K. Campbell & Associates Ltd. and that as remuneration for his services in those years, received from the said J. K. Campbell & Associates Ltd. $12,581.67 and $15,403.33 in his 1965 and 1966 taxation years respectively;

(b) THAT pursuant to the direction of or with the concurrence of the Appellant in each of the said years, J. K. Campbell & Associates Ltd. paid amounts to Independent Management Ltd. for the benefit of the Appellant or as a benefit that the Appellant desired to have conferred on Independent Management Ltd.;

(c) THAT the said sums of $12,581.67 and $15,403.33 were income of the Appellant from an office or employment;

(d) THAT the sums of $12,581.67 and $15,403.33 earned by the Appellant personally and were income of the Appellant for his 1965 and 1966 taxation years respectively, and were paid to Independent Management Ltd. in respect of the Appellant’s services, and not services rendered by Independent Management Ltd.;

(e) THAT the scheme under which the Appellant purported to cause to be paid to Independent Management Ltd. the remuneration paid by J. K. Campbell & Associates Ltd. did not constitute a valid or bona fide business transaction but in effect an attempt to artificially reduce the Appellant’s income from his employment with J. K. Campbell & Associates Ltd.;

(f) THAT the Appellant &nd Independent Management Ltd. were not persons dealing at arm’s length,

5. In making the said re-assessments dated March 14th, 1968 the Respondent acted upon the further alternative assumption that the Appellant, through a contract or other arrangement by which he has caused to be paid to Independent Management Ltd. the remuneration for his services, has in fact transferred or assigned to Independent Management Ltd., a person with whom the Appellant was not dealing at arm’s length, the right to amounts (viz. $12,581.67 and $15,403.33) that would, if the right thereto had not been so transferred or assigned, be included in computing the Appellant’s income for 1965 and 1966 because the amounts would have been received or receivable by him in respect of those years and that accordingly the said amounts should be included in computing the Appellant’s income for 1965:and 1966 by virtue of section 23 of the Income Tax Act.

6. In any event, the Respondent says that at all times material to this appeal, Independent Management Ltd. was the agent of the Appellant and that the amounts received by Independent Management Ltd. for the use and benefit of the Appellant were income of the Appellant when received by Independent Management Ltd.

The argument of counsel for Cameron, as I understood it, was essentially that:

(1) The management fees received by Independent from Campbell Ltd. must be included in the income of Independent as income: from its business of providing management personnel and management services and accordingly the Minister erred in including in the income of Cameron his one-third share of the moneys received by Independent from Campbell Ltd.

(2) The Minister erred in including that portion of the moneys. received by Independent from Campbell Ltd. as income of Cameron pursuant to Section 5 of the Income Tax Act because Cameron was not an employee of Campbell Ltd. but a full-time employee of Independent and that the services

rendered: by Cameron to Campbell Ltd. were rendered by him in his capacity as an employee of Independent and that Cameron had no personal right to receive any payment for such services from Campbell Ltd. The: pertinent part of Section 5 reads as follows :

5. (1) Income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year . . .

(3) The Minister erred. in including any portion of the moneys received by Independent from Campbell Ltd. in Cameron’s income pursuant to Section 16(1) of the Z ncome Tax Act as all such moneys were paid to Independent pursuant to the agreement between Campbell Ltd. and Independent and Cameron neither directed, nor concurred in such payment and further that Cameron was not entitled to receive directly from Campbell Ltd. any portion of the moneys paid by it to Independent. Section 16(1) of the Income Tax Act reads as follows:

16. (1) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.

(4) The Minister erred in including in Cameron’s income pursuant to Section 23 of the Income Tax Act any portion of the moneys paid by Campbell Ltd. to Independent as Cameron never had the right to receive any portion of such moneys from Campbell Ltd. and therefore could not transfer a right which he did not have. Section 23 of the Income Tax Act reads as follows:

23. Where a taxpayer has, at any time before the end of a taxation year (whether before or after the commencement of this Act), transferred or assigned to a person with whom he was not dealing at arm’s length the right to an amount that would, if the right thereto had not been so transferred or assigned, be included in computing his income for the taxation year because the amount would have been received or receivable by him in or in respect of the year, the amount shall be included in computing the taxpayer’s income for the taxation year unless the income is from property and the taxpayer has also transferred or assigned the property.

(5) The incorporation of Independent and subsequent agreements between it and Campbell Ltd. and between it and J. K. Campbell were valid and bona fide transactions, conducted at arm’s length, and did not constitute a sham or an attempt to artificially reduce Cameron’s. income from. Campbell Ltd. by virtue of Section 137(1) of the Income Tax Act. Section 137(1) of the Income Tax Act reads as follows:

137. (1) In computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income.

In my view the determination of these appeals will rest upon findings of fact, (1) whether Independent was a ‘‘mere sham, simulacrum or cloak’’, and (2) assuming it should be found that Independent was not, then whether the primary or predominate purpose of the incorporation of Independent. and the arrangements it entered into with Cameron, Campbell Ltd. and J. K. Campbell personally, were transactions or an operation that would artificially reduce the income on which tax would be payable in the hands of the appellant, Cameron.

The position taken by counsel for the Minister was, as I understood it, that, despite the incorporation of Independent and despite all contracts entered into by Independent with due formality, in fact and in substance Cameron, along with Steele and Symon, remained an employee of Campbell Ltd. and accordingly one-third of the management fee paid by Campbell Ltd. to Independent was income of Cameron arising from his office or employment with Campbell Ltd. and in effect Independent performed no service for Campbell Ltd. but in its highest degree was merely a depositary of the moneys received by Cameron, Steele and Symon from Campbell Ltd. as income from their employment by Campbell Ltd.

Ever since the case of Salomon v. Salomon, [1897] A.C. 22, it has been a well settled principle, which has been jealously maintained that a company is an entirely different entity from its shareholders. Its assets are not their assets and its debts are not their debts. Only on evidence forbidding any other conclusion can it be held that acts done in the name of the company are not its acts or that profits shown in its accounts do not belong to it. The fact that a company may have been formed to serve the interests of a particular person is not sufficient to establish the relationship of principal and agent between that person and the company. In order to hold otherwise it must be found that the company is a ‘‘mere sham, simulacrum or cloak ’ ’.

In my view the evidence in the present appeals does not support that conclusion.

It is significant to note that the Minister adopted somewhat inconsistent attitudes. In the first place he taxed the manage- ment fees received by Independent as income in its hands. In doing so he must have accepted the existence of that corporate entity. In taxing Cameron, the appellant, he accepts as correct the salary and director’s fees that Cameron reported and received from Independent as Cameron’s income which is again an acceptance of the corporate entity but then the Minister adds to that income one-third of the management fee received by Independent from Campbell Ltd. which is tantamount to disregarding the corporate entity of Independent.

I should think that if the facts are consistent with the documentation, by which I mean the incorporation of Independent and adherence to the contracts entered into between Independent and Campbell Ltd. and with J. K. Campbell personally, then it would follow that Cameron should succeed in his appeals but on the contrary if the facts are inconsistent with that documentation and all such contracts were ignored, then the appeals should fail.

Counsel for the Minister emphasized instances in which he considered that the express terms of the contracts were ignored. By the agreement between Independent and J. K. Campbell personally Independent was to buy common shares in Campbell Ltd. held by Campbell from management fees available after deduction of the $2,000 insurance premiums. In one instance such shares were purchased by money loaned to Independent by its shareholders. However since Campbell, under the provisions of the contract could sell, in his discretion, his shares to Independent for moneys from other sources there has been no breach of the contract.

It was also apparent that there were liberties taken in what expenses were included in the budgeted expenses which Campbell Ltd. had undertaken to pay to Independent after approval by Campbell Ltd. of the budget submitted by Independent.

It is my view and assessment of the evidence in these respects that while there may have been some minor breaches of a technical nature, these breaches were agreed to by the parties to the contract and that otherwise the agreements were scrupulously adhered to by the parties.

It was also pointed out that so far as the public at large was concerned, as well as the junior employees of Campbell Ltd., no one knew that Cameron, Steele and Symon were not continuing in their employment as senior officials of Campbell Ltd. and by deliberate design this impression was firmly implanted in the minds of the customers of Campbell Ltd. and most significantly Cameron, Steele and Symon were appointed by Campbell Ltd. by letters, directed to them and not to Independent, to the offices previously held by them in Campbell Ltd. It was further pointed out that on some tax returns the address of Independent. was coincident with that of Campbell Ltd. and Independent had no telephone listing.

The formation of a private company does not call for specific notice to all and sundry. It is sufficient if the customers of the company know with whom they are dealing. Here the only customer of Independent was Campbell Ltd. and the customers of Campbell Ltd: continued to deal with Campbell Ltd. although the workings of its internal management was deliberately. disguised from them.

The appointment of Cameron, Steele and Symon to the titles of offices in Campbell Ltd. was done to confer a status upon them which must have been done with the knowledge of Independent. It did not create any contractual relationship between Campbell Ltd. and Cameron, Steele and Symon.

It was also suggested that the control over Steele, Symon and Cameron remained vested in Campbell Ltd. Under the provisions of the management agreement between Independent and Campbell Ltd., Campbell Ltd. understandably reserved to itself the right to accept or reject personnel supplied by Independent and to designate what duties would be performed by them and at what places.

It was further submitted that an element of control over Cameron, Steele and Symon was vested in Campbell Ltd. by reason of the obligation of Campbell Ltd. under the management agreement to pay the expenses of Independent in accordance with a mutually approved budget therefor. Salaries were an item of that budget. Naturally if exorbitant or unreasonable salaries were included the possibility of them being approved by Campbell Ltd. would be unlikely. In that sense there is an element of control but that is by virtue of the contract in that the budget was to be negotiated. There would be nothing to prevent Independent when the budget was settled from fixing and paying to Cameron, Steele and Symon salaries greater than those provided for in the budget approved by Campbell Ltd. if funds were available for that purpose. It is true that Independent’s source of income was from its management contract with Campbell Ltd. but in the meantime Independent had built up liquid assets which would permit of it paying greater salaries than those budgeted for if it considered it expedient to do so.

For the foregoing reasons I have concluded that Independent was not a sham, from which conclusion it follows that I cannot disregard that separate corporate entity. It follows that the argument on behalf of the Minister based on Sections 5, 16 and 23 of the Income Tax Act must fail.

If the company and agreements with that company were mere shams then it would follow that the transactions would artificially reduce the income of Cameron, within the meaning of Section 137 of the Act. However, having found the transactions to be matters of substance and reality rather than form only it does not necessarily follow that the transactions were not designed to “artificially” reduce income within the meaning of that word as used in Section 137.

In Susan Hosiery Ltd, v. M.N.R,, [1969] Ex. C.R. 408; [1969] C.T.C. 533, Gibson, J. considered on the evidence before him that the transaction there involved was a sham which the parties never intended to be acted upon and that Section 137 therefore applied.

In Shulman v. M.N.R., [1961] Ex. C.R. 410; [1961] C.T.C. 385, Ritchie, D.J. said at page 425 [400] :

In considering the application of Section 137(1) to any deduction from income, however, regard must be had to the nature of the transaction in respect of which the deduction has been made. Any artificiality arising in the course of a transaction may taint an expenditure relating to it and preclude the expenditure from being deductible in computing taxable income.

He then said:

In my opinion, the primary object of injecting Shultup into the management setup was to reduce the income tax payable by the appellant on his professional income.

Sheppard, D.J. in The Cattermole-Trethewey Contractors Ltd. v. M.N.R., [1970] C.T.C. 619, considered that whether a disbursement was an expense within the meaning of Section 137 (1) depends upon (page 625),

(a) The primary object of the transaction being to reduce the income unduly or artificially, and it is not necessary that it be the exclusive object;

(b) Any artificiality may taint an expenditure;

(c) There must be, in order to come within the Section 137(1), a “disbursement or expense by the employer”. The section apparently does not apply to a transaction where there has been no disbursement or no expense.

The third criterion expounded by Mr. Justice Sheppard has no application to the present appeals of Cameron, who was an employee and because it is not the assessments of Campbell Ltd. or Independent which are under appeal before me.

For the same reasons that I have found that the existence of Independent was not a sham, I would also conclude that the operations were not artificial.

The purpose of the insertion of the management setup was not for more efficient management of Campbell Ltd. That could have been achieved by continuing as was done before. J. K. Campbell testified that the incorporation of Independent was to serve as a vehicle whereby those who had been senior employees of Campbell Ltd. could purchase common shares held by him in Campbell Ltd. He did not wish to deal with Cameron, Steele and Symon, who were the senior employees at the time of the initiation of the plan in their personal capacities. He did say he wished to deal with a corporate entity. This he is entitled to do and in that decision he was no doubt guided by the advice of his accountant. Furthermore he did not wish to necessarily restrict himself to dealing with those three persons. There would be no impediment to other persons becoming shareholders in Independent. In fact Symon disposed of his shares in Independent and the arrangements continued without him, and another corporate entity, Modern, became a shareholder in Independent.

I accept J. K. Campbell’s testimony that this objective was the primary purpose. He was looking forward to the time of his retirement and making provision for the disposition of his shares in Campbell Ltd. in that event and in the event of his death and at the same time providing for the orderly continuance of the successful business, in which he felt a pride and which bore his name and of which he was the founder, after his retirement. If a saving in income tax resulted to anyone that was incidental to the overall plan.

Accordingly I would allow the appeals with costs.